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Daily Market Digest: RBNZ holds rates, UK Trade balance narrows, China posts weak inflation

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In a close call, the RBNZ decided to leave the OCR rate unchanged at 2.25% at its meeting yesterday. UK’s trade balance data narrowed in April. China’s inflation grew at a weaker pace of 2.0%, down from April’s 2.30%, while PPI continued to improve. ECB’s Draghi spoke at a forum in Brussels today urging fiscal policy makers to come together and act without any undue delay. Here’s what’s moving the markets today.

Today’s Economic events

  • RBNZ holds OCR at 2.25%
  • Japan core machinery orders m/m -11.0% vs. -3.20%
  • Japan M3 money stock y/y 3.40% vs. 3.30%
  • China CPI y/y 2.0% vs. 2.30%; PPI y/y -2.80% vs. -3.10%
  • French final nonfarm payrolls Q1 0.30% vs. 0.20%
  • Switzerland Unemployment rate 3.50% vs. 3.50%
  • German trade balance 24bn vs. 21.4bn
  • ECB President Draghi speaks in Brussels
  • UK Goods trade balance 10.52bn vs.
  • US weekly jobless claims 264k vs. 270k
  • Canada new HPI y/y 2.10% vs. 2.10%; m/m 0.30% vs. 0.20%

Coming up

  • The US Wholesale Inventories
  • BoC Governor Poloz Speech

RBNZ holds OCR rate at 2.25%

The Reserve Bank of New Zealand, in its monetary policy meeting last night, held the overnight cash rate unchanged at 2.25%. This is a second month of holding rates steady after previously interest rates were cut to 2.25% from 2.50% in March. Economists were broadly divided on the outcome of the RBNZ meeting with a 50 – 50 split. The RBNZ’s monetary policy statement was surprisingly hawkish.

In the monetary policy statement, the RBNZ was more optimistic on the economy and showed less concern for low inflation that previously noted. The RBNZ’s statement said that global financial risks were dissipating, and that domestic economy was supported by a number of factors. On inflation, the RBNZ said that inflation expectations remained important for further policy decisions and said that further policy easing may be required. Surprisingly, references to the Kiwi’s exchange rate was not given that much of importance.

Analysts at Citi say, “Reserve Bank of New Zealand Gov. Graeme Wheeler is fighting an ‘odd combination’ of softening inflation expectations and stronger housing market activity.” Citi notes that New Zealand economy will expand at a pace of 0.80% in the first quarter rising to 2.90% annual gains, with most of this coming from household consumption and building construction. However, as widely speculated, Citi joins the group which calls for one more rate cut from the RBNZ but unsure on the timing.

“With possible new macro-prudential measures to tame the frothy housing market at least six months away, there is a risk that the bank won’t cut rates again before the U.S. Fed restarts the hiking cycle, which would also make an OCR cut somewhat less likely in the near term,” Citi says.

China consumer inflation rises 2.0% in May

Consumer prices rose less than forecasts in May, rising 2.0% on the month, according to data from the National Bureau of Statistics. May’s 2.0% increase in inflation is slower than April’s 2.30% and runs below the target inflation rate of 3 percent. Food prices increased 5.90% on the year, but it was slower than April’s 7.40% increase. Non-food inflation was unchanged at 1.10%. On a month over month basis, consumer inflation fell 0.50% extending April’s 0.20% declines and marked a third consecutive month of decline in consumer prices.

The Producer Price Index (PPI) also fell in May at a rate of -2.80% and followed April’s decline of 3.40%. However, producer price index has been steadily improving. Julian Evans-Pritchard at Capital Economics says, “A further recovery in producer price inflation in the coming quarters is expected as commodity price deflation continues to ease.”

Zhang Deli, an economist with Minsheng Securities, says, “China’s consumer inflation is unlikely to pick up much speed in the short run, as the main drivers, pork and vegetable prices, are likely to drop in the months ahead” and in the long run, he says “no basis for high inflation combined with stagnating growth.”

Draghi speaks at Brussels Economic Forum

ECB President Mario Draghi spoke in Brussels earlier today and said that the central bank would bring inflation back to its target level of 2.0% but required the support of other policy makers in the region. His comments came while speaking at the 5th Annual Tommaso Padoa-Schioppa Lecture at the Brussels economic forum. Draghi said that inflation was a monetary phenomenon and that a committed central bank can always fulfill its mandate of price stability.

Draghi said, “But monetary policy does not exist in a vacuum. The situation of central banks is better described as independence in interdependence, since other policies matter a great deal. They can buttress or dilute the effects of our policy. They can slow down or speed up the return to stability. And they can determine whether stability is accompanied by prosperity, which is directly relevant to the social cohesion of the euro area.”

He said that it was important for both monetary and fiscal policy makers to come together and act “without undue delay.”

Draghi’s comments come just a day after the ECB started to purchase corporate bonds under the Corporate Sector Purchase Program or CSPP. Under this program, the ECB is expected to dip its hands into purchasing corporate debt for euro-domiciled companies which have an investment grade rating on their debt. Bond yields in the corporate sector also fell into negative. It is unclear on the scope and size of the corporate bond purchases, but the ECB said that it will publish a weekly report on the purchases it made.

Sell USDJPY after gains on a Brexit no vote – Deutsche Securities*

Analysts at Deutsche Securities give a longer term trade call on USDJPY, in conjunction with the upcoming EU referendum vote. Taisuke Tanaka, chief FX strategies at Deutsche Securities in Tokyo notes that “Investors should quickly sell the dollar against the yen once the Japanese currency has weakened in the case of a stay vote in the U.K.’s Brexit referendum on June 23.”

The comments come on the assumption that the UK will vote to stay in the EU. Tanaka expects that the vote to stay in the EU will improve global risk sentiment and could weaken the yen considerably, but the move in USDJPY would be limited in magnitude and sustainability. On the flip side, should UK voters give the mandate to leave the EU, Tanaka says it would be difficult to get a grip on the size of currency flows that could take place between the UK, Japan or between eurozone and Japan. He says the JPY could strengthen initially on the fears of instability.

*Institutional Call of the day is not a recommendation or an endorsement by to buy or sell

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