The Kiwi ended the week largely unchanged, though it was choppy. NZD found some support from US inflation data, which came in line with expectations and saw markets pare back Fed rate cut bets. However, the RBNZ's Q3 inflation expectations survey proved the more decisive driver, with a drop in near term expectations prompting a sell-off in the Kiwi. That said, the kiwi rose higher late in the week, seeing it end the week where it started. The key local focus was on the RBNZ inflations expectations survey for Q3, which showed some promising signs on the inflation front. Expectations one year ahead dropped sharply to 2.60% from 3.41% previously, while the two year ahead measure eased to 2.34% from 2.53%. Longer dated expectations ticked slightly higher, with the five and ten year ahead measures at 2.31% and 2.20% respectively, though both moves sit within normal quarterly volatility. Every measure now sits at or below levels recorded six months ago, before the Middle East conflict escalated, suggesting the recent inflation overshoot may likely be viewed as temporary rather than embedded.The data supports our view that the RBNZ's hiking cycle will be more shallow than what markets are currently pricing. However, we do not read this as a case for the RBNZ to show complacency around inflation risks in the NZ economy. Businesses continue to report elevated cost pressures, and inflation was already running hot before the Middle East conflict added further upside risk. We maintain our view that the RBNZ will hike in September and again in February 2027.Adding to this, BusinessNZ PMI data for July also was released. Manufacturing output softened in July, with the PMI easing to 54.3 from June's exceptional 60.1, though still above May's 51.5 and the survey's long run average of 52.5. All sub-indices stayed in expansion, led by production at 57.3, while employment was weakest at 52.8. More notable was the shift in sentiment, with 57% of comments negative as manufacturers cited the Middle East conflict, high fuel and raw material costs, soft demand, and election uncertainty. That said, BusinessNZ did flag this as normal volatility rather than a genuine loss of momentum.
Globally, the focus was on US inflation data for July. US headline CPI rose 0.1% MoM, with core inflation rising 0.2% MoM, in line with expectations. More importantly for the Fed, the annual core rate eased to 2.5% y/y from 2.6%, while on a three-month annualised basis core inflation fell to just 1.6%. Core goods prices rose 0.2% MoM, with tariffs and elevated chip costs pushing nominal prices higher in technology goods, though adjustments continue to mask much of this in the official data, as seen in falling smartphone prices. Additionally, shelter, the largest weighted component in the basket (~35% weight), rose just 0.1% MoM. Indeed, with asking rents showing signs of easing across a growing number of US states, this softness will likely feed into CPI rents over coming months. This will likely add further downward pressure on headline inflation given its large weighting in the basket. Adding to this, US PPI data was also released and pointed to contained pipeline pressures, with the headline measure flat in July and the core reading rising just 0.2% MoM, both below consensus. Core goods PPI rose only 0.1% MoM, the smallest increase since December 2024, while services PPI rose 0.2% MoM. The report saw markets pare expectations for a near-term Fed hike, with pricing now around a 40% chance of a September move. This reinforces our view that underlying inflation is moderating and that relative price shocks from tariffs and energy have not broadened into more persistent pressures. Alongside renewed signs of labour market weakness, the data support our view that the Fed will remain on hold for the remainder of the year. Indeed, the bar for a September hike from the Fed has risen, though the risk is not eliminated. Before they meet in September, July's PCE data and the August CPI and labour reports are all due.The Middle East also remained in focus this week. Brent crude climbed as high as $90/bbl as prospects of reopening the Strait of Hormuz continued to dim, before easing back to close the week near $88/bbl. The late week retreat in prices came as evidence mounted that flows of oil were holding up better than expected, with Gulf producers said to be disguising cargo movements through the strait. Adding to this, US Energy Secretary, Chris Wright, claimed that flows have averaged 9mb/d over the past week. However, the easing in oil prices did stall as there were reports that Iranian backed Houthi militants targeted Saudi Aramco's Jazan refinery for the second time in a week. Talks to reopen Hormuz have also seemed to have stalled, with both sides demanding concessions the other is unlikely to meet. Indeed, given the recent supply constraints, the IEA now projects a global shortfall of 1.8mb/d this quarter, more than double its earlier estimate
