Fed shifts to one 2024 cut, four in 2025

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 US expansion rolls on, pushing back the timing of when interest rate normalisation will happen.

US CPI inflation came in lower than expected for May, slowing to 3.3%, the lowest in three months. In April it was 3.4% and forecasts for May were 3.4%. While this rise was lower than the past three months it is a higher rate than the October to February period. And it is above the Fed's target.

Then the US Federal Reserve kept the federal funds rate unchanged at the 5.25% to 5.5% range, as expected. Still, the Fed officials projected only one interest rate cut this year and four cuts in 2025, emphasising their intention to maintain higher borrowing costs for a longer period to get inflation back into range.

While all this was going on, US mortgage applications surged almost +16% in the first week of June, the sharpest weekly increase since January 2023. This is a rebound from the -5.2% drop in the last week of May and fully erases the slumps from the two prior weeks.

India's industrial production rose +5.0% in April from a year ago, little-changed from recent growth levels. The heady rises of late 2023 seem to be past them now with a more orderly expansion in play. India's passenger vehicle sales had been falling over the past few months after a heady rise and were only +4.3% higher in May than a year ago.

India's CPI inflation eased to 4.7% in may from 4.6% in April. But food price inflation hardly changed at 8.7%, a worrying sign for them.

China's CPI rate slipped -0.1% in May from April, to be just +0.3% higher than a year ago. Observers were expecting a stronger price gain than that, although not by much more. Low demand seems to be keeping prices close to deflation again. Beef prices were particularly soft, down -3.6% in the month to be almost -13% lower than a year ago. Lamb prices were down -1.2% in May from April, down -7.5% in a year. These are far softer than overall food price changes (-1.0%) for the year). Milk prices were unchanged in May, down -1.7% for the year. Meanwhile, producer prices are still languishing in deflation, but less so. They were down -2.5% in April from a year ago, easing to -1.4% in May.

Meanwhile, Japanese producer price inflation is rising, up +2.4% in May from a year ago, a nine month high.

The Bank of Japan is about to consider gradually reducing its Japanese government bond holdings, taking a step toward normalising not just interest rates, but the quantitative side as well. They are in the middle of a sea-change shift in monetary policy.

The EU has decided to hit EV imports from China with new anti-dumping tariffs taking them to almost 50% for some models. The concerns about the impact of Chinese "over-capacity" are spreading globally now. As you might expect, China isn't happy with this move.

The UST 10yr yield is now at 4.30% and down -10 bps from yesterday. 

The price of gold will start today up +US$16 from yesterday at US$2329/oz.

Oil prices are up +50 USc at US$78/bbl in the US while the international Brent price is just over US$82/bbl. However whether they will remain up at these levels seems uncertain. The world faces a ‘staggering’ oil glut by end of decade, the IEA warned overnight.

The Kiwi dollar starts today +½c firmer at just over 61.9 USc and jerked around by the two big US forces. Against the Aussie we are slightly softer at 92.8 AUc. Against the euro we are little-changed at 57.3 euro cents. That all means our TWI-5 starts today at 71.2, and up another net +20 bps from yesterday.

The bitcoin price starts today at US$69,157 and a bounce-back of +3.6% from this time yesterday. Volatility over the past 24 hours has still been moderate at just on +/- 2.4%.

You can find links to the articles mentioned today in our show notes.

You can get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston. And we will do this again tomorrow.