We are expecting some volatility in the NZD tonight thanks to the release of the first major economic data for the week.
Unlike other countries, New Zealand only reports its retail sales data once every quarter. Therefore, the data tends to have a bitter impact on the market when it does come out.
The question is, now that the RBNZ has cut rates, how long will they maintain the current stance? Well, the data tonight as well as later in the week may give us some clues as to the answer.
What We Are Looking For
There are three important data points coming out at 00:45 CET (or the day before at 18:45 EST.) The headline is the quarter over quarter change in the retail sales number.
Expectations are for retail sales to have stayed flat in the first quarter, compared to 1.7% growth in the three months prior. This is somewhat disappointing because January and February are the most important months for tourism in New Zealand. Considering there were record tourist arrivals, retail sales should be doing better.
The Underlying Numbers
Analysts expect the core retail number to come in at 0.9%. This is down from 2.0% in the prior quarter.
The core indicator strips out the effect of vehicle purchases, explaining the difference – which we’d already seen in the trade balance. A drop in vehicle sales can be a sign of reluctance to engage in investment spending.
On the other hand, vehicles are purchased on credit. This means it could be a sign that consumers were anticipating a rate drop by the RBNZ and were holding off for better credit conditions. We’ll be able to verify this with the trade balance coming out Friday morning (or Thursday evening if you are in America).
Forecasts dictate that the year over year retail sales number will drop to just 0.6% from 3.5% This indicates a more longer-term drop in consumer sentiment.
Retail sales are an essential driver of inflation. In fact, the lack of progress in getting the inflation rate to rise to target levels is what motivated the RBNZ to cut rates the last time around.
If retail sales trends continue, it would be a bad sign for inflation. It could also put further pressure on the RBNZ to be dovish and increase the likelihood of another rate cut.
On the positive side, business confidence reported last week showed a significant increase in to positive territory. This might be an indicator that following three months of uncertainty, the economy is settling into a more positive outlook. After all, electronic card transactions took a turn to the upside in the last three months.
Retail sales data from New Zealand takes the place of consumer confidence in other economies. And the market could react accordingly. The number is important because of the inflation expectations it implies.
Higher than expected retail sales would indicate a stronger consumer segment and potentially higher inflation. This would reduce the chances of central bank action. We’d expect to see strength in the NZD in that case. Keep in mind that the current expectations are at the bottom of the usual fluctuations of this data. So, there is more potential for upside as the market is already pricing in disappointing data.
If the retail sales on a quarterly basis slip into contraction, that would be a bad sign for the economy. In fact, it would raise the prospect of another interest rate cut. While it might be seen as positive for the NZ stock market, it would likely drag on the currency.