As we near the end of the year, whereby we saw great economic and political developments globally, next week brings a potential of economic data that will drive the markets and could easily cause volatility. Even though the Fed hike is well priced in already, the big focus will be on the bank’s expectations to raise interest rates next year. The greenback remains strong as it nears a 13-year high. A hawkish statement is more likely to continue its strength. Also we have British inflation and the BoE’s rate decision. The central bank is expected to keep interest rates on hold, while Carney’s stance towards ‘inflation overshoots’ in future data will likely be the primary takeaway.
Last week we had vital economic data from New Zealand. Out of interest, one of them being the ANZ commodity price Index. It rose 2.7% in November, the seventh rise in as many months. This is a monthly report also done by the ANZ bank that tracks the movement in the prices received for New Zealand’s main export categories, in both world prices and New Zealand Dollars. Also the world was caught by surprise with the announcement of the resignation of New Zealand prime minister, John Key. The Kiwi shrugged this off and we didn’t see any major spikes across kiwi pairs.
Global Dairy Trade
Dairy prices continued to edge higher in last week’s Global Dairy Trade auction. Prices gained 3.5%. Prices rose for most products on offer including a 4.9% lift in whole milk powder prices, a 1.4% lift in skim milk powder prices and a 2.9% gain in AMF prices. Dairy prices have now risen an impressive 56% since July, led by a 74% surge in whole milk powder prices which now sit at $ 3 593 per tonne. A key driver has been sharp declines in milk production in vital dairy regions in New Zealand.
Key Points on Governor Wheeler’s speech
Wheeler’s speech provided an insight on the RBNZ’s thinking regarding New Zealand’s economic conditions. He confirmed that the RBNZ expects to keep the Official Cash Rate at the current low for some time as the current economic developments do not cause the bank to change its view on the direction of the monetary policy. While inflation is expected to rise in the following year, the return to 2% is expected to be gradual due to changing political environments in the US, UK and Europe. The Bank needs to keep rates low to ensure that domestic growth remains firm and domestic inflation picks up. It is worth mentioning that CPI of 2% has become a standard for most central banks in recent years. The 2% takes into account the upward bias in the CPI, that being the tendency of the index to overstate inflation, and it provides a buffer allowing to sufficiently lower real interest rates should the economy deteriorate.
Electronic Card Spending
We saw a decline in spending in November. Even though it edged back slightly. This is a reflection of the recent Earthquakes. Such events have significant impact on economic activity as it disrupts trading activity in affected areas.
Total: -0.3% m/m (last 0.6%), 5.8% y/y
Retail: -0.1% m/m (last 0.5%), 5.1% y/y
Core retail: -0.4% m/m (last 0.2%), 5.5% y/y
New Zealand Half Year Fiscal and Economic Update
Better improved fiscal accounts were widely expected prior to last week’s HYEFU, and it didn’t disappoint. Economic data suggested that growth in New Zealand’s economy would be stronger for a long period of time. It also suggested that the tax take is running well ahead of its forecast.
Kiwi Crosses Summary
Much of the ECB’s rate decision last thursday was already priced in. The markets reacted more to the ECB’s policy statement whereby the central bank’s president, Draghi announced an extention of the bank’s two year QE stimulus program beyond the initial March 2017 expiration. This was accompanied by a reduction in the size of their monthly bond purchases from 80 billion to 60 Billion Euros. We then saw the euro weaken across board.
With the kiwi being the strongest performing currency last week, and pound weakness, we saw the kiwi taking advantage of that and the pair dropping more than 400 pips. Political factor continue to dominate over the pound and this makes it a bit bizarre for my liking.
Last week’s US economic data was largely unchanged,though inflation expectation fell and consumer confidence spiked to its highest levels in two years.This resulted in a stronger greenback against the kiwi.
The week ahead, we don’t have much vital economic data from New Zealand. The GDP for September quarter has been rescheduled to the 22nd of December 2016, I believe that this is due to this week’s Economic headlines.
For Further Reading, I have provided links to the data I utilized in compiling my post.
– Half Year Economic and Fiscal Update
– ANZ HYEFU
– Westpac HYEFU
– Westpac Weekly Commentary
– Fortnight Agri Update