RBNZ August Rate Decision: Unexpected 25bp Rate Cut, Inflation Expected to Return to Target in Q3

Remarks of Officials

Central Bank

Summary:

The Reserve Bank of New Zealand (RBNZ) unexpectedly cut interest rates by 25 basis points at its August meeting. Members believe that all measures of core inflation have fallen and the components of CPI that are sensitive to monetary policy have declined further. Headline inflation will return to the target range in the third quarter.

On August 14, local time, the RBNZ announced the result of its August interest rate decision, unexpectedly cutting interest rates by 25 basis points to 5.25%. Excerpts from its monetary policy statement are as follows:

New Zealand's economy is experiencing sluggish growth and economic activity is likely to decrease in the middle of the year. Restrictive interest rates, sluggish global growth, falling net migration and reduced government spending are continuing to reduce domestic demand, and the economy is moving from a period of excess demand to one of excess supply.

The June quarter data suggest that employment growth has slowed, with private sector jobs, hours worked and wage growth all falling. Employment growth is expected to weaken further in the coming quarters as a result of tighter government spending and public sector job losses.

Subdued economic activity has meant that firms have cut back on hiring. Job vacancies have continued to fall and businesses reported that it is much easier to find workers. Net migration has recently slowed from a high level and is expected to fall further in the coming year. Nevertheless, the labour supply continues to grow. In turn, the weakness of the labour market and the decline in headline inflation have led to a decline in nominal wage growth.

Inflation fell considerably in the June quarter, due mostly to lower tradables inflation, while domestic inflation declined in line with expectations. Business inflation expectations have returned to around 2 percent at medium- and longer-term horizons. All measures of core inflation have fallen and the components of CPI that are sensitive to monetary policy have declined further. Combined with weak high-frequency indicators of economic activity, these developments strengthened the Committee's confidence that headline inflation would return to the target range in the third quarter.

Recent indicators provide confidence that inflation will continue to return to target within a reasonable period. Monetary policy will need to remain restrictive for some time to ensure that domestic inflationary pressures continue to dissipate. The pace of further easing will therefore depend on the Committee's confidence that pricing behaviour remains consistent with a low inflation environment and that inflation expectations remain close to the 2 percent target.

New forecasts from the RBNZ show that the average official cash rate (OCR) is expected to be 4.92 percent in the fourth quarter of 2024 and 4.62 percent in the first quarter of 2025. Annual inflation is expected to be 2.3 percent in the third quarter of 2024. GDP is expected to contract by 0.5 percent in the second quarter of 2024 from the previous quarter; By the middle of 2025, the average OCR is expected to decline by 101 basis points.

RBNZ August Rate Decision

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Owen Li

Stocks

Investors might be reading too much into last week's historic surge in the Cboe Volatility Index, better known as the VIX or Wall Street's "fear gauge."

Instead of signaling widespread panic, the VIX's dalliance with crisis levels may have had more to do with a quirk in how the index is calculated, Wall Street strategists said. As a result, any market-timing signals investors had gleaned from the move are likely useless, according to Peter Tchir, chief macroeconomic strategist at Academy Securities.

"I think the VIX 65 print is a garbage piece of data … use it in your investing at your own peril," Tchir said in a report shared with MarketWatch.

Why A Historic Surge in the VIX Wasn’T the Signal Investors Thought It Was_1

To recap: The VIX -12.51% topped 65 at around 8:30 a.m. Eastern time on Aug. 5, capping off its biggest intraday swing on record, according to Dow Jones Market Data. The index had only reached higher levels during the 2008 financial crisis and around the time of the COVID-19 crash in 2020.

At the time, a sense of fear was palpable across markets: Japanese stocks had just seen their biggest daily drop since 1987, and S&P 500 futures were down 4.4% as traders grappled with U.S. recession worries and the unwinding of a popular yen carry trade.

Amid the tumult, Tchir and others latched on to the notion that the VIX move still seemed large relative to where stocks were trading. Tchir ultimately concluded that liquidity issues in the options market had likely distorted readings of the index.

One indication that the jump in the VIX might not be reflective of a commensurate surge in demand for hedges could be found in VIX futures, Tchir said. The front-month VIX futures contract didn't rise nearly as much as the VIX itself, calling into question the move in the index.

Tchir ultimately zeroed in on a more likely culprit. As markets tumbled, options dealers had adjusted bid-ask spreads in some of the most illiquid S&P 500 options, he concluded. This appeared to have an outsize impact on the level of the index, even though relatively few trades in the options used to determine the level of the VIX had actually taken place.

A team of Bank of America analysts arrived at a similar conclusion in a report shared with MarketWatch on Tuesday.

In the report, the BofA team pushed back on popular explanations for the jump in the VIX — like the notion that it had been driven by the unwinding of speculative "short volatility" bets, which typically pay off if the VIX falls or remains low.

After taking a closer look at the tape, the BofA team concluded that a few trades in illiquid out-of-the-money S&P 500 options likely had a major impact on bid-ask spreads across the options chain.

The level of the VIX is determined by a mathematical formula that relies on the bid-ask spread of S&P 500 options expiring between 23 days and 37 days out.

Call options represent an agreement to buy a stock at an agreed-upon price before a specified expiration date. They typically represent a bullish position on the part of whoever is holding the option. Puts, meanwhile, represent an agreement to sell at a predetermined price before a predetermined expiration. They can be used to hedge a portfolio against losses, or they can represent outright bearish bets.

An option contract is considered out of the money when the strike price is below the level where the market is currently trading, in the case of a call — or above it, in the case of a put.

Finally, the VIX quickly moved lower once Wall Street had opened for trading, helping to support the theory that liquidity issues were behind its premarket jump, the BofA team said.

U.S. and Japanese stocks have already clawed back their losses from early last week. But both Tchir and the BofA team said the fact that investors didn't see a genuine washout means stocks could be vulnerable to more volatility in the coming weeks.

The historically volatile months of September and October could once again prove to be a challenging stretch for markets this year, the BofA team said.

The VIX was on track to finish below 20 on Tuesday, down 49% from its Monday closing high north of 38. The nearly 50% drop in the index since then represents the biggest six-day slide for the VIX on record.

Meanwhile, the S&P 500 1.68% and Nasdaq Composite 2.43% were poised to climb for a fourth consecutive day, while remaining on track for their biggest four-day jump since November.

Source: MarketWatch

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Samantha Luan

Central Bank

WELLINGTON, Aug 14 (Reuters) - New Zealand's central bank slashed its benchmark cash rate for the first time since March 2020, sending the local dollar tumbling as policymakers flagged more cuts over the coming months saying inflation was converging on its 1% to 3% target.

The decision to reduce rates by 25 basis points to 5.25% came almost a year ahead of the Reserve Bank of New Zealand's (RBNZ) own projections, taking some market players by surprise.

The policy easing was in line with market pricing but defied most economists' expectations, with 19 of 31 economists in a Reuters poll having forecast the central bank to hold steady as they have since May 2023.

"The Committee agreed to ease the level of monetary policy restraint by reducing the OCR (official cash rate)," the central bank said in its statement.

“The pace of further easing will depend on the Committee’s confidence that pricing behaviour remain consistent with a low inflation environment, and that inflation expectations are anchored around the 2 percent target,” it added.

Investors reacted by knocking the kiwi dollar down 0.75% to $0.6032 , erasing most of the 1% gains made overnight as soft U.S. producer price data slugged the U.S. dollar.

Swaps shifted to imply another 29 basis points of easing by October and 67 basis points of easing by year end. Rates are seen near 3.0% by the end of 2025, well below the RBNZ's projection. Bank bill futures also jumped.

ASB Bank chief economist Nick Tuffley said he expects the RBNZ will continue steadily cutting the cash rate by 25 basis points in consecutive meetings.

“If inflation pressures evaporate faster than expected, the RBNZ may need to hasten the return to a more neutral setting of around 3.25%,” Tuffley added. ASB Bank along with Kiwibank announced they would cut their mortgage lending rates.

The RBNZ's forward guidance suggested at least three more cuts by the middle of next year, projecting the cash rate at 4.9% in the fourth quarter of 2024 and 4.4% in the second quarter of 2025. Previously, it had not expected to start cutting rates until the middle of 2025.

The minutes of the meeting, released alongside its statement, said the Committee observed that the balance of risks has progressively shifted since the May Monetary Policy Statement.

“With a broad range of indicators suggesting the economy is contracting faster than anticipated, the downside risks to output and employment that were highlighted in July have become more apparent,” the minutes added.

A global front-runner in withdrawing pandemic-era stimulus, the RBNZ has lifted rates 525 basis points since October 2021 to curb inflation in the most aggressive tightening since the official cash rate was introduced in 1999.

New Zealand's annual inflation has come off in recent months and is currently running at 3.3% with expectations that it will return to the central bank's target band in the third quarter of this year.

The rate hikes have sharply slowed the economy with meagre first quarter growth and recent data indicating still-subdued momentum.

New Zealand joins other central banks that are starting to ease rates. The European Central Bank, Canada, Sweden and Switzerland have all cut interest rates and an increasing number of analysts are now pencilling in a half-a-percentage-point rate cut for the Federal Reserve's September meeting.

New Zealand's neighbour Australia, however, is an exception to the global easing trend. The Reserve Bank of Australia last week ruled out near-term rate cuts.

Source:Reuters

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Samantha Luan

Central Bank

SYDNEY—The Reserve Bank of New Zealand cut its official cash rate by 25 basis points to 5.25% after a policy meeting Wednesday, but signaled that a shallow easing cycle would likely play out given that domestic inflation pressures remain worrisome.

“With headline CPI inflation expected to return to the target band in the third quarter and growing excess capacity expected to support a continued decline in domestic inflation, the committee agreed there was scope to temper the extent of monetary policy restraint,” the RBNZ said in a statement.

“However, members noted that monetary policy will need to remain restrictive for some time to ensure that domestic inflationary pressures continue to dissipate,” it added.

While money markets had priced in a strong expectation that the RBNZ would cut interest rates, the consensus among economists was that the central bank would hold rates steady.

The decision to cut follows recent data showing inflation in New Zealand softened by more than expected in the three months through June.

Consumer prices rose by 0.4% in the second quarter of this year, and by 3.3% from the same period a year earlier. The annual rise was lower than the 3.6% increase expected by the RBNZ.

The easing in policy brings RBNZ in line with many of its global peers that have either started to cut interest rates or are likely to cut before the end of the year.

New Zealand’s economy has moved in and out of recession over the last two years and unemployment has been rising, while inflation expectations have been declining.

Source:The Wall Street Journal

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Titan FX

Commodity

Gold Price Technical Analysis

Gold prices found support near the $2,380 level against the US Dollar. The price formed a base and recently started a fresh increase above $2,420.

Gold Aims for Critical Upside Break, US CPI Next_1

The 4-hour chart of XAU/USD indicates that the price settled above the $2,440 level, the 100 Simple Moving Average (red, 4 hours), and the 200 Simple Moving Average (green, 4 hours). It even surpassed the $2,465 resistance zone.

Finally, the bears appeared near the $2,475 zone. The price is now consolidating and eyeing for more upsides. Immediate resistance is near the $2,475 level.

The first major resistance sits near the $2,485 level. A clear move above the $2,485 resistance could open the doors for more upsides. The next major resistance could be near $2,500, above which the price could accelerate higher toward the $2,520 level. Any more gains might send Gold toward the $2,550 resistance.

On the downside, there is a key support forming near the $2,440 level. The main support is now near $2,400. There is also a major bullish trend line forming with support at $2,400 on the same chart.

A downside break below the $2,400 support might call for more downsides. The next major support is near the $2,380 level. Any more losses might send gold prices toward $2,365.

Looking at Oil, the bulls remained in action, and they were able to push the price above the $77.50 and $77.65 resistance levels.

Economic Releases to Watch Today

US Consumer Price Index for July 2024 (MoM) – Forecast +0.2%, versus -0.1% previous.

US Consumer Price Index for July 2024 (YoY) – Forecast +2.9%, versus +3% previous.

US Consumer Price Index Ex Food & Energy for July 2024 (YoY) – Forecast +3.2%, versus +3.3% previous.

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ING

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Global Macro and Markets

Global Markets:

The market mood has shifted back towards rate cuts again in the last 24 hours with US PPI data coming in on the soft side ahead of today’s CPI numbers. 2Y US Treasury yields fell 8.8 basis points, and the 10Y yield fell 6.1bp taking it to 3.843%. EURUSD has climbed steeply and is eyeing 1.10. Other G-10 currencies have been pushed stronger by the USD weakness. The AUD is up to 0.6639, Cable is up at 1.2866, and the JPY has declined to just below 147. Asian FX also had a strong day yesterday. The PHP and IDR gained about 0.6-0.8% respectively, and USDCNY has dropped to 7.1550. US equities were in a happier frame of mind on Tuesday. The S&P 500 rose 1.68% while the NASDAQ gained 2.43%. Chinese stocks made smaller gains of about 0.3-0.4%.

G-7 Macro:

Yesterday’s PPI can’t be relied on to give too accurate a steer on today’s CPI numbers, but the direction has at least encouraged thoughts of a softer CPI print. The headline July PPI inflation rate dropped more than expected to 2.2% YoY, down from 2.7%, though there was a more mixed story from the core figures.

There is plenty of scope for CPI and other data releases to inject further market volatility over the coming weeks ahead of September’s FOMC meeting, and our Chief US economist and FX strategists consider a number of scenarios in the linked note. Along with the PPI data, there were also more encouraging signs from the small firm US NFIB business survey. The same cannot be said for the German ZEW business survey, which continued to head lower. Other G-7 data releases today include July CPI for the United Kingdom and preliminary 2Q24 GDP for the Eurozone. An increase of 0.3% QoQ is the consensus forecast for the Eurozone GDP result, which would leave year-on-year growth unchanged at 0.6%.

South Korea:

The jobless rate unexpectedly dropped to 2.5% in July (vs 2.8% in June, 2.9% market consensus), the lowest since November 2023. The labour participation rate edged down to 64.2 %, the third consecutive monthly decline from the recent peak of 64.7% in April.

The increase in employment for the month was mainly driven by the service sector, while manufacturing (-23k) and construction (-19) shed jobs. Construction recorded its sixth consecutive monthly decline, reflecting sluggish construction activity. Among services, transportation (21k), education (40k), and health & social work (8k) added jobs, but wholesale/retail sales (-26k), real estate (-14k), and recreation-related (-10k) sectors lost jobs. On a YTD basis, health and social work added the most jobs (136k), largely driven by government social welfare policies.

Meanwhile, private-sector hiring has been sluggish, including manufacturing (-2k), construction (-152k) and whole/retail sales (-59k). These declines are contributing to weak household consumption. We are concerned that private-sector hiring will remain sluggish, weakening household income and consumption.

South Korea: Private-sector hiring has been sluggish Asia Morning Bites_1

What to look out for: India trade balance

August 14th

S Korea: July unemployment rate

India: July wholesale prices

August 15th

Japan: 2Q preliminary GDP, June industrial production

Australia: July employment change, unemployment rate

China: July industrial production, retail sales, fixed assets Ex rural

Indonesia: July imports, exports, trade balance

Philippines: BSP overnight borrowing rate, June Overseas cash remittance

August 16th

Singapore: July non-oil domestic exports

Japan: June tertiary industry index

Taiwan,China: 2Q preliminary GDP

US: U. of Mich. sentiment

To stay updated on all economic events of today, please check out our Economic calendar

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[Quick Facts]

1. Japanese retail investors are betting heavily on a yen rise.

2. Nvidia rebound adds $400 billion market value in four days.

3. Bostic: Recession not imminent, still expects rate cuts by year-end.

4. U.S. PPI rose less than expected in July.

5. Sources: Gaza ceasefire could delay Iran's retaliation against Israel.

[News Details]

Japanese retail investors are betting heavily on a yen rise

Japanese retail investors are betting on a further rally in the yen even as it retraces some of the gains made in the past two weeks. Data from the Tokyo Financial Exchange shows that by Monday, retail traders held net long positions in the yen against 14 foreign currencies totaling ¥431 billion ($2.9 billion), up 22% since the Bank of Japan's rate hike last month and nearing the record high of ¥501 billion set in April.

These long positions indicate strong confidence in the yen's potential for further appreciation. The prospect of Fed rate cuts and increased market volatility have driven carry traders away, further supporting the yen bulls. While the interest rate differential suggests selling the yen and buying other currencies, market turbulence makes this challenging, said Takuya Kanda, head of research at Gaitame.com Research Institute. The risk of falling stock prices also tends to drive the yen higher against other currencies.

Nvidia rebound adds $400 billion market value in four days

Nvidia's stock price has surged nearly 17% over the past four trading days, adding more than $400 billion to its market value. This rally has also lifted the broader market, with Nvidia accounting for about 22% of the S&P 500's gains during this period. "Nvidia delivered a lot of good news this earnings season, but the impact of carry trades was so significant that the positive news didn't matter. Now that the technical pressure has eased, the market has returned to fundamentals, driving the stock price surge," said Spear Invest founder and CIO Ivana Delevska.

Nvidia's rebound also caught options traders betting on further declines off guard. Institutional data shows that in terms of contracts profiting from a 10% rise, the cost of hedging against a 10% drop in the stock over the next 60 days is near its highest level since May 2023.

Bostic: Recession not imminent, still expects rate cuts by year-end

Atlanta Fed President Raphael Bostic said on Tuesday that he doesn't foresee a recession. The economy still has enough momentum that we can see a slowdown without the labor market deteriorating to a worrisome degree.

He's looking for "a little more data" before supporting a reduction in interest rates, emphasizing he wants to be sure the U.S. central bank will not have to change course once it begins cutting. If the economy evolves as expected, rates could be lower by the end of the year.

The rise in unemployment is largely due to an increase in labor supply, not a decline in demand, and there hasn't been much talk of layoffs.

U.S. PPI rose less than expected in July

U.S. Producer price index (PPI) rose 0.1% in July from a month ago, missing expectations for a 0.2% rise. It increased 2.2% from a year earlier, also below forecast. The core PPI was unchanged from the previous month, the tamest reading in four months. Weaker consumer demand has forced sellers to lower prices, leading to significant price drops in industries such as machinery and automotive wholesale, as well as food and alcohol retail. Against the backdrop of receding inflationary pressures, the market expects the Fed to make a series of rate cuts starting next month, with the possibility of a 50 basis point cut.

Sources: Gaza ceasefire could delay Iran's retaliation against Israel

Three senior Iranian officials said that only if a ceasefire agreement in Gaza is reached this week can Iran be prevented from directly retaliating against Israel for the assassination of Hamas leader Haniyeh on its soil, according to foreign media reports. Iran had vowed a severe response to the assassination of Haniyeh during his visit to Tehran late last month and blamed Israel for the incident.

Israel has neither confirmed nor denied its involvement. One of the sources, a senior Iranian security official, stated that if Gaza negotiations fail or if Iran believes Israel is stalling, Iran will launch a direct attack against Israel with its allies, including Hezbollah. The sources did not disclose how long Iran would allow negotiations to progress before responding.

[Today's Focus]

UTC+8 10:00 Reserve Bank of New Zealand Reserve Bank Rate Decision (Aug)

UTC+8 11:00 RBNZ Governor Orr's Monetary Policy Press Conference

UTC+8 2:00 Next Day: U.K. CPI YoY (Jul)

UTC+8 8:30 Next Day: U.S. CPI YoY (Jul)

To stay updated on all economic events of today, please check out our Economic calendar

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