The kiwi rose strongly this week, building on last week's gains, with themove driven by softer US inflation data and hawkish remarks from RBNZChief Economist Paul Conway. Ultimately, the performance of the NZDreflected that FX markets continued to shrug off the recent flare up inthe US-Iran conflict.
On data, largely covered in our mid-week update, the BusinessNZ PSIrose to 50.6 in June from an upwardly revised 48.0, the first expansionin services since January, though activity, inventories and employmentremained in contraction, albeit at a slower pace. The NZIER's QSBO Q2also showed an improvement in business sentiment, however, a net 41%of firms reported price rises last quarter, with a net 54% expectingfurther increases over the next quarter.
This theme of inflation persistence was echoed in a speech by RBNZChief Economist Paul Conway, which flagged that NZ firms now pass oncost increases more rapidly than in the past and are less likely to cutprices when costs ease, an asymmetry that raises the risk of the currentcost shock becoming embedded and supports the case for furthertightening beyond July.
NZ retail spending fell 1.4% in June, reversing May's gain, with corespending down 1.5%. Fuel spending dropped 1.7%, but weakness wasbroad based, with furnishings down 4% and apparel and hospitality bothdown 2%, while groceries were the only category to rise. Consumercaution remains elevated, with many households cutting discretionaryspending and delaying travel, and with tensions in the Middle Eastpushing oil prices higher again alongside the RBNZ's hiking cycleunderway, we expect spending could remain relatively weak through thesecond half of the year.
June's SPI data offered an early read on price movements ahead ofTuesday’s CPI print for Q2. Petrol and diesel prices continued to fallthrough the month, down 4.2% and 12.1% respectively. Rents alsoremained soft, up 0.1% MoM / 0.2% YoY, consistent with the broadersoftening in housing costs across New Zealand. Food prices, however,were more solid, rising 0.6% MoM and 2.5% YoY, though even thismarked some easing from May's pace.
Looking ahead, the recent softening in petrol prices suggests thatheadline inflation may come in a bit lower than first previouslyanticipated. Indeed, we now expect inflation to rise 1.4% QoQ, whichwould lift the annual rate to 4% (from 3.1% in Q1). This sits a touchabove the RBNZ's newly revised forecast of 3.9%, though it marks ameaningful downward revision from our previous call of 1.8% QoQ and4.4% YoY.
The US-Iran conflict remained the key global theme this week, with theUS military carrying out more strikes on Iran. Indeed, Iran has retaliatedwith attacks on US bases in Jordan, Kuwait and Bahrain, and warned thatUS infrastructure in the region would face heavy retaliation shouldWashington target its civilian sites. That said, US Central Commandreported a double digit number of vessels crossed the Strait of Hormuzon Tuesday night with US support, though many ships continue to transitwith tracking systems switched off, making traffic volumes difficult toverify. Brent crude closed out the week around $88/bbl with prices uparound 19% for July to date.
The IMF also released a notable paper on the conflict this week, findingthat closure of the Strait of Hormuz has cut off around a fifth of global oilconsumption, with over 1.1 billion barrels lost by May. Oil prices, however,rose far less than feared, as demand compression, non-Gulf productiongains led by the US, Venezuela, Guyana and Russia, and inventorydrawdowns helped absorb the shock. The IMF did note the recovery ofinventories could take two to three months even once the Strait fullyreopens, and warned these buffers are now depleted, leaving marketsmore exposed to renewed escalation. Hence the recent escalation in theMiddle East, if it persists for longer than markets anticipate, could pushoil prices higher than seen earlier this year.
On the data front, US headline CPI fell 0.4% MoM in June, well below the-0.1% consensus, with the annual rate easing to 3.5%. core CPI was flaton the month against expectations for a 0.2% rise, slowing the annualrate to 2.6%. PPI told a similar story, with the headline measure falling0.3% MoM on lower gasoline prices, taking the annual rate down to 5.5%from 5.7%, while core PPI rose a below consensus 0.2% MoM. Goods PPIfell 1.4% MoM, with nearly two thirds of the decline reflecting lowergasoline prices, while services PPI rose 0.2% MoM, half of which camefrom expanding gasoline retailing margins.
Overall, the disinflationary trend shown in both CPI and PPI for Junecould be overlooked given the surge in oil prices seen through July. Thatsaid, markets still pared back Fed hike pricing, with a September movenow around 60%, down from being fully priced earlier in the week, yetmarkets are still fully pricing in a hike by year-end. Our long held call forno further hikes this year is reinforced by the prints, though the outlooknow hinges heavily on the trajectory of the Iran conflict.
On the US consumer, June retail sales rose 0.2% MoM (from 1%), in linewith consensus, with the slowdown driven by falling gasoline prices,though sales ex-gasoline rose 0.7% m/m following a 0.9% gain in May.Indeed, spending growth was quite solid across the board, with seven ofthirteen groups rising through the month. The resilience in spendingacross the US likely reflects higher tax rebates coinciding with astabilising labour market. Additionally, University of Michigan consumersentiment for July jumped sharply, with the index rising to 54.4 (from50.8), largely supported by easing oil prices.That said, most survey mostresponses were collected before the resumption of US strikes on Iran.
