The kiwi has continued to weaken this week as rising global bond yieldsand mounting caution ahead of the FOMC meeting weigh on sentiment.
BusinessNZ PSI was one the key releases this week, which showed NZservices activity expanding for a third month in a row. August PSI rose to51.2 (from 50.6), the highest reading since September 2023. Looking atthe details, three of the five sub indices remained below 50, with SupplierDeliveries the weakest at 49.0 and Employment, and Activity/Sales bothsoft at 49.4. New orders improved and suggested a modest pick up inunderlying demand. That said, sentiment softened from July, with 60.8%of comments negative, largely reflecting rising cost pressures.
NZ Retail card spending fell 0.9% MoM in August, reversing most of July's1.2% gain. Fuel spending picked up as pump prices moved back above$3/litre, but every other category softened. Grocery spending dropped0.4%, whilst household spending on durables (includes householdfurnishings) fell 1.6%, and hospitality spending declined 1.7%. The datasupports our view of a shallower rate hike cycle than markets expect,with just one more RBNZ hike this cycle as households face pressurefrom higher petrol prices and rising borrowing costs.
Globally, US 10 year Treasury yields touched 5% earlier this week for thefirst time since 2023, as oil prices surged after Saudi Arabia shut a keypipeline amid the Iran conflict. The rise in yields was also likely reflectinggrowing concerns around rising government debt and heavy borrowingfrom tech firms funding the ongoing AI boom. UK gilt yields also climbedto their highest since 2007, with markets now pricing a near certain Fedhike this week.
On the Middle East, the situation worsened over the weekend as Saudi Arabia closed its East West pipeline, which normally carries around 7 million barrels per day (just under 7% of global daily demand) to Yanbu on the Red Sea and had kept exports elevated despite Iran's closure of the Strait of Hormuz. Reports are mixed on how long the pipeline will stay shut, though US Energy Secretary Chris Wright has played down the concerns and suggested a swift reopening, leaving the market struggling to price the new supply risk, with the outlook also hinging on how much can be drawn from storage at Yanbu. The broader oil outlook remains bleak, with inventories being drawn down across the board, Middle East exports falling sharply, and the US Strategic Petroleum Reserve at its lowest level since 1982, all pointing to continued upward pressure on prices and inflation ahead.
Looking ahead, focus turns to three major central bank meetings this week, the Fed, BoJ and BoE. We expect the Fed to raise rates 25bp on Wednesday, with futures pricing around a 90% probability following the firmer August inflation print, though we see it as a one and done move rather than the start of a fresh tightening cycle, with Chair Warsh likely to keep forward guidance vague. The BoJ is also expected to hike, with markets focused on whether commentary turns more hawkish, as anything softer would disappoint. The BoE, by contrast, are expected to keep rates steady, with focus also on their post decision commentary.
