Markets toy with US rate cuts sooner than Fed has indicated

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 financial markets are in a risk on mood today.

First, the April US inflation rate brought no surprises, coming in as expected at 3.4%, a dip albeit a small one, from March's 3.5%. But it still qualifies as 'sticky' - there have been nine lower readings in the past twelve. Their 'core' rate fell to 3.6%, also as expected. Airfares and rent remain the key components keeping inflation up in the US. Petrol prices rose a very minor +1.2% over the year. (The other measure we use has them up +2.0%. Either way, petrol is not pushing up inflation there.)

The apparent slowing of inflation is bring debate and market bets on when the Fed will cut its policy interest rates. The Fed itself of tempering expectations, but markets aren't waiting. Yields on US benchmark bonds are falling in secondary markets, equity prices are rising in anticipation (and to record highs), and the US dollar is weakening as a risk-on mood envelopes markets today.

Meanwhile, the official data for US retail sales were up +4.0% in April from a year ago on an 'actual' basis, and now showing 'real' gains above inflation. (But when you seasonally adjust this data and correct for varying holiday periods, the gain isn't that high.) Meanwhile, American business inventories are not rising, in fact posted a small dip in March. They don't currently have an excess inventory problem.

US mortgage applications were little-changed last week from the prior week, to be -14% lower than the same week a year ago. Benchmark mortgage interest rates fell -bps to 7.08%, mortgage brokers report.

China left its 1-yr Medium Term Lending Facility rate unchanged at 2.5% yesterday.

Indian exports fell sharply in April from March, and were only +0.8% higher than a year ago. Presently, India is not a powerhouse exporter or participant in global trade. April merchandise trade exports of US$35 bln in the month is barely more than Australia's.

The EU delivered some better economic results overnight with March quarter economic activity expanding (GDP was +0.4% higher in the quarter than the same quarter a year ago, 'real'.) Although they may seem low to us, they are 'good' for them in the current circumstances.

Their Spring forecasts out overnight see a "gradual expansion amid high geopolitical risks", anticipating growth rising to +1.0% this year and +1.6% next. Industrial production is rising recently, cutting into the prior declines. But they are making hard work of it getting this key indicator to rise on a year-on-year basis.

And staying in Europe, we should note an assassination attempt on the newly-elected nationalist firebrand Slovak prime minister. He has been a pro-Russian, anti- democracy lightning-rod, the subject of large street demonstrations since his election. It is the king of spark that in the past has kindled wider, broader consequences.

Argentina's central bank cut its benchmark interest rate -1000 bps to 40% from 50%, marking the sixth adjustment since December due to a slowing inflation rate, bringing the rates to the lowest since June 2022. The monthly inflation rate slowed for the fourth straight month to 8.8% in April from 11% in the previous month and below market forecasts of a 9% gain.

In Australia, the rate of gain in their wage pay slipped to 4.1% in the March quarter. That is the first time that gain rate has fallen since Q4-2020 and it may suggest labour market pressures are starting to ease there.

Standard & Poor's has been looking at the 2024 Aussie budget. They are concerned about 'structural spending pressures' that won't ease in futute. They are also worried about the broader issue of weak productivity and “how effective spending programs such as Future Made in Australia are in allocating resources”.

The UST 10yr yield is now at 4.36% and down -9 bps from this time yesterday. 

The price of gold will start today up another +US$34 from yesterday at US$2389/oz, a move essentially driven by the falling greenback.

That same move has boosted oil prices today which are up +50 USc to just on US$78/bbl in the US while the international Brent price is now just on US$82.50/bbl.

The Kiwi dollar starts today with a broad-based, across-the-board rise, up almost a full +1c from yesterday at just on 61.3 USc and its highest level in eleven weeks. Against the Aussie we are up at 91.5 AUc and a one month high. Against the euro we are +½c higher at 56.3 euro cents. That all means our TWI-5 starts today just on 70.2 and up +60 bps from yesterday, and its highest since mid March.

The bitcoin price starts today at US$65,097 and up a spectacular +6.3% from this time yesterday. Volatility over the past 24 hours has been high at just on +/- 3.2%.

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.