It's all about the Fed

Kia ora,

Welcome to Tuesday’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 all laser-focused on the US Fed today.

In the waiting period before the US Fed policy announcement on Thursday (NZT), the US dollar is edging higher, and hovering at a 20-year high. This is a distortion that is having global impacts. 

The UST bond yield benchmarks are also pushing higher, at 11 year highs. But equities are little-changed, waiting nervously to see if they have priced in the Fed's expected rise properly. At this point, the expectation is for a +75 bps hike taking the US Fed funds rate up to 3.25%. Markets have priced in +80 bps now, and expect their benchmark rate to max out at 4.5% in mid-2023. That means they expect another +125 bps over the next nine months, indicating they think most of the work has been done and after this week’s rise it will be mopping up operations from the Fed. Still, the last time the US Fed funds rate was at 4.5% was in 2008.

There was a small fall in homebuilder sentiment in the US in September, but it is the ninth in a row for this sector. This is a sector on the front lines of any looming recession.

Canada has reported that its August producer prices fell, making it three consecutive month-on-month falls in a row and taking the annual rise back to +10.6%. Recall the annual rise was over +18% in March so the recent declines are gathering pace. The falling cost of raw materials is a feature of this reversal.

But from the Fed's point of view, inflation is still stalking their economy. US retail petrol prices might be -6.2% lower now than a month ago, but they are still +15% higher than year-ago levels. That's a big improvement, but probably not enough.

Of more concern for policymakers is that inflation is embedding itself in wider sections of their economy, and the risk of wage-push inflation remains high.

China has reported a good inflow of foreign direct investment in August, +US$14.5 bln and +11% more than the same month a year ago. In a longer perspective however, this level is only equivalent to a +5% rise pa from 2018. Good but not special.

It has now been two months since many Chinese homebuyers stopped repaying mortgages to protest stalled construction on their properties. A lack of progress at more sites now threatens to intensify the boycott, despite assurances from authorities.

Later today Japan will reveal its August CPI rate. It was 2.6% in July, 2.4% for its 'core rate'. Markets expect that core rate to rise to 2.7% in August. The Bank of Japan has maintained its ultra-loose monetary policy for a very long time now, and eyes are on whether these sort of rates will be enough to induce any sort of change.

The UST 10yr yield starts today at 3.49% and up +3 bps from this time yesterday. That is touching an 11-year high. 

The price of gold will open today at US$1671/oz. This is -US$5 below where it was this time yesterday.

And oil prices start today little-changed from yesterday at just over US$85/bbl in the US while the international Brent price is still just under US$91/bbl.

The Kiwi dollar will open today at just on 59.6 USc and almost -½c lower than this time yesterday. Against the Australian dollar we are also -½c lower at 88.7 AUc. Against the euro we are down likewise to 59.4 euro cents. That all means our TWI-5 starts today at 69.2, down -40 bps and a two year low.

The bitcoin price is now at US$18,987 and -3.5% lower than this time yesterday. Volatility over the past 24 hours has been very high at just on +/- 4.0%.

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’ll do this again tomorrow.