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Summary

United States: Can I Get a Price Check?

• The latest inflation data brought some signs of tariff-induced cost pressure, and July retail sales tell us consumers are still spending. But it remains to be seen to what extent firms pass costs on and how much price growth consumers can stomach today.
• Next week: Housing Starts (Tue.), Existing Home Sales (Thu.)

International: Policy Prognostications and Growth Surprises

• This week brought a range of economic developments and data releases across both G10 and emerging markets. In monetary policy announcements, the Reserve Bank of Australia delivered a rate cut while Norges Bank held rates steady. In both the UK and Japan, Q2 GDP surprised to the upside. In contrast, China’s July activity data disappointed, with retail sales and industrial production below expectations.
• Next week: Reserve Bank of New Zealand Policy Rate (Wed.), Riksbank Policy Rate (Wed.), Eurozone PMIs (Thu.)

Credit Market Insights: Young Borrowers: Another Crack in the Economy

• Even as overall borrowing expanded by 1% over the second quarter, cracks are beginning to emerge that reveal increasing vulnerabilities among certain households. Sharp rises in auto loan and credit card delinquencies over the past few years signal stress for young borrowers, a group which has reduced borrowing by 15% since 2023.

Topic of the Week: Signs of Higher Tariffs Filtering through to Selling Prices

• The Producer Price Index (PPI) for final demand rose 0.9% in July, handily beating expectations for a 0.2% increase. Elevated producer prices and wholesale and retail margins indicate firms may be less willing to absorb tariff costs.

Full report here. 

• We expect the RBNZ to cut the OCR by 25bp to 3%.
• We don’t expect a significant change in the RBNZ’s OCR profile, which is still likely to indicate a chance of a further cut in November.
• Beyond this meeting a data-dependent easing bias seems likely. A higher bar seems likely for an easing in October.
• We don’t expect a split vote, but we do expect to see evidence of debate among MPC members around the weight placed on high near-term inflation and rising expectations versus lower medium-term forecasts.

RBNZ decision and communication.

In its July review the RBNZ clearly indicated an easing to 3% was on the cards at the next meeting, assuming the dataflow between May and August went as expected. There’s nothing in the recent dataflow that should deter them from this course of action – even though there may be more debate on the outlook from August. The MPC member who voted for a pause in May had a different view on the timing of cuts and not the quantum in general. Hence, we anticipate a consensus decision this time around.

The focus will be on the forward outlook. In May, the view was a chance of easing in November – but not a full chance. Something like a 50:50 probability seemed to be in the tea leaves back then. There didn’t seem like a high chance of an October cut barring significantly adverse surprises. The view was that the OCR was on a glide path within the “neutral-ish” zone. There wasn’t much consideration of a move into stimulatory territory – even in the adverse scenario canvassed in the forecasts.

We don’t think that view will have changed much. Some domestic data has surpassed expectations (GDP, firmer CPI indicators) while other indicators may have disappointed (consumer spending, housing market indicators, PMI indices). In aggregate these don’t seem to have amounted to much. Hence if the forward track changes we expect it will be at the absolute margin – and such changes carry no policy information at all.

It’s useful to keep in mind that the RBNZ included a lot of weakness in their near-term output profile in their May forecasts. The weaker indicators seem to suggest that these adjustments were appropriate. We might see some adjustments at the margin to the timing of GDP growth. The RBNZ’s GDP Nowcast for the June quarter is lower than their previous forecast for 0.4% growth. So that might be revised down closer to our 0% q/q forecast for that quarter – incorporating the full impact of the residual seasonality that weighs down June quarters and boosts December quarters. The RBNZ’s forecast for the September quarter could be revised up from the 0.2% currently forecast. Hence, we might just see some subtle shifting in the profile as opposed to an aggregate marking down of 2024 growth (which at 1.8% y/y is low considering the 0.4% upside surprise the RBNZ got for March quarter GDP). We suspect the RBNZ’s output gap and short-term profile will be no weaker than presented in May and should be a touch less negative, implying less disinflation pressure in the medium term at the very margin.

The commentary on the labour market will be interesting but likely inconsequential. The RBNZ’s tendency is to start with their activity forecasts and develop an output gap estimate. The unemployment rate follows from that using an Okun’s law type relationship. Notwithstanding the substantial heat in the discourse around the Q2 labour market reports a week or so ago, it won’t change much for the RBNZ. We expect them to tweak the peak unemployment rate to reflect a higher peak than the optimistic 5.2% peak published in May. And we think they might push out the time over which the unemployment rate remains at the peak, so it lines up better with the output gap, assuming the expected lag between a pickup in quarterly growth and falling unemployment. None of this should impact the policy decision or OCR path at all. It’s all fine-tuning.

The commentary on the global outlook and tariffs will likely remain cautious and negative. The forecasts will reflect the increase in Consensus Forecasts since May. But we suspect the MPC will retain concerns that US trade policy has some twists and turns to go before the woods are formally cleared. We don’t expect the RBNZ to increase the indirect impacts of the external situation. Export prices have remained firm, and the global outlook isn’t weaker. NZ did end up with a larger tariff than was known in May. But the direct impacts of this were always likely to be negligible in aggregate. And hopefully the RBNZ’s business visits will have confirmed the view we have received from customers than it’s been generally OK to pass these direct costs through to US importers. And certainly, in aggregate the US import price data shows this seems to have been the case. Hence, we don’t expect much impact on the forecasts in the end.

The RBNZ expended a reasonable amount of capital in May shaping market expectations towards expecting OCR cuts at Monetary Policy Statements instead of at every meeting. In July, RBNZ Chief Economist Conway suggested that not much had changed for them since May. Hence, we think the strategy will remain the same. This will be to point markets to the data between now and November to support that last OCR cut. We don’t expect the RBNZ to reignite expectations of off-Monetary Policy Statement OCR changes unless something very untoward happens. And we haven’t seen that yet. That implies that the December 2025 OCR number of 2.92% looks about right. That’s about a 50:50 chance of a further cut in November. We don’t think the chances of a further cut are that high.

Could we get commentary raising the risks of a need to move the OCR into clearly stimulatory territory? We don’t think so, as to do so would invite markets to price such moves in quite soon and box the RBNZ in. Such a change in strategy would need to be supported by more substantive changes in the forecasts and risks. The global outlook might be such a pretext. But more likely would be an assessment that we need to see a decidedly stimulatory OCR relative to where the RBNZ thinks neutral is (currently RBNZ estimates range between 2.9-3.6%). Typical OCR cycles in non-crisis times often see the OCR bottom perhaps 50-125bp below neutral. Getting to that point might require knocking a substantial amount off the 2025 and 2026 growth forecast, presumably on the view that interest rate-sensitive segments of the economy won’t respond until an OCR in the 2-2.5% range is delivered. There’s been little evidence in support of that view emerging since May. There’s certainly plenty of exasperation as to how long it’s taking for the economy and labour market to pick up, hence the theme of our recent Economic Overview: “Are we there yet?” But central bankers know the lags are long and variable, so we doubt they will be too fazed yet. Especially with inflation knocking at the door of 3% for the next 5 months.

On inflation, we think they will boost their short-term forecasts such that annual inflation is forecast to be close to 3% for the remainder of this year (in the May MPS inflation was projected to be 2.7% and 2.4% respectively for the September and December quarters). That December quarter forecast looks particularly low and is a likely candidate for an upward revision, as it otherwise implies a sudden drop in quarterly inflation quite soon. We don’t think the medium-term forecasts will change much. Hence the mantra will be repeated where the MPC will retain confidence that inflation will head back towards 2% in the medium term.

Some alternative scenarios for the outcome of this meeting include:

• Hawkish scenario (10% probability) – a 25bp cut with a clear intent to pause. The RBNZ would note an intent to review things again in November but indicate a high hurdle for further cuts. This could happen if the RBNZ is losing confidence in where the CPI will peak, and how fast it will realistically fall in 2026. Rising inflation expectations would fuel that fire.
• Dovish scenario (10% probability)- a 25bp cut with a presumption of a further cut to 2.75% by November. The possibilities of a move lower still in the OCR towards 2-2.5% might also be discussed as a risk scenario. The RBNZ would be putting more weight on the downside growth and inflation scenario, with less regard for the short-term inflation picture.

Key developments since the May Monetary Policy Statement.

Activity: High-frequency economic data has generally been softer compared to the March quarter, though it’s more of a mixed tone rather than the broad-based downturn that we saw in mid-2024. The manufacturing PMI has dropped below the 50 mark again, and the comparable services index has remained soft. Retail card spending has lost some ground since the start of the year, although it recorded modest gains in the last two months. Westpac’s GDP Nowcast suggests an underlying growth pace of 0.1-0.2% for the June quarter. The actual GDP print is likely to come out lower than this, due to a seasonal distortion that has affected the figures recently, but the RBNZ had already made an allowance for this effect in its May forecasts.

Sentiment indicators: Forward-looking business confidence measures have generally held up at high levels, although the measures of current performance remain soft. The monthly ANZBO survey has picked up again after the initial shock of the ‘Liberation Day’ tariff announcement in April.

Global developments: Trump’s tariff announcements have been coming thick and fast in recent months, but as it currently stands, the weighted average US tariff rate is basically where it was at the time of the May MPS. There seems to be a growing acceptance of tariffs as the ‘new normal’, and Consensus forecasts of GDP growth for our main trading partners have been revised slightly higher again after the initial fall.

Inflation: June quarter inflation was close to the RBNZ’s forecast: annual inflation rose to 2.7% compared to their May forecast of 2.6%. The small upside surprise was likely due to the large increase in food prices. Swings in the prices of volatile items like food aren’t the focus for monetary policy. However, higher food prices and continued increases in administered costs (like rates) mean that inflation is likely to rise to around 3% before the end of this year – higher than the RBNZ had previously forecast. The RBNZ had noted this risk in their July policy review. Under the surface, core inflation remains within the target range and prices for more interest ratesensitive items have moderated.

Inflation expectations: We have seen a lift in some measures of expected inflation in surveys of households from both the RBNZ and ANZ. However, businesses’ expectations for inflation have remained well contained, as seen in both the RBNZ’s Survey of Expectations and in the ANZBO. Surveys of businesses’ plans for pricing from the ANZ and NZIER have been mixed.

Labour market: The unemployment rate rose to 5.2% in the June quarter, in line with the RBNZ’s forecast, although the 0.1% fall in employment was weaker than expected. The monthly filled jobs and vacancies data show that the current momentum remains weak, suggesting that the RBNZ will need to revise up its May forecast that the unemployment rate will peak at its current level.

Housing market: House sales and loan applications are running well ahead of year-ago levels. However, amidst a plentiful supply of dwellings, house prices have effectively been flat (and on the low side of the RBNZ’s forecast).

Commodity prices: Export commodity prices have generally held up over the last few months, with dairy prices coming off their recent highs while meat prices have made further gains. World oil prices have risen about 6% since May, against the RBNZ’s assumption of a slight fall.

Exchange rate: The current trade-weighted index (TWI) is only marginally below the 69.0 that the RBNZ assumed in its May Statement.

Kelly’s take.

There’s a decent case to remain on hold at this meeting and see how the economy progresses over the rest of the year. The building blocks of recovery are in place in the form of 225bp of interest rate cuts and very strong export returns that are not being meaningfully dented by the trade war.

A large part of the case for easier conditions in April and May was predicated on the global situation seriously spilling over to New Zealand. There might have been some of that in business and consumer sentiment in recent months. But mostly this hasn’t happened. Uncertainty will pass while the impact of commodity prices and interest rates will be more enduring. Market expectations of further OCR cuts increased the most recently when rate cut expectations in the US increased. This doesn’t seem like a good reason to ease more in New Zealand.

Given that view, what’s the case for cutting rates further when inflation is nearly 3% and forecasts suggest it might get to 2% but more likely somewhere between 2-2.5%? The policy lags are long and variable – that’s what we are seeing now. Raising expectations for 2-2.75% interest rates seems risky given where inflation is now. There’s plenty of scope to ease more down the road should low inflation rates become a more tangible reality. And it is an inflation mandate in the end.

Canadian year-over-year consumer price index growth is expected to hold at 1.9% in July, matching June’s reading on Tuesday.

But, the details will be closely monitored by policymakers as the removal of the consumer carbon tax from most provinces in April continues to artificially lower headline inflation. Underlying trends have surprised upward this year, partly due to tariff impacts on products like food and vehicles, but also from higher prices for domestic services.

We expect these trends continued in July. Gasoline prices decreased 0.7% from June and 15% from July 2024. Food prices, affected by Canada’s retaliatory tariffs, likely remain about 3% above last year. Prices excluding food and energy are expected to have increased slightly to 2.7% year-over-year, up from June’s 2.6%.

The Bank of Canada will focus on its preferred core measures that account for indirect tax changes. We expect CPI-trim and CPI-median measures to hold at approximately 3% year-over-year—still at the top end of the BoC’s 1% to 3% target range for inflation. But, the three-month rolling average growth should improve as a large increase in April falls out of that shorter time horizon calculation.

Overall, firm underlying inflation is likely connected to resilient Canadian consumer spending. Friday’s retail sales report is expected to confirm Statistics Canada’s advance estimate of a 1.6% increase in June after May’s 1.1% drop. Our RBC card transaction tracking indicates continued strength in July. Annual growth in CPI trim services excluding shelter was also running just above the target range in June.

We continue to expect the BoC will maintain current interest rates given limited further deterioration is expected in the labour market, additional fiscal stimulus will offset tariff impacts, and inflation is running at the upper limit of the central bank’s target range.

Week ahead data watch:

The advance estimate of a 1.6% increase in Canadian retail sales in June likely partially reflected a 2.2% rebound in auto prices. Sales at gas stations should be little changed with prices at the pumps not moving much from May. But, the advance estimate also implies an almost 2% jump in core sales (excluding gasoline and autos) in our estimates.

US inflation was the only tier-1 data point on the global front this week. While it was close to expectations it provided some relief in markets that there are still no strong signs of rising inflation from tariffs. Core CPI increased 0.3% m/m in line with expectations giving a small lift to the annual rate from 2.9% y/y to 3.1% y/y, see Global Inflation Watch - Still no clear signs of tariff-driven inflation, 12 August. Interestingly, it looks like the modest acceleration in core inflation was driven mostly by services (both shelter and non-shelter). A big upward surprise in PPI inflation on Thursday led to some reversal of the relief as it could suggest the tariff impact is simply just delayed.

Yields ended up broadly flat over the week while risk sentiment had another good week. A 25bp cut by the Fed is now fully priced in September and the market looks for another four 25bp cuts by the end of next year. It is partly fuelled by expectations that US President Donald Trump will select a dovish Fed governor in 2026 when Jerome Powell's term expires in May. Markets are now in line with our own Fed forecast and we see limited scope for further declines in bond yields. The list of candidates to replace Fed governor Powell widened this week with several private sector candidates now in the field. Treasury Secretary Scott Bessent said on Wednesday around ten candidates are considered.

Trump this week nominated a new head of Bureau of Labour Statistics replacing Erika McEntarfer who was fired after the recent labour market report showed weaker payrolls. Trump's candidate is E.J. Antoni, a conservative economist who has been highly critical of the payrolls data. Trump posted that "E.J. will ensure that the Numbers released are HONEST and ACCURATE."

In Europe it was quiet on the data front. The German ZEW expectations index dropped from 52.7 to 34.7 but this follows a period of steady increases, and the level is still solid. The Euro Economic Surprise Index is clearly in positive territory. Market expectations for the ECB rate this year did not change much with the market still seeing around a 50-50 chance of a further rate cut of 25bp from the current level of 2.0%. Long-term yields moved lower, though, driven by spill-over from the US. We expect the ECB is done easing and will be on hold for a long time now.

In China, credit data softened a bit but are overall still robust. The credit expansion is driven by government issuance, though, whereas private lending is weak. It underpins the picture that growth is held up by stimulus measures and still decent exports. Chinese leaders still struggle to lift private demand, and housing and consumption remains the weak links.

US and China extended a trade truce by another 90 days as widely expected and tensions between the two countries have eased somewhat. This contrasts with Trump's growing frictions with India and Brazil leaving him in confrontation with most of the BRICS countries. A meeting between Trump and Putin in Alaska on Friday has been widely anticipated but takes place after deadline of this publication.

Next week focus turns to Flash PMI data for August in US and euro zone as well as FOMC minutes, euro negotiated wages and Japan CPI.

Full report in PDF. 

US consumer confidence weakened in August, with University of Michigan Consumer Sentiment Index falling from 61.7 to 58.6, missing expectations of 62.1 and marking the first decline in four months. The drop was driven by a sharp fall in Current Economic Conditions Index to 60.9 from 68.0. Expectations Index edged down only slightly to 57.2 from 57.7.

While consumers are no longer bracing for the worst-case economic scenario feared in April at the height of tariff tensions, optimism remains fragile. Many still expect inflation and unemployment to worsen over the coming year, dampening any boost from earlier resilience in household sentiment.

Inflation expectations were particularly notable, with year-ahead projections rising from 4.5% to 4.9% and long-run expectations climbing from 3.4% to 3.9%. The rebound ends a multi-month easing trend and will likely catch the Fed’s attention, especially as it weighs the risk of entrenched price pressures against slowing growth.

Full UoM consumer sentiment release here.

Building on their gain in June, retail and food services sales continued to grow in July, advancing by 0.5% month-on-month (m/m). This was close to the market expectations for a 0.6% m/m increase, but slower than the upwardly revised 0.9% gain in June (previously reported as 0.6%).

A rebound in auto sales last month led to a healthy gain in the autos & parts category – up 1.2% on the month.  Sales at gasoline stations were also higher, rising +0.7%. On the other hand, sales at the building materials and garden equipment & supplies stores declined by 1.0%.

Sales in the "control group", which excludes the three volatile components mentioned above (i.e., autos, gasoline and building supplies) as well as restaurants rose by 0.5% on the month and are up 4.8% from the year ago. Sales were higher across most other categories, with gains ranging from 0.8% for sporting goods, hobby and bookstores to 0.4% for health & personal care stores. Miscellaneous and electronics retailers were the only two categories where sales were lower.

Sales at bars and restaurants – the only service category in the report – declined by 0.4% partially reversing June's 0.6% gain.

Key Implications

This was a decent report: July's gain in the control group was slightly better than expected, while June's headline gain was also revised higher. Decent retail sales over the last couple of months suggest that consumer spending growth is likely to come in around 1% (annualized) in the third quarter. This is still modest growth, particularly when compared with the 3.5% pace seen in the second half of last year, but slightly better than our initial tracking of just 0.5%.

Retail sales are reported in nominal values, with price changes mudding the water. The latest inflation report has shown that core inflation is gathering momentum. Core goods prices continued to rise, with two-thirds of goods categories now seeing price gains over the last three months. Up until recently, businesses have tried to absorb higher costs and shield consumers, but the last few months have shown that some of the costs are now being passed on. We expect greater pass through of tariff-related price increases over the coming months. With the labor market downshifting and cost pressures heating up, consumer spending is likely to remain tepid through year-end.

Daily Pivots: (S1) 146.66; (P) 147.31; (R1) 148.40; More...

Intraday bias in USD/JPY stays neutral at this point and outlook is unchanged. Further decline is mildly in favor as long as 148.51 resistance holds. On the downside, firm break of 146.85 support will suggest that whole rebound from 139.87 has completed at 150.90, and turn outlook bearish. Next target is 142.66 support. On the upside, above 148.51 will bring retest of 150.90 instead.

In the bigger picture, price actions from 161.94 (2024 high) are seen as a corrective pattern to rise from 102.58 (2021 low). Decisive break of 61.8% retracement of 158.86 to 139.87 at 151.22 will argue that it has already completed with three waves at 139.87. Larger up trend might then be ready to resume through 161.94 high. In case the corrective pattern extends with another fall, strong support is expected from 38.2% retracement of 102.58 to 161.94 at 139.26 to bring rebound.

Daily Pivots: (S1) 0.8044; (P) 0.8069; (R1) 0.8099; More….

Range trading continues in USD/CHF and intraday bias stays neutral at this point. On the downside, break of 0.8020 will revive that case that the corrective pattern from 0.7871 has completed, and target a retest on 0.7871 low. On the upside, firm break of 0.8710 will resume the corrective from 0.7871. Intraday bias will be back on the upside for 38.2% retracement of 0.9200 to 0.7871 at 0.8379.

In the bigger picture, long term down trend from 1.0342 (2017 high) is still in progress. Next target is 100% projection of 1.0146 (2022 high) to 0.8332 from 0.9200 at 0.7382. In any case, outlook will stay bearish as long as 0.8475 resistance holds.

Daily Pivots: (S1) 1.3502; (P) 1.3549; (R1) 1.3576; More...

GBP/USD is still extending consolidations below 1.3594 temporary top and intraday bias remains neutral. Further rally is expected as long as 1.3398 support holds. Above 1.3594 will extend the rise from 1.3140 to retest 1.3787 high.

In the bigger picture, up trend from 1.3051 (2022 low) is in progress. Next medium term target is 61.8% projection of 1.0351 to 1.3433 from 1.2099 at 1.4004. Outlook will now stay bullish as long as 55 W EMA (now at 1.3068) holds, even in case of deep pullback.

Daily Pivots: (S1) 1.1615; (P) 1.1665; (R1) 1.1700; More...

EUR/USD recovered after hitting 55 4H EMA but stays below 1.1.729 temporary top. Intraday bias remains neutral and more consolidations could be seen. But further rally is expected as long as 1.1589 support holds. Above 1.1729 will target a retest on 1.1829 high. Firm break there will resume larger up trend to 1.1916 projection level. On the downside, however, break of 1.1589 support will delay the bullish case and extend the corrective pattern from 1.1829 with another falling leg.

In the bigger picture, rise from 0.9534 long term bottom could be correcting the multi-decade downtrend or the start of a long term up trend. In either case, further rise should be seen to 100% projection of 0.9534 to 1.1274 from 1.0176 at 1.1916. This will remain the favored case as long as 1.1604 support holds.