The RBA may go for a rate cut in February. New Zealand dollar is falling amid recession in the economy and RBNZ’s dovish stance

At Thursday’s close, the Dow Jones Index (US30) was up 0.07%. The S&P 500 Index (US500) was down 0.04%. The Nasdaq Technology Index (US100) lost 0.13%. The three major indices closed subdued on the day after the Christmas holiday. Markets remained subdued as they assessed the potential impact of the Federal Reserve’s interest rate hike on corporate earnings next year. New labor market data showed a slight decline in jobless claims, down 1k to 219k instead of the expected increase of 4k.

Equity markets in Europe have not traded for the last 2 days due to the Christmas holidays.

CEBR projections that Britain will narrow the gap with the more lagging German economy over the next 15 years. Europe’s largest economy is expected to be 20% larger than the UK’s in 2039, up from 31% now. Similarly, the UK will overtake France and be 25% larger in terms of output by 2039.

WTI crude oil prices are holding near the $70 per barrel mark, supported by stimulus measures in China and a US industry report of lower crude inventories. In China, local authorities have been given more leeway to use funds from government bonds to stimulate growth. In the United States, the American Petroleum Institute reported a 3.2 million barrel drop in commercial crude inventories, which would be the fifth consecutive decline if confirmed by official data. Usually, the US inventories fall in December and then rise in the early months.

Asian markets rose steadily yesterday. Japan’s Nikkei 225 (JP225) rose by 1.12%, China’s FTSE China A50 (CHA50) jumped 1.27%, Hong Kong’s Hang Seng (HK50) gained 1.08%, and Australia’s ASX 200 (AU200) was not trading due to the Christmas holiday. Japanese stocks rose on Thursday thanks to comments from Bank of Japan (BoJ) Governor Kazuo Ueda, who stopped short of signaling an interest rate hike next month, emphasizing the need to monitor economic risks. In addition, the report said the country is planning a record $735 billion budget for fiscal 2025, driven by higher spending on social security and debt service.

The World Bank raised China’s economic growth projection for 2024 and 2025, but warned that low Household and Business Confidence and unfavorable factors in the real estate sector will continue to weigh on the economy next year. An expected increase in US tariffs on its goods when US President-elect Donald Trump takes office in January could also weigh on growth. Beijing has set its growth target for this year at “around 5%” and said it is confident it will meet that target.

On Thursday, the New Zealand dollar remained steady at around $0.565 on low trading volumes due to the holiday break. Rising expectations of more aggressive monetary policy easing by the Reserve Bank of New Zealand (RBNZ) continued to weigh on the currency. Data released last week showed that the New Zealand economy contracted by 1% quarter-on-quarter in the third quarter, following a revised 1.1% contraction in the previous period. This was worse than the 0.4% contraction expected by the market, officially putting the country into recession. As a result, investors fully priced in an excessive 50bp rate cut at the next RBNZ meeting in February.

This week, the Reserve Bank of Australia (RBA) released the minutes of its December meeting, emphasizing the need to maintain restrictive monetary policy for the time being. Earlier this month, the RBA kept its key interest rate at 4.35%, which was in line with market expectations. However, taking many by surprise, the RBA suggested the possibility of a rate cut as early as February next year.