Benchmark rates fall in anticipation of inflation control gains

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.

And today we lead with news the US Fed says it needs to see more progress on inflation before it considers a rate cut. But they hinted that a cut could be coming later this year. That was enough to see markets worldwide start pricing that in. Benchmark interest rates retreated everywhere.

But first in the US, there was actually quite a jump in mortgage applications last week after the prior week's unusual fall. And this latest week more than made up for that prior retreat. That came despite the benchmark 30 year mortgage interest rate staying up above 7%.

In its precursor reports, ADP said private businesses in the US hired an extra +140,000 workers in February, following an upwardly revised +111,000 in January, but slightly below forecasts of +150,000. Services companies were responsible for +110,000 of those extra jobs, while goods producers added +30,000.

Meanwhile, the number of job openings went down by -26,000 from the previous month to 8.863 mln in January, the lowest in three months and below the market consensus of 8.9 mln. Still, this data lags current conditions in a way the jobs reports don't.

These American labour market updates came ahead of Saturday's (NZT) February non-farm payrolls report which is currently expected to deliver a +200,000 increase on top of the very strong +353,000 January rise.

It would be appropriate to start reducing the Fed funds rate at some point this year, but only when there is greater confidence that inflation is sustainably moving towards the 2% target, Federal Reserve boss Powell said in his semiannual Monetary Policy Report to Congress. “Reducing policy restraint too soon or too much could result in a reversal of progress we have seen in inflation and ultimately require even tighter policy to get inflation back to 2%,” he noted. But markets moved past that caution almost instantly, with benchmark rates falling, equity prices rising, and the US dollar easing.

The Fed releases its February Beige Book survey results at 8am NZT and if there is anything notable in that we will update this item.

North of the border, the Bank of Canada delivered the expected no-change rate decision, holding its policy rate at 5% and saying it is in no hurry to cut.

We should perhaps note that the South Korean inflation rate ticked up above 3% again in February. They are having "last mile" problems too.

China has appointed a known hard-man to head its Securities Regulatory Commission who is determined to stamp out unwanted behaviours. Traders are going to have to be very careful they adopt the Party narrative in their trading actions. Only 'up' is now likely to be tolerated.

India says it is looking at a growth rate this year of about +8%.

Perhaps surprising some, the volume (ie real) of retail sales in the EU rose in January from December. But they are still lower than year-ago levels.

Readers of this column will recall us suggesting the the good Australian current account data was likely enough to ensure a good Q4-2023 growth outcome for economic activity (GDP) in Australia. Well that was a misplaced reading. The GDP data today disappointed many, with real economic activity up just +0.2% in the quarter, up +1.5% over the year. Clearly, the contribution from households was lower than expected amid budget and rate pain. And without that strong current account data they may have had to book a contraction.

The global airline industry is claiming that the passenger travel market was nearly fully recovered from the 2020 pandemic in January with 'resilient' growth in both domestic and especially international travel volumes.

The UST 10yr yield starts today at 4.09% and down -6 bps from yesterday. 

The price of gold will start today up +US$19/oz at US$2145/oz and another new record high.

Oil prices are up +US$1.50 at just on US$79.50/bbl in the US while the international Brent price is now just under US$83.50/bbl.

The Kiwi dollar starts today at just on 61.4 USc and an overnight gain of +½c. Against the Aussie we are down -¼c at 93.3 AUc as the Aussie rose more. Against the euro we have risen to 56.3 euro cents. That all means our TWI-5 starts today at just on 70.4 and up +20 bps.

The bitcoin price starts today at US$66,709 and up almost +2.0% from this time yesterday. Volatility over the past 24 hours has been extreme at +/- 6.6%.

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 tomorrow.