Kia ora,

Welcome to Wednesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the International edition from Interest.co.nz.

Today we lead with news bond prices are taking a hammering today, with losses mounting quickly now.

But first, the latest dairy auction has delivered higher prices. Overall they were up +4.9% in USD terms, and with our currency weakening, the rise in NZD was a stellar +10.2%. These rises were led by WMP which delivered a bit of a surprise. WMP was up +5.1% from the last auction. But in between there was a GDT Pulse event for WMP a week ago and that did not signal such a big rise today. Today's WMP result is +5.7% higher than the GDP Pulse event. Buyers are realising that future supply is going to be lower than they were planning so demand is returning to shore up that supply shortfall.

This the US, they have returned from their long Labor Day weekend to face sharply rising yields as bond losses pile up. The USD is surging too especially against commodity currencies which are in full retreat.

However, the US service sector is firing on all cylinders (if that is a valid phrase these days as the car industry turns electric?). The ISM services PMI expanded at a faster pace from its already healthy level. It was led by activity and new orders. Labour markets remained tight, they said.

The ISM services PMI is the widely-watched services survey in the US, but it isn't the only one. The internationally benchmarked Markit one told a quite different story. Usually these surveys see quite similar conditions, but not this month. The Markit services PMI is in contraction and reporting its sharpest fall since May 2020 with new orders retreating. One of them is wrong, its just not clear which one at this time.

Separately the US logistics LMI reports a fifth month of easing in August, the lowest expansion since May 2020. Mostly it is falling demand. Although the index shows the overall logistics industry continues to expand, the rate of growth is now the all-time high/tightness in March. Warehousing Capacity is down again, transportation prices fell for a second month while transportation capacity continued to increase and inventory levels grew. This logistics LMI suggests the Markit PMI might be closer to the mark rather than the ISM one.

Despite these risks, the bond market is back to pricing in another full +75 bps rate hike at the next US Fed review on Thursday, September 22 (NZT). Bond prices are taking a hammering.

In China, economic news has gone very quiet. It is neither fashionable not wise to report news that their economy is struggling, especially ahead of the upcoming Party Congress. But it is clear that house prices in their resale markets are falling across a broad range of cities now. And the Chengdu lockdown is shaping up to be a make-or-break situation for their zero-Covid policies.

In Japan, their currency is weakening fast. The Bank of Japan is holding on to its aggressive easing program to finally get inflation rising, and it might succeed. But the cost is a sharply falling yen as those easing policies are now in sharp contrast to the rest of the word. The very much wider yield gap between US Treasuries and Japanese government bonds has encouraged investors to dump the yen for the dollar.

In Europe, almost countries are well into formulating extensive support programs for energy supply and household budgets as the winter season looms, one where there will be no Russian energy to cover the cold snap. The size of these programs in total could be epic, and the EU is stepping up itself with overarching support.

In Australia late yesterday, their central bank raised its cash rate target by +50 bps to 2.35%. This was as expected. They said they aren't seeing any reason to expect CPI inflation lower than 7.¾% in 2022, so the pressure remains to get it back to 3% and within their policy range. In turn that means more outsized hikes can be expected, although they are clearly trying to avoid tipping them into a consumer-led spending recession.

The UST 10yr yield starts today at 3.33% and up +13 bps after Wall Street's long weekend. 

The price of gold will open today at US$1702/oz and down -US$9 from this time yesterday.

And oil prices start today -US$2 softer at just under US$86.50/bbl in the US while the international Brent price is now just under US$92.50/bbl.

The Kiwi dollar will open today just under 60.5 USc and more than -½c lower on a surging greenback. Against the Australian dollar we are unchanged at 89.7 AUc. Against the euro we are a bit less than -½c softer at 61 euro cents. That all means our TWI-5 starts today at 70.3 and -30 bps lower this time yesterday.

The bitcoin price is now at US$19,110 and a sharpish -3.6% lower than this time yesterday. Volatility over the past 24 hours has been high at just on +/- 3.2%.

You can find links to the articles mentioned today in our show notes.

And get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston and we’ll do this again tomorrow.