The kiwi ended the week higher,though it was a bumpy ride,gaining early in the week in thelead up to Thursday’s Q3 CPIbefore a mixed reaction to therelease. The currency initiallysold off on the headline miss butrecovered as markets focused onfirmer underlying inflationpressures, before giving backsome ground late in the week asthe AI driven sell off intechnology stocks soured risksentiment.On CPI, headline inflation rose0.7% QoQ in Q3, easing theannual rate to 3.7% from 4.1%.That was in line with ourquarterly forecast but a touchbelow consensus and the RBNZ’sprojections of 0.8% and 3.9%,with the miss coming almostentirely from fuel as petrol anddiesel prices fell back through thequarter from their April peak.The detail beneath the headlinewas firmer, with tradable inflationexcluding fuel rising 1.2% QoQ, itsfastest pace in over a year, ashigher prices for vehicles,computing equipment andinternational airfares suggest theweaker kiwi is starting to feedthrough to import prices.Domestic inflation also picked upto 1.0% QoQ, driven largely by asharp rise in local authority rates,while rents remained soft. Coremeasures firmed too, with CPIexcluding food, household energyand fuel lifting to 2.9% from 2.5%and services inflation rising to3.1% from 2.6%, a clear sign thatprice pressures are broadeningbeyond fuel.
Looking ahead, the focus thisweek turns to the RBNZ decisionon Wednesday, where we nowexpect a 25bps hike to 3.00%,bringing forward our previouscall for a December move. Theinflation backdrop hasdeteriorated since theSeptember meeting, with oil wellabove $100/bbl and a sharplyweaker kiwi adding directly totradable inflation while headlineinflation already sits above thetop of the target band. With fuel prices reboundingsharply in recent months, weexpect headline inflation to lift to4% in Q4, and in our view theRBNZ’s September forecasts, setbefore the currency weakenedand oil moved above $100/bbl,leave clear upside risks to itsinflation track.With a single mandate focusedon returning inflation to the 2%midpoint, the softer labourmarket and weaker householdspending carry less weight inthe Bank’s decision. Combinedwith relatively resilient growth,we think the RBNZ will prefer tomove the OCR close to itsestimate of neutral now ratherthan wait for pressures to buildfurther. We see scope for furthertightening beyond this, thoughour base case is that it comes in2027, dependent on incomingdata.
It was a relatively quieter week on the global data front,with inflation releases in the UK and Japan the main focus,and both continued to point to building inflation pressuresacross the two economies.UK CPI surprised to the upside in September, rising 0.4%MoM and lifting the annual rate to 3.5%, ahead ofexpectations of 0.3% and 3.4%, while core inflationclimbed to 2.8% from 2.6%. The firmer print adds tobuilding inflation pressures in the UK, which in our viewcould push the BoE to raise rates later this year.In Japan, headline CPI rose to 2.1% YoY in September from1.9%, while core inflation, which excludes fresh food,jumped to 2.1% from 1.7% and the measure excluding freshfood and energy climbed to 2.4% from 1.9%. With coreinflation now above the BoJ’s 2% target, the data gives theBank further impetus to keep raising rates. We expect twomore hikes this cycle, though not at this week’s meeting,with one likely before the end of the year and another inthe first quarter of 2027. We do, however, expect the BoJto revise its inflation forecasts higher this week given theescalation in the Middle East conflict and the resulting risein oil and petrol prices.Turning to bond markets, US Treasuries and GermanBunds reclaimed their safe haven status as the sell off intechnology stocks resumed, pulling yields lower. Frenchdebt was the clear exception, with the 10 year OAT/Bundspread widening by more than 15bp to 175bp, approachingthe 191bp peak reached during the euro zone debt crisis,as recent protests, the 2027 budget debate and nextyear’s presidential election keep political risk firmly infocus.
More broadly, the deterioration in risk sentiment highlightshow fragile markets remain in a rising rate environment,and with the Fed and ECB both meeting this week, recentvolatility will likely feature in policymakers’ deliberations.Brent crude extended its climb this week, finishing at$117/bbl as escalating hostilities in the Middle East stokedfears of further supply disruptions. The Iran backedHouthis stepped up their campaign against Saudi Arabia,with a drone strike on Aramco’s Shaybah field killing twopeople, followed by attacks on the port of Yanbu late inthe week that the group also claimed. The strikesprompted the US to pull some personnel and their familiesfrom its diplomatic missions in the kingdom. Oil output hasso far been largely unaffected, but the growing focus onenergy infrastructure, alongside ongoing Iranian attackson shipping in the Strait of Hormuz, points to a rising riskof disruption.Looking ahead, it is a busy week for central banks, withfive G10 banks meeting (the Fed, ECB, BoJ, BoC andRBNZ). Of these, we expect the RBNZ to hike, as outlinedin our preview, and see a good chance the BoC followssuit, with market pricing around an 80% chance of a move.Even where rates are left on hold, we expect hawkishmessaging across the board given the recent rise ininflation across developed economies.
