Important to take NZ inflation risk seriously; more Fed tapering to come; IMF upgrades growth forecast

by Kymberly Martin

NZ Dollar

Good morning all, middle of the week and the NZD opens our morning at the 0.8300 level. 

At first glance it has to be said despite yesterday’s CPI print and immediate reaction the Kiwi hasn’t kicked on and is certainly not the star of the show.

To illustrate our flows yesterday and overnight witness a mixture of accounts, using the rally to reduce “long” positioning.

As to the CPI, even with yesterday’s stronger than expected Q4 CPI, when we weigh everything up; we still come down on the side of the RBNZ having to adhere to its word, of leaving the start of its stimulus-removal campaign until its March Statement, where it can explain in full.

We note though that yesterday the market moved to price a 50/50 chance of a 25bp OCR hike in January. This was up from around a 25% chance of a hike before the data. So, the CPI outcome does suggest the odds of a January hike are not negligible

I would reiterate that we remain as concerned about New Zealand’s inflation outlook as we’ve been for a while now. We just didn’t think it would get such a giddy up from the CPI report.

But if this helps wake people up to the inflation risks ahead, and that the Bank should probably have started rebalancing OCR settings already, then so be it.

My apologies for the faux pas yesterday with regard to the timing of the REINZ update. So what of the housing market, it is not demonstrably weaker, or stronger, than the RBNZ probably expected. December’s Real Estate Institute results, published Monday, did little to enlighten. If anything, turnover continued to drift lower (on a seasonally adjusted basis) pointing to moderation in house price inflation, although only at the margin.

Given the jockeying caused by the LVR introduction last October, it will be the first few months of 2014 that will hopefully give us a better steer on how the housing market is going. While it’s threatened by impending increases in the OCR it’s supported by the surging economy. The key number to watch more than others in respect to the local residential property market will be turnover, given its leading information content.

Overnight the fortnightly GDT auction registered a 1.4% pickup in prices.

The day ahead suggests immediate parameters of ongoing resistance ahead of the 0.8350 level, with shorter term exporter appetite eyeing any retreat to a window in front of 0.8275 – and an eye on the performance of the AUD today in light of their CPI print (1:30pm NZT).

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Majors

Yesterday some noted Hilsenrath of the WSJ (closely watched commentator of the Fed) writing that the month end meeting of the FOMC would see a further US$10 bln shaved from the monthly bond buying of QE. At the margin for a time the comments gave the USD some favour. His comments though should not surprise, data and commentary over the past weeks is in tune with this view.

The IMF as expected delivered increased estimates for world growth in 2014, improving slightly from 3.6% to 3.7%. They warned of growth remaining “weak and uneven”, boosting Chinese and US forecasts marginally though we doubt markets will give this any lasting attention as the IMF has a “behind the curve” track record.

Germany updated the ZEW survey series, with a mixed outcome of a better than forecast read on the “Current Situation” at 41.2 vs. 35.0 expected and a worse than forecast outcome of 61.7 vs. 64.0 expected for the “Expectations” reading.

On the day our attention will be on Australian CPI, the consensus looks for a headline rise of +0.4% q/q and 2.4% y/y. The all-important trimmed/weighted mean should rise by +0.6% q/q. We suspect it will take an outsized +0.4%/+0.8% core outcome to move markets sufficiently either way. A consensus outcome will add to the notion of the RBA sitting on their hands at their February meeting (Tuesdaythe 4^th).

Later today, the BOJ, and their latest monetary policy deliberations. No change to policy is anticipated but the possibility of commentary that steers towards further easing in the months ahead.

As we head to a busier end of the week offshore with Flash PMI’s a feature on Thursday across Asia & Europe we note the release tonight of Labour market updates from the UK as well as the BoC policy update. Like their Japanese counterpart most see the Canadians on hold but shading a dovish bias to commentary.

All its research is available here.