Bond yields rise as rate cut bets fade

Kia ora,

Welcome to Monday’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 investors are much less sure rate cuts will come in 2024.

This week, given that American jobs growth remained strong in March, all eyes will now turn to their inflation data with CPI due out on Thursday. That is expected to show inflation rising there slightly to 3.5%, but core inflation easing slightly to 3.7%. And variations will likely colour market responses. The Americans will also release PPI data this week, along with consumer sentiment survey results for April.

Of course this week our own RBNZ reviews its OCR. And they will be joined by Canada and the EU. Australia will release its NAB business sentiment survey results, along with the Westpac consumer sentiments survey results, both tomorrow (Tuesday).

China will release its CPI and PPI data along with new lending data for March, also both on Thursday.

Over the weekend China released its March FX reserves level and it was little-changed as it has been over the prior three months.

In the US, their economy added many more jobs than expected. Analysts were thinking the expansion would be +200,000 in March from February, but in the end the headline seasonally adjusted gain was +303,000. On an actual, unadjusted basis the gain on employer payrolls was +659,000. The wider household survey saw an even larger rise of more than +1.04 mln in the month to 161.4 mln people employed both on employer payrolls and the self-employed. Adding more than +1 mln paid jobs in a month is very expansionary. Guessing here, but strong immigration (both legal and illegal) is helping fuel the expansion.

Average weekly pay rose +4.1%, bolstering this strength although that was slightly lower than the +4.3% rise to February. In any case it is more than inflation and it shows that even after absorbing the migrant flow it remains 'real'.

Today investors are looking past the fact that the Fed may delay rate cuts, realising the American economy is in much better shape than they have assumed, and equity prices are rising, even though bond yields are rising too.

The US$5 tln US consumer debt market has been expanding marginally recently although it did show a faster than usual rise in January. The February data out today shows a slower rise and one less than expected. This market indebtedness level runs at 17.8% of US GDP, very much higher than the New Zealand equivalent which is only 3.7% of our GDP.

Unfortunately, Canada's labour market isn't showing the same robust expansion in March as the US has, essentially marking time with little change after February's good gains.

Australian retail sales are rising but slower than their inflation rate. They were up +1.6% in February from a year ago. But in that same time their inflation indicator rose 3.4%. Any way you look at it, that is a volume drop.

The Australian goods trade surplus halved in February from the same month a year ago. It came in at a +AU$6.5 bln surplus, down from +AU$12.9 bln in February 2023. The reasons is the combination of falling exports (-2.4%), and import growth staying high (+17.1%). Of particular note is that both rural and non-rural exports fell more than -3%, but that gold exports were up +25% on that basis.

An updated KPMG/University of Sydney report shows that China is sharply reducing its investments in Australia in favour of other Belt & Road states - in fact investing in B&R partners so it can wind down exposure to Australia. A prime example is in nickel mining where China has invested in cheaper (and 'dirtier') nickel mining and processing. Overall in 2023 Chinese investment in Australia fell to AU$1.4 bln, and its lowest level in seventeen years (pandemic excepted).

The UST 10yr yield is now at 4.40% and up +1 bps from Saturday, up +20 bps in a week. This is its highest since late November, so a strong bond market signal. 

The price of gold will start today a little higher by +US$3 from this time Saturday at US$2329/oz and yet another all-time high.

Oil prices have slipped a minor -50 USc to just on US$86.50/bbl in the US while the international Brent price is now down a bit more at just over US$90.50/bbl.

The Kiwi dollar starts today at just on 60.1 USc and unchanged from Saturday. Against the Aussie we are firmer at 91.5 AUc. Against the euro we are unchanged at 55.5 euro cents. That all means our TWI-5 starts today just on 69.2 and unchanged.

The bitcoin price starts today firmer at US$69,783 and up +2.9% from this time Saturday. Volatility over the past 24 hours has been modest at just on +/- 1.5%.

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.