Kiwi tanks on disappointing inflation, China’s industrial output jumps

Summary:

• New Zealand dollar loses momentum following a weaker-than-expected inflation release
• Chinese economy grew more than expected in the first quarter, a sharp rebound in industrial production
• Some comments from ongoing US-Japan trade talks
• Netflix offered light guidance overshadowing upbeat Q1 results

Rate cut odds jump

Looking around the FX market one may notice that the US dollar is losing steam across the board on the back of improved risk sentiment and related capital flows to riskier assets. However, the NZ dollar is an exception here, it is declining approximately 0.4% against its US peer after first quarter price growth came in below expectations, increasing the odds for a rate decrease in the oncoming weeks.

Inflation in New Zealand slowed down more than expected in the first quarter suggesting the RBNZ could be more willing to cut rates soon. Source: Macrobond, XTB Research

Headline price growth came in at 1.5% YoY and missed the consensus of a 1.7% YoY increase, it was a fall from 1.9% YoY registered during the final three months of the past year. In quarterly terms price growth stayed at 0.1% while economists surveyed by Bloomberg had expected a 0.3% rise. It needs to be said that first quarter inflation there was below the latest RBNZ forecast of 1.6% YoY. On the face of it, it could encourage the Reserve Bank of New Zealand to mull over a possible rate decrease in order to bring inflation back closer to its midpoint target of 1-3%. On the other hand, one needs to factor in that price growth still remained quite comfortably above the lower bound of the RBNZ’s target. Moreover, the details of the reading showed that while tradable prices decline 0.4% YoY during the first quarter, non-tradable prices - which are not affected by the currency - increased 2.8% YoY, matching their fastest pace since the first quarter of 2014. This implies that while domestic price pressure remained weak last quarter, as evidenced by the steady annual core inflation (excluding food, fuel and energy), it did not deteriorate as headline inflation suggested. Nonetheless, the data was bearish for the NZ dollar with the rate cut probability by June rising to virtually 80%, from slightly above 60% yesterday.

Technically the NZDUSD took a hit overnight but it has reversed some of its losses ever since. The pair managed to stay above 0.67 and it could try to head to the orange bearish trend line. Source: xStation5

Green shoots of recovery in China?

A bag of macroeconomic releases we were offered overnight from China could be classified as upbeat. First and foremost, a GDP growth rate held unchanged at 6.4% in annual terms, beating the median estimate of a 6.4% increase. This result could be somewhat unexpected due to a broad-based weakness in Europe and huge declines in industrial production in economies such as Germany. On top of that, China’s industrial output in March jumped sharply by 8.5% YoY, smashing the consensus of a 5.9% YoY increase. This seems surprisingly strong number seems to coincide with better exports as well as manufacturing PMI for the same month. Furthermore, one needs to take into account an immense increase in credit supply during the first quarter which also could have boosted activity. The question is whether such a sudden and widespread improvement was more than a one-off event? We will see shortly when the PMI data for April is released. Beyond these two values, retail sales increased 8.7% YoY while the consensus had called for 8.4% YoY, whereas fixed assets investments rose 6.3% YTD and matched expectations. To sum up, the bag of China’s data confirmed out assumption of better general economic activity since the second quarter unless March was a one-off bounce caused by improved sentiment after the US scrapped the idea to increase tariffs.

China’s industrial output jumped sharply in March joining to excellent exports, PMIs and credit data. Are these green shoots of recovery on the horizon? Source: Bloomberg

In the other news:

• US Trade Representative Robert Lighizer said the US raised concerns about a “very large” trade deficit with Japan; meanwhile Japan’s trade (unadjusted) trade surplus widened to 528.5 billion JPY from 334.9 billion JPY with exports falling 2.4% YoY and imports rising 1.1% YoY

• European car sales drop 3.9% YoY in March, marking the seventh consecutive month of declines

• US oil inventories fell 3.1 million barrels last week while gasoline inventories fell 3.6 million barrels, API reported

• Netflix shares declined 1% immediately after the company released its earnings; overall we got solid numbers for the first quarter but the disappointment came from light guidance suggesting Q2 EPS of 55c compared to the 99c expected