Fed doubles down, markets yawn at first, then react

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 global economy is still adjusting to inflation, war, the pandemic and supply-chain issues.

First up, the US Fed raised its policy rates by +75 bps to 2.5%, unanimously, very much as expected, and for a second month in a row. While they acknowledged spending and output data had softened recently, they also said further rate rises are likely. Their commitment to clamping down on inflation is sort of being ignored by markets.

Markets handled this announcement with a surge in equities, a fall in bond yields, and a fall in the USD after the press conference remarks.

Meanwhile, US durable goods orders rose much more than expected in June from May and are now almost +12% higher than year-ago levels. Capital goods orders are up almost 7.5%.

And updated data out for inventories showing them rising in both the wholesale and retail sectors are at a pace that isn't worrying yet, but is probably not sustainable all the same, because they are up about a quarter from the same month a year ago, which was an unusual low point.

The American merchandise trade balance slipped a bit in June from May, but remains elevated, consistent with expanding demand and activity.

But their residential housing market is in trouble, with pending home sales falling sharply in June. They were down -8.6% nationwide from May as escalating mortgage rates and housing prices impacted potential buyers. That is -20% below year ago levels as activity in these markets shudders.

US mortgage applications fell again last week, the fourth consecutive retreat and the eighth in the past 12. Also falling were mortgage interest rates but that doesn't seem to be helping.

In Shanghai, significant parts of the city are back in lockdown as Covid cases spread fast. Drivers and delivery personal, as well as ‘closed-loop’ quarantine staff, have been spreading the pandemic across the city, officials say. It’s an ominous sign for the Chinese end of supply chains. Shanghai isn't the only center grappling with these pressures.

In Europe, they are learning how to cope with a fast shutoff of gas from Russia, more variable daily now. The squeeze is on. And German consumer sentiment is taking a hit from all this uncertainty, especially as it drives inflation.

In Australia, their June CPI data came in at 6.1% year-on-year and just below analysts’ expectations of +6.2%. But that was up from +5.1% at March. It was also their highest level in more than 20 years (and the 20-yr-ago peak was when they introduced GST). Apart from that, it is their highest since 1990. Perhaps signaling that this could be their new peak, the Q-on-Q rate slipped from +2.1% in March to +1.8% in June. But this probably locks in another +50 bps hike on Tuesday, August 2, by the RBA. For perspective the New Zealand June CPI rose +7.3%, the US was up +9.1% and Japan was up +2.4% for the same annual period. Canada's CPI rose +8.1%. All these comparables make the Aussie rise seem moderate - even if they don't think so.

The UST 10yr yield started today at 2.77% and down -2 bps from this time yesterday. Then after the Fed press conference it slid further, down another -4 bps. 

Wall Street had opened its Wednesday session unruffled by the Fed and up +1.5% trade before the chairman's press conference. But after that it surged, now up +2.5%. 

The price of gold will open today at US$1721/oz in New York which is up +US$3 from this time yesterday.

And oil prices are +US$1.50 firmer today at just over US$96.50/bbl in the US, while the international Brent price is now at just over US$101.50/bbl.

The Kiwi dollar opened today little-changed from this time yesterday at 62.2 USc. Then after Powell's remarks it rose to 62.6 USc. Against the Australian dollar we are also softer at 89.6 AUc. Against the euro we are also softer at 61.3 euro cents. That all means our TWI-5 starts today at 71 and little-changed.

The bitcoin price has risen from this time yesterday, it has make back +3.5% to US$21,667. Volatility over the past 24 hours has been moderate at just over +/-2.2%.

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.