Two big central banks speak

Economy Watch

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 two big central banks have been active in their signaling over the past 24 hours.

First up today, as many expected the US Fed sent a clear signal that they are more open to a September rate cut. That first came from changed wording in their no-change statement that was more balanced between the two aspects of their mandate: inflation and jobs. Powell then confirmed a potential September rate cut at his press conference.

Because this was largely what was assumed in advance, there has been no major financial market reaction, but the reactions there were, were 'positive'.

The US dollar slipped marginally on the news, the S&P500 rose after already being up sharply. The benchmark UST 10yr fell -3 bps.

The US ADP jobs report came in lower than the expected +150,000 gain. It reported a gain of just +122,000 in July. This is the precursor report to the official non-farm payrolls report which is expected to show a +175,000 gain when it is reported on Saturday (NZT). The ADP Report slowing is consistent with the Fed's expectation that the labour market is not pushing undue labour market pressure on the US economy.

The Chicago PMI also came in very much as expected, also not putting upward pressure on inflation from the heartland factory sector.

And neither are American pending home sales. They may have risen in June from May, but they are still lower year-on-year.

However, mortgage applications are still shrinking, despite mortgage interest rates staying well below 7%.

The Bank of Japan actually has raised its official policy rate, and from 0.1% to 0.25% with a +15 bps hike late yesterday. They also said they will cut their bond buying activity. This has been seen as an aggressive move that signals the central bank's growing confidence in the recovery of the domestic economy and its concern about the sharply weaker yen.

The yen appreciated significantly. Equities rose. Their benchmark bond yields rose.

Taiwan's GDP expanded +5.1% real in Q2-2024, high, but less than the very high +6.6% rate in Q1-2024. Both were the best results since the pandemic recovery, and back to their long golden economic expansion between 1994 and 2008.

China's official July factory PMI fell slightly into a further contraction. Their official services PMI fell to a very minor expansion. Both were about what was expected, but neither is very promising.

In Europe, their Euro Area inflation rate unexpectedly edged up to 2.6% in July from 2.5% in June, when forecasts expected it would slow to 2.4%. The larger economies kept it elevated, the smaller ones generally reported lower rates.

In contrast, Russian inflation hit 8.6% and well higher than the +6.3% rise in retail sales. War inflation is eating them up, which is why their central bank recently raised its policy interest rate to 18%. And it is not going to help that Russia is having to double its 'bonuses' for fighting in their invasion army.

The Q2-2024 CPI in Australia rose to 3.8%, exactly as analysts expected. Their June month inflation indicator came in at the same 3.8%. Markets seem to have focused on the 'trimmed mean' quarter-on-quarter rate of +0.8% which was lower than expected - and concluded the RBA is likely to hold rates unchanged next week.

The UST 10yr yield is now at just on 4.10% and down another -4 bps from yesterday.

The price of gold will start today up another +US$20 from yesterday at US$2426/oz.

Oil prices are +US$3 higher at just over US$77.50/bbl in the US while the international Brent price is just over US$80.50/bbl. Rising Middle-East tensions are behind the move.

The Kiwi dollar starts today another +40 bps firmer at just on 59.4 USc. Against the Aussie we are almost +1c higher at 91.1 AUc. Against the euro we are up another +40 bps at 55 euro cents. That all means our TWI-5 starts today at 68.5 and up +40 bps from yesterday.

The bitcoin price starts today at US$66,595 and up +1.1% from this time yesterday. Volatility over the past 24 hours has been modest, at +/- 1.1%.

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.