New Zealand CPI To Make or Break Rate Hike Expectations

How Will The Markets React?

New Zealand’s financial markets have been in a tizzy over the past few weeks; and it seems that everything is building up to the next RBNZ policy meeting. Consequently, the next monetary policy meeting is not scheduled to take place until next week, though the key to its speculation will come much sooner. Since the central bank’s decision to lift the overnight cash rate 25 basis points to a record 7.50 percent on March 7th, the markets have eagerly absorbed every economic indicator that is at all related to consumer spending and housing sector strength – the two areas of the economy RBNZ Governor Alan Bollard said must cool before he will back off of his inflation fighting warpath. However, both of these indicators are realistically only lead-ins for consumer-level inflation, which the central bank is charged to keep within a 1 to 3 percent target band. Due Tuesday at 22:45 GMT, the consumer price index for the first quarter has the potential to charge speculation of a rate hike to a near certainty or erase expectations for the rest of the year. The Kiwi dollar and New Zealand Government Bond yields have rallied hard to new highs in recent days, perhaps front-running the inflation news. At the same time, equities are starting to bow under the same outlook for higher rates. On the other hand, should price pressures come across the wires softer than expected, it may very well catch traders in a vulnerable position and spur big reversal and position squaring – a strong possibility since the fundamental calendar is virtually empty until the rate decision itself. Joining the speculative crowd, there are a number of related topics that have added to the inflation debate. For the hawks, retail sales surged 1.9 percent in February (the most in three years) and housing prices rose 9.8 percent in March from the same period a year ago.  All of this is topped by a considerable rebound in energy prices. On the other hand, the high level of the kiwi may have tempered imported inflation.

Bonds – 10-Year New Zealand Government Bond Yields

Government bond yields have surged to new highs in the past three sessions. The recent rally began back last Thursday when the national statistics group reported the fastest jump in consumer spending in three years. When the number hit wires, traders instantly put the data into perspective by recalling the RBNZ Governors commentary following the last rate decision where he vowed not to correct his hawkish lean until consumer spending and housing sector growth were brought under control. This indicator alone triggered the big move that followed in yields though it most likely found considerable help along the way from a return of the international carry trade and a large Uridashi bond issuance. If the retail sales report could set off such a move, the market may be in for a ride with CPI.





FX – NZD/USD

The New Zealand dollar has appreciated fast and furiously, as markets make the carry-trade the position du jour. In fact, since March 6, NZDUSD has surged more than 500 points to test the .7400 level while NZDJPY has gained over 800 points to probe 89.00! NZDUSD is quickly approaching resistance at the 2005 high of .7466, but just how long can carry trade differentials lead Kiwi higher? If the release of New Zealand consumer prices hits the tape at or above estimates, the popularity of the lucrative trade could last longer than many expected. The figure is forecast to rise 0.5 percent during the first quarter – up from -0.2 percent during the fourth quarter – potentially leading the annual rate closer to or above the RBNZ’s target band of 1-3 percent. The combination of hot inflation, rising consumer spending, and strong housing demand may leave the RBNZ no choice but to consider hiking rates once again from the record high of 7.50 percent. On the other hand, a softer consumer price reading would slash estimates for RBNZ policy action and could potentially lead to a powerful bout of Kiwi selling. Nevertheless, the probabilities are in favor of Kiwi bulls, who could bring the currency to snap up towards fresh new highs.





Equities – NZX 50 FF Gross Index

Trading of New Zealand equities crawled to a start this week, as the NZX-50 Index gained a mild 0.2 percent to 4,170.70 on the back of shares of bellwether stock Telecom Corp. Telecom, New Zealand's largest telephone company, added 1.9 percent, to NZ$4.83 after TelstraClear Ltd., the New Zealand unit of Australia's Telstra Corp., halted a plan to offer high-speed wireless to compete with Telecom and Vodafone Group Plc. Trading in the broader market may remain subdued ahead of the release of New Zealand consumer prices from the first quarter. The quarterly rate of growth is anticipated to pick up 0.5 percent after easing -0.2 percent the quarter prior, potentially leading the annual rate closer to or above the RBNZ’s target band of 1-3 percent. With inflation likely to be hot, rising spending, and strong housing demand, the RBNZ may have no choice but to consider hiking rates once again from the record high of 7.50 percent. Should the consumer price report indicate mounting inflation pressures, equity traders may sell off shares in fear of tighter monetary policy, potentially keeping the the NZX-50 Index from reaching its February highs of 4,216.29.