The Reserve Bank of New Zealand Might Raise Rates on Wednesday

Stocks were unchanged this morning after key benchmarks hit new highs and investors waited for new inflation data, due out this week. The Dow Jones barely moved while the S&P 500 fell slightly. The Nasdaq edged higher, but all three indexes largely refused to budge.

Amazon made a big move today, joining the Dow and taking Walgreens’ spot. Since the Dow cares more about stock price than how big the company is, bringing in Amazon shakes things up, especially for tech and consumer retail sectors. Amazon’s stock did not react to the Dow listing.

As February draws to a close, traders seem to be feeling good about the market’s future prospects. The market is perhaps more complacent than ever thanks to major indexes hitting important marks and Nvidia’s huge earnings gain last week. But analysts are starting to wonder if this AI-driven excitement can keep going, given the economic and inflation worries still hanging over markets. This Thursday, all eyes will be on the Fed’s favorite inflation gauge, the personal consumption expenditures (PCE) price index, which could potentially wreck the melt-up rally.

Some analysts think the AI rally has legs due to the growth potential facing not just Nvidia, but other leading chipmakers as well. The entire industry is in uncharted waters in this regard.

Investors are feeling better about stocks after a surprisingly good earnings season, too. But traders need to remember that the Fed’s still looking for signs of reinflation, which could influence their decisions on interest rates this year. The market has not priced in an inflation resurgence at all, which could lead to some truly harrowing drops on hotter-than-expected inflation readings.

Prior to Thursday’s coming inflation report, January home sales were reported this morning and did not look as hot as expected, missing the mark set by economists because of high mortgage rates. Sales of new homes ticked up a bit, but not enough to meet expectations.

Data on durable orders are due out tomorrow and wholesale inventories the day after. Investors will probably look past these, though, with consumer spending and inflation figures out Thursday.

What could also ruffle some feathers this week is a Wednesday meeting at New Zealand’s central bank. Normally, monetary policy meetings from New Zealand wouldn’t be worth worrying about for US stocks. And this week’s meeting is certainly flying under the radar for 99% of investors.

But, unlike the rest of the world, the Reserve Bank of New Zealand is actually thinking about raising rates, not cutting them. Markets have priced in about a 25% chance that the central bank will hike rates by 25 basis points (0.25%) on Wednesday and about a 60% chance of a hike by May.

Despite some nervousness about inflation expectations rising in New Zealand, most signs suggest they might hold off on hiking rates for now. However, the situation’s pretty tense, with a lot of factors to consider, including some hot inflation reports that suggest the bank could be considering a hike.

There’s a lot of debate about the right move for central banks right now. They’re stuck between a rock and a hard place, trying to manage inflation without crashing the economy. Even Janet Yellen’s been talking big about managing inflation without a huge spike in unemployment, but history’s full of quotes that didn’t age well.

So, we’re possibly in a tricky spot where policy decisions could go either way. Economic models love to assume things will just naturally get better, but real life loves throwing curveballs. With all the ups and downs in the economy lately, making accurate predictions is harder than ever.

In the end, everyone’s trying to guess whether we can land this plane smoothly or if we’re in for a bumpy ride. Economic models have their place, but they’re not perfect. And as we all know, sometimes things don’t go as planned. That first curveball could arrive on Wednesday in New Zealand – something that no one had on their bearish “bingo card” heading into the final weeks of February.


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