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Collinson FX: Jan 20: PM of Aotearoa's resignation not expected to change NZ economic direction

by Collinson FX 19 Jan 2023 14:42 PST 20 January 2023
P Class Auckland Championships, November 13, 2022 - Wakatere Boating Club © Richard Gladwell, / nz

January 20: No change with PM's exit

European equities took some profit overnight, celebrating gains for the new year, but US markets finally broke the positive sentiment. US Retail Sales and Industrial and Manufacturing data was heavily negative and talk of recession is returning. Inflation is heading in the right direction, but remains stubbornly high, as do energy prices, thus casting a negative economic pall. US Building Permits contracted 1.6%, while Housing Starts fell 1.4%, amidst a gloomy housing sector. The US Beige Book report was flat, with little good news, while the Fed remains hawkish. The USD was steady, with the EUR trading around 1.0800, while the GBP traded up around 1.2350.

The NZ ‘PM of Aotearoa’ resigned yesterday, which had little impact on the currency, as this will have little impact on the NZ economy.

The economic direction will not alter, in the short term, as Adern will remain in office until February and her Government is unlikely to change their economic direction, under a new leader. Australian Unemployment was steady, while inflation expectations are on the rise, as is Food Inflation in NZ. The prospects of recession in Europe and the US is not good for commodity currencies and the AUD fell back to 0.6900, while the NZD dropped below 0.6400. Markets will digest data and look closely at inflation ad growth numbers to close out a negative week.

January 19: Inflation plunges in Europe along with energy crisis

European markets continued to post gains on equity markets, boosted by plunging inflation and an easing in the energy crises. US Share markets are headed in the opposite direction, down, despite falling energy prices. US Retail Sales plunged into negative territory, as did Industrial and Manufacturing Production, while the US Dollar remained soft. The EUR has held above 1.0800, while the GBP jumped to 1.2340, boosted by the second successive month of falls in inflation. A mild winter in Europe has curbed energy demands, allowing an easing to the energy crises, but supply remains a serious problem.

The Japanese Tankan report fell into negative territory, reflecting continued depression in business confidence, encouraging the Bank of Japan to leave interest rates at unprecedented historical lows. The Yen crashed to 131.50, following the BoJ news, but recovered in overnight trade. The weaker reserve allowed commodity currencies to post gains, with the NZD rising above 0.6500, while the AUD blew through 0.7000, but both suffered severe setbacks as US equity markets tumbled. US equities are starting to burst the enthusiasm and confidence bourses had been experiencing in the first couple of weeks of 2023, as reality bites hard.

January 18: US has first correction of the year

US equity markets hit the first real correction for the year, following a strong and confident rally to open the new year. Warnings of recession are now starting to materialise in corporate numbers, with Goldman Sach’s missing earnings targets and warning of a difficult year ahead.

The Empire State Manufacturing Index plummeted, falling deeply into contraction mode, unsettling markets. In Europe the equity rally continues as inflation eases and energy prices stabilise. The important ZEW Economic Sentiment report surged back into positive territory and the German inflation number turned negative, for December.

German inflation contracted 0.8%, falling back to an annualised rate of 8.6%, from previous double digits. The US Dollar remained soft, with the GBP rallying back to 1.2275, while the Yen traded around 128.00.

Chinese economic data releases were terrible, but in line with expectations, following Covid lock-downs. Chinese GDP plummeted to zero for Q4, while Retail Sales collapsed into heavily negative territory. China has shrugged off the lock-downs ahead of the Chinese New Year celebrations and looks for a strong economic rebound in Q1, 2023. The weaker reserve allowed the AUD to push back towards 0.7000, while the NZD pushed back above 0.6400, despite a fright following the release of the latest Business Confidence numbers.

NZ Business Confidence collapsed to minus 70! This is a shocking number and reflects much of the sentiment in an economy beset with inflation and economic challenges. Markets will focus on the Bank of Japan and their latest policy statement, set to be released later today.

January 17: Positive start for week in Europe

Markets continued the positive start to the year in Europe, while US markets celebrated the MLK holiday. There was little in the way of data releases overnight, although the WEF kicked off in Davos, with all of the world elites gathering to discuss climate change and digitisation.

European equity markets continued to post gains, boosted by the precipitous fall in energy prices, perhaps due to demand and a mild Northern Hemisphere winter? Bond Yields remained low and the US Dollar soft, with the EUR holding above 1.0800, while the GBP trades around 1.2200.

Asian markets look ahead, with China re-opening and a slew of Chinese economic data releases before the Chinese New Year. Japanese PPI numbers edged higher (10.2%p.a.), which confirms the incremental rises in inflation, that the Bank of Japan is beginning to notice.

Australian Building Permits plunged 9% for the year, reflecting the dire state of the housing sector, one of the major reasons for the RBA’s inaction on monetary policy. The AUD trades around 0.6950, while the NZD holds above 0.6350, ahead of key Business Confidence data, set to be released later today. Markets will be watching key Chinese data, in the form of GDP, Retail Sales and Industrial Production.

January 16: Pressure on for Interest rate rises to halt

Markets closed out yet another strong week of trading, boosted by the better than expected inflation data, confirming precipitous falls in the latest US CPI number.

US headline inflation plunged from 7.1% to 6.5%, increasing the pressure on the Federal Reserve to halt the interest rate increases, or at least pause the incremental rises. The trading year has been a cradle of hope and positive sentiment, based on the premise that 'peak inflation' has come and gone. US and European banks are increasing provisions for doubtful debt, confirming the 2023 recession, but hopes are rising for a shallow and brief downturn.

The Ukraine war rages on and the China re-opening, will once again put upward pressure on energy prices, but a mild Northern Hemisphere winter will balance the demand. The positive economic sentiment has seen US Bond Yields crater and the US Dollar has retreated. The EUR trades well above 1.0800, while the GBP looks to hold above 1.2200.

The flagging reserve has allowed the commodity currencies to regain some upward momentum, with the AUD approaching 0.7000, while the NZD looks to regain 0.6400. A keen eye will be kept on the Bank of Japan, which will announce their latest prognosis of monetary policy. Recent signs of inflation is beginning to register and a subtle shift in policy nuances, will be of no great surprise. The Yen has been regaining ground, moving below 128.00, hinting at some slight shift in policy at the margins? The US celebrates the MLK Holiday Monday, so expect a slow start to the week.

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