Opinion: Dairy payout forecast to get worse for some months yet

By BNZ Markets' Brendan Marsh The New Zealand dollar was once again on the back foot on Friday night, with weaker equity markets through Asia & Europe illustrating the fickleness of investor sentiment. Traders with a very short term focus and some momentum funds exited "long" NZ$ positions as the broader market responded to news flashes about the proposed bail out of the US automakers. The Senate rejection of the bill means that the US Treasury seem likely to tap into the TARP facility to provide some form of short term funding that will see the new US administration tackle what to do with the three companies in the new year. Our economists spent a bit more time going through the detail of the Consensus growth forecasts released Friday morning and can confirm that they are ugly reading for NZ. New Zealand trading partner growth is expected to slump to just 0.6% in calendar 2009 from 2.3% in 2008 and 4.1% in 2007. Just three months ago the consensus view was that growth would be 2.6% for 2009. Last month the consensus was 1.1%, the number the RBNZ built into its December MPS. Indicative of just how awful these figures are, trading partner growth will trough at 0.3% on an annual average basis in September 2009 - that's a full 1.0% lower than the 1982-84 recession when New Zealand growth troughed at -1.3%. This suggests that the downside risks for both growth and interest rates are very big indeed. Their weekly look at dairy prices is once again glum as dairy prices continue to slide, with the returns on all products falling sharply during the past week. Most significantly, the price of skim and whole milk powders - which tend to lead price changes in other dairy products - fell around 8% during the week. The good news amongst the detail is that wholemilk powder, currently selling at $US1850/t, is close to the support price of the US government's intervention scheme (which aims to ensure a specific return to US dairy farmers) of $US1760/t. This should set a floor for global whole milk powder prices. The bad news is that because the prices of butter, cheese and casein tend to lag those of milk powder (by as much as eight months in the case of butter), average USD dairy prices - which have a major bearing on the NZ dairy payout - will likely keep falling for some months yet. On the calendar this week, we start today with Q3's manufacturing survey which will provide the last piece of the September quarter GDP puzzle. We're looking for a nominal sales figure consistent with a decline in real activity of 0.5%, with the weak readings in the PMI since mid-year suggestive of risks skewed to the downside. Today also sees November's Performance of Services Index, which will most likely print below 50, consistent with contraction in the wider economy. On Wednesday, WMM's consumer confidence index could hold the relatively robust level of the previous survey, with tax cuts, petrol price falls and lower mortgage rates all helping support household sentiment. There's also the chance that headline business confidence could hold up reasonably well in Thursday's National Bank Business Outlook. As always, though, we'll be more interested in the underlying details, with firms' intentions regarding investment and employment of particular note. It's a familiar line to write but, given the backdrop of slowing global growth and fragile risk appetite, the NZ recession and falling NZ interest rates, we continue to think bounces in the currency will attract sellers. It's worth noting, NZD/USD is now above the 0.5320-0.5520 "fair value" range implied by our short-term valuation. For the week we expect rallies to be limited by 0.5550-0.5600. If the week ahead is clouded by weaker equity markets and easier investor sentiment then last weeks support levels at 0.5325-0.5375 will once more be challenged. * Danica Hampton is away for the week. All of the research produced by the BNZ Markets team of economists is available here.