US Retail Sales decline, PPI softens, New Zealand GDP next

The New Zealand dollar is in negative territory on Wednesday, ending a 3-day rally that saw NZD/USD climb 160 points. In the North American session, NZD/USD is trading at 0.6205, down 0.50%.

New Zealand GDP projected to contract in Q4

New Zealand releases fourth-quarter GDP later today, with the markets braced for a slowdown compared to Q3. GDP is expected to decline 0.2% q/q in Q4, compared to a 2% gain in Q3. On an annualized basis, the consensus stands at 3.3% growth, down sharply from 6.4% in Q3.

The Reserve Bank of New Zealand has been aggressive in its tightening, raising the cash rate to 4.75%. The central bank is in an all-out battle against inflation, but success remains elusive as inflation remains stickier than anticipated. In the fourth quarter, inflation came in at 7.2%, the same as in Q3 and a tick lower than the 7.3% gain in Q2. The sharp rise in rates hasn’t eased inflation but has hurt the economy. Retail sales for Q4 fell 0.6%, after an upwardly revised gain of 0.6% in Q3, and manufacturing sales fell sank to -0.4% in Q4, after a 5.0% gain in the third quarter. A weak GDP report will likely result in more criticism of the central bank’s rate policy, which is causing economic damage but has failed to rein in inflation.

The road from 7% inflation to the RBNZ’s target of 1-3% promises to be a long and bumpy journey, and the markets are expecting the central bank to raise rates as high as 5.25% in mid-2023 before taking a pause. That means more misery for households and businesses who are grappling with the double whammy of rising interest rates and red-hot inflation.

In the US, today’s numbers were dismal. The retail sales headline figure came in at -0.4% m/m, missing the estimate of -0.3% and well off the January reading of an upwardly revised 3.2%. The core rate slowed as expected to -0.1%, after an upwardly revised 2.4% gain in January. The Producer Price Index also slowed in February and the NY Empire State Manufacturing Index fell by -24.6, compared to -5.8 prior.  These unimpressive numbers have lent support to the case for a pause from the Fed at the next meeting. Currently, the markets have priced in the likelihood of a 25 bp hike or a pause at close to 50/50.

NZD/USD technical

• NZD/USD is testing support at 0.6212. Below, there is support at 0.6149.

• 0.6290 and 0.6353 are the next resistance lines.