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Business confidence survey one of the clues to RBNZ's next move

Monday 30th September 2019

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The next clue to what the Reserve Bank might do in November will be this afternoon's business confidence survey.

The ANZ Bank monthly survey's headline index registered pessimists at a net 52.3 points in August, the weakest since 2008 and up from the 44.3 point reading in July – a reading of zero would be neutral.

“That's definitely a really important piece of the puzzle and it's looking really ugly,” says Mark Lister, head of wealth research at Craigs Investment Partners.

“If it's weak again, and weak again in a month's time, that will become increasingly frustrating for the Reserve Bank.”

He notes that there have only been eight months during the last 20 years when confidence has been lower.

Today's survey, next month's ANZ survey, the Sept. quarter inflation report on Oct. 15 and the Sept. quarter labour force report due on Nov. 6 will be the key data points until Nov. 13 when the Reserve Bank will deliver its next monetary policy statement.

Last week, the central bank left its official cash rate unchanged after slashing it 50 basis points to 1 percent on Aug. 7. Normally, it cuts by 25 points each move and has only cut by 50 points at times of crisis in the past, such as during the GFC or after the Christchurch earthquakes.

“They're pulling their key level reasonably hard and they're not getting the response they want,” Lister says.

The surveys are suggesting that the government is to blame. “Business is clearly not happy with everything that's coming out of the Beehive. The government hasn't instilled confidence in the business sector,” he says.

Central banks around the world have been cutting interest rates and many, like New Zealand's central bank, have suggested fiscal policy needs to weigh in to promote economic growth.

While cutting the OCR “can only do so much,” the government could also do its part by increasing spending and its budget is in good shape to allow room for more spending.

“They might make use of that room next year, it being an election year,” Lister says.

But that doesn't go to the root of what's upsetting the business sector: “business isn't upset because they think the government isn't spending. They don't feel they're being heard,” he says.

“Growth is only going to keep slowing if business confidence stays as subdued as it is for too much longer.”

A key concern is that as well as the headline number, businesses' view of their own actively turned negative in the August survey with a net 0.5 percent expecting their own activity to decline, the lowest level since the depths of the GFC in 2009.

Employment and investment intentions both fell in August and profit expectations were also down.

Despite reporting cost pressures, businesses also suggested their ability to raise prices had decreased, suggesting margins could be at risk for some, Lister says.

Another key event likely to influence the New Zealand Reserve Bank is what the Reserve Bank of Australia decides to do tomorrow when it reviews its cash rate.

The market is expecting the RBA to cut its cash rate by 25 basis points to 0.75 percent – it is currently pricing in a 77 percent likelihood of a cut.

Pricing in New Zealand markets is currently implying a 70 percent chance of a 25 basis point OCR cut in November.

A key consideration for both Antipodean central banks is that, with other central banks cutting their key rates, they won't want their respective currencies to rise too much.

At least some of the local gloom has been inspired by deteriorating economic conditions globally and a number of key pieces of data on that front will land this week, including the US non-farm payrolls data due on Friday.

The market is expecting 145,000 new jobs to have been created in the US in Sept. after the August print failed to live up to expectations and the June and July figures were revised down.

The US ISM manufacturing index due on Tuesday will also be a key number after it fell below the key 50 point-level in August for the first time in more than three years – a reading below 50 indicates manufacturing activity is contracting.

Manufacturing data for China, both the official Performance of Manufacturing Index and the Caixin Index, will be released later today ahead of Chinese markets closing through to Oct. 7 to celebrate the 70th anniversary of the People's Republic.

Chinese industrial production slowed in August and the official PMI contracted for the fourth consecutive month while export orders fell for the 15th month in a row, reflecting China's trade war with the US.

In both the US and China, activity in the services sector has remained in positive territory.


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