The Kiwi has traded a relatively tight range this week, holding steady following the Q2 retail sales data as markets await Friday's Jackson Hole Symposium.Locally, the focus was on a soft Q2 retail sales print.
Locally, the focus was on a soft Q2 retail sales print. Headline volumes fell 0.5% QoQ, with the weakness concentrated in fuel (-13%), accommodation (-8%), and motor vehicle and parts (-2.3%). Core retail volumes, which strip out fuel and motor vehicle and parts, rose 0.7% QoQ, suggesting spending outside the areas directly hit by the Middle East disruption is holding up well. Retail sales (values) told a slightly firmer story, up 0.9% QoQ as price effects offset the volume decline, with nine of the 15 categories posting higher sales values through the quarter.
Elsewhere, attention turns to the US PCE report and the Jackson Hole Symposium. Core PCE, the Fed's preferred inflation gauge, is expected to rise 0.2% MoM, keeping the annual rate steady at 3.3%, with little sign that inflationary pressures are broadening across the US.
Later in the week, the bigger risk is a hawkish surprise from Fed Chair Warsh's Jackson Hole address on Friday. US data has softened markedly in the weeks leading into the symposium, with September hike odds falling to around 40% from 70% a few weeks ago, tilting the balance of risks that direction. In our view, Jackson Hole tends to move currency markets only when the Fed Chair signals a shift in the reaction function itself, rather than near term guidance, though this year carries added risk given Warsh has flagged a new policy framework. Even so, his preference for a smaller balance sheet points to a reduced Fed footprint and higher bond yields, rather than a hawkish shift in rate policy
