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Central bank pressures

Ready for a hike

The NZ dollar got two bites of the cherry yesterday. The first was in the aftermath of the Reserve Bank of Australia’s relatively hawkish policy decision and ahead of the quarterly NZ employment data. The second came when those jobs numbers underlined the possibility of a rate hike from the RBNZ in two weeks’ time.

Statistics NZ made no attempt to underplay the importance of the employment data, headlining its report: “Sharp falls in unemployment and underutilisation”. The rate of unemployment fell to 4% in June, close to its lowest level in 13 years. The labour cost index rose by an annual 2.2%, still short of the 2.4% level seen in early 2020 but heading in that direction. A ten-year high for inflation and the Reserve Bank of New Zealand’s newish obligation to consider house prices when setting policy have combined to put pressure on the central bank to be seen to be doing something. Governor Adrian Orr said this week that the bank “needs to think about when and how we would return interest rates to more normal levels”.

Taken together, the circumstances lead investors to suspect that a rate increase at the next policy meeting is all but a done deal. With that in mind, the NZ dollar pushed ahead overnight, extending the gains it had made during Tuesday’s London session. It is the top performer, with an average gain of 0.5%, three quarters of a cent ahead of sterling, which is in second place.

 

Old Lady getting edgy?

Investors are thinking similar but less dramatic thoughts about what the Bank of England’s Monetary Policy Committee might come up with at tomorrow’s meeting. While there is no practical risk of a rate increase, there is every chance that two or more members could press for a tapering of the asset purchase programme.

That suspicion worked in sterling’s favour. It strengthened by an average of 0.1%, taking a third of a cent each from the US dollar and the euro. The pound was steady against the safe-haven Swiss franc and Japanese yen. There were no UK economic data to affect it one way or the other.

There was not much to affect the other major currencies either. A record 10.2% annual increase in Eurozone producer prices was a little less than forecast. Canada’s manufacturing PMI was 56.2, putting the sector “firmly in expansion territory”. US factory orders were a little better than expected, with a 1.5% monthly rise.

 

Services PMIs

The vast majority of today’s ecostats are purchasing managers’ index readings for the services sector. Although two of the three released already came in below 50, all the rest are expected to be in the growth zone.

Australia delivered a 44.2, weighed down by the latest Covid-19 wave. Japan, which has remained almost exclusively below 50 since the pandemic took hold last March, managed 47.4, also hampered by Covid outbreaks. The directly comparable 54.9 from China was four and a half points higher on the month. Also released overnight, Australian retail sales fell 1.8% in June, exactly as forecast.

Predictions for the European services PMIs from Europe range between 57 from France and 62.5 from Germany. Britain is expected to be in line with the provisional figure of 57.8. US readings of 59.8 and 60.4 are expected from Markit and ISM. The Eurozone reports this morning on retail sales for June, and after lunch ADP produces its monthly Employment Change report, an important pointer to Friday’s official US employment data.

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