Equities & bond yields fall in risk-off shift

Kia ora,

Welcome to Friday’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 global bond market is rallying (prices up, yields down) with traders now pricing in three US Fed rate cuts before the end of the year. There is a sudden risk-off mood appearing today.

We should remind ourselves that the Northern Hemisphere is well into its summer vacation season. Markets are relatively thin, and this is when changes can get amplified. "Silly season" news is usual fare (food scares, catastrophes, etc.) although this year it is rather dominated by the Olympics.

First up today, we should note that American initial jobless claims came in slightly higher than expected, +249,000 on a seasonally adjusted basis. This 'rise' attracted the headlines. But on an actual basis they were in fact lower at 215,000 and a decrease of -10,000 from the prior week. There are now 1.94 mln people on these benefits.

Their July job cut tally was unusually low at just over 25,000. However the same report suggested new hiring activity was low too.

Tomorrow's July non-farm payrolls report is still expected to reveal a +175,000 expansion.

Also low was the widely-watched ISM factory PMI for July. The extent of the retreat was more than expected, the sharpest contraction since November 2023. Shrinking new order levels was a key cause. Falling new orders were also a feature of the internationally-benchmarked S&P/Market PMI version although they do not see the American factory sector contracting. Both versions reported lower inflation pressures.

These reports have pushed Wall Street sharply lower today.

Globally, there were a number of factory PMIs released today. In Europe, the contraction was unchanged. In Japan, their marginal expansion slipped back into a marginal contraction in July. In India, their strong expansion continues but now features very frothy inflation.

South Korea they are holding a good expansion.

In Taiwan they are getting a good, sustained expansion. In China, it is back to [minor] contraction as new orders fall away.

And the fierceness of the housing falls in China was on full display again in July. The value of new homes sold by the top 100 developers fell -20% in July from a year ago. Sales fell -16% in June on the same basis. The declines in prior months were in the order of -30% to -40%.

In Europe, the English central bank cut its policy rate by -25 bps to 5%, as expected.

In Australia, some heat seems to be going out of some residential real estate markets. July prices actually fell in Melbourne, Hobart and Darwin, and were no-change in Canberra from June. That only leaves Perth Adelaide and Brisbane with rising prices. Sydney rose too but only a minor +0.3%.

And perhaps we should note that ANZ's purchase of Suncorp Bank, now finalised, has shifted ANZ ahead of NAB in market share of mortgages in Australia, no longer 'fourth'. It is a ray of 'good news' in the shadow of the bank's bond market manipulation scandal there.

Heat is also going out of the Australian factory sector with a spreading contraction in July. Output, new orders and employment are all retreating faster now.

However, the Aussie merchandise trade surplus rose in June to AU$5.5 bln. No surprises there. But interestingly there are stresses beneath the hood. They are seeing the falling global steel price hit some reasonably significant aspects of their terms of trade. Iron ores prices fell -9%, coal prices are down -13%. Gas prices are down -8%. Shipping more helped cushion the overall impact. And they were 'lucky' - the price of gold rose +12% offsetting some of the other falls.

Global container shipping freight rates eased an insignificant -1% last week, holding very high. The same causes are still in play. That is extending sailing time - and fattening shipping company profits. Bulk cargo rates fell -9% last week however.

The UST 10yr yield is now at just on 3.98% and down a sharp -12 bps from yesterday.

The price of gold will start today up another +US$9 from yesterday at US$2435/oz.

Oil prices are -US$1.50 lower at just over US$76/bbl in the US while the international Brent price is just over US$79.50/bbl.

The Kiwi dollar starts today another +10 bps firmer at just on 59.5 USc. Against the Aussie we are +40 bps higher at 91.5 AUc. Against the euro we are up another +20 bps at 55.2 euro cents. That all means our TWI-5 starts today at 68.7 and up +20 bps from yesterday.

The bitcoin price starts today at US$62,304 and down a very hard -6.4% from this time yesterday. Volatility over the past 24 hours has been high, at +/- 3.6%.

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 on Monday.