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OCR cut 50bps as expected as inflation risks move into better balance

Going into today’s RBNZ policy review, the only question was the size of the OCR cut that the Bank would choose to deliver. As it turns out, the RBNZ chose to cut the OCR by 50bps to 4.75%, as was expected by Westpac, most economists and as largely priced by markets. And looking ahead, the brief policy statement and the record of meeting indicate that a further cut in the OCR of 50bps can reasonably be expected at the next meeting on 27 November, provided that the dataflow over coming weeks prints broadly in line with our expectations (see further below).

In the accompanying brief policy statement, the RBNZ described economic activity as “subdued”, in part due to restrictive monetary policy. Business investment and consumer spending were described as “weak”. The RBNZ also noted that employment conditions were continuing to “soften”. On a more positive note, it was recognised that some exporters have benefited from improved export prices. However, this was balanced by the observation that global economic growth remains “below trend”. The RBNZ stated that “The outlook for the United States and China is for growth to slow, while geopolitical tensions remain a significant headwind for world economic activity.” Importantly, the RBNZ estimates that the New Zealand economy is now in a position of excess capacity, “…encouraging price- and wage-setting to adjust to a low-inflation economy”, with disinflation assisted by lower import prices.

Further nuance on the key factors considered by the Bank’s Monetary Policy Committee (MPC) in arriving at today’s decision can be found in the unusually brief “record of meeting”. The MPC discussed the respective benefits of a 25bps versus a 50bps cut in the OCR. They agreed that a 50bps cut “…at this time is most consistent with the Committee’s mandate of maintaining low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates, and the exchange rate. The Committee noted that current shortterm market pricing is consistent with this decision.”

The market has reacted to the RBNZ’s decision and message with a modest decline in wholesale interest rates and the NZ dollar. Thirty minutes post the announcement, the 2Y swap has fallen 7bps to 3.64% with the RBNZ’s 27 November meeting now closely to fully priced for a further 50bps rate cut. The NZD/USD has declined by around 25pips.

Our assessment: a further 50bps cut likely at the 27 November MPS meeting

The RBNZ has delivered as expected. The RBNZ’s assessment is that there isn’t a benefit to maintaining a slow 25bp per meeting pace given that output and employment remain weak, and inflation looks set to print close to 2% very soon. The RBNZ continues to consider the OCR at 4.75% as restrictive.

We saw no pushback on our expectation (and market pricing) for another 50 bp easing at the November Monetary Policy Statement. Hence this remains the modal expected outcome.

The RBNZ rightly notes that their future policy decisions will be influenced by the data to come. The CPI (16 October) and the Labour market reports (6 November) are most prominent to watch out for. We don’t see outcomes in those reports that will push the RBNZ from a further 50bp easing in the November 27 meeting.

Key data and events ahead

Ahead of the RBNZ’s next policy review several key data releases and events are scheduled. The following seem most important:

Q3 CPI (16 October): Ahead of the September Selected Prices Indexes (released this Friday), we currently think that the CPI will print close to the 2.3%y/y forecast made by the RBNZ in the August MPS. The October Selected Price Indexes will also be released ahead of the RBNZ’s next policy meeting.

RBNZ speech on the transmission of policy (16 October): RBNZ Assistant Governor Karen Silk will give an on the record speech on the transmission of monetary policy to financial conditions, which may provide some insights as to how the RBNZ is viewing financial conditions in the wake of recent rate cuts.

Q3 labour market data (6 November): We presently forecast a rise in the unemployment rate to 5.0%, matching the RBNZ’s August MPS forecast. News on developments in labour costs will also be of interest, to confirm that growth is slowing in response to looser labour market conditions.

Q4 RBNZ expectations survey (11 November): A large decline in inflation expectations over the past two surveys has contributed to the RBNZ’s dovish change in stance, so the updated survey will also be of interest.

Global events: The US election on 5 November and Federal Reserve policy meeting on 7 November will have implications for the economic outlook and financial markets. Any further stimulus measures announced by China could also be important.

In addition to the above, we expect the RBNZ will pay very close attention to high frequency measures of business activity (such as the Business NZ PMIs, ANZ business survey) and of behaviour in the consumer sector (electronic card spending and housing market activity and prices). Developments in key export and import commodity prices and broader financial conditions (including the exchange rate) will also be relevant.

US Federal Reserve (Fed) vice-chair Philip Jefferson said risks to the central bank’s employment and inflation goals are now closer to equal.

“The balance of risks to our two mandates has changed — as risks to inflation have diminished and risks to employment have risen, these risks have been brought roughly into balance,” Jefferson said on Tuesday in prepared remarks for an event at the Davidson College in North Carolina.

Jefferson, in his first public speech since May, said he will be assessing incoming economic data and the balance of risks “when considering additional adjustments to the federal funds target range”. He added that he is making decisions on a meeting-by-meeting basis.

Fed officials lowered interest rates at their meeting last month for the first time since the onset of the Covid-19 pandemic, reducing them by a half percentage point. The move came amid further signs of cooling inflation and growing concerns about the labour market.

Forecasts released the same day showed the median projection from Fed officials called for an additional 50 basis points in reductions this year, implying smaller, quarter-point cuts at each of their two remaining meetings in 2024.

The vice-chair said the economy is growing at a “solid pace”, even as the labour market has slowed from an overheated state. He said inflation is much closer to the Fed’s 2% target and should continue to cool towards it.

A surprisingly strong jobs report released last week tempered fears around the labour market. Employers added 254,000 workers to payrolls in September, while figures for July and August were revised higher. The robust pace of hiring helped bring the unemployment rate down to 4.1%.

“The good news is that the rise in unemployment has been limited and gradual, and the level of unemployment remains historically low,” Jefferson said. “Even so, the cooling in the labour market is noticeable.”

The jobs news last week drove investors to pare bets on another large rate cut at the Fed’s next meeting in November. Markets now see a quarter-point reduction as the likeliest outcome.

A handful policymakers, including New York Fed president John Williams, have indicated continued support for further rate reductions, albeit at a slower pace, even after the stronger-than-expected September jobs report. That data led a few Fed watchers to call on the central bank to stop cutting rates.

Jefferson also spoke at length about the history of the discount window, the Fed’s primary emergency lending facility. Following the collapse of Silicon Valley Bank and other regional lenders last year, policymakers have encouraged all banks to sign up to the discount window and to practise using it, should they need it in a liquidity emergency.

The Fed is also in the process of collecting comments from the public on various aspects of discount window use and functionality, Jefferson said.

Before joining the Fed’s board of governors in 2022, Jefferson was the vice-president for academic affairs and dean of faculty, as well as an economics professor, at the Davidson College.

Source: The edge markets

Macro:

Market Picture

The cryptocurrency market rolled back 1.8% in 24 hours to $2.17 trillion due to a reduction in risk appetite among investors, sparking a sell-off in bonds and equities. That said, as the less risky of the cryptocurrencies, bitcoin has been gaining ground relative to the overall market during similar periods, now holding 56.9% of the capitalisation of all currencies – its highest since April 2021. That share is largely taken away from Ethereum, which now weighs in at 13.5% of the entire market, which was also last seen three and a half years ago.

Technically, bitcoin sold off to consolidate above its 200-day moving average, a demonstration of bearish strength. But we’re still inclined to see this as more of a short-term correction for now, as the latest episode of risk-off is driven by strong data. While this is a formal reason to sell, strong employment is still a positive factor, promising more demand for final consumption and investment. The threat to cryptocurrencies so far is a combination of a new round of rising prices with signs of a weakening economy. Perhaps they’ll be found in economic reports this week and next. But that’s nothing more than a risk.

News background

According to CoinShares, crypto fund investments fell $147 million last week after three weeks of inflows. Bitcoin investments were down $159 million; Ethereum was down $29 million, and Solana was up $5 million. Investments in funds with multiple crypto assets were up $29 million, recording their 16th week of inflows. Since June, such products have become favourites among investors who prefer to invest in a diversified basket of assets rather than individual assets.

Despite the previous week’s difficult start, the options market points to bullish sentiment in the fourth quarter. QCP Capital is optimistic for a strong October, given the projected rate cuts and bitcoin’s correlation with equities. UBS forecasts China’s announcement of a new stimulus package from 8-18 October for 1.5-2 trillion yuan ($213-285 billion) with an additional 8 trillion yuan ($1.14 trillion) in 2025.

Crypto Insights noted ‘one of the highest levels of crypto optimism’ for the year among investment fund managers. The number of funds invested in cryptocurrencies topped 1,600.

PwC notes that the UAE has abolished VAT on all crypto transactions, putting digital assets on par with traditional finance (TradFi).

Pavel Durov said Telegram users bought up to 600,000 ‘rare’ gifts in a few hours on the day of their launch. The developers promise that in the future, ‘rare’ gifts can be converted into NFTs on the TON blockchain and traded as tokenised assets.