The two most interesting items during the session here were inflation data from China and the Reserve Bank of New Zealand’s July monetary policy review.
The Reserve Bank of New Zealand dropped a dovish bombshell. I explained it at the time (see points above):
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From the Reserve Bank of New Zealand statement:
- The committee expects inflation to return to the target range of 1 to 3 percent in the second half of this year.
If so, why shouldn’t we expect interest rates to be cut soon? I think the Reserve Bank of New Zealand would agree, based on the following:
- The Committee agreed that monetary policy would need to remain restrictive. The extent of this restriction would be eased over time in line with the expected decline in inflation pressures.
The TL;DR version of all this is “if inflation goes down, prices go down.”
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Interest rates and the FX market are in agreement. The NZD/USD pair fell after the statement, with rates markets pricing in near-term rate cuts. The Reserve Bank of New Zealand is due to meet on August 14, and markets are pricing in a 40% chance of a 25bp rate cut at that meeting. New Zealand is due to release its CPI data next week – a key data point for the RBNZ in determining the timing of a rate cut.
From China, we got inflation data for June. Headline CPI came in at 0.2% y/y versus 0.4% expected and 0.3% in May. While China appears to be in danger of flirting with deflationary CPI again, core inflation has provided some indication that this is not the case. Core CPI came in at 0.6% y/y, unchanged from May. Of course, PPI remained deflationary. The CPI disappointment has sparked calls for easing from the People’s Bank of China. The yuan weakened during the session. USD/CNY hit its highest level (weakest relative to the yuan) since November 14 last year.
Japan’s wholesale inflation data showed an acceleration in June. The producer price index (or corporate goods price index) rose 2.9% year-on-year. The yen-based import price index rose 9.5% year-on-year in June, up from 7.1% in May, a sign of how the weaker yen is affecting the prices companies charge each other for imported raw materials.
The NZD/USD pair fell during the day, as did the Yuan and Yen.