Market Update
Changing of the Guards
With a new NZ Government now in office, expect the RBNZ’s remit to drop back to a single (price stability) mandate, losing the maximum sustainable employment component, allowing the Reserve Bank to focus exclusively on addressing inflation, which at 5.6% still has a meaningful way to go to get back to sub -3%.
At their November meeting, the RBNZ left rates untouched as widely expected, with recent data prints including lower-than-expected inflation, rising unemployment, and falling wage growth across the private sector, supporting the narrative the Central Bank’s efforts are sufficient for inflation to continue to steadily decline.
The caveat here is the recent influx of immigration. In adding more available workers, this has helped ease labour supply and wages, however the impact on demand is now becoming clearer – its adding pressure on rental supply and prices. This is an area the RBNZ are watching closely with risks that if pressures exceed expectations, it could drive inflation up.
And while plans to impose a foreign property buyers’ tax have been abandoned, policies around housing including reintroducing rental notice periods, interest deductibility, and reducing the bright-line timeframes, favour landlords, which should result in a boost of rental supply (and please the RBNZ), although this may potentially lift property prices.
With a long list of potential policies, including a reduction in fiscal spending, as well as answers around how some of the subsequent budget holes will be filled, we will have to wait to see the ultimate effect of the new government on domestic inflation levels.
Homegrown Price Pressures
The start of the month saw the Reserve Bank of Australia increase rates 0.25%, citing that inflation had been more persistent than expected a few months ago, service price inflation had continued to rise, and the risk of higher-for-longer inflation had increased.
Governor Bullock stressed that drivers of Australian inflation levels are increasingly homegrown, rather than international factors. The release of October’s 4.9% inflation prints, which surprised against forecasts of 5.2%, would have been welcomed by the Reserve Bank.
After rising for the last two months, inflation levels resumed their downward trend, matching July’s level - the lowest in 20 months. However, the RBA are anticipating it will take a further 2 years for inflation to fall below 3% as the Central Bank balances their objective of bringing inflation down, while trying to keep as many people in employment as possible.
With one more meeting before the end of the year, the market is expecting the Australian Central Bank to take a cautious approach leaving rates unchanged, something they’ve done five times already this year.
Goldilocks in the US
Meanwhile, data releases over the month continue to paint a hopeful outlook for the US - unemployment has ticked up but remains relatively low, retail spending contracted -0.1% after six months of increases, growth remains strong surpassing forecast at 5.2% for the third quarter, and inflation in October dropped back to 3.2%, closing in on its target range.