Aussie inflation rocks Kiwi rates

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 our wholesale rate markets are being roiled by Aussie inflation data.

But first in the US, orders for durable goods declined -0.4% in September from August, following a downwardly revised rise in August. But analysts had expected a much larger -1.1% drop due to ongoing supply chain disruptions. The September data is the first decline in five months. But we should also note that the September data is more than +14% higher than the same month in 2020. New orders for capital goods jumped +26% on the same basis.

Meanwhile, the US merchandise trade deficit topped -US$100 bln in September, its largest ever. Exports rose +17% year-on-year while imports rose +18%.

On Wall Street, tech firms including Google and Microsoft, are reporting record earnings.

The Canadian central bank had a rate review overnight and left its policy rate unchanged at 0.25%. But at the same time, they ended their QE program - no more new money printing for them. However they didn't go so far to signal when they might start draining the built-up reservoir of pumped-in liquidity. They added about C$350 bln on Canadian government bonds to their balance sheet over this QE program in about 18 months, or about 20% of annual GDP.

In September, industrial profits at Chinese industrial enterprises rose +16.3% from the same month a year ago, growing much faster than their revenue gains of just under +10%. They seem to have taken advantage of soaring material prices and persistent supply bottlenecks to raise margins. (Official data is opaque because they only release it on a year-to-date basis.)

And in a move many didn't see coming, China's authorities essentially instructed their businesses to ensure they pay their offshore debts on time, and give early warnings if they suspect they can't.

In Europe, import prices German companies paid jumped almost +18% in September from a year ago, the steepest price increase since August of 1981. But most of the rise was for energy and is off a low base. Still these costs will flow through the German industrial community and into final goods.

In Australia, their headline inflation rates dipped to 3.0% in September, down from 3.8% in June. This was an expected reversal, but the effect was more than they anticipated (3.1%). The more technical RBA Trimmed Mean CPI however actually rose by +2.1% year-on-year in Q3, the most since Q4 2015, after a 1.6% rise in Q2. And one large supermarket chain in Australia, Woolworths, says it is facing fierce cost rises. And that comes at a time more Australians are eating out after lockdown, rolling back their recent high volumes.

These rises put the RBA's bond market targeting in a tough spot. Markets now think the RBA may have to raise its policy rates faster and earlier than they had previously signaled. And bets along those lines will make it increasingly expensive for the central bank to defend its 0.1% three year yield target.

Rents are rising fast in Australia, rising almost +9% over the past year and the highest gains since 2008.

The UST 10yr yield opens today down a very sharp -9 bps to 1.53%. 

The price of gold is having a minor rise today, up +US$15 to US$1795/oz.

And oil prices are down by more than -US$2 to just under US$82.50/bbl in the US, while the international Brent price is now just over US$83.50/bbl.

The Kiwi dollar opens today firmer at 71.8 US. Against the Australian dollar we are little-changed at 95.5 AUc. Against the euro we are a fraction firmer at 61.9 euro cents. That means our TWI-5 starts today at just on 75.3, still well over the top of the 72-74 range of the past eleven months, and possibly now resetting this range.

The bitcoin price has dropped by -5.0% since this time yesterday, and now at US$58,909. Volatility over the past 24 hours has been high at just over +/-3.8%.

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.