New Zealand Rates Hinge On The Persistence Of Consumer Spending

Credit Card Spending (YoY) (APR) (03:00 GMT; 23:00 EST)
Expected: N/A
Previous: 7.5%

How Will The Markets React?

The outlook for monetary policy in New Zealand has undergone drastic changes in the past month. Not a few weeks ago, the central bank was on track to hike rates at least two more times before the end of the year. However, after the Reserve Bank of New Zealand actually lifted its overnight cash rate 25 basis points to a record 7.75 percent, expectations for further moves were curtailed significantly when it stated in its news release that the exchange rate would “exert some downward pressure on medium-term inflation.” This was the first inclusion of dovish rhetoric in the group?s boiler plate statement in some time. Needless to say, the shift shook up the market?s steady rate outlook. While the correction that resulted in interest rate futures and bond yields was sharp and extensive, it didn?t last for long. When rational heads prevailed, the masses realized the two sentences on inflation and high exchange rates were not necessarily the admission of dovish intentions, but rather the first warnings that things may cool. So, analysts and traders turned back to the most reliable tool available to them: the economic calendar. Since the April RBNZ meeting, data has burned up the wires. This is especially true of consumer spending and housing sector inflation - RBNZ Governor Alan Bollard?s well-documented, main concerns for future policy decisions. Housing was certainly steering the economy towards another rate hike as sales for the year through April rose 8.1 percent and price growth hit a record high. Perhaps the more pressing factor into a possible follow to last month?s hike though is consumer spending. Retail sales in the first quarter of the year soared 3.8 percent, the most since records began in 1995. Now, the market turns to its next central piece of data. There is no consensus for Monday?s credit card spending report, though its leading status could point the way for overall consumption since purchases on credit is usually the first thing to go.
Bonds - New Zealand 10-Year Government Bond Futures
Volatility in New Zealand government bonds have been the envy of the debt world recently. The active futures contract on the benchmark 10-year government bond yield has rallied nearly 400 basis points and retraced half of that in the span of two weeks in the lead up to and fallout from the RBNZ?s rate hike. After a brief period of consolidation, yields are back on the move. A bounce on support at 6.040 was triggered by strong economic indicators like house price inflation and retail sales. It?s not a coincident that these are the two areas where the central bank has placed the burden of the necessity of another rate hike. This suggests that Monday?s credit card spending report for April will have a considerable say over yields. If it falters, it could signal the beginning of a bigger trend.

The New Zealand dollar has formed a relatively well-defined channel after rejecting the highs near .7495 on the Reserve Bank of Zealand?s unexpected rate hike to a record high of 7.75 percent. Since then, fundamentals have done little to underpin the pricing of further tightening into the currency, and the release of credit card spending may only add to this sentiment. The April release credit card spending may ease back from March?s figure of 7.5 percent, as consistently high borrowing costs should eventually deter shoppers. However, the New Zealand consumer has proven uncommonly resilient, leaving open the possibility for a pick up. An increase is highly unlikely to spark a solid rally for NZDUSD given the second-tier nature of this particular indicator, but a reading of 7.6 percent or above could be enough to push the pair up to .7330.

Equities - NZX 50 Index
New Zealand stocks hit a record high in intraday trading on Friday, with optimism over the national budget, which was announced Thursday, offsetting a sell-off of some of the previous session’s biggest gainers. The NZX-50 index ended the day 0.1 percent higher at 4,280.43 led by financial services firm Tower Ltd., the only New Zealand-listed default provider for KiwiSaver - the government’s retirement savings plan - rallied 5 percent to NZ$2.42. On the other hand, Fisher & Paykel Healthcare and Fisher & Paykel Appliances, two stocks set to gain from government tax benefits for research and development spending, eased back Friday after surging on Thursday, with F&P Healthcare down 1.9 percent to NZ$3.61 and F&P Appliances 1.6 percent lower at NZ$3.74.