NZ GDP: Only good news here - TDS

Analysts at TD Securities offered their review of the surprise beat in NZ GDP.

Key Quotes:

"Jun qtr GDP jumped by +1.0%/qtr, outpacing TD/median expectations of +0.8%/q. More importantly, the RBNZ looked for +0.5%/q. Annual growth picked up from 2.6% to 2.8%/y.
The NZD jumped from $US0.66 to $US0.665 on the headline (was $US0.686 three months ago). A slip from the PM earlier this week hinting that the data was 'pleasing' meant the markets were looking for a solid result, despite the subsequent denial."

"The OIS strip has adjusted from a 40% chance of a cut over the coming year to closer to 20%. Even when we pushed back our first hike to November 2019, we were more constructive on the economy, and attached only a small risk to the RBNZ delivering a rate cut."

"The RBNZ decides on the Official Cash Rate (OCR) next week (27 Sep) mere hours after a widely expected US Federal Reserve hike. OCR Reviews used to be place-making 4-5 paragraphs noting that conditions are unfolding as expected, but under RBNZ Governor Adrian Orr this is not guaranteed."

"Actual activity data since the August MPS has been upbeat, with decent card sales, exports and a revival in housing, however, persistently low inflation and recessionary-level business sentiment are deep concerns for the RBNZ."

"TD expects the OCR to remain at 1.75% next week (as does unanimous consensus), the Governor to muse that the next move could be “up or down” as per the August policy assessment, as well as repeat that “we expect to keep the OCR at this level ... into 2020”."

"Some reduction in the global risk premium is expected to benefit currencies such as the NZD, though we think AUDNZD is a better expression over the coming weeks. As NZDUSD is at our high-frequency fair value, we favour a squeeze in positioning and look for a push towards $US0.68 in the immediate future."

"The entire NZGB curve is trading below ACGBs, due to a combination of scarcity and the RBNZ keeping expectations that the next move in the cash rate could be down. We prefer spread products like Kauris and LGFA for yield pickup."