As US consumer inflation rose to a 40-year high in January, many financial watchers expect the US Federal Reserve to take a more hawkish stance this year to tame red-hot commodity prices and ease the financial pressure on American companies and their profitability.
Uncertainty over the impact of surging costs and the inflation trajectory has weighed on markets in the US and overseas, but some consumer companies in the US are taking advantage of this scenario to hike output costs — in levels not seen in nearly two decades since IHS Markit started tracking private-sector activity — in a bid to bolster profit margins.
Data from the survey released last week showed that inflationary pressures worsened in February as input costs climbed from the 10-month low recorded in January on the back of higher raw material, transportation and wage costs, and supply constraints.
This prompted American manufacturers and service providers to hike their selling prices to help offset the costs. Starbucks (NASDAQ: SBUX) in its most recent earnings call, hinted at plans to further lift prices this year after already announcing adjustments in October and January.
Starbucks President and CEO Kevin Johnson attributed the move to inflationary pressures, particularly in its home market, which together with China accounts for 61% of its global store network. Johnson also noted the impact of high inflation, the lingering pandemic and higher wage costs to the company’s profitability in recent quarters.
In December, supply chain-driven inflationary costs weighed on Starbucks’ US business by more than 170 basis points on margin in its most recent quarter. The same goes for McDonald’s (NYSE: MCD), which also highlighted higher labor inflation in its recent earnings report.
In 2021, the US fast-food chain boosted its menu prices by 6%, which according to CFO Kevin Ozan was "to deal with the 4% commodity price increases,” higher labor costs and a competitive market. The executive acknowledged that these factors will again weigh on the company’s margins and cash flow this year.
Still, efforts to cover higher costs have resulted in higher revenues for companies like Starbucks, McDonald’s, and companies in the gaming sector.
Wynn Resorts (NASDAQ: WYNN) recently reported narrower losses in the fourth quarter as its revenue surpassed estimates after the casino operator continued to adjust its cost structure. CFO Craig Billings told a recent earnings call that customers who were cooped up for 2020 and early 2021 are now "traveling and spending again with a vengeance.”
The company expects to have "strong pricing power” on rooms, food, and beverage this year, Billings added.
With limited supply, a recovering labor market, and the unleashing of pent-up demand, consumers are looking past higher prices, allowing companies to further make upward price adjustments. In January, US retail sales rose by the most in 10 months, with the value of sales reaching a record high as consumers splurged on automobiles and other goods.
Economists expect a further tightening of interest rates in New Zealand in the coming months after the central bank last week delivered its third straight rate hike since October, fueled by growing risks of higher inflation.
The Reserve Bank of New Zealand (RBNZ) lifted its official cash rate by 25 basis points to 1%, widely expected by the market. The bank raised its projected cash rate increase to a peak of around 3.4% in the third quarter of 2024 against a peak of 2.6% in its previous guidance issued in November 2021.
"The committee agreed it remains appropriate to continue reducing monetary stimulus so as to maintain price stability and support maximum sustainable employment,” the central bank said while disclosing plans to taper its bond-buying program beginning in July at a pace of NZ$5 billion per fiscal year, subject to market conditions.
The bank now expects annual inflation to return towards the 2% midpoint of its target band in early 2025 versus its previous forecast of around the third quarter of 2024. The revised forecast comes as New Zealand’s inflation rate in the fourth quarter of 2021 rose to 5.9%, the highest since the second quarter of 1990 and almost double the top of the RBNZ’s 1% to 3% target band.
While many economists expect the RBNZ to further lift interest rates as it had hinted, Capital Economics’ Ben Udy said a more aggressive hiking cycle will likely weigh on the economy in 2024, "so we still think the RBNZ will eventually have to reverse course.”
Back in August, the central bank delayed an anticipated rate hike, which was widely expected to be the world’s first in the COVID-19 pandemic era, after the government reimposed a nationwide lockdown to contain a single case of COVID-19. This underscores the RBNZ’s willingness to hit the brakes in tightening its policy to provide support to the economy in times of pandemic and inflation-related shocks.
The RBNZ’s hawkish policy stance pushed the New Zealand dollar to a near five-week high of 67.42 US cents on Feb. 23, while the Australian dollar likewise surged to an over five-week high of 72.27 US cents on Wednesday. Both currencies, however, pared gains on Friday, indicating the presence of sellers and a bearish outlook for the NZD.
The outlook comes as trader have maybe priced the extent of the RBNZ’s rate hikes this year, with the US Federal Reserve also widely tipped to deliver around four rate hikes in 2022 and 2023 after the inflation rate in the world’s largest economy surged to a 40-year high of 7.5% in January.
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APAC should be hogging most traders’ attention in the first half of the coming week. China and New Zealand take the spotlight up to Wednesday. A sprinkling of US and European data helps to round out the offerings.
*Please note; Author is working from UTC +13 when determining the timeline of data releases.
China opens the week and reveals its 1Y Loan Prime Rate. The People’s Bank of China (PBoC) has kept the 1Y Loan Prime Rate at 3.85% for the past 18 months. No change in the rate is expected on Monday. However, looking to a long-term change, China’s Premier Li Keqiang noted on Friday that China is facing “many challenges” in managing the downward pressure on its economic growth and rising commodity prices.
New Zealand releases data on Retails Sales (Q3) in the lead up to the country’s Central Bank Interest Rate decision on Wednesday. Retail Sales in the last two quarters rose 3.3% and 2.8% respectively. A projected -0.5% is expected in Q3 as the country’s largest city has been in lockdown for the entire Q3 period.
European and Great Britain Markit PMI Composite data (NOV) is also released on Tuesday. Aggregating the data from the economies’ Manufacturing and Service sectors, the PMI is a broad indicator of economic expansion or retraction. Although still firmly within an expansionary range, a slight pullback in the PMI values is expected for both economies.
US Markit PMI Composite data (NOV) is up next. Unlike Tuesday’s PMI data, US PMI is expected to lift ever so slightly from 58.4 to 58.8.
As mentioned above, the Reserve Bank of New Zealand (RBNZ) will be updating the market as to its Interest Rate decision. A 25 basis point hike to 0.75% is all but guaranteed at this point. Speculation of a 50 basis point hike has emerged in reaction to Inflation Expectation in the country, reaching 2.96% in two years. Although, such a significant hike is unlikely and deviates from RBNZ precedence.
Thursday is all about the United States. For October, durable Goods Orders, New Home Sales, and Personal Spending data are released in quick succession. Any beat or miss in the slightly optimistic forecasts for these data points should be pounced upon by traders.
The FOMC minutes are then released later in the morning. Fed representatives have been vocal about their stance on inflation, employment, and the need to keep a loose monetary policy for the short term, all last week. These notes should be reflected in the FOMC minutes.
A quiet Friday closes the week. South Korea’s Interest Rate decision should be watched closely. A 25 basis point increase is possible, which would bump the Interest Rate to 1% from 0.75%. Analysts are split as to its likelihood as the South Korean Government has other tricks up its sleeve to curb rising prices (such as removing fuel taxes).
Oil hitting one hundred dollars per barrel sometime in the next six months is the bullish sentiment held by many financial institutions.
Analysts expect that Oil producers will not be capable of ramping up supply in time to meet an anticipated surge in demand. Increasing supply is not a simple undertaking. It generally takes weeks or months of investment to ensure the infrastructure is in place to manage the change in supply.
The lift in demand is supposed to be driven by economies further relaxing travel and commerce restrictions in line with the rollout of their respective vaccine programs.
The shortage of supply in the face of surging demand will then push the Oil price up another USD 30 per barrel. WTI and Brent are currently in-between USD 72 and 75 per barrel, with a general momentum to the upside. The upside momentum is in line with the general optimism swirling around global markets since the world's major economies, particularly the US and the United Kingdom, reported the immense success they were having in vaccinating their populations.
The major event that can derail the bullish predictions for Oil is, of course, Covid. In particular, the Delta variant spreading further afield.
The drop in price that Oil experienced over Monday trading (28/06/20201) perfectly Illustrates the power of the delta variant to affect Oil prices
The price drop followed new lockdown measures in South Africa, Australia, New Zealand, and Malaysia. Throughout Monday trading, WTI fell by 1.5%, and Brent fell by 1.9%
To make matters worse for the bullish predictions for the Oil price is the upcoming OPEC meeting on July 1st. The Oil-producing nations might agree to lift the number of barrels they supply.
The last time OPEC met, they were drinking the positive-optimism cool-aid being served at that time. But, in doing so, they knowingly dismissed the lacklustre data coming from the US and Eurozone and the worsening situation in India and Japan.
However, OPEC noted that they had not ruled out a negative outlook for the rest of the year in their last meeting. Therefore, we could expect a different tone from the group in the forthcoming meeting.
Suppose OPEC continues to believe that the global economies are on their way to recovery. In that case, they might continue on their plan to lift supply, and a bullish prediction extending to $100 per barrel begins to look less likely.
The rise in New Zealand house prices over the past 12 months has been extraordinary. As a result, Finance Minister Grant Robertson has moved to increase the scope of the Reserve Bank's concerns. Moving forward, the Reserve Bank must consider the price of NZ property in conjunction with the other issues it monitors and controls.
Since its new mandate, the Reserve Bank has begun to flesh out its understanding of the country’s housing crisis and how it will affect its policy decisions.
This pair has been ranging in a consistent bound for the past seven or so years. If we have a look at a longer-term timeframe,
We can see that the pair has been ranging between $0.8 and $0.95, with a significant support/resistance area at 0.9. Currently, the price is just under 0.90c, at 0.899.
New Zealand has rallied on the government's consistent handling of the Coronavirus, and more recently, the RBNZ comments suggesting that negative rates are less likely to be on the table, implying a better than expected in the New Zealand recovery.
However, upbeat sentiment on a Pfizer vaccine before the end of the year has spiked a risk-on rally, especially in the Oil markets. The Canadian Dollar is known for its commodity correlation like the Australian Dollar, in which the CAD strengthens/weakens depending on the price of commodities like Oil. In the past five days, Oil has rallied over 7% on Pfizer vaccine's news. Oil rallying tends to strengthen the Canadian Dollar.
However, the Canadian Dollar has not strengthened against the NZ Dollar, with recent RBNZ's comments further strengthening the NZD. However, as we approach this significant support/resistance area, alongside further positive news on a Coronavirus vaccine before year-end, may end the Bull rally in the New Zealand dollar and heavily reject that 90c resistance level.
There is not much news following the Coronavirus situation in Canada. However, the country has experienced a recent Coronavirus spike due to its non-essential lockdown restrictions. The government faces a similar curve to that of the United States and in Europe.
Due to this, top deputy Carolyn Wilkins from the Bank of Canada stated that the country "is likely to exit the pandemic with a lower profile for potential output, leading to a significantly diminished ability to generate goods, services, and incomes on a substantial basis." She also states that "Canada's plan to lift immigration levels will boost potential output growth overtime."
Similarly to the United States, New Zealand has its elections coming up in 25 days. What's the future of the New Zealand dollar once a party is enacted?
Generally speaking, there are two "main" parties in New Zealand – national and Labour. From a thousand miles away, National vs. Labour would be compared to Democrats vs. Republicans. National can be categorized as "pro-business' – Lowe taxes, fewer benefits. Labour can be known to people for having "socialist" policies – higher support for students, higher taxes for the rich, etc.
Therefore, if National wins, this would provide a push for the New Zealand dollar. Similarly, a possible push downwards if Labour wins.
The New Zealand dollar is currently sitting around 0.65, firmly rejecting that 0.68 cent level forming a double top before firmly falling. We can see that 0.68 cent level has been a healthy historical support/resistance level since 2016.
Therefore the question becomes, who is poised to win the election?
An article in the Financial Times regarded New Zealanders for their "humility" and their "[tendency] to view the mass Euphoria that characterizes US political campaigning with suspicion," suggesting that New Zealanders tend to steer their eyes towards the center-left Labour party.
The party leader of the Labour Party, Prime Minister Jacinda Ardern, has been praised for her empathic response to the horrific Christchurch Shooting, which killed 51 Muslims, a deadly volcanic eruption on Whakaari Island, and her handling of the Coronavirus.
On the other side of the aisle, we have the National Party with Judith Collins at the helm. Judith has been struggling with the National party's misfunction's initial tailwinds, having switched leaders three times in the past year. Judith Collins has been struggling against the popularity of Ardern lately. Their attack on the economic damage of Labours' "go hard, go fast" approach to totally eliminate the virus has been met with fierce criticism due to the public being generally approving the policy. To date, there have only been 25 deaths regarding the virus.
As of the current polls, Labour is set to win with a wide margin. 1 News poll showed yesterday that Labour was on 48%, with National party on 31% - this could see Labour forming the first single-party government since 1996 – the year New Zealand moved from the First past the post system to MMP.
In the United States, the difference between the constituents in Democrats and Republicans are quite polarizing. However, in New Zealand, the difference is not as great as that of the United States. Some even question whether National and Labour's policies are much different in the first place. If you look at their social media presence, they attach each other like what the other party is doing would destroy the country.
However, an article from the Spinoff, a news provider in New Zealand, summed up the politics between the two parties greatly – "How did we end up with two parties that are pretending to do things differently?" Hotelling's Law, created by Harold Hotelling in 1929, helps explain why this happens. In summary, both Labour and national policies end up near the middle, to appeal to the most voters, which is why they look very similar.
Therefore does it matter who gets into power if the policies are quite similar? In the long run, probably not. For New Zealanders? Again, probably not. But for the markets? Most likely, yes.
Hello traders! This week ahead, we have many events that directly affect significant currencies such as the GBP, USD, the NZD, and the Euro. Traders should be aware of these critical events not to be whipsawed by the market. Here is your week ahead
UK Inflation dropped sharply to 0.2% in August, as stated last Wednesday, primarily due to the governments' "eat out to help out" scheme, pushing restaurant and café prices lower. After July's higher CPI figures, this conveyed the strong influence the "eat out to help out" scheme had on meal prices. The report explicitly talks about Inflation. However, implicitly talks about what the UK's treasury economic outlook is. A dovish tone may send the GBP against the US lower this week ahead.
We can't seem to escape Jerrome Powell, can we? Dubbed as the Reserve Bank of the World, the Federal Reserve of the United States' economic outlook and changes in policies directly affects traders' and investors' sentiment. It is without saying, traders and investors should be looking at these speeches this week ahead like a hawk to examine any change in Powell's tone about the economy. A more than expected dovish tone should push the USD higher against major currencies, vice versa.
Similar to the Inflation report hearing, Governor Bailey's speech will set the tone for the future of the UK's economy. However, what traders should be looking out for is whether Governor Bailey will give any hints on implementing negative rates in the UK. If he does, this would be a contrast to his position a couple of months ago, which could significantly see the Cable drop.
Australia has had a fierce battle with the Coronavirus. After having initial success with battling the Coronavirus without a strict lockdown, a massive spike in Melbourne, Victoria, has caused a setback of setbacks. A trans-Tasman bubble touted to be around mid this year has been pushed back to at least March 2021. Conditions are better now in Victoria, with the state reporting its lowest increase in Coronavirus cases in three months of 28. This is, in contrast, to triple-digit growth a month ago. With National Australia Bank (NAB) posting an increase of online retail sales of 62.6%, analysts predict a rise in retail sales from 3.2% the previous month. This may provide a push for the Australian dollar higher this week ahead.
New Zealand has been relatively prosperous in controlling the Coronavirus in comparison to other countries. However, that success has come at a brutal economic cost. New Zealand has suffered a 12.2% drop in GDP, higher than Australia, and the OECD average of -7% and -10.6%. With the market pricing in a 72% probability of a rate cut next year (Source: Bloomberg), a rate cut this early will send the New Zealand dollar spiraling downward. However, market consensus predicts that rates will stay the same at 0.25%. All eyes will be on Adrian Orr, which may give a better indication for the timeline of negative rates in New Zealand.
Just some personal perspective. There has been some speculation that the reason why the RBNZ has not implemented negative rates as of yet is to get banks to get their systems ready and bee prepared when negative rates do come. Furthermore, evidence has been shown in mortgage rates. Or more, the duration of low-interest mortgage periods. A couple of months ago, banks would offer 2.55% mortgage rates for six months. However, now, banks are only offering the same quality for one year. This suggests that they are trying to lock borrowers in these rates for a more extended period to minimize remortgages' wave once negative rates come in early 2021.
Europe has faired well regarding the collaboration between the countries regarding the EU's reaction to the Coronavirus in terms of fiscal and monetary policy. With that said, individual states have had different outcomes when it comes to the Coronavirus. Pair that with countries such as Greece and Italy facing economic distress before the Coronavirus, and you have a mixed bag when it reaches the individual countries' future. PMI's measure bearish/bullish sentiment for manufacturing. A figure above 50 signals expansion, while a figure below 50 shows contraction. Consensus state that the UK is set to release a PMI of 56. While still expanding, expansion is less than in the previous month when it was 58.8. Europe is set to release a PMI of 51.7, slightly lower than the 51.9 the last month. Germany is set to release a PMI 54.2, marginally lower than the 54.4 of the previous month.
Busy week ahead as we continue to tackle the Coronavirus around the world. Stay Safe, Trade Safe.
The New Zealand dollar has fallen against the US Dollar as New Zealand records new community transmitted cases since the last time 102 days ago.
After a rally in risk-on currencies, the New Zealand dollar has fallen over 0.75% over the past two days from its high from 0.6175 as the largest city in the country, Auckland, was put into a mandatory level 3 lockdown for three days. For reference, New Zealand uses a 4 level system, with four being the most severe of lockdowns imposing a mandatory stay at home order for all citizens, with only essential workers such as nurses and doctors allowed to work.
Level 3 is less severe; however, it still imposes mandatory work from home orders if it is possible to do so. Schools and restaurants are closed. However, takeaways are allowed. Furthermore, only gatherings of 10 are permitted, with police roadblocks around the Auckland area to catch people going in/out of the city.
Prime Minister Jacinda Ardern urges citizens not to panic and panic buy at the supermarkets. However, queues have been seen stretching out the door at many supermarket chains, with police being required to be present to control the crowd of shoppers.
In terms of the New Zealand dollar and New Zealand equities, this sell-off may be purely reactionary. New Zealand is doing far better than essentially every other country, including its bigger brother Australia. This may be a good time for bulls to enter the market. As we’ve seen with many other securities as of late, the market is quick to pounce on a beaten asset for the rebound.
Meanwhile, in the United States, we see the market edge higher, with the NASDAQ and Dow Jones climbing back to their all-time highs on useful US inflation data. However, the outperformer was the SP500 with cyclical assets such as energy stocks help push the index past its all-time highs.
The S&P 500 broke the 3,386 level, finishing the US trading session just under 3390, an all-time high.
This is a familiar picture with investors and traders who have been following the markets for the past couple of months – the market rallies on good news regardless of the relevancy, with the market discounting the bad news citing Fed liquidity propping up assets. Regardless, the rally in equities has been astounding, proving the wrong unbelievers of the “V-shape” recovery.
Barry Jones, manager at the James Investment research, stated that the rally in the equity markets has been “absolutely amazing” and that the market has “done the V-shape recovery that the economy has not” with the “stock market [plowing] right ahead.”
Futures pulled back slightly at the end of the US session, most likely gearing up for the retail sales figure this Friday. A better than expected result will most likely see the NASDAQ push up above its record high of 11,286 and solidifying the S&P 500’s push above its all-time high.
As the dollar continues, it's a downward spiral, risk-on currencies such as the New Zealand dollar have seen a rise in value. I have talked about how the market is slowly pricing in the long-term effects of the Coronavirus on macro-environments, and it seems like the Currency markets are gradually displaying this.
NZD/USD in Blue, CAD/USD in Teal, EUR/USD in Orange, GBP/USD in Red
The New Zealand Dollar is up 9.06% against the USD. However, at the same time, we see the Pound, Euro, and Canadian dollar only up 4.76%, 7.45%, and 5.35%, respectively. We can interpret the returns in the light of the Coronavirus and the respective geographical macro environment. The United Kingdom has been hit hard with the Coronavirus amongst battling with Brexit woes. Canada has had a relatively successful Coronavirus response, without having to resort to a strict lockdown, and Europe having hot spots of the pandemic, however, have had a cohesive response to the pandemic, coming up with a 750 Billion Euro recovery fund to fight the economic damage caused by the Coronavirus.
However, no nation has gone as hard and fast as New Zealand, going from citizens have relative freedom to lockdown in less than a week. New Zealand's relatively quick response may have come at an economic cost. However, it is similar to ripping the band-aid off as quickly as possible. This high initial cost may prove beneficial for the nation down the line, and the market is pricing this in accordingly with the appreciation of the New Zealand Dollar.
An increase in demand for the New Zealand Dollar may come from being one of the first countries to reopen their borders to foreign nations, with talks of an Australian bubble coming by the end of this year and a Cook island Bubble as soon as next month. Furthermore, as equities slowly price in the effects of the Coronavirus in the future, overseas investors may find New Zealand equities favorable.
However, investors should watch out for further rate cuts from the Reserve Bank of New Zealand, which currently hold interest rates at 0.25%. If the RBNZ continues to purchase bonds at the current rate they are now, they will run out of bonds to buy by the end of this year unless they lower their standard on the bonds they purchase. If not, they will have no other choice but to dip into negative rates.
Currently, the NZD/USD pair is consolidating in the 0.66 range. A push to 70c, a level not reached since June 2018, would require both an increase in demand for the New Zealand dollar and a decrease in demand for the US Dollar.