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Daily Market Commentary 18th October 2023

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US Retail Sales came in hotter than expected an increase of 0.7% for September, reigniting fears of rising inflation. This sent bond yields higher in both the US and Europe, which may be reflected in further interest rate rises from the Fed. This was not enough to interrupt the recent rally in US equities, where markets took the Retail Sales number, as a positive for the economy and economic growth. Industrial and Manufacturing in the US remains flat, while the NAHB House Market Index was slightly lower. The important ZEW Economic Sentiment report from Germany and Europe was much more positive than expected, although remaining depressed, but was enough to boost the EUR back towards 1.0600. This was not the case for the GBP, which slumped below 1.2200, as the US Dollar reacted to rising bond yields.

The rising reserve hit the NZD, which was already trading lower, due to the latest quarterly inflation report. Headline inflation for the year plunged to 5.6%, from over 6%, in the last annualised report. This number was welcomed by markets and the pressure was apparently off the RBNZ to further raise rates, but this did not tell the full story. Q3 2023 came in at 1.8%, much higher than Q2, Q1 and Q4 2022, just cooler and replacing the extremely high reading of 2.2% in Q3 2022. Inflation is not cooling, just the headline annualised rate, but the NZD plunged to 0.5870 anyway. The RBA minutes suggested the pause in rate rises, was a close thing, as inflationary pressures continue to build.  The RBA recognised the pressures from global oil prices, rising due to war in the Middle East, Europe and OPEC+ oil cuts. If these conditions continue, then the RBA may sneak a rate rise in, under cover of the Melbourne Cup. The AUD posted gains, despite the firmer reserve, breaking back above 0.6350.

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