Markets now expecting rate cut signals

Kia ora,

Welcome to Wednesday’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.

And today we lead with news we are looking for signs inflation is actually easing and policy interest rates can be adjusted lower.

But first, at the overnight GDT dairy auction, prices rose a bit more than +3.3% from the prior event two weeks ago. That takes the price level back to where it was in October 2022 with a nice up-trend developing now. Overall prices are now +13% higher than a year ago. Volumes offered however are at a four year low. The key WMP price was up +2.9%, SMP was up +3.5% and butter up +5.1%. Interestingly, mozzarella was up almost +10% indicating rising foodservice demand. China is back with good demand for WMP and butter, but it is the Middle East where the rising cheese demand is coming from. However we should note that the recently rising NZD capped the overall price increase at +1.9%.

In the US Redbook retail sales indicator was up +5.5% last week from the same week a year ago, handily more than inflation so they are seeing real gains still.

Not only are retail appetites high and rising, American stock ownership levels are now back to levels last seen prior to the GFC.

At an event in Germany, the US Treasury Secretary Janet Yellen called out China, the UAE, and Türkey as the main evaders of the American and European sanctions on Russia over its invasion of Ukraine.

In Canada, their CPI inflation rate eased to 2.7% in April from 2.9% in the earlier month, in line with market expectations, and is now the softest rate of consumer price growth since March 2021. Their core inflation rate is down to 1.6%. This shift lower is what their central bank said would happen. Easing food prices (from a year ago) led the shifts. The chance of rate cuts there next month have risen. Their policy rate is currently at 5%.

In China, we are awaiting the data for April on foreign direct investment flows. It is unlikely to be very positive but it will give an updated position of where the 'de-risking' trend is at.

In Australia, the expanding labour force (up +2.5% in March from the same month in 2023) is behind a +7.1% rise in total labour compensation in March from the same month in 2023. That means in April 2024, total wage and salary compensation will have pushed on up above AU$100 bln in the calendar month.

Consumer sentiment in Australia, as tracked by the Westpac Melbourne Institute survey was virtually unchanged in May from April but at a low level still. It is a measure that has been in the doldrums for more than two years now; the last time it was 'positive' was in February 2022.

Join us at 2pm this afternoon when we will have full coverage of today's RBNZ Monetary Policy Review. No-one is expecting any rate change, but their outlook opinions will be very important. Financial markets currently have two OCR rate cuts pencilled in for 2024 and three in 2025 and the RBNZ assessments of where they stand in the battle against inflation could well adjust that pricing - and that in turn may have echoes in current wholesale money markets.

The UST 10yr yield is now at 4.42% and down -2 bps from this time yesterday. 

The price of gold will start today down -US$14 at US$2420/oz.

Oil prices are down another -50 USc at US$78.50/bbl in the US while the international Brent price is still just under US$83/bbl.

The Kiwi dollar starts today down another -20 bps from yesterday at just over 60.9 USc. Against the Aussie we are marginally softer at 91.4 AUc. Against the euro we are also softish at 56.2 euro cents. That all means our TWI-5 starts today just on 70.1, and down -10 bps from yesterday.

The bitcoin price starts today at US$69,683 and up +1.9% from this time yesterday. Volatility over the past 24 hours has been moderate again at +/- 2.7%.

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.