Inflation updates in focus for GBP & NZD performance

NZD: Mixed CPI report dampens RBNZ rate cut speculation

The biggest mover during the Asian trading session overnight has been the New Zealand which has strengthened following the release of the release of the latest CPI report from New Zealand. It has resulted in the NZD/USD rate rising to an intra-day high of 0.6082 while the AUD/NZD rate has fallen to an intra-day low of 1.1073. The release of the latest CPI report from New Zealand proved to be mixed bag. On the plus side, it revealed that headline inflation slowed to 3.3%Y/Y in Q2 down from 4.0% in Q1. It was the slowest reading since Q2 2021. The RBNZ had been expecting headline inflation to slow less to 3.6% in Q2 in their projections from the May Monetary Policy Statement. However, the domestically driven parts of inflation are not slowing as quickly. Non-tradeables inflation increased by 0.9%Q/Q which lifted the annual rate to 5.4% in Q2. The RBNZ had been expecting non-tradeables inflation to slow more to 5.3% in Q2. In contrast, there was further evidence of disinflation in the tradeable goods with import prices falling by -0.5%Q/Q ad lowering to annual rate of growth to just 0.3%.

Taking everything into consideration, New Zealand rate market participants are less confident over how quickly the RBNZ will begin to cut rates as they believe that the RBNZ will place more weight on domestic price pressures which appear to be slowing less quickly than expected. According to Bloomberg, the probability of the RBNZ beginning to cut rates as soon as at their next policy meeting on 14^th August is now judged to be finely balanced at just below 50:50. Prior to that meeting, the RBNZ will also have available the latest New Zealand Labour market report for Q2 which is released on 6^th August. Overall, the developments have not significantly changed our view that the there is room for AUD/NZD to continue to moving further above the 1.1000-level as we expect monetary policy to diverge between the RBA and RBNZ in the near-term. With economic growth remaining weak in New Zealand and inflation slowing, we expect the RBNZ to begin cutting rates while the RBA has indicated that it is seriously considering raising rates further in response to stronger inflation in Australia.            

SERVICES INFLATION IS PROVING STICKY IN THE UK

Source: Bloomberg, Macrobond & MUFG GMR

GBP: Services CPI continues to be sticky casting doubt on August BoE cut

The main economic data release at the start of the European trading session has been the latest UK CPI report for June. The report revealed that headline inflation remained in line with the BoE’s inflation target at 2.0% for the second consecutive month. It was  similar story as well for core and services inflation which the BoE is watching closely to assess inflation persistence risks in the UK. Core and services inflation remained at 3.5% and 5.7% respectively in June for the second consecutive month. At the same time, goods inflation moved further into negative territory coming at -1.4% in June. The breakdown revealed that food & non-alcoholic beverage inflation continued to ease to 1.5% in June down from 1.7% in May. Clothing & footwear inflation also slowed to 1.6% in June down from 3.0% in May. However, the annual rate of inflation picked up for transport to 0.9% in June from 0.5% in May and for restaurants and hotels to 6.2% in June from 5.8% in May.

The slightly stronger than expected report has not had a significant impact on pound performance. It continues to highlight that services inflation remains sticky at an uncomfortably high level which could deter MPC members from voting for a rate cut as soon as at next month’s MPC meeting. The UK rate market has become less confident that the BoE will cut rates next month which is currently priced at just under 50:50. For the pound it at least removes one potential downside risk which could have derailed its current upward momentum, and supports our long GBP/SEK trade recommendation (click here). The improving growth outlook for the UK economy was also highlighted in the IMF’s updated World Economic Outlook update yesterday. The IMF’s GDP forecast for the UK economy for this year was revised higher to 0.7% to reflect stronger growth at the start of this year.               

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	10:00	CPI (YoY)	Jun	2.5%	2.6%	!!!
US	13:30	Building Permits	Jun	1.400M	1.399M	!!
US	13:30	Housing Starts	Jun	1.300M	1.277M	!!
US	14:00	FOMC Member Barkin Speaks	--	--	--	!!
US	14:15	Industrial Production (MoM)	Jun	0.3%	0.9%	!!
US	14:35	Fed Waller Speaks	--	--	--	!!

Source: Bloomberg