Least worst choices

4 mins read

By Jeffrey Halley 

The Reserve Bank of New Zealand raised policy rates by 0.50% to 2.0% Wednesday morning, with Governor Orr setting a hawkish tone in the press conference afterwards.

In the statement itself, the RBNZ’s “least worst choices” policy seemed to imply that, although external risks remained, the domestic economy was strong and could tolerate tighter monetary conditions.

Adrian Orr seemed to be saying much the same, suggesting that terminal rates could go above 3.0% and would get there sooner, rather than later.

We’ll see just how strong the New Zealand economy is in due course, but a hawkish RBNZ has seen the New Zealand Dollar rally by 0.70% to 0.6505 Wednesday, making it the biggest currency gainer in Asia.

Elsewhere, Singapore’s GDP Growth came in tight on expectations, rising by 3.70% YoY for Q1. With inflation data on Tuesday also less worse than expected, expectations for another unscheduled tightening by the Monetary Authority of Singapore have receded for now.

That may bring some relief to the Malaysian Ringgit, which has fallen to 3.20 against the Singapore Dollar.

Overnight, the recession word weighed on stock markets once again.

European PMI data was a mixed bag. Manufacturing PMIs held steady, while Services PMIs fell as consumer demand takes a hit from the rise in the cost of living. That wasn’t enough to stop the Euro rally, powered by suddenly hawkish ECB heavyweights.

The picture was rather grimmer in the United Kingdom where the most honest central bank in the world, the Bank of England, has already signalled a white flag on bringing down inflation and pencilled in a recession next year.

UK Manufacturing PMI held steady at 54.6, but Services PMIs plummeted to 51.8.

The UK is facing a winter of discontent as the cost of living soars, with the railways RMT union voting to strike over pay negotiations. Expect more of this going forward.

Additionally, the Chancellor is apparently preparing to widen the scope of the windfall tax on energy companies, probably to help pay for his cost of living mini-budget. UK stock markets didn’t like that.

Finally, the “party gate” report on those lockdown wine frenzies in the No 10 garden is due for release Wednesday, potentially putting more pressure on PM Johnson’s leadership. ​ Little surprise that Sterling slumped versus the Euro and the US Dollar overnight.

In the United States, the recession world hit particularly hard after the Snap Inc. induced meltdown by Nasdaq stocks overnight.

US New Home Sales plummeted to 591,000 in April, while Richmond Fed Manufacturing slumped to -9 in May. The S&P Global Services Flash PMI for May fell to 53.5, with Flash Manufacturing easing to 57.5.

It was the new home sales that really frightened the Street, though, as house building, and its ancillary services and suppliers are a good chunk of US domestic GDP. Soaring mortgage interest rates and petrol prices appear to be doing a lot of the Fed’s work for it before it even gets started.

If there is one takeout from all of this, it is that rising inflation and borrowing rates are already crimping the demand side of the equation. Unfortunately, we are seeing very little sign of price pressures reducing due to a combination of factors, all of which have been thrashed to death here and in research everywhere.

The uncomfortable reality is that central banks are going to be forced to continue the tightening path, even as growth slows around the world, because inflation has proven sticky and not transitory.

That is the least worst choice central banks need to make in a stagflationary environment. I am asked every day if we have seen the low in the equity market sell-off. Hopefully, I have answered the question.

Finally, US President Joe Biden’s trip around Asia continues.

Unfortunately, with its emphasis on containing China and hawking a trade agreement empty of potential access to the US domestic market (Congress needs to approve that), the trip is not going to make much headway in re-establishing US leadership in the region. Asia really needs to see the colour of America’s money.

Furthermore, the reliability of the US as a partner has taken a further hit, with White House officials explicitly refusing to rule out the possibility that the US could enact crude oil export restrictions to help cap energy prices domestically. The US doesn’t have a crude oil problem, it has a refining and transportation problem, but let’s not let facts get in the way.

I have warned about food nationalism previously, but if President Biden prioritises November’s mid-term elections over the economic war with Russia, and supporting Europe, it really is every man for himself globally.

I can’t see that being positive for equities anywhere, or European asset markets full stop, or for Ukraine. Only the Kremlin is likely to be popping champagne as the US does Russia’s divide and conquer for them.

White House unnerves oil markets

Oil prices continued to range trade overnight, finishing almost unchanged in New York. Asia, though, has seen both Brent crude and WTI rise.

Both Brent and WTI spiked 1.0% higher in early Asian trade, although those gains have eased as the session has gone on. Brent is 0.90% higher at $114.70 a barrel, and WTI is 0.65% higher at $110.90.

The White House likely needs to “clarify” its stance, least it creates unintended consequences by pushing crude prices higher. Brent crude, notably, is testing multi-week resistance.

Gold rises again

Gold had another decent overnight session, buoyed by lower US yields and a still-weakening US Dollar.

Gold finished 0.69% higher at $1866.50 an ounce. In Asia, some US Dollar strength has seen it weaken slightly by 0.40% to $1859.00.

Overall, although I acknowledge gold’s upward momentum, I remain sceptical of its longevity until it manages to hold on to material gains in the face of US Dollar strength.

The technical picture continues to remain supportive, and it seems only a marked US Dollar recovery will cap gold’s rally.

Gold took out resistance at the double top at $1865.00 an ounce which becomes intraday support, followed by $1845.00 and $1840.00. It should now target $1886.00, its 100-day moving average. That would open up a test of $1900.00, although I suspect there will be plenty of option-related selling ahead of that level.


Jeffrey Halley is Senior Market Analyst, Asia Pacific at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.