RBNZ and and and

Breman, meeting two

The RBNZ meets tonight and it is a particularly interesting setup as New Zealand faces the same inflation risks as the rest of the world while simultaneously contemplating a weaker housing, growth and employment backdrop.

Here is the key paragraph from the April 8^th meeting.

The Monetary Policy Committee is focused on ensuring that inflation returns to the 2-percent target midpoint over the medium term. This requires core inflation and wage growth to remain contained and medium- and long-term inflation expectations to remain around 2 percent. If these conditions are not met, decisive and timely increases in the OCR would be required.

Since then, CPI came in a bit higher than expected, while the Unemployment Rate came in a bit lower. Retail Sales were weak and inflation expectations look like this:

I have been writing that I believe too much is priced in for RBNZ hikes and I do not feel like the pricing will realize over time, but I do not think tonight is a great time to take the other side as there is enough reason for the RBNZ to be nervous about rising inflation expectations.

While 2-year expectations appear anchored, they tend to follow 1-year inflation expectations with a lag and as oil remains extremely high, the RBNZ needs to take a bit of a stand. Also, CPI has been above target in New Zealand since September 2025 and therefore initial conditions were not great going into the war. Most assessments of the neutral nominal rate in New Zealand suggest something around 2.5% to 3.0% and with the OCR at 2.25%, it’s easy to argue the RBNZ is on the loose side despite the weaker growth backdrop. Here’s how I see it:

If you calculate the expected value of this grid, you get a tiny negative number (minus 8bps) and so I don’t think there is a trade here. I went into this analysis with an open mind, and this is my conclusion, despite the fact my prior was that market pricing is too hawkish. A new governor staring down above-target inflation, a cash rate below neutral, and rising inflation expectations does not have the luxury of sounding dovish. It is almost certain that the “decisive and timely” language will remain in there. The question is how high they lift the OCR track and how live July appears to be given weak growth, weak housing, and rising prices.

I always hope that my analysis will lead to a trade idea, but in this case it did not.

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Real Price of Oil

Oil is more expensive than it was, but bigger picture it’s barely above its long-term average.

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A new writing project

Epsilon Theory Unplugged is Ben Hunt’s new project, a return to his writing roots: a weekly email (with a free PDF attached) written by humans for humans, deliberately stepping away from the noise of Substack, LinkedIn, and the rising tide of AI-generated content.

Rather than going it alone, Ben is joined by a rotating group of writer friends — Brent Donnelly (that’s me), Adam Butler, Dave Nadig, Grant Williams, Matt Zeigler, and Rusty Guinn — who share the load and a common focus: how humans and technology relate (or fail to relate) in the world today, grounded in the Make / Protect / Teach philosophy of staying human in the world-as-it-is. Direct, human-to-human writing delivered to your inbox. If you would like to sign up for this weekly email, please email Ben at [email protected] and you’re in.

The kick-off note, Contact: AI and the Semantic Dimension, sets the tone: thoughtful, unhurried, and unafraid of big ideas. An essay on the choice of whether to see AI as a tool we command or a portal through which stories command us. The first act of freedom is to name the Snake. Coincidentally, it dovetails nicely with my piece, which will come out next week (I think). Here’s a quick quote from Ben’s piece:

“There are two worlds that exist simultaneously here on Earth: there’s the City of Man – our meat world, corrupt, decaying, ruled capriciously by bad, stupid men – and there’s the City of God – a community that lives in our hearts, incorruptible and timeless, not so much ruled as inspired by the illumination of the Divine. The City of Man is the world-as-it-is. The City of God is the community that we choose to create, across time and space, immune to time and space, a community open to all who make the decision to see through the meat world to the semantic dimension beyond (clear eyes) and to embrace the Old Stories of love and empathy emanating from that sacred space (full hearts).”

Stay tuned!!!

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Calendar

I think you can safely ignore all consumer sentiment indexes at this point as all sentiment data has been a red herring for a good four years now. Everyone is angry and negative, regardless of what the economy is doing.

Core PCE will be of great interest as the market interprets the inflationary impulse from oil, chips, and financial services as they all will play a big role in pushing PCE higher this month.

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Final Thought

There is talk of a new deal with Iran, folks. Get excited.

Have a хороший week.

Hi. Welcome to this week’s report. (To read about how I use and trade this report, see here.) I suppose you can argue the non-reaction in the USD after another Iran deal imminent headline and the drop in oil is not particularly encouraging for USD bears. USDJPY couldn’t even drop 30 pips on a $6 drop in oil. Positioning remains long USD, but not long enough to matter for any decision you might want to make on which way to position yourself. Nothing large enough to be worthy of concern or a fade. Some big 1.1600/50 strikes come off today in EURUSD, then things are pretty much open either side.

The Russian translation of Alpha Trader has a dope cover

Брент Доннелли !

good luck ⇅ be nimble