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 inflation is easing in the world's largest economy.

First up today, the American August CPI inflation rate slowed for a 5th consecutive month to 2.5%, its lowest since February 2021 and below market expectations of 2.6%. But it was up +0.2% from July, which was as expected. Meanwhile, their core inflation rate steadied at a 3-year low of 3.2% but this core rate was up +0.3% from July. So some mixed signals here. Energy costs were much lower, rents and travel costs a little higher.

There were only modest market movements after this data. Benchmark bond yields firmed slightly, the USD rose, and Wall Street took it in its stride shaking off the pre-release jitters.

None of this will change the Fed meeting discussions a week from today. Today's data probably locks in a -25 bps rate cut rather than the option of a -50 bps cut.

American mortgage application levels were little-changed last week, continuing at a low level. But mortgage rates fell with the benchmark rate falling to under 6.3%. However, that was not enough to entice any significant change in housing market activity.

Lower yields were also on full display in the UST 10yr bond auction. Today's event was strongly supported with a median yield of 3.61%, down from 3.98% at the prior equivalent event a month ago.

Across the Pacific, China's August vehicle sales were soft. They were 2.45 mln units in the month, -5.0% lower than for August 2023. And this was despite a Beijing program to boost this key domestic market. 1.1 mln of the sold units (45%) were EVs or hybrids. In July, sales were -5.4% lower than a year ago. Without the support, you have to wonder what levels they would be at.

Chinese long-term government bond yields hit a fresh low yesterday, underscoring strong investor appetite for these expected capital gains even as the central bank intervenes to tamp down what it considers a bubble. The yield, which moves inversely to price, on the China government 10 year bond fell to 2.106% at one point. That is its lowest level since 2015, the starting point for comparable data. That has Beijing officials scrambling (and threatening traders).

And that is not the only problem they face in their financial sector. Recently Beijing cracked down on banks offering higher than official rates for deposits. That had the perhaps-predictable outcome that depositors - especially corporate depositors - withdrew their deposits from banks and shifting them to places they get better returns. The effect on bank balance sheets was substantial. And there is a new scramble on to shore up this sudden distortion.

In a key update from an RBA official yesterday, they reinforced their guidance that the tight labour market is a key element in their hawkish views on inflation and its likely trajectory. They see it staying tight enough to prevent inflation from falling to where they need to get it. That reinforced last week's comments by Governor Bullock who said that monetary policy will need to remain sufficiently restrictive until inflation actually moves toward the central bank’s 2-3% target range on a sustainable way. Clearly they don't think they are there yet. Rate cuts are a ways off in Australia.

The UST 10yr yield is now at just on 3.67% and up +3 bps from yesterday. 

The price of gold will start today up an insignificant +US$1 from yesterday at US$2514/oz.

Oil prices have recovered +US$1.50 at just under US$67.50/bbl in the US while the international Brent price is now just over US$70.5/bbl.

The Kiwi dollar starts today at 61.3 USc and -20 bps softer from this time yesterday. Against the Aussie we are down -40 bps at 92 AUc. Against the euro we are -20 bps softer at 55.6 euro cents. That all means our TWI-5 starts today at 69.3, and -30 bps lower from yesterday.

The bitcoin price starts today at US$57,692 and up +0.9% from this time yesterday. Volatility over the past 24 hours has been moderate at just under +/- 2.2%.

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.