Japan Finally Raises Interest Rates As Inflation Wish Comes True

The New Zealand Dollar (NZD) finds itself at a critical juncture, with indications pointing towards a potential downturn amidst a backdrop of mounting challenges. Analyst sentiment and overall market perception towards the NZD have turned decidedly negative, reflecting a confluence of internal and external factors that could exacerbate its recent woes.

First and foremost, expectations for the New Zealand economy to underperform its peers are dampening spirits. The NZX50 stock index, a barometer of the country's economic health, is currently trading significantly below pre-pandemic highs, serving as a tangible reflection of this skepticism. Furthermore, analyst forecasts paint a concerning picture for New Zealand's key macroeconomic variables – growth, inflation, and unemployment. All these factors appear weaker compared to regional counterparts, contributing to the prevailing pessimism surrounding the NZD.

Adding fuel to the fire are looming interest rate dynamics, which historically have had a strong correlation with the NZD's value. The current scenario raises significant concerns, as the spread between New Zealand's interest rates and those offered elsewhere has narrowed considerably. Notably, the last time the spread was this tight, the NZD traded below 0.60. This historical precedent, coupled with the Kiwi currently hovering near multi-year lows, suggests a potential for further depreciation.

However, amidst the prevailing pessimism, there are analysts who offer a more nuanced view. While the broader market leans heavily towards a decline for the NZD, there are those who suggest that the "fair value" estimate for the Kiwi sits around 0.65. This estimate takes into account factors beyond just interest rates and inflation, including variables like productivity and the terms of trade, which can have a significant impact on a currency's value. Nevertheless, there still exists some downside risk, as their 12-month forward estimate dips slightly to 0.64, anchoring their end-2025 forecast for the NZD at the same level. This suggests that there might be a period of stagnation, if not depreciation, for the Kiwi in the foreseeable future.

Looking ahead, volatility looms on the horizon for the NZD, driven by the significant qualitative headwinds it faces. Even if quantitative analysis offers a slightly rosier picture, the combination of weak sentiment and potentially sluggish domestic economy could lead to a significant increase in volatility for the Kiwi. In the worst-case scenario, if market sentiment trumps fundamental analysis, the NZD could experience an extended period of weakness. This scenario could have significant implications for New Zealand businesses engaged in international trade and investment, as they navigate through uncertain market conditions and exchange rate fluctuations.

US stock futures dipped on Tuesday as investors awaited the commencement of a pivotal Federal Reserve policy meeting. S&P 500 futures experienced a decline of roughly 0.4%, while Dow Jones Industrial Average futures slipped 0.2%. Meanwhile, Nasdaq 100 futures dropped approximately 0.6%, influenced by Nvidia's share retreat following updates from its annual developer conference.

Investor attention is centered on the Federal Reserve's two-day meeting, which is set to begin later in the morning. This meeting is widely viewed as a critical juncture for financial markets, particularly in light of recent inflation surprises. Although interest rates are anticipated to remain unchanged, market participants are keenly focused on the central bank's economic projections, notably the "dot plot," for indications regarding the potential timing and extent of future rate adjustments. The Federal Reserve's policy decision is slated for release on Wednesday afternoon.

In the preceding session, major market indices posted gains, with the Nasdaq rebounding from consecutive weekly losses, buoyed by robust performances from growth-oriented stocks such as Alphabet and Tesla. However, premarket trading indicated downward pressure on numerous mega-cap growth stocks, with Nvidia witnessing a 2.1% decline subsequent to the announcement of a new AI chip.

Additionally, other semiconductor firms, including AMD, Marvell Technology, and Intel, registered declines ranging from 1.0% to 3.0%. AI server manufacturer Super Micro Computer experienced a significant drop of nearly 10% following the announcement of a share sale anticipated to generate approximately $2 billion.

Amidst uncertainties surrounding the Federal Reserve's economic forecasts, investors are exercising caution amid concerns about potential signals indicating fewer rate cuts and a potential delay in the policy easing cycle. Traders have adjusted their expectations for the timing of the first rate cut, with bets on a reduction in June decreasing from 71% to 55.2%, reflecting evolving market sentiment.

Stocks related to the cryptocurrency sector, such as Coinbase Global, Riot Platforms, and Marathon Digital Holdings, witnessed losses, mirroring the sharp decline observed in bitcoin prices. Conversely, Spire Global surged by 14.9% following the announcement of a collaboration with Nvidia for the development of AI-driven weather prediction capabilities.

Market sentiment remains cautious as investors await the outcome of the Federal Reserve meeting, recognizing the pivotal role of the central bank's guidance in shaping future market trends. The focus on interest rates and economic forecasts underscores the significance of Federal Reserve decisions in navigating market volatility and uncertainty.

In February, the Consumer Price Index (CPI) in Canada demonstrated a slight deceleration, rising by 2.8% year-over-year, down from the 2.9% gain observed in January. This deceleration was primarily driven by decreases in the indexes for cellular services, food purchased from stores, and Internet access services. However, offsetting this deceleration was a notable year-over-year increase in gasoline prices, which rose by 0.8% in February, following a significant 4.0% decline in January.

The slowdown in the headline CPI, excluding gasoline, resulted in a 2.9% year-over-year increase in February, down from the 3.2% recorded in January. Factors such as rent and mortgage interest costs continued to apply upward pressure on the headline CPI, despite the overall deceleration.

On a monthly basis, the CPI saw a 0.3% increase in February, up from the previous month's flat performance. Contributing to this monthly increase were higher prices for travel tours and gasoline. When seasonally adjusted, the CPI rose by 0.1% in February, indicating some stability in price movements after accounting for seasonal variations.

Notably, Canadians experienced reduced costs for cellular services and Internet access services in February. Consumers who subscribed to a cell phone plan during this period paid 26.5% less year-over-year, driven by lower prices for new plans and increases in data allowances. Similarly, prices for Internet access services declined by 13.2% year-over-year, with providers offering specials contributing to the decrease.

Despite these declines, food prices purchased from stores continued to ease on a year-over-year basis in February. Slower price growth was observed across various categories such as fresh fruit, processed meat, and fish. However, other food items like preserved fruit, cereal products, and dairy products experienced decelerated price growth during the same period.

Despite the moderation in price growth for groceries, prices remained elevated compared to previous years. From February 2021 to February 2024, prices for food purchased from stores increased by 21.6%, reflecting ongoing inflationary pressures in the food sector.

Gasoline prices, which experienced a decline of 4.0% in January, rebounded with a 0.8% year-over-year increase in February. Month-over-month, gasoline prices rose by 4.0%, driven by higher global prices for crude oil. This increase in gasoline prices contributed to the overall uptick in the CPI for the month.

Furthermore, consumers paid more for travel tours in February compared to January, attributed to seasonal demand for travel to various destinations such as the United States, Mexico, and the Caribbean. This increase in travel-related expenses reflects changing consumer behavior and economic conditions influenced by factors like seasonal patterns and geopolitical developments.

Overall, the mixed inflationary environment observed in February highlights the complex interplay of various factors influencing consumer prices. From changes in telecommunications costs to fluctuations in food and gasoline prices, these dynamics impact consumer spending patterns, economic decision-making, and policy formulation. Understanding these trends is essential for policymakers, businesses, and consumers alike to navigate the evolving economic landscape effectively.

Gold prices advanced on Monday, but gains were limited in a context of market caution ahead of high-impact events in the coming sessions, including the FOMC announcement on Wednesday. In this context, XAU/USD climbed approximately 0.2% in early afternoon trading in New York, bouncing off technical support located around the $2,150 region.

The Federal Reserve will hold its March meeting this week. Although the central bank is largely expected to keep its policy settings unchanged, the institution led by Jerome Powell could modify its forward guidance and adjust its outlook in the quarterly summary of economic projections in light of disappointing developments on the inflation front.

The upside surprise in the last two CPI and PPI reports highlight a concerning trend: progress on disinflation is stalling and possibly even reversing. For this reason, the Fed may opt for a more cautious approach, postponing the transition to a looser stance and reducing the scope of future easing measures. This could mean two quarter-point rate cuts in 2024 instead of the three envisioned earlier.

If policymakers were to signal a less dovish roadmap and a delay in the easing cycle, U.S. Treasury yields and the U.S. dollar could shoot higher as Wall Street recalibrates interest rate expectations. This scenario could pose a threat to the current rally in precious metals and trigger a major downward correction in the space. This implies gold could be in a vulnerable position in the days ahead.

On the flip side, if the central bank adheres to its previous outlook and indicates it is not far from gaining greater confidence to finally begin reducing borrowing costs, gold may find itself in a more advantageous position to initiate its next leg higher. Upside inflation risks evident in recent data, however, suggests the dovish FOMC outcome is less likely to play out.

Following a lackluster showing last week, gold prices found stability on Monday and successfully rebounded from support around the $2,150 mark. Should gains pick up traction in the coming days, trendline resistance at $2,175 could hinder further upside progress. However, if this barrier is breached, all eyes will be on the all-time high around $2,195.

Conversely, if bears mount a comeback and regain control of the market, the first technical floor to watch in the event of a pullback appears at $2,150. Bulls must vigorously defend this zone to thwart an escalation of selling pressure; failure to do so may usher in a drop towards $2,085. Subsequent losses beyond this point could shift focus to $2,065.

Japanese equities are up 0.2% despite the JPY weakening 0.9% today against the USD (above the 150 level again) as the Japanese central bank is ending its negative policy rate that has been in place since 2016. US and European equity futures are slightly lower in early trading hours with the next big central bank event being FOMC tomorrow night. Later today the German Mar ZEW survey is among the first indications we get on the European economy in March and is well-watched economic figure. Nvidia unveiled yesterday its new AI chip called Blackwell which taking over from the successful Hopper AI chip, but investors were not overly excited with Nvidia shares down 2% in extended trading. Nvidia’s GTC conference will last until Thursday and will likely continue to impact AI stocks. On earnings, Xiaomi, China’s largest mobile phone maker, is expected to revenue growth of 10% YoY in Q4.

The historic decision from the Bank of Japan to end negative rates and yield curve control came with caveats around accommodative policy being maintained and saw yen coming under pressure. USDJPY rose above the 150 handle to highs of 150.43 and focus now turns to risks of a hawkish outcome from the Fed meeting. EURJPY rose above 163 and could target the 2022 high at 164.30. The RBA was on hold but weakened its hawkish bias. AUDUSD plunged 50 pips as a result and was last seen at lows of 0.6515. USDCHF getting close to a re-test of the 0.89 handle as EURCHF printed fresh YTD highs at 0.9661 with SNB meeting on Thursday still likely to throw a dovish surprise as we discussed in the podcast yesterday. The EURUSD was attempting a rally to 1.09+ yesterday but the dollar's strength got in the way and the pair slipped back towards 1.0860. GBPUSD remained range-bound around 1.2720 yesterday but also lost momentum to test the 1.27 handle in Asia today ahead of UK CPI and BOE decision this week. GBP strength could be tested if equity sentiment weakens, as noted in our weekly FX chartbook.

Strong factory output and investment growth data in China underpinned copper and a rebound in iron ore back above USD 100/t while crude oil traded near a near five-month high, supported by OPEC+ production curbs and not least diesel and gasoline strength after Ukrainian drone strikes over the weekend hit three Russian refineries potentially knocking out 600k b/d of Russian oil-refining capacity. Iraq is said to cut its oil exports to compensate for its recent above-quota production. EU gas reached a six-week high on supply concerns from an unplanned Norwegian outage, US Freeport LNG export problems and focus on Russia’s LNG export capability following drone attacks. Gold trades nervous ahead of Wednesday’s FOMC with focus on the 284 tons long recently bought by hedge funds. Short-covering in key crops gaining momentum led by wheat following Monday’s jump on Black Sea supply concerns

The Bank of Japan ended its negative interest rate policy and abandoned yield curve control while maintaining quantitative easing. Markets have been anticipating the move for days, and Japanese government bond yields slid across tenors after the announcement. Although bond markets remain muted after the announcement, such a decision will have profound long-term repercussions for global bond markets, including the repatriation of Japanese investors. In Europe, Bunds tumbled yesterday, with 10-year yields rising by 20 basis points in only six days as European sovereign debt continues to flood the primary market, and inflation met market expectations with core CPI at 3.1%. US Treasuries also ended the day lower, with yields rising by 2bps across tenors. This week's focus is on the Federal Reserve and the update on the Summary of Economic Projections, which will show higher growth and inflation for 2024. The question is whether such forecasts will be accompanied by 75bps of rate cuts this year. We see a higher probability of US Treasury yields ending the week higher, with ten-year yields resuming their rise to 4.5%.

The Bank of Japan has entered a new era as it scrapped negative interest rates and yield curve control, while also ending its ETF purchases. The central bank has set the short-term interest rate at between 0-0.1% in its first rate hike since 2007, although comments suggested that they expect accommodative conditions to persist for some time which is a signal that concurrent rate rises are unlikely. The Reserve Bank of Australia kept its policy settings unchanged but toned down its hawkish bias even though there was no mention of rate cuts in the statement. Markets have increased the odds of rate cuts this year, now standing at over 40bps from 35bps pre-RBA.

S&P 500 & Nasdaq 100 Bearish Engulfing top and reversal pattern. Key support for S&P 500 at 5,057. Nasdaq 100 key support at 17,478. DAX looks toppish, key support at 17,620. Below expect sell-off to 17,326-17,118.EURUSD correction support at 1.0870 and 1.0830. USDJPY likely to test resistance at 150.90 and 151.95. EURJPY likely to break resistance at 163.70, potential to 165. GBPUSD correction, support at 1.27, but could drop to 1.2660. GBPJPY likely bullish move to 192.60. AUDJPY range bound 96.80- 98.20. Gold correction unfolding likely to test support at 2,134, possibly 2,115. WTI crude oil testing resist at 82.56, upside potential to 84.60. US 10-year T-yields testing resistance at 4.35.

Yesterday, the VIX slightly decreased to $14.33 (-0.08 | -0.56%). The S&P 500 and Nasdaq 100 indices saw increases of 0.63% and 0.99%, respectively. These movements indicate a positive market sentiment ahead of the anticipated FOMC announcements. The VVIX dropped to 86.78 (-5.39 | -5.85%), suggesting a decrease in volatility expectations, while the SKEW index experienced a slight increase to 139.94 (+1.03 | +0.76%). With no major economic news affecting US markets on Monday, all eyes are on the FOMC's upcoming interest rate decisions. VIX futures showed a slight uptick to 15.35 (+0.020 | +0.13%), while S&P 500 and Nasdaq 100 futures are down slightly to 5209.50 (-5.25 | -0.10%) and 18190.00 (-41.50 | -0.23%), respectively. Monday's trading session was most active in options for TSLA, NVDA, AAPL, GOOGL, AMD, GOOG, AMZN, PLTR, WBD, and SOFI.

BOJ ends negative rate policy implemented in 2016 and raises policy rate for the first time since 2007 (FT), Nvidia unveils new AI chip named Blackwell at GTC conference to succeed its successful Hopper chip (Bloomberg), UBS market value reaches $100bn for the first time in 16 years as Credit Suisse integration is working out (Bloomberg), Gunvor says Ukraine drone attacks shut 600,000 barrels of Russian refining (Bloomberg)

Germany Mar ZEW survey est. 20.5 vs prior 19.9 (10:00), US Fed Housing Starts est. 1440k vs prior 1331k, Canada Fed CPI est. 3.1% YoY vs prior 2.9% (12:30), APIs weekly crude and fuel stock report (1930).