iPredict Weekly Update
Key Points:
* John Key forecast to be re-elected, requiring one coalition partner
* Economic outlook worsens with double-dip recession now expected to continue through March quarter, and rising expectations it may extend into June quarter
* OCR strongly expected to be cut on 10 March and expectations for 90-day yields and floating-mortgage rates fall, despite inflation expectations rising
* Greens, New Zealand First and probability of UnitedFuture winning Ohariu trending down
* Harawira strongly expected to win Te Tai Tokerau and probability of New Left Party approaches 50%
* Contracts for Manurewa, Maungakiekie, Rodney, Waitaki and National’s Rodney selection to be launched at 2.00 pm today
Commentary:
This week’s snapshot from New Zealand’s prediction market, iPredict, continues to forecast that John Key will be able to form a government following this year’s General Election – but whereas last week his National Party was forecast for the first time to be able to govern alone the market now again indicates he will need at least one coalition partner.
Mr Key’s forecast re-election is despite worsening expectations for economic data. The market now indicates a 60% probability that Statistics New Zealand will report on 24 March that New Zealand was in a double-dip recession in the December 2010 quarter, up from 52% last week and 48% the week before.
Looking ahead, there is now a 58% probability the recession will extend into the March 2011 quarter (up from 40% immediately following the Christchurch earthquake last week and 16% the week prior to the earthquake) and a 39% probability it will extend into the June 2011 quarter (up from 18% last week and 6% the week before). The probabilities the economy will be in recession in the September 2011 and December 2011 quarters remain steady at 18% and 14% respectively.
Inflation expectations have risen. Annual inflation is expected to be 4.5% for the March quarter and 5.0% for the June 2011 quarter, up from 4.9% last week. The probability unleaded petrol will exceed $2.20 per litre in 2011 has increased from 63% last week to 77% this week, while the probability it will exceed $2.30 per litre has now reached 43% compared with just 30% immediately following the earthquake.
Despite this, there are growing expectations that interest rates will fall. The market now indicates a 70% probability the Reserve Bank will lower the Official Cash Rate (OCR) from its current 3.00% on 10 March, up from 11% immediately following the earthquake last week, and up from less than 1% prior to the earthquake.(1) The probability the bank will hold the OCR on 10 March is now down to 28% compared with 80% immediately following the earthquake and 98% prior to the earthquake. The bank is then expected to hold the OCR on 28 April (86% probability) and 9 June (84% probability).
Expected yields for 90-day bank bills have also plunged. Immediately prior to the earthquake, the expected 90-day rate on 1 June 2011 was 3.37%, but today this is down to 2.81%. The expected 90-day rate on 1 September 2011 has fallen from 3.53% to 3.16%, while the expected rate on 1 December 2011 has fallen from 3.71% to 3.44%.
Average floating-rate mortgages are broadly believed to have reached their peak. The probability they will reach 6.50% in 2011, from their current 6.39%, is now down to 40%, from 84% last week and 88% the week before. The probability they will reach 6.75% is now just 21%, compared with 48% immediately following the earthquake and 69% prior to it. The probability they will go as high as 7.00% is now down to 12%, from 21% last week and 40% prior to the earthquake.
The market continues to indicate a 97% probability that the election will be held on Saturday 26 November.
Between now and then, all party leaders continue to be expected to retain their positions. The most vulnerable continue to be Labour’s Phil Goff and the Maori Party’s Tariana Turia, but with Mr Goff having just a 13% probability of being replaced (down from 14% last week) and Mrs Turia just a 12% probability of being replaced (down from 13% last week).
Act Leader Rodney Hide has a 69% probability of retaining Epsom for his party (up from 68% last week) and UnitedFuture Leader Peter Dunne a 53% probability of being re-elected in Ohariu (down from 60% last week and 65% the week before).
Winston Peters is not expected to be elected to Parliament, with just a 28% probability he will be back, steady compared with last week. There is a 28% probability he will stand in the Epsom electorate.
There is an 89% probability newly Independent MP Hone Harawira will win Te Tai Tokerau as an independent or for a party other than the Maori Party, up from 72% last week and 48% the week before. Labour is expected to retain Ikaroa-Rawhiti (55% probability, steady compared with last week) while Labour’s challenger in Te Tai Tonga, Rino Tirikatene, has a 50% probability of defeating the Maori Party incumbent Rahui Katene, compared with 51% last week. Mrs Katene has a 48% probability of winning compared with 47% last week.
The probability that a new left-wing party will be formed involving at least two of Mr Harawira, former Alliance President and current Unite National Secretary Matt McCarten and former Green MP Sue Bradford remains below 50%, but has risen sharply since Mr Harawira’s departure from the Maori Party to 47% from 34% last week. The probability of a new right-wing party involving former National Party leader and Reserve Bank Governor Don Brash is down to 14% compared with 15% last week.
Forecast party vote shares are: National 46.5% (steady compared with last week), Labour 31.9% (down from 32.3%), the Greens 7.0% (down from 7.2% last week and 8.0% the week before), Act 4.0% (up from 2.5% last week), New Zealand First 3.2% (down from 3.4% last week and 4.3% the week before), UnitedFuture 2.1% (up from 1.7% last week and 1.5% the week before) and the Maori Party 2.0% (down from 2.2% last week).
Based on this data, the market is forecasting the following Parliament: National 59 MPs, Labour 41 MPs, Greens 9 MPs, Act 5 MPs, the Maori Party 3 MPs, UnitedFuture 3 MPs and Mr Harawira. There would be 121 MPs, requiring a government to have the support of 61 MPs on confidence and supply. National’s Mr Key could govern with the support of one of Act, UnitedFuture or the Maori Party.
Because of growing speculation about the possibility of a new left-wing party, iPredict has also analysed what would happen were that party to receive 2% of the total vote (“all others” currently stands at 2.4%) and were Mr Harawira to win his seat for the new party. Under this scenario, Parliament would be as follows: National 58 MPs, Labour 40 MPs, Greens 9 MPs, Act 5 MPs, the Maori Party 3 MPs, UnitedFuture 3 MPs and the new left-wing party 2 MPs. There would be 120 MPs, requiring a government to have the support of 61 MPs on confidence and supply. Mr Key could govern with the support of one of Act, UnitedFuture or the Maori Party.
The result in the most marginal Maori electorate, Te Tai Tonga, does not affect the overall political situation.
There continues to be no politically plausible combination that would allow a Labour-led government to be formed, with there now being an 83% probability there will be a National Party prime minister after the election, up from 81% last week and 79% the week before.
In electorates for which bundles of stocks were launched last week, Mr Key has a 98% probability of retaining his Helensville seat, National’s Shane Ardern a 95% probability of retaining Taranaki-King Country, National’s Phil Heatley a 90% probability of retaining Whangarei and National’s Eric Roy a 79% probability of retaining Invercargill despite competition from former Labour MP Lesley Soper.
Looking at marginal seats other than Ikaroa-Rawhiti, Ohariu and Te Tai Tonga mentioned above, electorates where the predicted winner has less than 65% probability of winning are: New Plymouth (62% probability of being won by Labour’s Andrew Little from National’s Jonathan Young, up from 60% last week); Otaki (63% probability of being retained by National’s Nathan Guy over Labour’s Darren Hughes, steady compared with last week); Waitakere (62% probability of being won by National’s Paula Bennett over Labour’s Carmel Sepuloni, up from 58% last week); and West Coast-Tasman (53% probability of being retained by National’s Chris Auchinvole over Labour’s Damien O’Connor, down from 55% last week).
There is a more than 99% probability National’s Jami-Lee Ross will win the Botany by-election, up from 98% last week.
There is an 80% probability voters will elect to retain the MMP voting system in the referendum to be held on election day, steady compared with last week.
iPredict is owned by Viclink, the commercial arm of Victoria University of Wellington. Details on the company and its stocks can be found at www.ipredict.co.nz
The company will be providing full election coverage this year, including of every electorate race in the country. Bundles of contracts for every electorate will be launched progressively through to the end of March. Contract bundles will be launched at 2.00pm today for the Manurewa, Maungakiekie, Rodney and Waitaki electorates.
A contract bundle will also be launched at 2.00pm today asking who will be selected as the National Party’s candidate in the Rodney electorate: John Kirikiri, Mark Mitchell, Christopher Penk, Brent Robinson, Scott Simpson or other.
The weekly political snapshot is taken at a random time each week to avoid market manipulation by political parties or activists. This week’s was taken at 9.33 am today.
(1) The contract is worded “Reserve Bank to increase OCR by more than 50 basis points, or lower it, on 10 March 2011,” but it has been assumed the market rates the probability of an increase of 75 basis points or more at zero.