Faster rate moves and a higher peak coming from the US Fed

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 markets have been moved by US Federal Reserve chairman Powell's testimony to Congress and it was a bit more hawkish than markets were expecting. The 2-10 US bond yield curve hit -100 bps for the first time since 1981.

But first, the overnight dairy auction was a lame affair. Overall prices were down -0.7% in USD terms but given the shift lower in our currency they were up +0.7% in NZD terms. The WMP price was confirmed from the Pulse event the prior week, but the cheddar price took a very heavy drubbing, down more than -10%. Butter was essentially unchanged. None of the components lifted in the expected way, so this event has been a disappointment. Overall, this result isn't going to change any forecasts on its own, but it does expose the early February rise as an outlier, and there have been 18 event declines in the past year (of 26 events) and prices are now a third lower than where they were a year ago.

In Washington DC, Powell told the US Congress the Fed is prepared to increase the pace of rate hikes, because the data shows a stronger American economy that has been unresponsive to the rate hikes so far. He signaled that rate hikes will probably go higher than they have previously indicated.

While he was speaking, the retail data for last week came in and it was unusually weak, up only +3% from year-ago levels on a same-store basis and far less than inflation. In fact, it was the weakest rise since late 2021.

Perhaps reflecting the lower mood, the US logistics LMI eased back a bit in February, still expanding, but not by as much.

Across the Pacific, Chinese exports fell sharply, down -6.8% from year-ago levels in February. But this was less than the January fall of -9.9% and also less than anticipated (-9.4%). But despite 'beating estimates' it is a grim reminder of the global pullback in trade. Chinese imports fell a stunning -10.2% and much more than expected or in January.

Taiwanese February exports fell -17% and imports were down -9.4%, also reflecting the grim state of world trade.

Taiwanese inflation is now turning to deflation as the drop in trade pressures their economy. Year-on-year is is down to 2.4%. But consumer inflation rose very modestly in February from January, and producer prices actually fell on the same basis.

Back in China, the National People's Congress underway in Beijing is about to put public security, financial regulation and technology, all areas now handled by the state, under direct Communist Party control. It is raising their authoritarianism to a new level, making them more like North Korea in fact. Xi's grip is tightening. International firms are moving out of China and disengaging their supply chains.

In Europe, Germany factory orders were expected to all about -1% in January from December, but in fact they rose +1% to be up almost +11% from year-ago levels. To be fair much of this will be 'inflation' but not all, so they are facing a good future prospect in factory activity there.

Australian exports rose marginally in January from December which was an improvement over the prior month's slip. But imports rose much more, which shrank their enormous trade surplus somewhat.

But the key Aussie news was the RBA's +25 bps rate hike and the hawkish commentary from them. Some interpreted the Statement to suggest they are nearing the end of these hikes, but that is a wishful interpretation.

The weakening of global trade is also evidenced by the January air cargo data. The 2022 impetus has leaked away starting 2023 in a worrying trend.

The UST 10yr yield starts today at 3.96% and a net -2 bps lower from yesterday. 

The price of gold will open today at US$1821/oz and down -US$30 since yesterday.

And oil prices start today down -US$2 at just under US$78/bbl in the US. The international Brent price is down a bit more and is now just over US$83.50/bbl.

The Kiwi dollar is down -½c again, now at 61.3 USc and dragged lower by the AUD. Against the Aussie we are up a full +1c at 92.9 AUc. Against the euro we are little-changed at 58 euro cents. That leaves the TWI-5 at 70.2 and also little-changed from yesterday.

The bitcoin price is little-changed again from this time yesterday, now at US$22,298 and a -1% slip. And volatility over the past 24 hours has been modest at +/-1.4%.

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.