Opinion: Dire business confidence points to 3.5% OCR

By BNZ Markets With signs that New Zealand households might be starting to find their feet, yesterday's National Bank business survey was always going to be a crucial cross-check. Unfortunately for the optimists, the business sector remains heavily pessimistic about the economy. This, in due course, is not good news for consumers. December's National Bank business survey hit fresh lows which, given recent depths, is really saying something. Activity expectations collapsed, strongly implying that the growth outlook is already far weaker than the RBNZ and Treasury counted for in their recently updated forecasts. Investment and employment intentions sank yet further, with a record net 86% of firms expecting to see the unemployment rate lift in the coming year. On its own, today's results would likely provide the RBNZ with plenty to reason to contemplate further aggressive cuts in the OCR. But the survey also confirmed a slump in business' pricing intentions. This might be enough to assuage fears Dr Bollard is harbouring about firms' unwillingness to 'do their bit' with respecting to passing on lower input costs. At the very least, it provided further support to our belief that CPI inflation will very quickly drop within the RBNZ's target band, paving the way for further substantial monetary policy easing. In both Australia and New Zealand, money markets still look reluctant to come to terms with the extent of monetary policy easing still required. In New Zealand, for instance, overnight wholesale interest rates suggest the trough in the OCR is pushing down towards 4%. Yet we see risks being firmly skewed toward a trough lower than this, with 3.5% a more realistic terminal point. As for longer rates, they will likely be capped via the Fed's new approach of quantitative monetary easing. However, upward pressure on yields will likely emerge later down the track, especially with so much issuance of government bonds in the pipeline, including in NZ. We mentioned yesterday markets would be coloured by volatile trading, and last nights price action will have many a London trader heading home shirtless as they battled a 2.5-3.0% rally in the major currencies and a subsequent 3.5-4.0% collapse. The NZD has tagged along for the ride, surfing through to highs in the 0.6050/0.6100 region before tumbling to open just on the US 59 cent level. We'll wrap the week with a repeat of the broad parameters that we have in our sights. While the attention of analysts is on the woes of the US economy and the expansion of fiscal and monetary policy then expect support for the NZD to shape at the 0.5725/0.5775 window, with progress closer to early November highs at the 0.6100/0.6150 level likely to result from the volatile trading in markets that are increasingly skinny in the lead up to the Christmas and New Year breaks. On the day we look to trade initially inside a 0.5840/60-0.5950/70 window. Locally there's November Visitor arrivals to note as we complete a torrid week in markets. The challenge is how to summarise with a few cold hard facts markets activity and volatility that is extreme and most traders' commentary is suffused with expletives. Caution from Japanese officials about the level of the YEN once again causes some concern, with leveraged and real money names covering short currency positions against the JPY. Asian sovereign names noted in these flows and elsewhere as nett buyers of EUR in the London market. Record lows in German ZEW data had no immediate impact, EUR continued it's charge north despite the headline survey tumbling to 82.6 (previous 85.8) and the expectations survey printing at 76.8 (previous 77.6). The GBP on the other hand battled fruitlessly for most of the night as analysts digested the BoE's Bean comments on the possibility of ZIRP in the UK and a view that the UK economic outlook is worsening. Retail Sales data printed better than forecast at +0.3% but was ignored in the current environment. Instead the NY day has so far been a sharp reversal, with USD demand at the London fix sparking a sell off in major currencies that has been exacerbated by thinning markets and weak risk appetite amongst micro traders. * All of the research produced by the BNZ Markets team of economists is available here.