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 bond market has bared its teeth overnight, egged on this time by a hawkish Fed.

But first up today, there was another dairy auction this morning - and another overall dip in prices. There were down nearly -1.0% in USD terms, and down a massive -3.8% in NZD terms. And that is because of the other big economic move overnight - the rise of commodity currencies. We will come to that later, but the dairy price drop is largely due to the -1.5% fall in WMP prices, and in turn that is mostly about Chinese demand. The new difficulty shipping to China as it increasingly locks down is a part of that factor too.

But the auction also delivered higher prices for SMP, BMP, and cheese. These are key to the foodservice and ingredients business, and are benefiting from the return of foodservice industries worldwide. Nothing in this auction is likely change any farmgate milk payout forecast, but it might boost Fonterra's earnings from the upweighted foodservice and ingredients business.

The American retail impulse quickened last week and it was already quite upbeat.

And the US Logistics Managers' Index reached another new high in March. Conditions have been booming in the American logistics sector, and the March result is an all-time record high. Previous highs have featured excessive imbalances and supply-chain problems. They haven't been resolved, but this report suggests things are starting to return to a better balance, just at a high level.

The US reported another high trade deficit for goods and services March, but no more than for February. Not only are services exports rising again, but goods exports are now rising as fast as imports as imports stay in high demand while their local economy stays exhibiting strong demand and elevated consumer spending.

That is all consistent with a fast expanding services sector in the US, aided no doubt by relaxing of pandemic restrictions there. The widely-watched local ISM services PMI retained its high expansion level, while the internationally-benchmarked Markit one rose to match it. Both reported on-going cost pressure.

Canada also reported rising exports, along with rising imports. (Their exports were helped by higher oil prices.) Upbeat domestic conditions there saw their trade surplus dip a little bit in March.

The global bond market rout resumed overnight, with the US yield on the 10-year note, which sets the tone for corporate and household borrowing costs worldwide, surging above 2.56%, its highest level since May 2019. Investors anticipated an aggressive looming policy tightening cycle as major central banks sought to tame inflation, currently running at records levels in Europe and 40-year highs in the US. Market moves were exacerbated by surprisingly hawkish comments from Federal Reserve Governor Lael Brainard, who said they would rapidly reduce the Fed's balance sheet as soon as next month and is prepared for a more aggressive move when it comes to raising interest rates to bring down inflation. Meantime, Germany's 10-year Bund yield, the benchmark for Europe, rose to as high as 0.61%, closing in on its highest level since May 2018.

The BIS has weighed in on the side of raising policy rates sharply and possibly for longer than standard, to kill off the long-term threat of inflation.

Inflation risks were on the mind of the Reserve Bank of Australia yesterday. Although they kept all their policy settings unchanged, their statement was notable in that the reference to 'patience' was dropped, and signals were released that they expect the inflationary conditions will be there mid-year for a change in policy and higher rates. The main thing they want to see is some wage inflation, which has been absent till now.

And staying in Australia, regulator ASIC has commenced civil penalty proceedings in their Federal Court against Macquarie Bank for failing to adequately monitor and control transactions by third parties, such as financial advisers, on their customers’ cash management accounts.

China's credit easing is underway, trying to head off persistent economic headwinds. The local price for iron ore surged yesterday, and on outsized volumes. Markets are betting Chinese regulators are serious stimulus by using their usual playbook.

One of the puzzles we raised a few times now is why Australia and some Asian countries still have low CPI inflation. Well that situation is breaking up now, with South Korea reporting CPI at a 10 year high, and the Philippines also reporting higher CPI inflation, both now over 4%.

In Europe, Poland has vetoed the EU plan to implement a 15% minimum tax rate by the end of 2023, leaving the international overhaul agreed last year in limbo.

The UST 10yr yield opens today at 2.56% and up and unusually high +14 bps from this time yesterday. 

The price of gold starts today at US$1922/oz and down -US$8/oz from this time yesterday.

And oil prices are down -US$1.50 to just over US$100.50/bbl in the US. And the international Brent price is now just over US$105.50/bbl.

The Kiwi dollar will open firmer than at this time yesterday at 69.7 USc. Against the Australian dollar we are softer because there rose more against the main currencies and we are now at 91.7 AUc and a -½c fall. Against the euro we are also firmer at 63.8 euro cents and building on yesterday's big gain. That all means our TWI-5 starts today at just under 75.1 which is a new four month high.

The bitcoin price is up +1.5% since this time yesterday to US$45,990. Volatility over the past 24 hours has been moderate at +/- 2.2%.

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.