RBNZ OCR Change Of Call: Weak GDP Implies A Lower Trough In The OCR

Westpac

Economic

Central Bank

Summary:

The OCR looks set to end 2025 at 3.25% – lower than previously thought.

Weaker starting point implies a more pressing case to ultimately cut further

Recent months have seen accumulating evidence that the economy has started to turn the corner, with the significant cuts to the OCR made by the RBNZ since August supporting consumption, investment and the housing market. Yesterday’s ANZ Business Outlook survey provided further evidence of that turnaround, as did earlier data this week on the service sector PMI and our own consumer confidence survey. Forward indicators of housing market activity also look more encouraging.

However, yesterday’s GDP data tell us that this recovery is following a much steeper downturn in the middle quarters of this year. The cumulative 2.1% fall in GDP over the June and September quarters were much more than had been thought – indeed, outside of Covid, the steepest two-quarter downturn since 1991 – and tell us that past interest rate increases were biting harder into the economy than generally appreciated.

A full analysis of the GDP data will be released later yesterday. However, our initial read of this data strongly suggests the RBNZ will be even more confident that more interest rate cuts will be required after February 2025. GDP growth was revised higher in 2022 and 2023, implying stronger productivity growth over that period than estimated previously. Even so, the weaker than expected growth in mid-2024 means that the economy is likely to be starting from a position of greater excess capacity than the RBNZ previously thought. So even though yesterday’s data has no bearing on the recovery that we now believe to be underway, that recovery will take longer to remove the excess capacity now evident in the economy.

All else equal, that implies slightly less pressure on domestic inflation. Hence the RBNZ will likely be more confident that it can continue to ease policy and that the case for moving policy closer to a fully neutral setting is strengthened. The RBNZ’s view is that the neutral OCR is around 3% – this data will likely tell them they need to get there faster. Likely, they will want to be there by mid- 2025. All else equal we can see their revised forecasts in February reflecting that view.

Of course, all else may not be equal. The exchange rate is appropriately falling sharply and there are many unknowns in how the global environment, terms of trade and trade environment more generally will evolve.

But for now, it looks more likely that the OCR will trough a bit lower than previously thought. Following a 50bps rate cut at the 19 February meeting, we have pencilled in an extra 25bp cut in the April meeting to join the one already envisaged in May 2025. This will take the OCR to a trough of 3.25%.

Ahead of the RBNZ’s next meeting in February, there are several key pieces of domestic data that could be important for the RBNZ policy stance and our own forecast. That includes the Quarterly Survey of Business Opinion on 14 January, the CPI on 19 January and the Q4 labour market update on 5 February. Adjustments to the rates outlook in both directions are possible.

We have not revised our view of the neutral OCR – which remains at 3.75%. This means that the key consequence of this data is more stimulatory conditions by the end of 2025. That also lays the ground for an extra increase in the OCR later in 2026 to bring the OCR back to neutral levels. Hence, the view is starting to look a lot more like a normal interest rate cycle.

Our view remains that the mix of financial conditions is likely to tilt towards more easing being delivered in the form of a weaker exchange rate. Yesterday’s FOMC meeting seemed to solidify the view that US interest rates will remain higher than seen pre-Covid, even as New Zealand short rates head down. We will reevaluate our exchange rate forecasts in the New Year once a bit more data becomes available. Fair to say though, downside risks to our published NZD/USD and Trade Weighted Index forecasts exist.

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JPMorgan

Economic

In the early internet days, the late U.S. Senator Ted Stevens famously used the analogy of a “series of tubes” to explain how the internet worked. Today, investors are trying to understand the “series of tubes” that enable artificial intelligence. Behind every interaction with an AI tool is not only a complex web of digital neural networks, but also a humming physical network of data centers, electricity lines and power plants.

From an investor perspective, after the spectacular run-up in the “Magnificent 7” stocks over the last two years, investors are now asking, are there opportunities to diversify along the value chain? And specifically, in alternative investments?

We think so. Let’s take a closer look at how investors in private energy infrastructure are investing in this trend without the high volatility of the public markets.

A boom in data center building

Even preceding the recent surge in consumer AI, a data center building boom has been underway. The amount of capacity in the U.S. is on track to double over the next decade. There is currently more than 3,800 MW of capacity being built in the U.S., up about 70% from the prior year and another 7,000 MW in various stages of pre-construction. (Data centers are commonly measured in terms of electrical capacity, as well as the more traditional square footage, underscoring the criticality of energy supply to their operations.)

But electrical grid constraints at a local level are becoming bottlenecks to new construction. AI data centers are massive consumers of electrical power. A ChatGPT query, for example, consumes an estimated 2.9 watt-hours, 10 times more than a Google search. And as Google and other search engines begin to incorporate AI responses by default, their energy needs will grow. This is particularly a challenge for the hyperscalers looking to scale AI adoption in the coming years. 40% of existing AI data centers are expected to be operationally constrained by power availability by 2027, according to a Gartner study.

Privately-held power generators are often able to ramp up capacity more quickly than their public counterparts, using funding from investors rather than taxpayer dollars. This is allowing them to take advantage of emerging opportunities to power the latest, most energy-hungry facilities.

These large scale shifts in the energy and data landscape are creating compelling opportunities for investment and value creation in the “tubes” of the internet, particularly in alternative markets.

AI is evolving rapidly and creating winners and losers in the public equity markets. But increased electricity demand is a theme that will remain relevant into the coming years. Private infrastructure investment offers opportunities to gain long-term exposure to these favorable trends with lower volatility than public markets or venture capital. How is the AI Building Boom Fueling Opportunities in Private Energy Infrastructure?_1

How is the AI Building Boom Fueling Opportunities in Private Energy Infrastructure?_1

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Warren Takunda

Economic

The December Federal Reserve meeting knocked the wind out of markets, delivering exactly what investors didn’t ask for this holiday season: more volatility, fewer rate cuts ahead, and hawkish posture from Jerome Powell.

The Federal Open Market Committee, as widely expected, delivered a 25-basis-point rate cut, bringing the target range to 4.25%-4.50%.

Yet, the updated economic projections left little room for market cheer. The central bank now anticipates just two additional cuts in 2025, a dramatic shift from the four cuts projected in September.

During the press conference, Powell added fuel to the fire: “From here, it’s a new phase, and we’re going to be cautious about further cuts.”

“We’re significantly closer to neutral,” Powell said, referring to the interest rate level that neither fuels nor stifles economic growth.

Powell struck an optimistic tone about the current state of the US economy, describing it as resilient, highlighting a "remarkable" performance compared to global peers which are struggling with sluggish growth and high inflation.

“When we attend international meetings, the story is how well the US economy is doing,” he said.

When asked about recession risks, Powell dismissed the idea of an imminent downturn. “Most forecasters have been predicting a slowdown in growth for a very long time, and it keeps not happening,” he added.

Fed highlights fresh inflation fears

Driving this recalibrated stance are hotter inflation forecasts. Headline inflation for 2025 is now expected to hit 2.5%, up from 2.1%, while core inflation—excluding food and energy—is also seen at 2.5%, up from the previously 2.2%.

Powell reiterated the Fed’s resolve to achieve its 2% target, though he conceded it might take “another year or two.”

When asked whether the Fed might consider raising rates again in 2025, Powell said, “You don’t rule things completely in or out in this world. That doesn’t appear to be a likely outcome.”

“Our focus is on seeing further progress on inflation and continued strength in the labour market,” Powell said, highlighting the Fed's data-driven approach.

Powell also addressed questions on fiscal risks under a potential Trump administration and the inflationary fallout of tariffs. While refusing to make assumptions, Powell acknowledged the Fed is keeping a close eye on these developments:

“We’re in the phase of monitoring potential outcomes, not making policy assumptions.”

Stocks fall, dollar surges to 2-year highs

The S&P 500 plunged 3.03% to 5,866.80, while the Nasdaq 100 sank 3.74% and the Dow Jones dropped 1,103 points (-2.54%) in a broad market rout. Tesla Inc. led the sell-off in the tech sector, tumbling 8.1%.

For the S&P 500 and the Dow, Wednesday’s session marked their steepest declines since September 2022.

Wall Street’s CBOE Volatility Index, often dubbed the ‘fear gauge,’ spiked nearly 60%, reflecting mounting investor anxiety as Fed Chair Jerome Powell dismissed expectations for imminent policy easing.

The euro slid 1.33% against the dollar to $1.03518, its weakest level since November 2022, while the dollar index (DXY) surged 1.22% to 108.265, a two-year peak. Stocks Plunge as Federal Reserve's Tilt Triggers ‘Black Wednesday’_1

Stocks Plunge as Federal Reserve's Tilt Triggers ‘Black Wednesday’_1

Commodities also felt the pressure: gold fell 2.3% to $2,584, and silver tumbled 3.9%, touching a five-week low.

Treasury yields jumped as investors reassessed the outlook for interest rate cuts. The 10-year Treasury yield climbed 12 basis points to 4.52%, the highest since late May.

Bitcoin stumbles as Powell rules out crypto reserve

Addressing speculation over Bitcoin and crypto reserves, Powell rejected the idea of a US government-backed Bitcoin strategic reserve tool.

“We’re not allowed to own Bitcoin,” Powell clarified, citing legal constraints under the Federal Reserve Act. “We have no intention of pursuing changes to that law.”

Bitcoin slid more than 5% to approximately $100,000 in the wake of Powell’s remarks, adding further strain to the cryptocurrency market.

Source: Euronews

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ING

Economic

Commodity

Energy – EIA reports smaller than expected inventory draws

Crude oil edged lower this morning as the dollar surged to its highest level in more than two years following expectations for fewer interest rate cuts from the Federal Reserve next year. Meanwhile, a lower-than-expected oil inventory withdrawal reported by the Energy Information Administration (EIA) is also keeping prices under pressure.

US weekly inventory numbers from the EIA yesterday showed that commercial crude oil inventories (excluding SPR) decreased by 0.9m barrels for the week ended on 13 December 2024, lower than market expectations of a decline of around 1.6m barrels. The draw was also smaller than the 4.7m barrel draw the API reported the previous day. When factoring in the SPR, the draw was even smaller, with total US crude oil inventories falling by just 0.4m barrels. Total US commercial crude oil stocks stand at 421m barrels, 6% below the five-year average.

Oil inventories at Cushing, Oklahoma rose 108k barrels to 23m barrels, after dropping to their lowest level since late September over the preceding week. Crude oil imports increased by 0.67m bbls/d last week to 6.65m bbls/d while exports strengthened by 1.8m bbls/d to 4.9m bbls/d (the highest since the end of July) over the reporting week.

In refined products, stocks of gasoline increased by 2.35m barrels, against a forecast for a build of 1.44m barrels. However, distillate fuel oil stockpiles fell by 3.2m barrels last week, in contrast to the market expectations of a build of 1m barrels. Meanwhile, refineries operated at 91.8% of their capacity, down from 92.4% seen in the previous week and the same period last year.

Metals – Gold tumbles on Fed outlook

Gold prices fell more than 2% to the lowest level in a month yesterday as the Fed forecasted slower monetary easing in 2025. In its final meeting for the year, the central bank lowered its interest rates by 25bp as expected. However, its quarterly forecasts for 2025 show 50bp of rate cuts for the year compared to previous estimates of 100bp of rate cuts. The US dollar index strengthened to the highest level since November 2022 while treasury yields also edged higher following the expectations of a slower pace of rate cuts next year.

LME copper was seen trading below US$8,950/t, and other industrial metals also edged lower this morning following the overall weakness in the broader financial markets. LME copper 3m prices settled at US$9,029/t yesterday, the lowest since the start of the month.

The latest data from the International Lead and Zinc Study Group (ILZSG) shows that the global zinc market recorded a marginal surplus of 19kt in the first 10 months of the year, lower than the surplus of 356kt during the same period last year. Global refined zinc production fell 1.7% year-on-year to 11.36mt, while total consumption reported gains of 1.3% YoY to 11.34mt between January and October 2024. As for lead, total production declined by 1.7% YoY to 10.78mt while consumption fell by 1.6% YoY to 10.76mt over the first ten months of the year. The global lead market witnessed a slight surplus of 21kt between January and October this year, compared to a surplus of 37kt during the same period last year.

Agriculture – US cocoa surges to fresh highs

US cocoa prices surged above US$12,000/t for the first time, while the price in London also edged higher yesterday on rising concerns of lower output in the Ivory Coast. Recent weather reports suggest that current dry conditions in West Africa are posing threats to cocoa trees and are expected to hamper output in February and March next year. There are no rainfalls expected in the region for the next 7-10 days and the Harmattan wind could worsen the production recovery. As per recent Bloomberg estimates, cocoa output in Ivory Coast is expected at 1.9mt in the 2024/25 season. This is lower than the government estimates of about 2.1mt-2.2mt near the start of the season in October. The expectation for a poor harvest comes at a time when inventories in the US exchange warehouses are at their lowest levels in more than two decades.

France’s Agriculture Ministry estimates the 2024/25 French soft wheat inventories at 2.87mt, higher than its previous estimates of 2.79mt. However, this is still 9.9% lower compared to the 2023/24 levels. Meanwhile, expectations for soft wheat exports in the 2024/25 season stand at 9.76mt (around 41% YoY), down from 9.89mt estimated earlier. As for corn, stockpile estimates were increased from 2.36mt to 2.68mt, while exports are seen at 4.67mt (vs. 4.76 estimated earlier) for the 2024/25 season.

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

Risk Warnings and Disclaimers

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Economic

Forex

Central Bank

How the Fed's decision impacts risk assets

The outcome of this morning's Federal Open Market Committee (FOMC) meeting has rattled key risk assets, including stocks, the AUD/USD, and Bitcoin, while causing the United States (US) dollar and US yields to surge higher.

The FOMC delivered a 25 basis point (bp) cut, as widely expected, which brought the Federal Reserve (Fed) Funds interest rate into a range of 4.25 – 4.50%. The Fed signalled a slower pace of easing in 2025, with the 2025 median dot showing just two 25 bp cuts compared to four previously forecast.

The Fed's revised projections were more hawkish than anticipated by most pundits. However, they aligned with pricing in the rates market leading up to the meeting, as noted in our Wall Street/FOMC article here earlier this week.

US dollar surge and global market reactions

Combined with the Fed's revised outlook, which included a lower unemployment rate and a higher forecast for gross domestic product (GDP) and core inflation, the rates market is now pricing in just 32 bp of rate cuts for 2025 (versus 50 bp yesterday). The next full rate cut by the Fed is not anticipated until September 2025.

Stepping back, this morning's Fed rate cut outcome should not have been too surprising following recent warm US inflation and activity data.

'Inflation has made progress towards the Committee's 2 percent objective but remains somewhat elevated.'

AUD/USD technical analysis

The AUD/USD hit its lowest level in two years this morning at 0.6199 as US yields and the surging US dollar reacted to the Fed's hawkish 25 bp rate cut.

The AUD/USD has dropped 10.7% in just over eleven weeks from its 30 September high of 0.6942, pushing the relative strength index (RSI) further into oversold territory.

After dropping through the trapdoor of the 0.6370 - 0.6335 support level and then below the 0.6270 low of October 2023, there is now little support until the 0.6170 low from October 2022 before facing the psychologically significant 0.6000 level.

To counter the mounting downside risks, the AUD/USD must promptly reclaim resistance in the 0.6350 - 0.6370 range on a sustained basis.

Why is the Fed's Hawkish Approach Unsettling AUD/USD and Bitcoin?_1

Bitcoin technical analysis

Bitcoin also took a hit following this morning's hawkish Fed rate cut, falling to a low of $99,997 (-5.68%). The downturn occurred as risk sentiment weakened and US yields alongside the US dollar surged.

Yesterday morning, before the pullback commenced, we posted on X here, noting the bearish divergence evident on the RSI and the possible formation of a loss of momentum daily candle, which we indicated would increase 'the chances of a corrective pullback' from its $108,364 record high.

While a 7.67% pullback from a recent record high is a significant move in more traditional asset classes, it doesn’t substantially alter the trend in the high-octane world of Bitcoin. It's worth remembering Bitcoin has surged over 56% in the six weeks following the US election.

From a chart perspective, ideally, the overnight pullback would deepen into a band of support between $95,000 and $90,000 to work off further overbought readings and rebuild energy before another push higher in early 2025. Why is the Fed's Hawkish Approach Unsettling AUD/USD and Bitcoin?_2

Why is the Fed's Hawkish Approach Unsettling AUD/USD and Bitcoin?_2

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Warren Takunda

Economic

The Bank of Japan left interest rates on hold, as expected, clearing the way for traders to sell the yen - which fell to a one-month low against the dollar - and then switch their focus to the Bank of England's decision later in the day.

A cautious outlook from the Federal Reserve has already set stocks tumbling and the dollar soaring. It also forced investors to confront some of the risks - inflationary or otherwise - that could accompany an unpredictable U.S. administration as President-elect Donald Trump prepares to take office.

Sterling may be ruffled next.

Britain's currency has been supported by the relatively hawkish market expectations for BoE policy - its 1% fall for the year so far is the smallest of any G10 currency against the dollar.

After hot UK wages data earlier in the week, markets are expecting rates to stay on hold at 4.75%. Fifty basis points of cuts are priced in to 2025, with the first 25 bp cut fully priced for May. That could shift if policymakers sound particularly hawkish.

The Fed on Wednesday cut interest rates by a quarter of a percentage point, as expected, but signalled a slower pace of easing ahead.

Fed officials raised their median projection of where they see the long-run neutral rate, significantly raised their 2025 inflation outlook, and continued to sketch out a path of further rate cuts next year.

The dollar extended its gains in Asia, pushing South Korea's won to a 15-year low. Stocks fell.

U.S. stocks plunged on Wednesday, with all three major indexes posting their biggest daily decline in months, after the Federal Reserve cut interest rates but signaled a slower pace of rate cuts to come.

New Zealand data showed the economy sank into recession in the third quarter, bolstering the case for more aggressive rate cuts and sending the kiwi to a two-year low.

Thursday also brings central bank meetings in Norway and Sweden.

Norway's central bank, in contrast with other western central banks, will likely keep interest rates at their highest level since 2008, supported by economic growth, above-target inflation and a weak local currency.

Sweden's central bank will likely cut its key rate by a quarter point, with further policy easing ahead early next year if inflation remains under control, a Reuters poll of economists showed. Morning Bid: Japan Holds, Bank of England Up Next_1

Morning Bid: Japan Holds, Bank of England Up Next_1

A line chart of the movement of the US Dollar Index stock index over the last 365 days. None

Key developments that could influence markets on Thursday:

- Central bank decisions in Britain, Norway and Sweden

Source: Reuters

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Risk Warnings and Disclaimers

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Warren Takunda

Stocks

Shares skidded Thursday in Asia after U.S. stocks tumbled to one of their worst days of the year when the Federal Reserve hinted it may deliver fewer rate cuts in 2025 than earlier thought.

The Fed cut its key rate by a quarter of a percentage point to between 4.25% and 4.5%, as expected. Other major central banks have stood pat this week, with the Bank of Japan opting Thursday to keep its benchmark rate at 0.25%. That decision, which also was no surprise, pushed the dollar higher against the Japanese yen.

Asian markets fell, but generally by less than 2%, with Tokyo’s Nikkei 225 falling 0.7% to 38,813.58. The dollar was trading at 156.44 yen, up from 154.79 yen.

A weaker yen tends to push prices higher in Japan, which depends heavily on imports, and that in turn raises pressure on the Bank of Japan to raise rates. Analysts say they expect a BOJ rate hike in January, but also that the central bank is wary of big changes as it waits to see possible shocks from President-elect Donald Trump’s policies on tariffs.

There are “high uncertainties” surrounding Japan’s business outlook and prices and developments in foreign economies and commodity prices, the BOJ said in a statement.

Chinese markets also declined. The Hang Seng index fell 0.5% to 19,760.10, while the Shanghai Composite index dropped 0.4% to 3,370.03.

Australia’s S&P/ASX 200 shed 1.7% to 8,168.20, while the Kospi in South Korea slipped 2% to 2,435.93. India’s Sensex fell 1.1%.

In Taiwan, the Taiex lost 1%, while Bangkok’s SET fell 1.1%.

On Wednesday, the S&P 500 fell 3%, just shy of its biggest loss for the year, to close at 5,872.16. The Dow Jones Industrial Average lost 1,123 points, or 2.6%, to 42,326.87, and the Nasdaq composite dropped 3.6% to 19,392.69.

The Russell 2000 index of small-cap stocks tumbled 4.4%.

Wednesday’s rate cut is the third this year after it began in September to lower rates from a two-decade high to support the job market. Wall Street loves easier interest rates, but the cut was already widely expected and investors were more focused on how much more the Fed will cut next year.

A lot is riding on it, particularly after expectations for a series of cuts in 2025 helped the U.S. stock market set an all-time high 57 times so far in 2024.

Fed officials released projections on Wednesday showing the median expectation among them is for two more cuts to the federal funds rate in 2025, or half a percentage point’s worth. That’s down from the four cuts expected just three months ago.

“We are in a new phase of the process,” Fed Chair Jerome Powell said.

Asked why Fed officials are looking to slow their cuts, he pointed to how well the job market is performing overall and how recent inflation readings have picked up.

Powell said some Fed officials, but not all, are also already trying to incorporate uncertainties inherent in a new administration coming into the White House. Worries are rising on Wall Street that President-elect Donald Trump’s preference for tariffs and other policies could further fuel inflation.

“When the path is uncertain, you go a little slower,” Powell said. It’s “not unlike driving on a foggy night or walking into a dark room full of furniture. You just slow down.”

The reduced expectations for 2025 rate cuts sent Treasury yields higher, squeezing the stock market.

The yield on the 10-year Treasury rose to 4.51% from 4.40% late Tuesday, which is a notable move for the bond market. The two-year yield, which more closely tracks expectations for Fed action, climbed to 4.35% from 4.25%.

Nvidia, the superstar stock responsible for a chunk of Wall Street’s rally to records in recent years, fell 1.1% to extend its weekslong funk. It has dropped more than 13% from its record set last month and fallen in nine of the last 10 days as its big momentum slows.

In other dealings early Thursday, U.S. benchmark crude oil gave up 46 cents to $69.56 per barrel in electronic trading on the New York Mercantile Exchange. Brent crude, the international standard, fell 42 cents to $72.97 per barrel.

The euro rose to $1.0396 from $1.0355.