Yin and yang

Rarely do all parts of the NZ economy move perfectly in synch. A much more common occurrence is that some sectors perform strongly while others confront much more challenging times. Such is the case now.

Our view is that recent positive and negative developments largely offset each other from the Reserve Bank’s point of view. By contrast, financial markets appear to have concentrated only on the negative developments. So when the RBNZ issues its Monetary Policy Statement later this week, markets might be surprised by the Reserve Bank’s more balanced take on the economy. Nevertheless, the OCR will remain on hold and we suspect that the RBNZ will rule out an October hike to boot.

The tide has well and truly turned for New Zealand’s largest export sector, dairy. Last week saw yet another disappointing GlobalDairyTrade auction. Prices fell 6% on a trade weighted basis, with Whole Milk Powder prices more than reversing the small increase of the previous auction. Skim Milk Powder prices have come under particular pressure in recent auctions, likely reflecting a combination of strong northern hemisphere milk production and of Russia’s yearlong ban on exports from a number of countries. And with the all-important Chinese consumer remaining downbeat in the latest Westpac-MNI Chinese consumer sentiment survey, the clouds hanging over the dairy sector show few signs of departing any time soon. Our $5.80 KgMs payout forecast once again looks too optimistic. We’ll look to revise it down following the next GlobalDairyTrade auction.

Eventually falling dairy prices will be the catalyst for pushing NZs terms of trade down from its current four decade high. But surprisingly, last week’s data showed that the terms of trade did eke out another small increase in the June quarter, as import prices fell by more than export prices. Beneath this headline, there were hints of what is to come. Dairy and forestry prices both fell in the quarter. And as we noted above, dairy prices have continued to tumble in recent months which will be reflected in forthcoming terms of trade data.