US Fed dials back QE

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 Chinese consumers are wary of what lies ahead in a possible Delta winter, and household preparations are distorting their retail economy.

But first, at their latest review, the US Federal Reserve has announced the start of its tapering program this month. It said that it is reducing the monthly pace of its net asset purchases by -US$10 bln for Treasury securities and -$5 bln for agency mortgage-backed securities. These are modest reductions in their bond buying, but the plan is to end it by June 2022, a key step toward withdrawing pandemic-driven economic support amid a recent inflation surge. Overall, this is generally as expected.

The October US non-farm payrolls report is due on Saturday (NZT) and a gain of +450,000 is expected following the very we4ak September result. Today the precursor ADP Employment report surprised on the upside, showing a rise of +571,000 on top of their September +523,000. In October, every sector they monitor reported good gains.

If the jobs report comes in as expected, that will be a good result given that their September factory order data was a very modest improvement over August. But at least it was +14% higher than for September 2020 and +7% over September 2019 pre-pandemic levels.

The more current services sector activity indexes for October were very strong however. The widely-watched ISM one positively glowed at an all-time high and noting that "demand shows no sign of slowing". The internationally-benchmarked Markit one was positive too noting "a steep upturn", just not a record high for them.

The rise of air cargo activity in the US tells the same strong story. But activity in this sector is not impressive in the Asia/Pacific region. And there is little recovery in international passenger air travel, and again the Asia Pacific region remains the hardest hit. But with a children's vaccine now being rolled out in the US, vacation bookings are up steeply in the US.

None of this will be helped by a growing pandemic spread in China, now it’s largest since Wuhan. Nineteen of 31 Chinese provinces have restrictions of some sort, many of them severe.

And people there are worried, especially as winter is approaching. Household "stocking up" is a growing distortion in China's retail trade, so much so the authorities issued a warning to local authorities to take action to prevent hording staples. Along with this alarm, some major food suppliers are hiking prices sharply. Their stress has all the potential to distort global food supplies and prices.

In Australia, residential building permits fell by a more than expected -4.3% in September from August, driven by a fall in house approvals in all states, and a fall in unit approvals in all states other than NSW where they had a surprising bounce.

The UST 10yr yield opens today at 1.59% and up +5 bps overnight with most of the rise coming after the Fed tapering decision.

The price of gold will start today at US$1766/oz and down a rather sharp -US$22 from this time yesterday. Silver fell similarly. US tapering brought little reaction.

And oil prices are a very sharp -US$2.50 lower at just on US$80.50/bbl in the US, while the international Brent price is now at US$82/bbl. 

The Kiwi dollar opens today recovering about +30 bps to just under 71.4 US. The Fed tapering decision hasn't really moved currency markets yet. Against the Australian dollar we are +60 bps firmer at 96.2 AUc. Against the euro we are also up at 61.6 euro cents. That means our TWI-5 starts today +40 bps higher than at this yesterday at just under 75.1, and still well over the top of the 72-74 range of the past eleven months.

The bitcoin price has fallen -2.7% since this time yesterday, and now at US$62,076. Volatility over the past 24 hours has been modest at just over +/-1.7%.

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.