Investors are waiting for RBNZ's decision, China flash manufacturing PMI

Economic data is pretty light around the world this week, after the long Easter weekend. RBNZ’s rate decision and China flash manufacturing PMI could be one of the key events to watch in the coming days. Any surprising outcome could move the relevant markets and currencies, like Aussie and Kiwi.

It will not be an easy task for RBNZ to make a rate decision this week. There are several reasons for them not to rush into a rate hike decision. Dairy prices have been falling tremendously in the past months, hurting New Zealand’s exports revenue, as a large dependency of its exports are of food & milk related items. The country’s inflation also fell to 1.5% YoY in the quarter of the first three months of the year, from 1.6% in the 4Q last year. Rising tobacco tax and education fee failed to push the inflation closer to RBNZ’s upper inflation target range, and the NZD spot is already 2-3% above its TWI basis.

New Zealand milk price (yellow) vs. New Zealand CPI YoY (white)

While headline inflation has been moderate, inflationary pressures are increasing and are expected to continue doing so over the next two years, according to the RBNZ’s statement. There has been some moderation in the housing market, but the level is far from enough to satisfy RBNZ. Restrictions on high loan-to-value ratio mortgage lending are starting to ease pressure; another interest rate hike in 2Q will have a further moderating influence. Due to the concerns for the rising of housing related prices, we forecast one more rate hike in 2Q and the chances of it falling this week will be no less than 70%.

NZDUSD spot (yellow) vs. NZD Trade Weighted Index YoY (white)

China flash manufacturing PMI is the first important guidance of the 2Q growth. Flash PMI tomorrow is likely to confirm a modest recovery in April, due to a seasonal cyclical rebound after Chinese New Year. Warmer weather conditions results in construction related industries to start engaging in more activities given a few mini-stimuli offered by the government recently. This is likely to offer an improvement to the current stagnant economy.

Increasing number of companies in the private sector are willing to boost their hiring in 2Q comparing to 1Q, according to a survey by Manpower in China. We forecast the number in April will rise to 48.3 from previous 48.