RBNZ Raise Rates, More to Follow?

RBNZ raised their interest rate today from a record low of 0.25% to 0.5%. It is a big deal, as it is the first time the central bank has raised rates since July 2014 (just over 7 years) where rates topped out at 3.5%. There were concerns that RBNZ were to refrain from raising rates today due to the latest rise in COVIC-19 cases. Yet Prime Minister Jacinda Arden poured cold water on that prospect after it was reported she had thrown in the towel on her ‘zero cases’ policy.

It’s all about the next hike

Today’s +25bps hike was justified with the need to keep inflation low (which remains hot) and their mandate to support maximum stable employment. But as the hike was expected by economists and market pricing, clues of another hike were required to send the New Zealand dollar higher today. Yet they never arrived.

However, the Committee is aware that the latest COVID-19 restrictions have badly affected some businesses in Auckland and a range of service industries more broadly.

RBNZ monetary policy statement, October 2021

The policy statement was optimistic over the medium-term, yet their reference to how badly affected the latest round of COVID-19 restrictions are likely as good as saying another rate hike is not imminent. Still, markets are still pricing in a second hike at their November meeting but, it should be remembered, the situation is fluid.

NZD trades lower despite the rate hike

The New Zealand was lower against all major currencies as traders booked profits, making it a classic case of “buy the rumour” (rate hike coming), “sell the fact” (rate hike occurring). Still, at 0.5% interest rate differentials should remain supportive of the Kiwi dollar to lower yielding currencies such as AUD, EUR, USD, JPY, even if it is trading lower against them all today.

US markets rebound despite facing several headwinds

Several forces have helped pull US equity markets from their record highs. By Monday’s low, the S&P500 (US500) had fallen 5.9% whilst the Nasdaq underperformed still with an 8.9% decline. The potential for the US government to default is they cannot increase their debt ceiling (again) has less than two weeks to be resolved. Yet rising oil prices and a brewing energy crisis for the globe had also been weighing on sentiment. High and persistent inflation is also threatening to weaken growth prospects, which is typically bad for the economy (and therefore the forward-looking stock market).

So yesterday’s rebound on Wall Street came as a pleasant surprise, but that is not to say bulls are out of the woods. The Nasdaq (USTEC) rose 1.4% by the close yet found resistance at the August low of 14,733. Should prices fail to rally this week (either before or after Friday’s Nonfarm payroll report) then bears could look for a break of the bullish trendline rising from the March 2021 low. Yet if it can hold above trend support and print a strong buying candle somewhere along it, it could suggest its 3-wave correction from its al-time high is complete.

Earnings season is now underway, although there is nothing scheduled from the Nasdaq 100 index. However, this week there are 5 companies due to release earnings from the S&P 500.

• Today: Constellation Brands Inc (STZ) – Earnings for Q1
• Today: Steris Plc (STE) – Earnings for Q1
• Tomorrow: Nike Inc (NKE) – Annual Shareholders meeting
• Tomorrow: Congra Brands Inc (CAG) – Earnings for Q1
• Tomorrow: Lamb Weston Holdings Inc (LW) – Earnings for Q1