Markets await US inflation data

Cautious sentiment prevails as investors analyze US inflation report's impact on monetary policy and market trends

By Ahmed Azzam | @3zzamous | 12 July 2023

  • US dollar weakens, Treasuries gain as investors await inflation report

  • Reserve Bank of New Zealand keeps rates steady to address spending and inflation constraints

  • US inflation expected to moderate, concerns over core price gains persist

Asian equity markets experienced a mixed performance on Wednesday, as cautious sentiment prevailed ahead of the release of a crucial US inflation reading that could have a significant impact on global interest rates. While shares in Japan and mainland China declined, Australia, South Korea, and Hong Kong saw gains. The US dollar weakened to a three-month low, and Treasuries advanced in anticipation of the US inflation report. The offshore yuan, on the other hand, strengthened for the fifth consecutive day following continued support from the People's Bank of China (PBOC) for the currency at its daily fixing. Additionally, Brent crude oil prices experienced a slight increase.

Reserve Bank of New Zealand holds official cash rate steady

During its July meeting, the Reserve Bank of New Zealand (RBNZ) opted to maintain the official cash rate (OCR) at 5.5%, in line with market expectations. This decision followed a series of interest rate hikes totaling 525 basis points since October 2021. The RBNZ acknowledged that the current level of interest rates was restraining spending and inflation pressures as intended. It further stated that the OCR would need to remain at a restrictive level to bring inflation back within the target range of 1% to 3% annually by the second half of 2024. The committee assessed the risks surrounding the inflation projection as relatively balanced, considering the ongoing easing of supply constraints. However, recent data indicated a slowdown in the labor market, even though employment remained above its sustainable level. The RBNZ recognized that New Zealand's monetary policy had tightened earlier than in many other countries. In terms of GDP, the board observed that despite reconstruction efforts in the North Island, recent indicators suggested weak growth in the near term.

US inflation expected to moderate in June

The upcoming US inflation data for June is anticipated to show a moderation, albeit not significant enough to dissuade the Federal Open Market Committee (FOMC) from proceeding with another interest rate hike in two weeks. Market expectations suggest that the consumer price index (CPI) growth will slow to 3.1% year-on-year, marking the smallest increase since March 2021 and down from May's 4%. Core price gains are also predicted to decelerate, moving from 5.3% to around 5%. The persistent nature of core price gains remains a concern for Fed officials, with at least four members scheduled to deliver speeches on the matter today, including Barkin, Kashkari, Bostic, and Mester.

Bank of Canada likely to raise rates

The Bank of Canada (BOC) is expected to raise interest rates by 25 basis points today, bringing Canada's benchmark rate to a 22-year high. While most analysts predict that this hike will mark the end of the current tightening cycle, Governor Tiff Macklem and other officials may not explicitly indicate that they have completed their rate adjustment efforts.