The big news story from last week was the softer-than-expected US CPI report for October - treasury yields and the dollar were pummelled, high beta currencies leapt higher and the three major US equity markets extended their impressive ascent, the S&P500 ending the week 10% above its 27 October swing low.
Adding +1.60% for the week, the New Zealand dollar sat in the bottom half of the G10 leaderboard, failing to capitalise on the dollar's pullback to the same extent as its other major peers.
Having leapt from near 0.5850 pre-CPI release, before marking the week's highs through 0.6050, the Kiwi ended the week below 60 US cents.
The market reacted to the 0.1% downside miss on both the headline (3.2%, down from 3.7%) and core (4.0%, down from 4.1%) inflation rates as if it was an earth shattering development…..yet the downside miss was all of 10 bps and inflation remains uncomfortably high.
Numerous Fed officials spoke last week, and whilst some are relative doves, some are relative hawks and others are centrists, the collective message is clear: at 5.25% - 5.50%, the Fed funds target rate is in restrictive territory, but FOMC members are considering whether more tightening is required. In addition, the peak rate will be held in place for an extended period, rate cuts will not be entering the periphery any time soon.
The market is dismissing the Fed's stance.
November's equity market rally and aggressive pullback in bond yields is indicative of a market that believes Jay Powell and his colleagues are done, a soft landing is the likely outcome as somehow the Fed can thread the needle to sufficiently cool the economy, returning inflation to the 2% target, whilst avoiding widespread pain.
The risk as we round out 2023, is that the market has gotten ahead of itself.
Yes, the CPI data provided further evidence that disinflationary forces continue to drive inflation back towards target and the recent run of softer macroeconomic data is representative of an economy that is cooling in an orderly manner.
However, the dramatic U-turn in rates markets in addition to the eye-watering short squeeze rally in US stocks has, in the blink of an eye, delivered a significant easing in financial conditions.
The Fed may choose to kick back against this, and current market pricing should the recent pullback in activity data fail to extend into the new year.
Current market pricing assigns a 75% implied probability that the Fed's first rate hike is delivered in May with just shy of 100bps of cumulative tightening priced in for 2024.
Whilst it appears a safe bet that the dollar's peak for the cycle has been reached, it is premature to declare an end to the dollar's dominance…..as we have witnessed on multiple occasions over the past 12+ months, the market is over zealous when attempting to price the timing of the Fed pivot.
Looking to the week ahead, a Thanksgiving Holiday shortened week dishes up S&P Global PMIs, monetary policy meeting minutes from the Fed and the RBA and a steady flow of central bank speakers.
Locally, the headline event is retail sales - household spending expected to further cool in the September quarter.
Technical levels to keep an eye on for the New Zealand dollar: 0.6050 on the topside and 0.5947 on the downside, the latter being the 38.6% Fibonacci retracement of the rebound from the late October low. The pair found support near here during the London morning, Friday.
Major resistance at 0.6050 has been challenged on three occasions from late September, NZDUSD failing to advance higher. A breakout above would be a major win for the NZD bulls, likely setting up a test of the 200-day moving average, located near 61 US cents.
We suspect more work has to be done between 0.5950 and 0.6050 before the Kiwi extends higher into year-end. Expectations are for a week of choppy range bound trade following last week's fireworks.