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Rates and rumours

Saw that coming

The Reserve Bank of New Zealand (NZD) raised its benchmark interest rate this morning for the first time in more than seven years. The NZ dollar is lower on the day. Discuss.

It was a classic case of “buy the rumour, sell the fact”. At its previous policy meeting in August, the RBNZ had put off an expected increase in the Official Cash Rate, “in the context of the Government’s imposition of Alert Level 4 restrictions on activity across New Zealand”. In other words, it would have raised the OCR then had it not been for the risk that such a move would pose to the recovery. This time around, investors were almost certain that the bank would pull the trigger, given the 3.3% inflation rate and runaway house prices, which are around 25% or 30% higher on the year.

Sure enough, the RBNZ raised the OCR from 0.25% to 0.5% as predicted. In its press release, the bank made passing reference to “unsustainable” house prices and “noted that further removal of monetary policy stimulus is expected over time”. Economists polled by Reuters foresee the OCR rising to 1.5% by the end of next year. And yet, apart from a brief spike, the Kiwi moved lower after the news because everyone had seen it coming. The currency is an average of 0.2% lower and down by three quarters of a cent against sterling.

 

Services surviving

The rash of services sector purchasing managers’ indices released yesterday brought mostly positive surprises. Even if they were lower on the month - and the majority were - the best part of them were at least better than the provisional readings.

Britain’s services PMI (GBP) was half a point lower on the month at 55.4, held back by a mixture of “supply constraints and [a] spike in costs”. Higher fuel, energy and staff costs were passed on to customers in September. “The rate of prices charged inflation accelerated sharply since August and was the fastest since the survey began in 1996”. Although there was no strong reaction from sterling, the pound did move gently higher to take silver for a second day, once again behind the oil-assisted Norwegian krone (NOK).

Markit’s other services PMIs tended to tell similar stories of supply bottlenecks and rising prices. In the Eurozone (EUR), services scored a 56.4 with the composite at 56.2, both of them better than expected. The euro was unchanged on average and a quarter of a cent softer against sterling (GBP). US services (USD) merited a 54.9 from Markit and a 61.9 from ISM.

 

Pause

With the RBNZ rate decision out of the way there is not much else on today’s agenda to entertain investors. Perhaps the most important ecostat is ADP’s employment change number (USD), which some argue is a pointer to Friday’s important US employment report.

In Europe this morning, the focus is on industry. Germany has reported on factory orders, which fell 7.7% in August. Sweden will reveal the August numbers for industrial production and factory orders. Eurozone retail sales are forecast to have increased by 0.8% in August.

Analysts reckon on a 428k monthly rise in employment (USD) when ADP prints its report at lunchtime. Whether investors react to it will depend on the mood they are in at the time.

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