Central banks eye more rate hikes

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.

And today we lead with news central banks are not yet done raising rates to quell inflation.

But first up today we can report a satisfactory dairy auction. Prices rose +3.2% in USD at this morning’s event on an overall basis with +3.8% rise for the dominant WMP product. Butter rose +6.6% and cheddar cheese was up +2.3%. SMP dragged however, unchanged. In NZD, the gain was magnified by the lower exchange rate, up a full +5.0%. This will be a relief as it comes after four poor or weak results, and is in fact the best result since early September 2022.

In the US, the slow but steady slide in retail sales gains continues, with same-store sales up only +4.3% last week from a year ago, and probably not keeping up with inflation.

You can see the trade consequences in the Logistics Managers Index (LMI). Growth is increasing at an increasing rate for inventory levels, inventory costs, warehousing utilisation, warehousing prices, transportation capacity, and transportation utilisation. But warehousing capacity and transportation prices are contracting. None of these levels are a special problem yet, but they are going in a tougher direction.

The American December trade deficit in both goods and services came in about what was expected, which was slightly worse that the November result. Still these deficits are still quite small in relation to the size of their economy even if they are at record nominal levels and make headlines. That is, the -US$948 bln deficit is about -3.8% of GDP. For New Zealand that same level is -5.0% and we don't have the advantage of having a reserve currency.

The US Fed boss was among a set of officials out commenting on the strong US jobs report, essentially saying they have more work to do to rein in inflation even if the 'disinflation' process has started.

Average cash earnings in Japan jumped +4.8% in December from a year ago, rising at the fastest pace since January 1997 and increasing for the twelfth straight month. A surge in special payments during the period helped fuel this jump that has rarely been above +2% since 1997. So far this surge hasn't encouraged the Japanese to spend more; household spending fell -1.3% in December.

Yesterday the Reserve Bank of Australia lifted its cash rate another +25 bps to 3.35% and said it sees more hikes ahead. They said the path to achieving a soft landing for the Aussie economy remains narrow. Most observers are now planning of a 4% cash rate in Australia by mid-year. They were not prepared for such a hawkish RBA stance.

Meanwhile banks will raise their mortgage rates and because this market is essentially on floating rates, the increase will flow through immediately and the stories about mortgage pain will grow. To ease payment pain, NAB subsidiary U-Bank is now offering 35 year loans. First home buyer borrowing is now at a five year low in Australia.

Australia posted a +AU$12.2 bln trade surplus in December in goods and services, extending its recent strong run, but even at that elevated level it was their 'smallest' in four months. Still exports were up a massive +21.7% from the same month a year ago, and imports were up +10.8% on the same basis. All this means they ended 2022 with a massive +AU$138 bln trade surplus, or +5.8% of GDP, and +13% higher than in 2021. (In 2021 it was +5.5% of GDP.)

The UST 10yr yield starts today at 3.62% and down -3 bps from this time yesterday. 

The price of gold will open today at US$1876/oz and up +US$9 from this time yesterday.

And oil prices start today up +US$3 at US$77/bbl in the US. The international Brent price is now just over US$83/bbl.

The Kiwi dollar has recovered somewhat and is now at 63.2 USc and up almost +½c from this time yesterday. Against the Australian dollar however we are lower at 91.1 AUc. Against the euro we are firmer at 58.9 euro cents. That all means our TWI-5 starts today at 70.5 and unchanged from yesterday.

The bitcoin price is now at US$22,980 and very little-changed from this time yesterday. Volatility over the past 24 hours has been modest at +/- 1.0%.

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 will do this again tomorrow.