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 NZD has leaped, and an aggressive risk appetite is back in favour on equity markets, as the perception grows that the global inflation surge is past its peak and will ease from here. But so far, the bond market isn't so sure and seems to be sitting this one out.

Triggering the sudden mood change was an unexpected easing in the American CPI inflation rate.

Analysts had expected the American headline inflation rate to ease from 9.7% in June to 8.7% in July. But it actually came in under that, at 8.5%. This was largely because petrol prices have retreated more than expected. But food prices haven't shown the same retreat. So their 'core' inflation rate (headline, less food and energy) is unchanged at 5.9% year-on-year.

Equity markets like this news because it might mean the US Fed will take its foot off the rate-rising accelerator sooner. That does seem unlikely any time soon, however.

But in a building worry, American wholesale inventories keep on rising, up by +US$182 bln in the year to June, which is a +25% surge. But to be fair, sales have risen sharply too on a nominal basis (+20%), so the inventory-to-sales ratio, while higher, isn't yet out of range.

US mortgage applications rose marginally last week because there was a +3.5% jump in refinancing, offset by a -1.4% fall in those wanting to buy a home. Meanwhile, the average rate on a 30-year fixed-rate mortgage increased 4 bps to 5.47%.

We have noted it before, but the spectacular budget repair by the US Government has extended into July, although slowing somewhat. In July 2021 they had a -US$302 bln deficit. This July it was -US$211 bln, a 30% improvement.

Also helping the mood in financial markets was a short statement from the Chinese military saying they have completed their exercises around Taiwan.

China's annual inflation rate rose to 2.7% in July from 2.5% in June, but this was below market forecasts of 2.9% for July. Even so, this was the fastest rise in consumer prices there since July 2020, mainly due to a surge in food prices with cost of pork bouncing back sharply. Beef prices held, but sheep meat prices fell sharply. Milk prices are stable.

Meanwhile, China's producer price inflation eased to a 17-month low of 4.2% in July, an easing from 6.1% in June and less than market consensus of 4.8% for July. The latest figure represented the 19th straight month of slowing producer price rises, from a drop in raw material costs as construction activity slowed.

Germany confirmed its July CPI inflation rate and it held at 7.5%, 8.5% on an EU harmonised basis. Given the Russian energy threats, this is actually a very creditable outcome for them.

The EU’s ban on Russian coal that begins very soon will boost their demand for imports from other countries like Indonesia and Australia. Coal prices are at historic highs.

And shipping costs for mid-size oil tankers from the US Gulf to Europe are near the highest levels since early in the pandemic as energy flows change rapidly.

In Australia, they are preparing for a record winter grain harvest. This comes at a lucky time for them as international demand is rising just as international supply is constrained because of war and drought.

The UST 10yr yield starts today at 2.78% and -2 bps lower than this time yesterday. 

Wall Street is up in its Wednesday trade with the S&P500 up a strong +2.0% from this time yesterday. 

The price of gold will open today at US$1796/oz which is up another +US$2/oz from this time yesterday.

And oil prices start up +US$1.50bbl from this time yesterday at just over US$91.50/bbl in the US, while the international Brent price is now just under US$97.50/bbl.

The Kiwi dollar will open today at 64.3 USc which is an overnight jump of +1½c from this time yesterday. Against the Australian dollar we are up +¼c at 90.6 AUc. Against the euro we are +¾c higher at 62.3 euro cents. That all means our TWI-5 starts today at just on 72.3, up +110 bps and now well above the tight range we have been in for the past month - in fact, our highest in more than three months.

The bitcoin price has moved up from this time yesterday, up +3.9% to US$23,929. Volatility over the past 24 hours has been high at just over +/-3.3%.

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.