Below trend growth to continue
In delivering only 25bps cut to the OCR and which was more than 100% discounted ahead of time and the RBNZ’s latest 90-day bill track only implying one more cut, the NZD has predictably bounced sharply. It up just over 1% as we go to press.
‘Is that all you’ve got, George?’, was what Muhammad Ali famously quipped to George Foreman just prior to knocking him out, after Forman was battering him on ropes in the 1974 ’Rumble in the Jungle’ fight in Zaire that many consider the greatest boxing match of all time. Fast forward 42 years, and Graeme Wheeler’s latest attempt to knock out the NZ dollar has just been met with a similar response from his opponent: the mighty global foreign exchange market.
In delivering only 25bps cut to the OCR and which was more than 100% discounted ahead of time and the RBNZ’s latest 90-day bill track only implying one more cut, the NZD has predictably bounced sharply. It up just over 1% as we go to press, but bear in mind that the Australian dollar currently sits some 2% above its pre-2 August RBA rate cut level.
The common denominator to ongoing across-the-board US dollar weakness (led overnight by the NOK after an unexpected surge in inflation and prompting Norges Bank to take any thoughts of a September rate cut off the table) continues to be Tuesday’s reported fall in Q2 labour productivity and what – if accurate – this implies for trend growth and hence the Fed. 2-year Treasury yields are off another 3bps so over 5bp lower than their post-July payroll high, while 10s are down 4bps after the latest 10-year note auction met solid demand (the auction was rated 4/5 by US primary dealers).
The main thing dragging stocks (slightly) down is energy, with oil prices as much as $1.30 lower after the EIA reported crude inventories up by one million barrels last week against an expected draw of 1.5mn.
The only piece of data of note overnight was the US June JOLTS report (job opening) which bounced back to 5.624mn from 5.514mn in May, a touch below expectations but still representing a very high level of openings.
RBA Governor Glenn Stevens yesterday delivered his last speech as Governor, ahead of stepping down from his post next month. It was as one would expect a wide ranging speech, that included a now familiar cry that governments should be prepared to borrow more for the right investment assets, but not generally to meet recurrent spending.
On the inflation target, the Governor argued that Australia’s average 2-3% over the cycle inflation target is flexible enough to cope with today’s persistently low inflation environment. He noted that:
“If it were the case that undershooting the target for a period while achieving reasonable growth was the ‘least bad’ option available, the inflation targeting framework has the requisite degree of flexibility to allow such a course”.
This suggests that both the growth outlook and importantly the trend in unemployment – rather than just CPI outcomes – will be important in driving the Bank’s monetary policy considerations going forward. In NAB’s revised forecast for two interest rate cuts in 2017, it is the continuation of low inflation, together with an expected slight upward trend in unemployment in 2018 as growth slows due to lower residential housing construction and a reduce contribution from LNG export growth, that drives this expectation.
There was no mention in the speech or the Q&A on the exchange rate. Read from that what you will: the Bank is certainly not making public any anxiety over the current level of the exchange rate. For now, the Bank’s mantra remains confined to noting that an appreciating exchange rate would complicate the economy’s transition.
Little wonder that the AUD ended the day firmer than when Mr Stevens stood up to speak. It currently sits more than two cents above our short term fair value model estimate, but which is inside the (roughly) +/- 3 cents fair value range.
With the RBNZ now come and gone (though we’ll doubtless be hearing plenty from Governor Wheeler through the day) there isn’t much to look forward to today, in front of tomorrow’s slug of China activity data for July and then some pretty important US numbers tomorrow night covering retail sales and consumer confidence.
We’ll get the Melbourne Institute’s August consumer inflation expectations data in Australia, (11:00AEDT) but these wouldn’t normally rate a mention for markets. They were last at a (wishful thinking?) 3.7%. NZ Food prices are due at 08:45.
Offshore the highlights such as they are should be the UK RICS house price data – one of the better forward indicators of UK housing trends – and weekly US jobless claims.
On global stock markets, the S&P 500 was -0.29%. Bond markets saw US 10-years -3.96bp to 1.51%. In commodities, Brent crude oil -2.56% to $43.83, gold+0.4% to $1,344, iron ore -1.6% to $60.58. AUD is at 0.7716 and the range since yesterday 5pm Sydney time is 0.7687 to 0.7754.
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