US economy no longer overheated says Fed

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.

Today we lead with news the US Fed is setting the scene for rate cuts down the track. When remains uncertain but financial markets have priced one in fully by November. The next big piece of relevant US data is Friday's CPI release.

But first up today, even though futures markets indicated WMP would hold in this week's GDP Pulse event but there would be downside risk to SMP, in fact both fell. In the event, WMP slipped -1.2% from last week's full auction, and SMP fell -1.4%. That puts both back to late April levels. The lack of gains might worry some of the analysts who forecast next season' farmgate payout levels.

American retail sales are rising faster now. The weekly Redbook report on sales activity at physical stores was up an impressive +6.3% from the same week a year ago. Obviously that is a way faster rise than inflation. We haven't seen a surge since more than that since the end of 2022 when the base was very weak.

And that is reflected in SME business attitudes. The NFIB Small Business Optimism Index rose in June to its highest level of the year, although to be fair it is only back to 2023 levels again, and in a longer context current levels are not high.

In his semi-annual monetary policy report to Congress, Fed boss Powell told the Senate Banking committee that the central bank does not expect it will be appropriate to reduce interest rates until it has gained greater confidence that inflation is moving sustainably toward 2%. He said data in the first quarter did not support a rate cut. But he did note that the more recent inflation readings have shown some modest progress. He said reducing policy restraint too late or too little could unduly weaken economic activity and employment while doing it too soon or too much could stall or even reverse inflation progress to date. His core message was however that the US economy is no longer overheated.

Today's UST 3yr bond auction was very well supported again, delivering a median yield of 4.35%. That compares with the prior equivalent event a month ago at 4.59%.

Taiwan reported surging exports overnight, up more than +23% from the same month a year ago. It was their strongest growth in export demand since 2022, on the back of technology products. Analysts had expected an +11% rise which itself would have been strong. Twice that is something special.

China might also be about to report a surge in exports, but that will be more about trying to get ahead of new American tariffs - after which a shadow will follow.

In China, giant property developer Vanke warned that its losses grew sharply in Q2-2024, saying that investment in some projects “has been over-optimistic.”

In Australia, the Westpac-Melbourne Institute Consumer Sentiment survey index fell in July from June. That leaves it broadly in line with the very low levels that started in July 2022. Pre-pandemic these levels were generally +20% higher. So far their 'stage 3' tax cuts have done little to improve sentiment. The biggest declines were among middle income earners, Victorians, and hospitality and construction workers. About 60% of those surveyed now expect the RBA to raise its policy rate, a big rise from 41% expecting that in the June survey.

According to the widely-watched NAB business sentiment survey, business conditions ease further in June, but business confidence bounced up. It is surprising that business confident is now back into positive territory and at its highest level since early 2023 when conditions continue to deteriorate. What business owners see to justify that is uncertain but to be fair the rise is hardly out of the margin for error.

India is about to overtake China as the top driver of global food demand over the next decade, according to recent estimates from the FAO. Southeast Asian nations are on the rise too. The fading of China, due in part to demographic shifts and an about-to-fall population, is a key global trend.

Global food prices were low and stable in June, and lower than any of the past three years. Given inflation over that period, the real cost of food is back to levels it first reached in 2007. For meat it is back to levels first reached ten years ago; for dairy back to levels first reached in 2010. Food prices are no longer a global stress point. By just about any measure, farmers should be paid more.

The UST 10yr yield is now at 4.30% and up +3 bps from yesterday. 

The price of gold will start today up a minor +US$5 from yesterday at US$2351/oz.

Oil prices are -US$1 lower at just under US$81/bbl in the US while the international Brent price is down at just on US$84.50/bbl.

The Kiwi dollar starts today -10 bps softer from yesterday and now at 61.2 USc. Against the Aussie we are slipped to 90.9 AUc. Against the euro we are holding at 56.7 euro cents. That all means our TWI-5 starts today just under 70.5 and little-changed overall.

The bitcoin price starts today at US$57,435 and up +2.4% from this time yesterday. Volatility over the past 24 hours has been modest at just on +/- 1.8%.

Join us at 2pm later today for the RBNZ's Monetary Policy review. No change is expected but a tone change could move markets. We will have full coverage.