The New Zealand dollar ground modestly higher over the week,even as US inflation data came in stronger than expected, helped by easing global bond yields.Domestically, the focus was onthe September selected price indexes, which showed fuel costs rebounding. Petrol rose 6.4%MoM and diesel 7.8%, reversing the decline through to July,though prices remain below the April peak. Over the year, petrol is up 24.3% and diesel 55.8%.Elsewhere, food prices were flat on the month and up 2.4% YoY,with fruit and vegetables falling 2.7% MoM while grocery food rose 0.7%. Electricity is up 9.5%through the year, whilst domestic air transport jumped 9.6% MoM -likely reflecting higher fuel prices.Overall the higher frequency price data supports our long held forecast that Q3 CPI, due next week, will rise 0.7% QoQ, easing the annual rate to 3.8%. That is a touch below the RBNZ’s forecastof 3.9%.NZ retail card spending was also released, and it was rather soft.Spending fell 0.4% MoM in September after a 0.9% decline in August, while core spending excluding fuel and vehicles fell 0.7%.
Fuel spending rose 2.9% as petrol prices rebounded late in the month, but households cutback discretionary spending,with hospitality down 2.3% and apparel down 2.0%. With fuel prices again draining household budgets and wage growth remaining weak, we expect consumer spending volumes to stay subdued.Elsewhere, Business NZ PMI datafor September proved more resilient. The index rose 3.2pts to 56.5, marking the 15th straight month of expansion and the highest print since 2021 outside June’s 60.1. New orders and production both lifted to57.0, and employment returnedto expansion. Sentiment was still mixed, with 53% of comments negative, as firms pointed to fuel prices and uncertainty ahead ofthe NZ election.Overall, the data continues to send mixed signals and show signs of a two speed economy,with a resilient manufacturing and export sector set against weak household spending and growing inflation pressures.Looking ahead, Q3 CPI is the key focus this week. A result inline with the RBNZ forecast the bank to act sooner and raise rates when it meets at the endof the month. Our base case isthat the next move comes in December, but that hinges largely on this week’s CPI data.
US data dominated the week, led by a hot September CPI print. Headline CPI rose 0.6% MoM, in line with consensus and up from 0.4% prior, which lifted the annual rate to3.7% from 3.4% against 3.6% expected. Core was the more important surprise, rising 0.3% MoM against 0.2%expected and lifting the annual rate to 2.6% from 2.4%.Indeed, on a three month annualised basis, core accelerated to 3.4% from 2.0% - suggesting inflation pressures potentially starting to re-accelerate. Core goods rose 0.3% m/m, led by used vehicles. Shelter rose 0.4%MoM on strength in lodging away from home, while rent rose 0.2% and owner’s equivalent rent 0.3%. PPI data also surprised to the upside, adding to further concerns around the inflation outlook for the US.September PPI rose 1.3% MoM against 0.5% expected, the sharpest gain since early 2022, taking the annual rate to6.3%. Energy costs for producers jumped 10.8% on the month as the Middle East war fed through, which flowedinto transport and warehousing (up 3.4%) and trade services (up 1.4%). Final demand goods rose 2.6% m/m,the largest monthly gain for that category since the series began in 2009. Additionally, core PPI rose 0.7% MoM and was up 5% through the year.US retail sales was also released and showed spending holding up in nominal terms but not in real terms. Sales rose 0.8% m/m, driven mainly by higher petrol prices. Exautos and gasoline sales rose 0.2% and the control group0.1%. Accounting for inflation, spending measures werelikely negative in volume terms, which suggests higher fuel costs are eating into household spending power.
For the Fed, this is the last inflation data before the FOMC meets, with PCE due a day after the meeting. Markets price around a 30% chance of a hike this month. We donot expect the Fed to move, but we continue to expect a hike at the final meeting of the year. The data points to a broadening out of the inflation pressures the Fed has been flagging, but we suspect policymakers will want more confirmation before raising rates.In terms of FX movements, the US dollar jumped on the CPI release on firmer Fed hike bets, but gave back some ground late in the week as bond yields fell. Yields dropped sharply after CPI, and the move continued after the stronger PPI, albeit at a more measured pace. It is evident that markets are becoming more concerned around falling Korean and Japanese equity indices and the impact on AI exposed stocks, with fears of a correction in the sector driving a reallocation back into bonds.Turning to oil markets, Brent crude prices ended the week higher as the conflict in the Middle East continued to intensify. Houthi drone and missile attacks on Saudi Arabia hit the headquarters of the state-owned oil producer,though production was not affected. Attacks on tankers in the Persian Gulf also continued, and Iran’s focus is shifting beyond the Strait of Hormuz, with other vessels across the Persian Gulf being targeted. Adding to this, hopes that the Russia and Ukraine energy ceasefire would ease diesel supply constraints were dashed by further attacks on Russian refineries. Sentiment was also weighed down by the IEA’s latest assessment, which showed global inventories down 10mbbl in September, leaving stocks 509mbbl lower than at the end of February.
