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Weekly Market Outlook: Eyes on RBNZ and PCE Numbers for Rate Hike Clues

Weekly Market Outlook: This week has a round of Fed speeches and major economic releases, with many traders focusing on consumer data.  On Tuesday, the Conference Board’s Consumer Confidence Index is expected to tick lower from 121.7 to 119.3.  While market participants will closely watch personal income and spending on Friday, which is expected to show a weaker number as the stimulus effect fades. Wednesday’s RNBZ rate decision should see no change in monetary policy, but hawkish discussions over tapering could be on the table especially after strong inflation and jobs figures. 

No Policy Changes expected from RBNZ

The Reserve Bank of New Zealand is expected to keep monetary policy unchanged, with interest rate anticipated to be left at 0.25% and asset purchases at NZD 100bln. At its last meeting, the RBNZ reiterated that the interest rate is prepared to be lowered if required and that the outlook remained highly uncertain, so it will maintain its current policies until it is confident inflation and employment targets are achieved. 

Despite the dovish tone conveyed, its actions so far this year have been towards policy normalisation, including the withdrawal of liquidity facilities and reimposition of mortgage Loan-to-Value restrictions. While it now also has to consider the impact of its policy decisions on housing prices, which many analysts believe will continue to surge. 

The latest data releases from New Zealand have been encouraging; as employment Change came with a gain of +0.6% and unemployment at 4.7%, both readings were better-than-expected in Q1. While the Labor Cost Index 1.6% better than 1.5% expected and CPI inflation was 1.5% also topped forecasts, suggesting that additional easing is currently unwarranted. Recent forecasts expect RBNZ to begin hiking rates in August 2022, and gradually hike the interest rate to 1.25% by the end-2023. While for the upcoming meeting, it is anticipated that the bank will maintain policy settings unchanged and some upgrades to economic forecasts may be expected, as well as an accommodative tone.

Weekly Market Outlook - NZD

USD awaits PCE Inflation Numbers

US Dollar traders will be watching key data including PCE inflation scheduled on Friday. The core PCE price index is expected to rise 2.4% y/y in April, which would mark the highest reading since 2007. Personal income and spending data will be released alongside the PCE price indices, where personal income is likely to tick lower by 14.5% on a monthly basis in April after being boosted by the stimulus payments in March. While personal consumption is expected to rise monthly by 0.6%.

Federal Reserve minutes for April’s meetings hinted that some policymakers are getting ready to start tapering discussions soon. Fed members are expecting that discussing a plan for adjusting the pace of asset purchases might be appropriate in upcoming meetings if the economy continued to make rapid progress toward the committee’s goals. It is speculated that the June meeting may signal the next tapering move. 

The minutes, however, reflected some members’ concerns about inflation. Fed officials have repeatedly offered assurances that rising prices in the near term will not translate to long-term inflation.

Strong PCE numbers will likely reinforce expectations that the Federal Reserve may start discussing tapering in the coming months. 

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