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Will improving global data reverse central bank dovishness?

Monday 15th April 2019

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Recent global data and figures due out this week aren't exactly backing the suddenly dovish stance of a number of central banks, including the United States' Federal Reserve and New Zealand's own Reserve Bank.

For example, manufacturing indicators for both the US and China, US employment data and prices for New Zealand's key commodity, dairy, have all been delivering positive news recently.

That is starting to cast doubt on whether the market has been right in pricing in up to two interest rate cuts before the end of this year both in the US and New Zealand.

And although only 29 of the companies in the benchmark US S&P 500 Index have reported so far, the results have been positive, with JP Morgan Chase in particular reporting record revenue and earnings and beating analysts' expectations.

“It's hard to see a rate cut based on what we know today – we would have to see things worsen” before a rate cut could be justified, says Mark Lister, head of wealth research at Craigs Investment Partners.

“For all the central bank dovishness, the data still looks pretty positive,” Lister says, adding that some commentators are now saying we're past the worst and activity should pick up from here.

In New Zealand, interest rate markets have pulled back after pricing in two full rate cuts this year on the back of the Reserve Bank's statement late in March that the next move in the official cash rate would most likely be down.

Investors are now pricing in 37 basis points of easing – usually, the Reserve Bank moves its OCR by 25 basis points every time it changes it.

Lister says people are starting to question whether central banks around the world will remain dovish.

Key numbers, both due out on Wednesday, will help provide a better steer as to whether New Zealand's central bank cuts rates in May or decides to wait a little longer. They are the latest Global Dairy Trade auction and the March quarter consumers price index.

The CPI is expected to come in at 1.6-1.7 percent for the year ended March. The main GDT Index has risen in each of the past nine auctions and is now 22 percent higher than at the start of the year and at its highest since July 2017.

Also due on Wednesday are the latest official figures on China's March quarter GDP.

The market is expecting annual growth will have slowed a little further to 6.3 percent from 6.4 percent in the December quarter and 6.6 percent in calendar 2018.

That annual rise had been the slowest since 1990 but more recent figures have painted a more mixed picture.

Both the official Purchasing Managers' Index and the Caixin PMI showed a solid rebound in manufacturing and both moved back into expansionary territory for the first time since November.

While the US has its own issues, China is the largest trading partner of both New Zealand and Australia and is also an important market for Europe and Japan.

“Where interest rates go is crucial for all asset classes and currencies. It looks like credit growth in China has rebounded a bit and the government is providing some stimulus and it's starting to show up in activity levels,” Lister says.

This week will also bring the first indicators of how manufacturing is faring into the second quarter in Japan, Europe and the US.

“If you see the data start to look better in the US, that would put the pressure on the Fed to start talking about hikes again or at least keep things stable,” Lister says.

“If the Fed changes tack or at least moderates that dovish view because of stronger data, then our Reserve Bank would have to change its stance too.”

But the changing view of interest rates does raise questions about resurgent world stock markets.

The Fed's dovish turn largely explains why the S&P Index closed above 2,900 points for the first time in five months. It has gained 16 percent year-to-date and is now less than a percent lower than its record last September.

New Zealand's S&P/NZX 50 has also been strong, up nearly 11 percent year-to-day, although it eased nearly a percent last week.

(BusinessDesk)

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