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 markets only have eyes for the Fed, even as geopolitical tensions rise further in Ukraine.

But first up today, there was another positive dairy auction this morning and overall prices rose a tad less than +2.0% which was probably a bit less than expected and which was no doubt due to the -0.7% slip in the SMP price when a good rise was anticipated. However the WMP price did rise +3.7%. Coming to the rescue has been the falling NZD however. Recall prices rose +10% at the prior event in NZD and this time the rise in local currency has been +4.6%. Fonterra's upcoming annual meeting will be full of satisfaction from their shareholders, even if this auction on its own probably won't change any farm gate payout forecast.

We are now less than 24 hours from the US Fed meeting results and markets are bracing for some pain. The current view is that the Fed will stay tackling inflation strenuously (with another +75 bps hike) and be prepared to inflict painful growth-reducing consequences to achieve their goal. They need markets to 'know' they are serious about beating inflation no matter what the cost. Those may be costs others will pay, but this is probably their last chance to get on top of the inflation thief. Blinking now will damage their cred for a generation.

In the US they reported that new housing starts rose in August while permits for residential housing slipped slightly. Completions dipped as usual during the August holiday period. Given the softness of their housing markets at present, this data is actually pretty good.

US retail sales growth softened last week on a same-store basis, but they were still more than +10% ahead of year-ago levels.

There was a UST 20yr bond auction earlier today where the yield rose sharply from the prior event. The well-supported tender drew US$32 bln in bids for the US$12 bln on offer and the median yield achieved was 3.75% which was almost +50 bps higher than the prior event a month ago.

Canada reported its inflation rate at 7.0% in August, down from 7.6% in July and lower than the expected 7.3%. Month-on-month prices fell, and by more than expected.

Japan also reported its August consumer price inflation but it rose to 3.0% from 2.6% in July. This was the 12th straight month of increase in consumer prices and the fastest pace since September 2014, amid surging food and fuel costs accentuated by a slump in the Yen. Core inflation also rose above analyst’s estimates to 2.8%. Without food or fuel the rate was +1.6%. Now all eyes will turn to the Bank of Japan to see how they react. But while core consumer inflation exceeded the central bank's 2% target for five straight months, the central bank seems unlikely to raise interest rates anytime soon as wage and consumption growth remain weak, analysts say.

China reviewed its loan prime rates today but made no changes to either the 1-year (used as a base for personal lending) or the 5-year (used as a base for institutional lending).

Taiwanese export orders recovered in August which was impressive given the geopolitical pressures swirling around it then. They were up +2.0% in August when a -2% fall was expected after a -2% dip in July.

Far more worrying however was producer price data out of Germany. These are now rising rampantly, up +7.9% in August from July when only a +1.6% rise was anticipated. That pushes their year-on-year PPI rise to a dangerous +45%. These are the largest changes ever recorded there. German industry is in a dark place at present.

The race is on to insulate Germany from Russian risks. Newly released data shows that in the first seven months of 2022, China shipped photovoltaic (PV) modules with a combined capacity of 51.5 gigawatts to Europe, +25.9% more than the whole of last year.

We should also probably note that in Australia, their officials face an improving Budget situation, one that could be +AU$50 bln better over the next few years.

The UST 10yr yield starts today at 3.57% and up another +3 bps from this time yesterday. That is another new 11-year high.

The price of gold will open today at US$1666/oz. This is another -US$5 below where it was this time yesterday.

And oil prices start today down -US$1 from yesterday at just under US$84/bbl in the US while the international Brent price is now just under US$90/bbl.

The Kiwi dollar will open today at just on 58.9 USc and more than -½c lower than this time yesterday, again. Against the Australian dollar we are also more than another -½c lower at 88.1 AUc. Against the euro we are down likewise to 59.1 euro cents. That all means our TWI-5 starts today at 68.6, down another -60 bps and a new two year low.

The bitcoin price is now at US$18,816 and -0.9% lower than 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.

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.