Scorching inflation hits 40 year high in the US

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 that it is all about inflation and its pressure on central banks.

First up today, the headline American CPI inflation rate rose sharply in June by +9.1% and well above the expected +8.8%. That's their largest rise since 1981. But their core inflation rate actually fell to 5.9% in June from 6.0% in May. That shows that most of the inflation pressure is coming from petrol (+60% year-on-year) and food (+10%). The May to June food price rises were less than the prior month. So really, its an energy story.

In the US, food makes up 13.4% of their index, and fuel 7.3% (3.5% for household use, and 3.8% for petrol). For New Zealand, food makes up 18.5% of our index, while fuels 7.5% (4.0% for household use, and 3.5% for petrol). We tax ourselves a lot more for petrol, so their change just seems a very big increase, not that they are actually spending more than us. The New Zealand CPI data for the June quarter is due out on Monday, and analysts expect ours to rise from 6.9%. Actual forecasts aren't released yet but they will undoubtedly be above 7%.

But with the headline rate so high, that does to seem to open the door to a full +1.0% rate hike when they meet next to review rates on Thursday, July 28 NZT.

The latest US Fed Beige Book reports an economy ticking over at a good level, but with signs of a coming slowdown. Most Districts reported that consumer spending moderated as higher food and petrol prices reduced households' discretionary income. Due to continued low inventory levels, new car sales remained sluggish.

As we have noted in previous months, the US Government deficit is being repaired fast. In the past 12 months, it is now down to just over -US$1 tln in the year to June (-4.1% of GDP), and a far cry from the -US2.8 tln deficit in the year to September 2021 (-12.3% of GDP). By any measure that is an impressively fast repair. The monthly deficit in June 2022 was less than half the June 2021 level. Spending is down -US$900 bln while tax receipts from a healthy economy are up almost +US$800 bln for the year to June.

There was another US Treasury bond auction, well supported, this one for their 30 year maturity. The median yield today was 3.05%, down from 3.11% at the prior equivalent event 5 weeks ago.

We have noted it before, but keep an eye on the energy crisis in Texas. Blackouts seem close now.

The Canadian central bank surprised markets earlier today and took the plunge with a full +1.0% rate hike, taking their policy rate to 2.50%. Most analysts had expected an outsized +75% bps jump, but their central bank Canuks surprised them still. Canada's inflation rate is running at 7.7%. It’s a rate change than makes yesterday's RBNZ hike look small by comparison.

Meanwhile, the IMF is warning G20 treasurers to tighten their budgets and their central banks to push up interest rates to prevent high inflation from becoming entrenched.

China reported a fatter trade surplus in June as exports rose almost +18% year-on-year, the most in five months as logistics constraints eased, especially in the Shanghai region and a catch-up in delays were eased. Meanwhile imports grew barely, up just +1% and far less than the almost +4% rise expected, suggesting this June surge is really just a one-off. Still the June +US$98 bln surplus was impressive.

In the Chinese property sector the stresses just go on and on. Buyers involved in 35 projects across 22 cities have decided to stop paying mortgages as of last week due to project delays and a drop in real estate prices. Others say it could be what is happening in up to 100 projects. This will sharply raise the bad debt risks for the exposed banks. On top of the regional bank run we have noted over the past few days, calls are out to address a 'crisis of confidence' in China's banks, banking system, and what might be unexpected corruption among banking managers. Their stumbling economy is putting huge pressure on regional banks, it seems.

The RBNZ and the Bank of Canada weren't the only central bank to raise rates yesterday in the face of the threat inflation poses. The Bank of Korea raised its base rate, also by +50 bps to 2.25%, the largest increase since the bank adopted interest rates as its primary policy tool in 1999, as it stepped up its battle against inflation now running at a 23-year high. The move followed five previous +25 bps hikes, and was the rate markets expected.

In Australia, ANZ has confirmed it is in talks to buy SME accounting software company MYOB from private equity giant KKR, but says an agreement is yet to be reached.

The UST 10yr yield starts today down at 2.91% and another -4 bps slip from yesterday. 

The price of gold will open today at US$1740/oz which is +US$14 higher than this time yesterday.

And oil prices are little-changed at just over US$94/bbl in the US, while the international Brent price is just under US$98/bbl.

The Kiwi dollar will open today a little firmer from this time yesterday at 61.6 USc. Against the Australian dollar we are still at 90.6 AUc. Against the euro we are little-changed at 61 euro cents. That means our TWI-5 starts today at just on 70.6 and a minor firming.

The bitcoin price returned to almost at the same level as this time yesterday at US$19,873. Volatility over the past 24 hours however has been high at +/-3.0%.

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.