The Reserve Bank of New Zealand surprises economists with a cash rate cut. Learn how to invest in chaotic markets and navigate volatility. Explore the implications of the UK wage growth slowdown. Plus, stocks surge amid key inflation data.
Sources:
https://www.cnbc.com/2024/08/14/reserve-bank-of-new-zealand-cuts-cash-rate-by-25-basis-points.html
https://www.economist.com/finance-and-economics/2024/08/13/how-to-invest-in-chaotic-markets
https://www.independent.co.uk/news/uk/home-news/wage-growth-bank-of-england-interest-rates-b2595551.html
https://finance.yahoo.com/video/stocks-close-higher-surging-amid-201127993.html
Outline:
(00:00:00) Introduction
(00:00:40) Reserve Bank of New Zealand cuts cash rate by 25 basis points
(00:03:00) How to invest in chaotic markets
(00:06:18) Slowdown in wage growth ‘clears the path for more interest rate cuts’ this year
(00:09:22) Stocks close higher, surging amid key inflation data
Simply Economics
New Zealand Cuts Cash Rate, Investing in Chaotic Markets, UK Wage Growth Slowdown
The Reserve Bank of New Zealand surprises economists with a cash rate cut. Learn how to invest in chaotic markets and navigate volatility. Explore the implications of the UK wage growth slowdown. Plus, stocks surge amid key inflation data.Sources:https://www.cnbc.com/2024/08/14/reserve-bank-of-new-zealand-cuts-cash-rate-by-25-basis-points.htmlhttps://www.economist.com/finance-and-economics/2024/08/13/how-to-invest-in-chaotic-marketshttps://www.independent.co.uk/news/uk/home-news/wage-growth-bank-of-england-interest-rates-b2595551.htmlhttps://finance.yahoo.com/video/stocks-close-higher-surging-amid-201127993.htmlOutline:(00:00:00) Introduction(00:00:40) Reserve Bank of New Zealand cuts cash rate by 25 basis points(00:03:00) How to invest in chaotic markets(00:06:18) Slowdown in wage growth ‘clears the path for more interest rate cuts’ this year(00:09:22) Stocks close higher, surging amid key inflation data
- Duration:
- 13m
- Broadcast on:
- 14 Aug 2024
- Audio Format:
- mp3
Good morning and welcome to Simply Economics. It's Wednesday, August 14th. On today's show, the Reserve Bank of New Zealand cuts the cash rate by 25 basis points and we discuss how to invest in chaotic markets. Plus the slowdown in wage growth clears the path for more interest rate cuts this year. This coverage and more, up next. I'm David and you're listening to Simply Economics. We start off with a surprising move from the Reserve Bank of New Zealand. On Wednesday, they cut their cash rate by 25 basis points to 5.25%, marking the first rate cut since March 2020. This decision comes as consumer price inflation in New Zealand returns to the central bank's target range of 1% to 3%. For more on this unexpected move and its implications, we turn to our correspondent. What do you make of this rate cut? This rate cut certainly caught many off guard, as most economists were expecting the RBNZ to hold rates steady at 5.5%. The central bank's decision appears to be driven by growing confidence that inflation is coming under control. The RBNZ noted that various inflation measures, including surveyed expectations, firms pricing behavior and both headline and core inflation, are all moving in line with their goal of low and stable inflation around the 2% target. The RBNZ also lowered its benchmark rate forecast quite significantly. What does this suggest about the path forward for monetary policy in New Zealand? The sharp downward revisions to the RBNZ's rate projections signal that more rate cuts could be on the horizon. The central bank now sees its cash rate falling to 4.92% by December of this year, implying at least one more 25 basis point cut in the coming months. Looking further out, the RBNZ forecast for December 2025 was cut from 5.14% to just 3.85%. Painting a picture of a more aggressive easing cycle than previously anticipated. While inflation seems to be moderating, the RBNZ did acknowledge that service sector inflation remains elevated. How might this factor into future policy decisions? The RBNZ did note that service inflation is still running hot, but they expect it to decline in the coming quarters. Going forward, the pace of further rate cuts will likely hinge on the central bank's confidence that inflation will remain low and stable, and that inflation expectations remain well anchored around the 2% target. If service inflation proves more stubborn than anticipated, or if inflation expectations start to drift higher, the RBNZ may need to tap the brakes on its easing cycle. As always, the path of monetary policy remains data dependent and subject to change as economic conditions evolve. We'll be closely monitoring incoming inflation prints and other key indicators to gauge the RBNZ's next moves. Now, let's shift our focus to the recent market turmoil that has left many investors seeing their portfolios take a hit. The conventional wisdom is that retail investors should simply ignore the volatility and wait for the storm to pass. But is that really the best approach? Here with more insight is our simply economics correspondent. So, what is the typical advice given to retail investors during market turmoil? The standard guidance is essentially, "keep calm and carry on." Investors are cautioned not to panic, not to obsessively check their portfolio balances, and definitely not to make any drastic changes to their investment strategy based on short-term market moves. The thinking is that for most retail investors with a long-time horizon, the best thing to do is ride out the volatility and trust that markets will eventually recover as they historically have. That sounds reasonable on the surface. Emotions can lead to bad investment decisions. But you're saying this, just ignore it advice, may be misguided? Well, it's a bit more nuanced than that. While it's true that making reactionary moves based on fear is unwise, that doesn't mean investors should just bury their heads in the sand. Volatility itself provides important information. It's a gauge of uncertainty and risk in the market. When volatility spikes, it's often a signal that something has fundamentally changed. There may be new economic data, shifting monetary policy expectations, or emerging geopolitical risks. Prudent investors should seek to understand what's driving the turbulence. So rather than ignoring market chaos altogether, you're saying investors should aim to look past the short-term noise and focus on the underlying drivers and what they mean for their particular strategy and holdings. Exactly. Tuning out the blaring headlines is good, but so is a thoughtful assessment of your portfolio's risk exposure. Volatility can reveal vulnerabilities, perhaps you're overexposed to a certain sector or asset class, or maybe your portfolio isn't as diversified as you thought. It's an opportunity to make adjustments, not a total overhaul, but incremental changes to better align your investments with your goals and risk tolerance. The key is to respond, not react. That's a helpful distinction, so while drastic moves are unwise, considered modifications in light of new information can be prudent. Any other advice for navigating market turmoil? Preparation is key. Ideally, you want a well-diversified portfolio that can weather volatility to begin with, but risk management is an ongoing process. Have a plan ahead of time for how you'll respond to different scenarios. Set rules around rebalancing and stick to them. And remember that volatility works both ways. Downside volatility gets all the attention, but big upside moves happen too. The investors who fare best through chaos are usually those who stay disciplined and take the long view. Great insights, as always. Volatility is a feature of markets, not a bug, something for investors to manage, not fear. Thanks for unpacking this important nuance for us today. Now, shifting gears to the UK economy, new data from the Office for National Statistics shows that wage growth has slowed to its lowest level in over two years, despite persistent inflation concerns. The figures reveal wage growth of 5.4% year on year for the three months ending in June, down from 5.7% in the previous quarter. Some economists believe this slowdown could pave the way for further interest rate cuts by the Bank of England later this year. For more, we turn to our economics correspondent Michael. What do you make of these latest wage growth figures? The slowdown in wage growth is certainly noteworthy, especially considering the UK has been grappling with stubbornly high inflation. According to the ONS data, once inflation is factored in, UK workers saw an average real wage increase of 2.4%. This cooling of the labor market will likely be welcomed by the Bank of England, which has been closely monitoring wage pressures as it navigates its monetary policy path. Some analysts, like those at capital economics, believe this wage data lends credence to their forecast that the central bank will proceed with two more 25 basis point rate cuts before the end of the year. The unemployment rate also ticked down according to the latest figures. How does that factor into the overall economic picture and the Bank of England's considerations? Yes, the unemployment rate fell to 4.2% in the three months to June, down from 4.4% in the prior three month period. However, despite the lower jobless rate, most economists don't expect this jobs report alone to significantly alter the Bank of England's near term plans. The consensus view seems to be that policymakers will likely hold rates steady at their September meeting before potentially moving forward with a couple of modest rate cuts in November and December, though, of course, the path of inflation and other incoming economic data will heavily influence those decisions. There are some contrasting views, though, on how this wage data will shape the interest rate outlook, correct? What are the other perspectives on this? That's right. While many see the wage slowdown as clearing the path for rate cuts, some institutions like the National Institute of Economic and Social Research strike a more cautious tone. NISR points out that even though pay growth has moderated, it remains quite strong, especially when accounting for inflation. They note that real wages rose 1.6%, which will help boost living standards for workers. And yes, or suggest this still robust wage growth, even if slower than before, could give the Bank of England pause as it moles upcoming rate decisions. policymakers will have to carefully weigh the wage data against the broader inflation picture. Certainly a lot for the Bank of England to consider as it charts the course ahead, it will be interesting to see how the balance of risks shifts in the coming months. Thank you for that insightful analysis. Shifting our focus across the pond, U.S. stocks closed higher today, with all three major indexes ending the trading session in the green. The Nasdaq composite led the way, closing over 2.4% higher, followed by a 1.68% gain in the S&P 500. The rally came after this morning's producer price index report for July. Investors are now eagerly awaiting July's consumer price index data, which is due out Wednesday morning. For more on today's market action, let's bring in our economics correspondent. So what do you make of today's strong performance in the stock market? The market certainly responded positively to the latest inflation data from the producer price index. The PPI measures the average change over time in the price's domestic producers receive for their output. In July, the PPI advanced 0.3% month over month, which was slightly higher than the 0.2% Dow Jones estimate. However, the annual increase of 0.8% marked the smallest rise since August 2020. This suggests that inflation pressures at the wholesale level are moderating, which is an encouraging sign for the broader economy. And how did the different sectors of the market perform today? Were there any standout winners or losers? Technology stocks were the clear winners, with the tech-heavy Nasdaq composite leading the charge. Within the S&P 500, the information technology sector gained 2.7% while communication services and consumer discretionary stocks also posted strong gains of over 2%. On the other hand, more defensive sectors like utilities, real estate, and consumer staples lag behind, but still finished in positive territory. This rotation into growth in cyclical stocks suggests that investors are becoming more optimistic about the economic outlook. Looking ahead, all eyes will be on the consumer price index data tomorrow. What are the expectations for that report and how could it impact the markets? Economists are forecasting that the CPI rose 0.2% in July, which would mark a significant slowdown from the 0.9% surge seen in June. On an annual basis, inflation is expected to have moderated to 8.7% from 9.1% in the prior month. If the data comes in line with or better than expectations, it could reinforce the peak inflation narrative and potentially spur another leg higher in the stock market rally. However, a hotter than expected reading could reignite fears of more aggressive rate hikes from the Federal Reserve and put pressure on risk assets. Finally, we saw the CBOE Volatility Index, or VIX, decline sharply today. What does that tell us about market sentiment? The VIX, which is often referred to as Wall Street's fear gauge, fell nearly 8% to close below the 20 level for the first time since April. This suggests that investors are becoming less anxious about near-term risks and more comfortable with the market's direction. A lower VIX is generally associated with a more stable and confident market environment. However, it's important to note that volatility can pick up quickly, especially around key economic releases like the CPI report. Thanks for that insightful analysis of today's market moves and a look ahead to the CPI data. We'll certainly be keeping a close eye on that report tomorrow. And with that, we wrap up our stories for today. Thanks for listening to Simply Economics. We'll see you back here tomorrow. [MUSIC] [BLANK_AUDIO]