Consumers and investors breathed a collective sigh of relief last week as headline inflation data showed price rises have peaked – at least for now.

This week, sizeable falls in spending on household durables like furnishings and hospitality, along with falls in fuel and clothing spending, are expected to be maintained in the June data.

There is now a growing expectation that quarterly consumers price index inflation will return to within the Reserve Bank’s target band by early next year.

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At 6 percent, the final headline figure was slightly higher than the consensus forecast of 5.9 percent but well below the 7.3 peak experienced a year ago when the war in Ukraine led to a sharp spike in commodity prices, particularly oil which peaked at almost US$140 a barrel at one point.

However, digging into the data revealed the percentage of goods in the ‘basket’ recording increases rose, with food and housing prices recording the biggest gains.

On the flip side construction-related costs eased to a still elevated 7.8 percent year-on-year, but well down from 11 percent previously, and are expected to continue to decline as the housing market cools.

Transport-related prices also eased, falling 1.9 percent over the quarter helped by international airfares that fell 12 percent. While petrol prices also fell, the excise tax which was reinstated from 1 July will see a bump in the current quarter.

Splitting off tradables (imported) versus non-tradables (domestic) prices reveals that around half of the country’s inflation is imported, though it has continued to track lower increasing at 5.2 percent, from 6.4 percent last quarter, and well down from its previous peak of 8.7 percent.

Importantly, non-tradable (domestically-generated) inflation, which the Reserve Bank is able to influence through monetary policy, fell from a peak 6.8 percent to 6.6 percent, while core inflation – which strips out volatile food and energy prices – fell from 6.5 percent to 6.1 percent, suggesting the road back to its 1-3 percent target band may well take some time yet.

As ANZ Bank chief economist Sharon Zollner noted in her commentary, while headline inflation was in line with the Reserve Bank’s May MPS forecast, the details of the release were on the more “worrying” side with some evidence to suggest inflation could be ‘normalising’ above the RBNZ’s 2 percent target midpoint – which is ultimately the Reserve Bank’s biggest fear.

“Sticky domestic inflation risks are going to remain a big worry for the Reserve Bank for as long as the labour market is unsustainably hot, with high labour cost inflation passing through to consumer prices. We now expect annual inflation to decline only slightly in Q3, from 6.0 percent year on year in Q2 to 5.8 percent year on year,” Zollner said.

Reserve Bank expected to remain on hold for the rest of the year – well, maybe

All things considered, the latest consumers price index data suggests the Reserve Bank is likely to remain on hold for the rest of the year as the central bank waits to see the full impact of its previous decisions flow though the economy; particularly the 40 percent of outstanding mortgages still to roll off their low fixed rates, and onto much higher rates between now and end of the year

As a result, Kiwibank chief economist Jarrod Kerr remains optimistic that the next move from the Reserve Bank will be a rate cut early in the new year.

“We’ve pencilled in a move in February. By then, we are likely to be in the middle of a mild recession; a recession engineered by the Reserve Bank to tame inflation.”

However, not everyone shares that outlook.

Westpac says the Reserve Bank could well resume its tightening cycle next month, pushing up the official cash rate by a further 25 basis points to 5.75% on ‘persistent’ core inflation remaining elevated and a strong labour market which it says is yet to “crack.”

Potentially adding to their case for another hike in the official cash rate could come in the form of a further spike in petrol prices. Brent Crude oil futures have already lifted 7.4 percent so far this month as the global economic outlook continues to improve, while the kiwi dollar looks set to weaken further after falling more than 3 percent last week setting up the likelihood of further price rises at the pump in the coming weeks.

Adding to the recent reinstatement of the Government’s excise tax, the combination has the potential to create yet another unwelcome inflationary headwind for consumers.

In other economic news, ANZ Banking Group revised down its farmgate milk price forecast for the 2023-24 season by 50c to $7.75/kg of milksolids pointing out that global demand for dairy products has been impacted by deteriorating economic conditions affecting consumer demand, particularly in China, where economic growth remains subdued.

Meanwhile, the BNZ-Business NZ seasonally adjusted performance for services index (PSI) barely remained in expansionary territory at the start of winter with a reading of 50.1, down from 53.1 in May.

Activity in the services sector, which accounts for more than two-thirds of the economy, hasn’t dipped into contractionary territory since February 2022, despite GDP shrinking in the most recent December and March quarters.

The services index followed its companion survey – the performance of manufacturing index (PMI) – which showed production at its weakest level of activity since November.

Big earnings week in the US and Fed rate decision will have investors on edge

Investors both here and in the US will be hoping that earnings results from Netflix and Tesla last week aren’t a taste of things to come after both companies released disappointing numbers, while a warning from Taiwan Semiconductor, the world’s biggest chipmaker, of a deepening downturn also weighed on sentiment.

Tesla shares tumbled 9.7 percent, their biggest single-day drop since early January, after the electric-car maker said its profit margins slipped as a series of price cuts aimed at boosting sales weighed on earnings, while shares in Netflix fell 8.4 percent after the streaming giant missed sales estimates and posted lower than expected guidance for the third quarter. It was the stock’s biggest one-day drop since December 2022.

Market heavyweights Alphabet (Google), Amazon, Microsoft and Meta (Facebook) will all report June quarter earnings this week.

Adding to an already busy week the US central bank will announce the outcome of its latest rate-setting meeting on Wednesday (US time) and is widely expected to increase its main policy rate by a quarter of a percentage point, bringing it to a target range between 5.25 percent and 5.5 percent. The rate hike is widely predicted by many economists to be the final rise in the current tightening cycle.

The Bank of Japan and the European Central Bank will also hold interest rate-setting meetings this week.

Meanwhile, stocks in the UK finished the week with their biggest rally since early January, following a sharper than expected drop in inflation in June.

The news helped London’s FTSE All-Share index to rally 3.1 percent for the week, its best run since notching up a 3.3 percent gain in the first week of the year, according to Bloomberg data. Property groups and housebuilders were among the biggest winners as tentative signs of cooling price growth left traders scaling back their expectations of where interest rates might peak.

Aside from the UK market, equities ended the week mixed with the NZX50 once again failing to push through the 12,000 level closing down 0.6 percent at 11,940, while across the Tasman Australia’s ASX200 index finished the week barely changed at 7314.

In the US the S&P500 managed to gain a further 0.7 percent for the week, despite the sharp selloff in Tesla and Netflix shares, bringing its year to date gain to 18.6 percent.

But at the half-way point in the year, a Bloomberg survey of market analysts has revealed a wide range of forecasts for where the benchmark S&P500 index will finish the year.

Credit Suisse is amongst the most bullish forecasting the index to end the year at 4,700 while Cantor Fitzgerald and BNP Paribas are amongst the most bearish with year end predictions of 3500 and 3400 respectively, implying a fall of more than 20 percent for the US market from current levels.

Fonterra receives significant government handout to reduce emissions

Diary giant Fonterra is set to receive $90 million towards a $790m plan to cut its dairy factories’ coal use, courtesy of the Government.

It’s the second subsidy sweetener specifically targeting New Zealand’s “largest emitters”, ministers said in a statement.

The first deal provided NZ Steel with a $140 million taxpayer contribution in a conditional funding agreement towards the $300m electrification plans at the company’s Glenbrook steel mill.

The deal is expected to cut coal use at six Fonterra dairy factories resulting in a reduction of approximately 2.1 million tonnes of carbon dioxide equivalents thereby halving its manufacturing emissions by 2030 and delivering 2.7 percent of all NZ’s required emission reductions between 2026-2030.

Under the partnership, Fonterra will undertake an emissions reduction programme across its business, focusing on the remaining coal sites used to process dairy. The government will co-fund up to $90m from the Government Investment in Decarbonising Industry Fund.

The fund is meant to be paid through emissions trading scheme revenue but may need further topping up from taxpayer funding if the failure of recent carbon auctions continues. Fonterra has approximately $790m in investment planned in total to meet a more ambitious decarbonisation target.

Fonterra chief executive Miles Hurrell said achieving the new target will require Fonterra to continue to undertake energy efficiency improvements and fuel switching to renewable energy source activities across its milk collection fleet and manufacturing sites, focusing in particular on the six still using coal.

Andrew Patterson is Newsroom's Markets Editor and has worked for decades as a financial journalist, radio presenter and editor with Australia's ABC, Radio Live and NBR.

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