Economy Watch

Kia ora,

Welcome to Friday’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 mixed news but the underlying vibe is positive.

First in the US, all eyes are now on tomorrow's August non-farm payrolls report. Analysts expect a rise of +160,000 jobs. But today's pre-cursor ADP Employment Report sharply undershot that level suggesting only +99,000 jobs will be added. If that is the case that would make it the smallest gain since 2021.

This data has clouded financial markets today.

A jump in reported layoffs in August added to the mood, but to be fair they only rose back to 'normal' levels.

But there was good news about the US economy too.

The level of jobless benefit claims last week fell, when a rise was anticipated

The ISM services PMI rose more than expected, on the basis of better new order levels. That was backed up by the companion S&P/Markit services PMI.

And the latest update for American productivity (for Q2) was particularly positive with a strong rise.

So you would have to think there might be upside in tomorrow's US labour data. We will know soon enough.

Wages in Japan rose by +3.6% year-on-year in July, slowing from a +4.5% rise in June which was the highest in 26 years, since January 1997. Markets expected a July rise of +3.1%.

EU retail sales volumes rose in July, the fourth rise in the past sixth months. Better yet, they were higher than a year ago on a volume basis.

German factory orders for July were another overnight surprise. They bounced back in June and July was expected to be weak. But in fact a good rise was posted again in July.

And it might also surprise you to know that after being hooked on Russian energy, the Germans have made a substantial shift away, not to other fossil-fuel suppliers, but rather to renewables. More than 60% of electricity production is now by renewables. And the overall energy intensity in the German economy is declining (ie improving). Both are huge shifts for Europe's largest economy.

Australia's merchandise trade surplus rose in July to its highest since February as exports grew to a 5-month high while imports fell to a 3-month low.

But the iron ore price took a sharp tumble yesterday. While that isn't great news for Australia, it isn't all bad. They have advantages over their rivals in Africa and South America in both freight costs and mine productivity.

Although China's media mouthpieces are talking up the prospects for recovering steel production, their trade association is warning that any short-term bump will probably be just a "flash in the pan".

Bulk freight rates continue to rise however. And global container freight rates are still extremely high essentially because of the Suez Canal/Horn of Africa security issues. They did fall -8% last week, but they remain +236% higher than pre-pandemic levels. (China to Europe rates fell quite sharply, but trans-Pacific rates didn't move much.)

The UST 10yr yield is now at just on 3.73% and down another -4 bps from yesterday. 

The price of gold will start today up +US$10 from yesterday at US$2513/oz.

Oil prices are -US$1 lower at just under US$69/bbl in the US while the international Brent price is now at just on US$72.50/bbl. That has forced OPEC to delay is planned rise in production.

The Kiwi dollar starts today up +30 bps from yesterday at 62.3 USc. Against the Aussie we are +10 bps firmer at 92.4 AUc. Against the euro we are also up +10 bps at 56 euro cents. That all means our TWI-5 starts today at 70 and up +10 bps from yesterday.

The bitcoin price starts today at US$56,336 and down -2.7% from this time yesterday. Volatility over the past 24 hours has been moderate at just on +/- 2.3%.

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

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

Kia ora. I'm David Chaston. And we will do this on Monday.

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Kia ora,

Welcome to Thursday’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 markets see a cooling US labour market in signals ahead of this weekend's August non-farm payrolls report.

But first, US mortgage applications rose by an insignificant +1.6% from the previous week in the last week of August, a low and stable situation. They are now -4% lower than the soft year-ago levels. Their benchmark 30 year fixed home loan interest rate slipped slightly to 6.35% and its lowest since May 2023.

(Yesterday, we mistakenly reported US retail sales from two weeks ago, up +5.0% at physical stores from a year ago. The actual result from this metric for last week was very much more positive, up +6.3% from the same week a year ago, its best rise since the end of 2022 when the very low year-ago base boosted results. This current result is actually quite impressive.)

US exports hit their highest level ever in July at US$267 bln. Imports rose too, but not to a record high. Their full trade deficit rose to -US$79 bln but that was well short of records set during the pandemic. This deficit continues to quite small in relation to US GDP.

US factory orders were solid in July. New orders rose by +5% from the previous month, above market expectations of a 4.7% increase. Year-on-year they are up +3.8%. Better, new orders rose by +9.8% for durable goods, lifted by transportation equipment which was up more than a third.

But there was a sharper-than-expected drop in July job openings in the US. The number of job openings fell by -237,000 to just under 7.7 mln in July from a downwardly revised 7.9 mln in June. That is the lowest level since January 2021 and below market forecasts of 8.1 mln. This is a first real sign of a cooling labour market there, although the new order data may make that a temporary dip. This is the data that has the financial market's attention today.

Meanwhile, the US Fed's Beige Book survey for August painted a modest picture of the American economy but with the balance of opinion that things are picking up from the current stable positions. This survey found little evidence of labour market stress.

Canadian exports came in little-changed in July, holding the higher levels first achieved in mid 2022.

And as expected, the Bank of Canada cut its policy rate by -25 bps earlier today to 4.25%, its third consecutive cut, saying excess supply in the Canadian economy continued to put downward pressure on inflation there which is now running at 2.5%, its lowest level in more than three years.

In China, the Caixin services PMI eased a bit but is still expanding. Incoming new business and activity remained in growth, with export business rising at a faster rate in August. Meanwhile capacity pressures were still evident, but firms reduced staffing levels amid cost concerns.

Bloomberg is reporting that China is considering cutting interest rates on as much as NZ$8.5 tln of mortgages in two steps to lower borrowing costs for millions of families while mitigating the profit squeeze on its banking system. To do that, financial regulators have proposed reducing rates on outstanding mortgages nationwide by a total of about 80 bps, part of a package that includes an accelerated timeline for when mortgages become eligible for refinancing, according to people familiar with the matter. The first cut may come in the next few weeks while the second move would take effect at the beginning of next year, said the people, asking not to be identified, they reported.

The EU said producer prices are now edging lower in July from a year ago, helped by the falling cost of imported energy.

Australia said its GDP was +1.5% higher in its June year after a smaller-than-expected +0.2% expansion in the June quarter. "Helping" keep it positive was record federal government spending on the public payroll and on the healthcare sector.

Meanwhile an August survey of the Australian manufacturing sector was particularly grim. The Ai Group Industry Index dropped sharply by 11.3 points to -30.8 in August, further deepening the contraction that has persisted for two years.

The UST 10yr yield is now at just on 3.77% and down another -7 bps from yesterday. 

The price of gold will start today up a minor +US$2 from yesterday at US$2493/oz.

Oil prices have held from yesterday's lower level at just under US$70/bbl in the US while the international Brent price is still at just on US$73.50/bbl.

The Kiwi dollar starts today unchanged from yesterday at 61.9 USc. Against the Aussie we are nearly +20 bps higher at 92.3 AUc. Against the euro we are -20 bps lower at 55.9 euro cents. That all means our TWI-5 starts today at 69.9 and down -20 bps from yesterday.

The bitcoin price starts today at US$57,910 and virtually unchanged from this time yesterday. However, volatility over the past 24 hours has been moderate at just on +/- 2.5%.

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

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

Kia ora. I'm David Chaston. And we will do this tomorrow.

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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 financial markets are looking for excuses to be negative, and they found one - sort of.

But first up today there was another full dairy auction and that brought a somewhat disappointing result. Overall prices fell a minor -0.4% in USD, down -1.1% in NZD. This event failed to maintain the upward demand for WMP, which fell -2.5% hurting the overall result. That contrasted with most other components, especially SMP which was up +4.5%. China and "North Asia" were the dominant buyers today but there was notably less demand for WMP from other regions. Although it was an unexpectedly soft result overall, at least it basically confirmed most of the prior months gains.

In the US, the two August factory PMIs each show a contracting manufacturing sector. The ISM one improved from July's deeper contraction, but the S&P/Markit one slipped back but to a similar level to the ISM one. Slower new order growth was a shared feature, especially for export orders. Although the variance in both from market expectations was very minor, it has had an outsized impact on the mood of financial markets today, post the US-holiday. Equities fell, benchmark yields retreated, and the USD softened.

Market ignored the rise of economic optimism in the RCM/TIPP survey, now at a 17 month high.

They also ignored the rise of US retail sales last week at physical stores, up +5.0% above the same week a year ago on a same-store basis.

Also ignored by markets was the 'good' logistics managers index for August that showed firms are gearing up positively for Q4-2024 activity.

The Canadian factory PMI continues to be marginally disappointing, although it is broadly stable.

China said it will likely impose tit-for-tat tariffs on Canadian canola imports as a retaliation for Canada's duty level on them dumping EVs into Canada.

In Australia and despite strong mineral exports, they are now back running balance of payments deficits. Australia’s current account balance fell by AU$4.4 billion to a deficit of -AU$10.7 bln in the June quarter. This was the largest since June 2018, double what was expected, reflecting continued falls in bulk commodity prices and higher income paid to non-residents. They ran a +AU$6.3 bln current account deficit in Q1. For the year to June, they now have a -AU$18.8 current account deficit, the largest annual level since March 2018.

The UST 10yr yield is now at just on 3.84% and down -9 bps from yesterday. 

Wall Street has opened after the holiday down -2.0% on the ISM result trigger. The NASDAQ is down -3.1%. 

The price of gold will start today down -US$8 from yesterday at US$2491/oz.

Oil prices have dropped -US$3.50 from yesterday to just under US$70/bbl in the US while the international Brent price is now just on US$73.50/bbl. That makes it the lowest since the brief dip at the end of 2023, and prior to that, at 2021 levels. The restoration of Libyan oil supply after the apparent end of political and security issues there was a key trigger to today's drop.

The Kiwi dollar starts today down -40 bps from yesterday at 61.9 USc and a two week low. Against the Aussie we are +40 bps higher at 92.1 AUc. Against the euro we are -20 bps lower at 56.1 euro cents. That all means our TWI-5 starts today at 70 and down -20 bps from yesterday.

The bitcoin price starts today at US$57,914 and down almost -1.0% from this time yesterday. Volatility over the past 24 hours has been modest at just on +/- 1.9%.

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

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

Kia ora. I'm David Chaston. And we will do this tomorrow.

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Kia ora,

Welcome to Tuesday’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 the world's second largest economy may be seriously out of balance, with implications for everyone.

With the US on holiday. the big global influences come from elsewhere today. First up, the private Caixin PMI for Chinese factories moved up from a minor contraction in July to a minor expansion in August. According to this survey, output growth accelerated amid an upturn in new orders and a stabilisation in employment. Meanwhile, price pressure eased and confidence hit a 3-month peak. All this was marginally better than the official factory PMI which recorded a slightly deeper contraction. The difference is that the Caixin survey is more about their private sector, the official PMUI more about their SOEs and the enterprises that dominate Chinese manufacturing.

But despite this stable factory activity, their firms have been buying raw materials at a high rate, so consequently there is a huge buildup in inventories across a wide range of sectors. If the world doesn't take the surge in exports that would be necessary to justify this build-up, then the resulting pullback will have large-scale international consequences. There are plenty of signs this imbalance may end badly for everyone involved.

And China's property woes are deepening, which is driving sharper equity market retreats. Falling prices aren't being stemmed, squeezing developers further and keeping house buyers away.

Taiwan's August PMI only registered a modest expansion in the island nation, about the same as for China.

Japan's August PMI showed neither an expansion nor contraction.

South Korea's August data pointed to sustained and stronger increases in both output and new orders for their manufacturing sector amid growing signs of client confidence.

India's August PMI registered softer increases in new business and output during August, albeit with rates of expansion remaining elevated by historic standards.

In Australia, their factory sector is deteriorating at a faster rate, but there are some signs things may improve later in the year. Although new orders and production continued to fall, export orders picked up and along with it, confidence in the future. But they also report that cost pressures are not easing, which will worry the RBA.

Australia is quite vulnerable to the Chinese economy's struggles

So it will be no surprise that job ad levels continue to shrink in Australia. And that company profits seem to be diving.

Meanwhile on the Australian property front, building consents jumped in July, especially for multi-unit developments although to be fair that is off a very low base, so it may not be significant.

And CoreLogic said August house prices rose only modesty from July to be up +7% for the year. However all this rise was from Brisbane (+15%), Adelaide (+15%) and especially Perth (+24%). Without them, there would be no rises.

The UST 10yr yield is now at just on 3.93% and up +2 bps from yesterday. The key 2-10 yield curve inversion has now disappeared, replaced by a positive +1 bp.

The price of gold will start today down -US$4 from yesterday at US$2499/oz.

Oil prices are little-changed from yesterday again, still just under US$73.50/bbl in the US while the international Brent price is still just over US$77/bbl.

The Kiwi dollar starts today down -20 bps from yesterday at 62.3 USc. Against the Aussie we are sharply lower at 91.7 AUc. Against the euro we are also lower at 56.3 euro cents. That all means our TWI-5 starts today at 70.2 and down -30 bps from yesterday.

The bitcoin price starts today at US$58,472 and back up +0.8% from this time yesterday. Volatility over the past 24 hours has been modest at just on +/- 1.4%.

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

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

Kia ora. I'm David Chaston. And we will do this tomorrow.

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Kia ora,

Welcome to Monday’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 the big northern hemisphere countries are starting to report their August activity levels - and most of them are fine.

But first in China, their official August PMIs were released over the weekend. Their factory PMI fell a bit further into a minor contraction. New orders, foreign sales, and buying levels all dropped for a fourth consecutive month. Their employment weakness also persisted in this sector.

However, the Chinese service sector lifted to maintain a minor expansion, but is still far below the February to May levels. In that broader perspective the August lift seems within the margin of error.

The private Caixin versions of these PMIs should be released later today.

Unofficial data of housing sales volumes and values in China weren't encouraging in August. More developers are being ordered to liquidate, unaided by any return of demand for housing. The top 100 developers faced a -10% retreat in sales in August from July, down more than a quarter from August 2023.

South Korean exports were more than +11% higher in August than a year ago, but that undershot the expected +13% rise, and they rose almost +14% in July. The growth of exports to China lagged the overall gains but those to the EU and the USA outperformed. But China remains their top export destination.

Japanese industrial production expanded in July, a good recovery from the June dip. But Japanese retail sales rose at a slightly slower rate than expected.

In the US, they are ending their summer with a major national three-day-weekend holiday, Labor Day. Their markets return in full on Wednesday NZ time.

But before this weekend started, another piece in the policy jigsaw was put in place for the US Fed, the PCE inflation level and that came in low and little-changed, confirming the conditions for a September rate cut. The July core PCE price index rose just +0.2% from the previous month and the market-expected change. The +0.2% monthly increase in headline PCE prices was also in line with expectations. That puts it +2.6% up on a year ago. Nothing disturbed market expectations here - although it probably means the chance of a -50 bps Fed cut is now off the table.

Perhaps helping, there was a slight improvement in the Chicago PMI from the American industrial heartland although this is more of a "contracting less" situation rather than an expansion. New order levels edged up.

Canada said its economy grew at a good +2.1% rate in Q2-2024 and that was better than what was expected by analysts there (+1.8%). Higher wages and savings helped, which drove more government spending.

India also released its Q2-2024 GDP and that rise was in a different league - up +6.7% from a year ago. However analysts had expected a +6.9% rise so that result was tinged with a slight disappointment.

The annual inflation rate in the Eurozone fell to 2.2% in August from 2.6% in the prior month, matching market expectations to result in the smallest rise in consumer prices since July of 2021. Much lower energy costs allowed the moderation.

Australian retail sales were a disappointment in July, with no rise from June and up +2.3% from the same month a year ago, well short of inflation's impact. It is worse on a per capita basis. And given the elevated inflation level they face the real prospect of an interest rate hike. (Financial markets however are not pricing in a hike.)

For the rest of the week, there will be a full dairy auction on Wednesday morning.

And a slew of PMIs from all the major economies are due this week. Australia will release its Q2-2024 GDP and Canada will have a rate decision (where a -25 bps cut is expected). And this week will end with the US non-farm payrolls report which is expected to show a solid +163,000 jobs gain. If it does, that will bolster the expected Fed normalisation move the following week and the rate cut by them.

The UST 10yr yield is now at just on 3.91% and unchanged from Saturday, up +11 bps for the week.

The price of gold will start today yp +US$2 from Saturday at US$2503/oz.

Oil prices are little-changed from Saturday, still just under US$73.50/bbl in the US while the international Brent price is still just under US$77/bbl. Despite all the obvious tensions in the usual places, actually global supply is more than enough and keeping prices low.

The Kiwi dollar starts today up +10 bps from Saturday at 62.5 USc, up a full +1c from a week ago, up +3c from the start of August. Against the Aussie we are firm at 92.4 AUc. Against the euro we are up +10 bps at 56.6 euro cents. That all means our TWI-5 starts today at 70.5 and up +10 bps from Saturday, up +100 bps in a week and up +200 bps since the start of August.

The bitcoin price starts today at US$57,989 and down -1.2% from this time Saturday. Volatility over the past 24 hours has been modest at just on +/- 1.5%.

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

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

Kia ora. I'm David Chaston. And we will do this tomorrow.

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Kia ora,

Welcome to Thursday’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 the northern holiday season can still spring a few economic and market surprises.

First in the US, mortgage applications last week were little-changed from a week ago (down -0.5%) and that is despite mortgage rates falling for a fourth consecutive week to 6.44% for their benchmark 30 year fixed loan. That is its lowest level since April 2023, and interestingly is the same rate that applied 30 years ago in October 1993. If you took our one of these loans back then and had to renew it today (!), the rate would be exactly the same.

In their government bond market, the US Treasury had a 5 year bond tender and that was very well supported - again. There was a massive US$100 bln more offered than they accepted. It gave investors a median yield of 3.59%, down from 4.05% at the prior equivalent event a month ago. Their bond rally is extending, so perhaps it is no surprise investors are so enthusiastic. Lower rates also mean the pressure on their Federal deficit is less than it would otherwise be. On average, the US Federal government pays about 3.35% over all its debt, so today's tender is approaching that average again.

The US holiday driving season is coming to an end with one final burst for their Labor Day holiday this coming weekend. Motorists there are paying -12% less for petrol than they did at this time last week, and on their way home they will be paying -1.4% less than they did a month ago. Energy inflation is not a thing there at the moment.

Today will also be signature days on the US equity markets after Wall Street closes. Nvidia will release its results and investors will then know if their sky-high valuation is reasonable. And Berkshire Hathaway may hit a capitalisation of US$1 tln, putting it in a very small and exclusive club of seven, all the others big tech companies.

In China, the levels of dissent are rising as their economy wavers, although the rises are containable by Beijing. In the year to October, they were up +16% according to detailed monitoring. Most current dissent is in the south in Guangdong province, but the big central provinces that include Beijing are also seeing rises in dissent. The October monthly levels may end up being the highest of the year. Almost half relate to workforce issues, about a fifth relate to homeowner stress.

And in some parts of China, stress is more than citizen protest. In giant Chengdu, the capital of Sichuan province, they are in an extended and crushing heat wave. Electricity is being rationed with many companies halting production after the local government imposed sharp restriction as the power supply buckled.

Australia released their month CPI Indicator yesterday. It rose 3.5% in July from a year ago, down from June's 3.8% but above consensus of 3.4%. It was the lowest figure since March, as electricity prices fell sharply following the extended Energy Bill Relief Fund rebate. Inflation remains outside the RBA’s target range of 2-3% and that electricity component is hiding some of the higher prices elsewhere. Don't expect Aussie rate cuts any time soon. 

And staying in Australia (and speaking of extremes), their Green Party said its “Robin Hood” reforms would levy an extra AU$514 bln in taxes over 10 years to pay for sweeping social benefit increases. (Chances of enactment are low however, because they only have 4 MPs in the House of Representatives, plus 12 of 76 in their Senate.) The Aussie Green's alignment to the bikie-gang controlled CFMEU union isn't endearing their policies to a wider audience either.

The UST 10yr yield is now at just on 3.84% and unchanged from yesterday. 

The price of gold will start today down -US$13 from yesterday at US$2506/oz, another record high.

Oil prices are down -US$1 at US$74.50/bbl in the US while the international Brent price is now just over US$77.50/bbl.

The Kiwi dollar starts today down -20 bps from yesterday at 62.3 USc. Against the Aussie we are unchanged at 92 AUc. Against the euro we are up +20 bps to 56.1 euro cents. That all means our TWI-5 starts today at 70.1 and unchanged from yesterday.

The bitcoin price starts today at US$58,877 and down another -4.7% from this time yesterday. Volatility over the past 24 hours has been high at just on +/- 3.7%.

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

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

Kia ora. I'm David Chaston. And we will do this on Monday because I am taking a short winter break.

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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 the last few days of the northern summer holiday period that is quiet but basically positive.

First, American retail sales at physical stores were up +5.0% last week from the same week in 2023, another pointer that the consumer side of the American economy hasn't stumbled yet.

But there are of course pockets of regional variation. The Richmond Fed's factory survey wasn't so flash in its August survey with a tenth straight contraction. The service sector in the region was stable however.

But the Texas Dallas Fed service sector survey is contracting just as we reported yesterday its manufacturing sector was.

But these regional business sentiment pockets might be outliers. As we noted for the Redbook retail survey, consumers seem upbeat. And that is reinforced by the latest Conference Board survey of consumer sentiment. The rise in optimism on a national level contrasts with a few pockets of business pessimism.

A very well supported US Treasury 2yr bond auction brought a median yield of 3.83% overnight, down more than -50 bps from 4.39% at the prior equivalent event a month ago. It's a bond rally directly related to the Fed signals at Jackson Hole.

Across the Pacific, China said profits at its largest industrial firms (mostly SOEs) rose +3.6% in the first seven months of 2024. This was little-changed from June. They were up +4.1% in July from the same month a year ago. That they are still profitable overall is a good sign, and they are not getting worse.

As China returns from its summer holidays, one thing may be missing - childcare. The sharp demographic shifts are moving faster now and a nationwide causality is childcare centers. Businesses providing these services closed for summer and a rather large number of them aren't re-opening. Enrolments are diving reflecting the swift shift in attitudes from the 'last generation'. (Of course, China doesn't have this problem on its own, but it is particularly fierce there.)

Taiwan however has reported a continuing rise in consumer sentiment there. In fact, these levels are now back at levels last seen in March 2020 before the pandemic hit the island nation. From June this year, you may even call the rise a surge.

The UST 10yr yield is now at just under 3.84% and up +3 bps from yesterday. 

The price of gold will start today up +US$1 from yesterday at US$2519/oz, another record high.

Oil prices are down -US$1.50 at US$75.50/bbl in the US while the international Brent price is now just over US$78.50/bbl.

The Kiwi dollar starts today up nearly +40 bps from yesterday at 62.5 USc. Against the Aussie we are up about the same to 92 AUc. Against the euro we are up +30 bps to 55.9 euro cents. That all means our TWI-5 starts today at 70.1 and also up +40 bps.

The bitcoin price starts today at US$61,804 and down -3.2% from this time yesterday. Volatility over the past 24 hours has been modest at just on +/- 1.8%.

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

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

Kia ora. I'm David Chaston. And we will do this again tomorrow.

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With US Federal Reserve Chairman Jerome Powell signalling interest rate cuts ahead, the US dollar's likely to weaken with the Kiwi dollar rising against it, Imre Speizer, Head of NZ Markets Strategy at Westpac Institutional Bank, says.

Speaking in a new episode of the Of Interest podcast, Speizer says although the expected central bank interest rate trajectory is very similar in NZ and the US over the next 12 months, financial markets will focus much more on the US.

"If the two racehorses go neck and neck, that should probably be neutral for the Kiwi dollar. [But] I don't think it will be, because the market will put a lot more importance on the US side of things. So even though the yield spread between New Zealand rates and US rates might not move too much, just the fact that the Fed is cutting aggressively will actually weigh on the broader US dollar," Speizer says.

"So you'll get the market selling the US dollar against all of the major G10 currencies and that will have a ripple effect into the Kiwi-US exchange rate... And therefore, if we see that US dollar weakening, which is our view over the next few quarters, you should see the Kiwi-US, all things equal, rising a bit."

Speizer also expects local swap rates, already down significantly over the last couple of months, to continue falling.

"The swap rates are going to fall a bit further over the next few quarters, and that's simply mechanical. So even if views around the economy don't change, the markets have already priced in this whole easing cycle. So think of it as they're priced in, they know the Official Cash Rate is 5.25% today. They believe it'll be below 5% by the end of the year. And in a year's time, into the threes [3% range], that's already priced in," Speizer says.

"So as you move forward in time, those high OCRs drop out of the calculation of a swap rate and you just mechanically end up with a lower rate. So even if nothing in the world changed, you would see, for example, that two year swap rate moving from its current rate of about 3.85% down towards somewhere in the lower threes over time. So that's just time and the mathematics doing its work. It's not really the market moving as such."

"Swap rates are very important in the New Zealand financial markets. They're arguably the most important interest rate instrument. Whatever swap rates do, other interest rates will follow. So, for example, if your two year swap rate went up by 100 basis points, you would find mortgage rates following suit, other business lending rates, bond yields, pretty much anything. They are the foundation of all interest rates in New Zealand. And the swap rates themselves are constructed by expectations of the OCR mostly," says Speizer.

In the podcast audio he also talks about what in Powell's Jackson Hole comments surprised financial markets, what to watch ahead of September's Federal Open Markets Committee meeting, OCR market expectations, what the yield curve is telling us at the moment, how commodities might start to exert more influence on exchange rates, the NZ government bond market following the issuing last week of a $6 billion bond that attracted record interest of $22.7 billion, the yen carry trade, Australia, China, geopolitical risk, and where he sees the NZ dollar at year's end.

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Kia ora,

Welcome to Monday’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 it seems the global soft landing has been achieved.

But first, the week ahead will feature some chunky economic data from the world's largest economies but no first-tier data. This seems befitting of the final week of the summer break in the northern hemisphere when end the week with long weekends in the US and Canada (Labor Day). Then after a northern summer of fickle markets, it will be back to normal market trading. That often sets the tone for the rest of the year.

In the US it will be headlined with durable goods orders, another Q2 GDP estimate which is expected to show an improvement, and some sentiment indexes. In China, it is industrial profits data and August PMIs at the end of the week India chimes in with Q2 GDP. And Australia with its monthly inflation indicator.

Japanese CPI inflation was at 2.8% in July from a year ago, holding steady for the third straight month while remaining at its highest level since February. Electricity prices jumped, and other fuel costs rose too after the full end of energy subsidies in May. However costs fell for education and communication. Meanwhile, their core inflation rate hit a five-month high of 2.7% in July. Monthly, the CPI rose by +0.2% in July, the least in three months, after a +0.3% gain in June.

In his testimony to the Japanese Parliament, the central bank boss kept future rate hikes in play this year by turning a potentially messy parliamentary hearing into a relatively straightforward reiteration of policy. These were his first public remarks following recent high volatility on equity markets. Since, things have settled nicely in his favour.

Taiwanese retail sales rose +3.4% in July from a year ago, a slight slowing of the pace of increase from June. Meanwhile their industrial production rose a very strong +12.3% in July on the sale basis, much of it due to strong international demand. This is a big turnaround because you might recall that a year ago it was contracting under election uncertainty and PRC pressure.

In China, they have suddenly closed its process for approving new steel plants. That comes after widespread negative global reactions to dumped steel products after a deep slump in local demand. In the past required Beijing authorities required the elimination of existing capacity before approving new plants. Those rules no longer apply. No new steel capacity will be approved.

China's economic stumbles are having no global impact.

In the US in his widely anticipated Jackson Hole speech, Powell gave the financial markets clear signals, and they reacted accordingly. He indicated the central bank will cut its interest rate in the September 19 meeting (NZT) noting that the US labour market is cooling quickly following the softer jobs report in July and the downward revision to payrolls this week. He also said the FOMC has gained further confidence that inflation is slowing to their 2% target, warranting a clear view that it is time to adjust monetary policy to less restrictive conditions.

The USD sank, equities rose, and bond yields eased a bit more than was already priced in.

This week's upcoming PCE inflation gauge (expect 2.6%, down from 3.4%) is widely expected to confirm the Fed's expectation that inflation is tracking as they need it.

Meanwhile American new home sales surged +10.6% in July from the previous month to an annualised rate of 739,000, well above market expectations of a +1% increase. It was the sharpest increase in sales since August of 2022 and the highest number of homes since May 2023 and the July level is +5.6% higher than the same month in 2023.

In commercial property markets things are getting decidedly tough in the US. A big-money-backed commercial property fund has suffered another fierce ratings downgrade, by Moody's, in fact to the lowest junk rating possible, 'C', a fast downgrade from an earlier August re-rating.

Canada's rail lockout has ended quickly with an Ottawa central government intervention to block the employer action. But just as they did the union filed notices of strike action on their part, to start Monday (Canadian time).

Meanwhile after two months of dips in May and June, Canadian retail sales rose in July in a +0.6% month-on-month jump, but to be only +0.2% higher than a year ago.

Canadian manufacturing sales also rose in June, better than expected.

In Australia, their "right to disconnect" law comes into effect today. Employees can ignore contact from the boss outside business hours, except where that is unreasonable. The problem is, the law is silent on what is "unreasonable". So its going to be messy until that is clarified, and that will probably require expensive litigation.

The UST 10yr yield is still at just on 3.80% and unchanged from Saturday. 

The price of gold will start today up +US$2 from Saturday at US$2512/oz. That is below its August 23 record high of US$2514/oz.

Oil prices are holding just under US$75/bbl in the US while the international Brent price is now just under US$78.50/bbl.

The Kiwi dollar starts today still up after its Saturday jump at 62.3 USc. Against the Aussie we are still at 91.7 AUc. Against the euro we are still at 55.7 euro cents. That all means our TWI-5 starts today at 69.9.

The bitcoin price starts today at US$64,173 and up a sharpish +6.4% from this time Saturday. Volatility over the past 24 hours has been low however at just on +/- 0.7%.

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

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

Kia ora. I'm David Chaston. And we will do this again tomorrow.

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Kia ora,

Welcome to Friday’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 financial markets in the US have the jitters ahead of a key speech by Fed boss Powell tomorrow at the Jackson Hole central bank shindig. Equities fell, bond yields rose, and the USD firmed and expectations grew Powell will make the case for only a gradual pace of rate cuts.

Meanwhile, US jobless claims actually fell last week and by about what was expected. But the seasonally-adjusted level rose and that wasn't expected and that grabbed the headlines in the absence of any other major economic news. There are now 1.86 mln people on these benefits, also a fall.

The 'flash' US PMIs from S&P/Markit shows their factory sector contracting slightly but their services sector expanding faster. New order levels are problem for their manufacturing sector. But service sector activity grew at a solid and increased rate in August, and because that sector is far larger than the factory sector, that points to robust GDP growth in excess of 2% annualised in the third quarter, which should help allay near-term recession fears.

The Chicago Fed's National Activity Index for July basically confirmed the manufacturing slowdown.

But the Kansas City Fed factory survey held on with an improvement in August, showing there are some regions still improving in their manufacturing sector.

Also improving were the July existing home sales which rose modestly at about the expected level and that ended a four month retreat. But despite that, the sales volume levels essentially remained at the low levels they have had since early 2023. And on a broader perspective, sales volumes at this level were first achieved in the mid-1970s, and were the levels in the GFC. So July's rise is a very low bar.

In Canada (and the US), all eyes are on a stoppage in their key rail network due to industrial action. It is a lockout, and it will have many spillover impacts in both countries.

In India, the expansion rolls on for both their factory and services sectors in an impressive way, with them shrugging off capacity issues in their factory sector with a notable rise in job creation. 'Growth' is creating many more employment opportunities.

In Japan, although it rose, its August factory PMI is still contracting, slightly. On the other had Japan's service sector is expanding at a good rate. That is the seventh consecutive expansion in their services sector.

In China, Reuters is reporting that regulators there will likely impose a six-month business suspension on a big part of PwC's auditing unit in the mainland as a penalty for its work on troubled property developer Evergrande.

In Europe, business activity rose at faster pace in August, but the rate of new order intake continued to ease. The uptick in business activity is largely due to the Paris Olympics however, so that probably won't last.

In Australia, their August PMI's sort of mirrors Japan but at a slightly lower level. The factory PMI is up but still contracting. Their services PMI is expanding although only at a modest rate.

Global container freight rates slipped another -2% is a continuation of the minor moves down from the extreme July heights, with the basic pressures unresolved. These rates are still almost three times higher than pre-pandemic and pre-canal-pressure levels. There is no real sign of a proper normalising. Bulk freight rates rose slightly last week.

The UST 10yr yield is now at just on 3.86% and up +8 bps from this time yesterday.

The price of gold will start today down -US$27 from yesterday at US$2482/oz.

Oil prices are recovered yesterday's US$1.50 drop, now back at US$73/bbl in the US while the international Brent price is now just under US$77/bbl.

The Kiwi dollar starts today down -30 bps from yesterday at 61.3 USc. Against the Aussie we are up +10 bps too at 91.5 AUc. Against the euro we are still at 55.3 euro cents. That all means our TWI-5 starts today at 69.4 and little-changed.

The bitcoin price starts today at US$60,305 and up +0.7% from this time yesterday in its recent yoyo pattern. Volatility over the past 24 hours has been modest at just under +/- 1.6%.

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

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

Kia ora. I'm David Chaston. And we will do this again on Monday.

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