UK CPI Underwhelms, NZ Lockdown Prevents Rate Hike

It was all lined up for RBNZ (Reserve Bank of New Zealand) to hike their interest rate today. Economic data had far exceeded expectations, inflation was on the rise and the employment situation got better and better. Economists agreed a rate hike was due and money markets were pricing in 110% probability of that happening yesterday. Until that was, a single case of VOCID-19 was logged in Auckland, New Zealand, which prompted the government to implement a 3-day lockdown.

Fastest lockdown yet?

It’s possible that this is the only time a single case has sparked a lockdown, and New Zealand did so without knowing which strain it was (and presumably acted out of fear it was the Delta variant). It turned out to be a shrewd move. Delta has since been confirmed, the number of cases has risen to 7, one of which is a nurse who was infectious for a few days before being detected.

No rate hike, but RBNZ remained hawkish

RBNZ held interest rates at 0.25%, yet kept a hike very much alive. Governor Orr said that whilst the lockdown has given room for pause, the clear direction “is to be lifting rates” so they’re keeping rates at 0.25% “for now”. This ultimately means that traders should pay very close attention to the rise of new daily cases in New Zealand, as it will decide whether they raise rates at their next meeting (or not). We should therefore see a strong inverted correlation between rising cases (NZD bearish) and lower or falling cases (NZD bullish).  

As New Zealand have done a fantastic job previously of controlling the virus, we suspect there could be room for two rate hikes at their October meeting, should lockdowns prove to be swift.

UK inflation underwhelms

There were hopes that UK inflation would continue to surge, as it would have piled extra pressure on BOE to taper their asset purchase program. It failed. CPI rose 2% YoY, down from 2.5% in June.

At the BOE’s meeting on August 5^th ‘some members’ judged it was not sufficiently clear the UK economy was on track for inflation to remain above its target sufficiently. And today’s print suggests they’re right, as CPI only spent two months above their 2% target.

It’s a shame because employment data released earlier this week is showing signs of improvement, which is exactly what BOE are paying close attention to. They next meet on 23^rd September so, unless we see a stronger CPI print net month it appears unlikely the meeting will be notably hawkish.

Taliban promise peace for Afghanistan – time to rally?

Equity markets have faced selling pressure over the previous two days due to a combination of weak data from China, rise in COVID-19 cases and the brewing crisis in Afghanistan as the Taliban regained control following the abrupt US exit.

Yet over the past 24hrs, Taliban leaders have been on air talking of a peaceful transition, vowing not to “take revenge” on civilians and promising women will be allowed to work and study. “We don’t want any internal or external enemies” said the Taliban’s main spokesman, Zabihullla Mujahid. Time will tell whether these words carry any weight, but it may be enough for a relief rally on indices if it proves true. But today’s session should reveal whether the overnight bounce was the start of a rally, or merely a ‘dead cat bounce’.

The S&P 500 index (US500) is carving out a potential swing high on the four-hour chart ahead of the US open. A bearish engulfing candle has just formed at the weekly pivot point with the 20-bar eMA capping as resistance and closed below the 50-dar eMA. Should prices remain below 4553 then it appears tempting to bearish swing traders. Conversely, should momentum break above 4453 it could signal a bullish extension, which makes 4453 a pivotal level for the US session.