Key insights from the week that was.
Events and data have all been offshore this week, with Australia’s single ABS release (April retail sales) due later today.
In New Zealand, at their May meeting, the RBNZ hiked the cash rate by 25bp to 5.50% as expected. However, their forward guidance surprised. Despite strong population growth at a time of limited capacity and expansionary fiscal policy, the RBNZ believe they have likely done enough to contain and reduce inflation, with their forward profile showing the cash rate at its peak. This is not to say policy will be eased anytime soon. Rate cuts are not expected until the second half of 2024.
Our New Zealand Economics team see upside risks to the RBNZ’s views on growth and inflation, and so continue to believe further tightening will be required, with one more hike forecast for August to 5.75% and rate cuts to start no sooner than July 2024. Westpac NZ Chief Economist Kelly Eckhold provided an overview of the key issues before New Zealand and the RBNZ in this week’s video update.
In the US meanwhile, the FOMC May meeting minutes highlighted the scale of the uncertainty clouding the outlook. The Committee clearly remains cautious regarding inflation risks, but increasingly these are being balanced by downside risks to growth – the result of both policy’s effect on the economy as well as the additional tightening in financial conditions associated with recent bank closures and deposit flight.
“Participants generally expressed uncertainty about how much more policy tightening may be appropriate” and “Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary” point to a conditional pause being the consensus view of the Committee. That said, rate cuts from December as we forecast will require a continued deceleration in inflation and labour market momentum. Principally due to shelter costs, the chief risk for inflation is that it sustains above-target momentum into 2024, even as activity deteriorates. This would put the FOMC in a difficult position.
As we go to press, fractious debate over the terms of a debt ceiling increase continue despite Treasury’s extraordinary measures potentially being exhausted within a fortnight. We expect a deal to inevitably get done, and some headlines received today have been constructive on this point. But we will have to wait to see whether an agreement materialises and, critically, how far out it pushes the next debt ceiling conflict.
Finally to the data received this week. For the US, the tone has remain mixed, with the S&P Global manufacturing PMI disappointing with a contractionary reading of 48.5 while the services measure beat with a robust 55.1. New and pending home sales meanwhile both disappointed in April net of revisions to March; while the second estimate of Q1 GDP carried next-to-no significance, the annualised estimate edged up from 1.1% to 1.3%.
Other global PMI results were similarly mixed across Europe, the UK and Japan, with manufacturing stagnant (Japan) or contractionary (Europe and the UK) but services experiencing healthy growth. For the UK, the key release for the week was the April CPI report which again shocked to the upside, headline inflation rising 1.2%/ 8.7%yr against 0.7%/8.2%yr expectations. Of even greater concern, the annual rate for core inflation lifted from 6.2%yr to 6.8%yr against expectations for an unchanged result.
In recent communications, the Bank of England have sought to look through the current strength in inflation, believing it will prove fleeting given underlying price dynamics and the steps already taken with policy. This outcome is sure to test their resolve. The market now has 100bps of additional hikes priced for UK Bank Rate by late-2023 compared to 50bps for the ECB and a December rate cut by the FOMC.