NZ Economic Update: RBNZ shouldn’t hold its breath for Fed support

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Key highlights:

  • US Non-farm Payrolls report misses market expectations.
  • The chances of a rate hike from the US Federal Reserve in September have declined.
  • This leaves the RBNZ to fight the NZD and NZ inflation consequences on its own.

The Reserve Bank of New Zealand is due to make its next OCR decision in just over two weeks and once again the Bank is most likely to have to do the heavy lifting on NZD strength, and its impact on inflation, itself. This, after the chances of a rate hike from the US Federal Reserve declined, following the most recent employment report, out Friday night. The Non-farm Payrolls report showed the US generated 151,000 additional new jobs in August. While far from being a poor result, it missed the consensus estimate of 180k and was shy of the 200k many were looking for to trigger a reaction from the Fed at the September 22 meeting.

If that date is familiar, it is because it is the same day as the RBNZ’s OCR call, albeit the US decision comes in the early hours of the NZ morning. The chances of a September hike in US, which would strengthen the USD vs the NZD, declined following the Payrolls and now stands circa 20%. While it doesn’t help the RBNZ, it does at least make the picture for the next few months clearer.

The RBNZ had been looking for the US to hike for much of the year (although it didn’t explicitly say) but seemed to run out of patience by August, cutting the OCR 25bp to 2.00%. Another cut is unlikely for September, with the RBNZ having stated a strong preference for moving at full MPS reviews, leaving OCR meetings, such as September’s, as an option for emergencies.

The chances of such an emergency in the next few weeks are pretty slim. While there is plenty of domestic data due in the next few weeks (in sharp contrast to the recent barren run), there are no inflation or inflation expectations data. There is Q2 GDP, due the week before the OCR. Given how many of the components, or indicators of them, are already out, the odds of a collapse in the data are very low. We now expect a thumping 1.2% qoq result. Dairy prices have also rebounded substantially in a short space of time and we expect a further solid lift at this week’s auction. This leaves the expected rates path for the RBNZ path intact.

That currently means no move in September, followed by a 25bp cut in November. The chances of a cut by November are currently around 78%. Recent rhetoric from the RBNZ has also indicated the Bank, while recognising the need for more easing, does not see a need to move at a potentially destabilising pace, so 50bp cuts are very unlikely. So unless inflation expectations or the Q3 CPI throw a massive spanner in the works, the OCR should close 2016 at 1.75%.

There is then a gap until the Bank reconvenes in February 2017. Current market pricing suggest a 64% chance the OCR will be down to 1.50% by the end of that meeting (that includes the odds of getting a 25bp cut this year as well). That is also expected to be the end of the easing cycle, at least by using market pricing. There is a fairly high risk of a cut at that meeting, particularly if the US Fed remains reluctant to come to the party.

 

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