US Fed hints at smaller future rate hikes

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 is all about the US Fed.

As expected, the US Fed has raised its policy rate by +75 bps to 4%. It is their sixth consecutive rate hike and the fourth straight +75 bps increase, pushing borrowing costs to a new high since 2008. The odds are currently divided between another +75 bps hike at their December 15 meeting, or a lesser +50 bps rise then, although today's statement tips the chances to the +50 bps end.

Recent economic data has been pointing to an impressively resilient economy although some signs of a slowdown are starting to emerge especially in their housing market. And of course, their inflation is sticky and close to a 40-year high. Of course, this is what the new high official interest rates are designed to bring down. Remember, they have an inflation target of 2%. But the overall resilience, especially in their labour market, is making that a tough task and there is scant evidence yet that these early sharp rate hikes are making a material difference, especially to inflation expectations.

Still, the Fed suggested it is coming to the end of its series of sharp hikes.

American mortgage applications fell again last week although not be as much as previously. And American mortgage interest rates also fell slightly, which wasn't expected. But they are still more than double the level of a year ago. Not falling are car loan interest rates, and they are now at their highest since the GFC and touching 6.3%.

The pre-cursor employment report from ADP which focuses on the private sector only delivered a marginally better result for October than expected. They reported a gain of +239,000 jobs last month, the most in three months, and compared to market forecasts of +195,000. However, hiring was not broad-based with the services-providing sector creating +247,000 jobs. On the other hand, jobs were lost in IT; professional and financial activities; education and health. Also the manufacturing sector shed -20,000 which is consistent with the tamer regional factory surveys we have been reporting recently. Analysts expect non-farm payrolls to rise +200,000 in October when they are reported on Saturday NZT.

Despite their extreme inflation stress, the number of German in paid work hit a new high in September at 45.6 mln. However, their labour market expansion is slowing somewhat. Their jobless rate stayed unchanged at 5.5%.

Just days after Russia suspended support for Ukrainian grain exports through the Black Sea, it has agreed with Turkey to restart its participation in the agreement. Wheat prices fell back on the news.

In Australia, residential building consent levels fell almost -6% in September from August, and are down -13% from a year ago. Meanwhile, lending for housing fell more than -8% in September from August and is down more than -18% year-on-year. Lending for commercial construction is down -33%. But non-residential building consents rose +3.7% in September and are down less than -2% year-on-year.

And the price of iron ore just keeps on falling as Chinese demand reduces further. Coal prices are no longer rising (although they aren't falling either). Chinese steel mills are highlighting weak demand, especially from their property sector.

The UST 10yr yield started today little-changed at 4.04%. But after the Fed announcement it fell to under 4%. 

The price of gold will open today at US$1648/oz. This is up +US$3 from this time yesterday.

And oil prices start today little-changed from this time yesterday at just over US$89/bbl in the US while the international Brent price is just under US$96/bbl.

The Kiwi dollar will open today at 58.6 USc and up a little since yesterday and a new six week high. But after the US Fed it has risen to 59.2 USc. Against the Australian dollar we are unchanged at 91.5 AUc and our highest since April. Against the euro we are up slightly at 59.5 euro cents. That all means our TWI-5 starts today at 69.5 and up +40 bps since yesterday.

The bitcoin price is now at US$20,533 and up a mere +0.4% from this time yesterday. Volatility over the past 24 hours has also been low at just on +/- 0.5%.

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.