A first major central bank cuts its policy rate

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 some central banks have started to cut policy rates, others are contemplating long holds or even rises.

But first, US mortgage applications fell a sharpish -5.2% in the last week of May from the prior week to be -13% lower than the same week a year ago, itself a weak level.

And the US ADP employment report disappointed too, indicating private payrolls rose +152,000 in May, and less than the +175,000 expected and the +188,000 rise in April. This is the precursor report for this weekend's May non-farm payrolls report when a +188,000 increase is anticipated. There may be downside expectations growing now. The ADP report said pay was up +5.0% over the past year indicating American workers are staying well ahead of inflation's rise.

US vehicle sales rose in May to an annual rate of 15.9 mln which is +2.5% higher than year-ago levels and that was better than expected, and higher than in April.

But the news that dominated markets overnight was the unexpectedly strong rise in the US ISM services PMI. The expansion it recorded was strong (53.8) and a sharp rebound from the minor contraction they reported in April. Further, this survey was backed-up, and more, by the S&P/Markit services sector survey which came in even stronger (54.8). New order growth in both surveys drove the expansions. And these new readings completely overshadowed the ISM factory survey hiccup (which you may recall was not matched in the S&P/Markit factory survey which was actually showing a positive expansion).

Markets reacted to the ISM services sector gains reported, especially Wall Street equities. They liked that the expansion is apparently broad-based.

Also worth a note is that a major carmaker is now building hydrogen fuel-cell vehicles in the US, as a hybrid with an electric battery. It's only emission is water vapour. Generally Americans have been reluctant to buy fast-depreciating EVs. It will be a test now for the appetite for fuel-cell cars.

Meanwhile in Canada, their services sector returned to a modest expansion and away from the prior contraction.

And the Canadian central bank came through with its expected rate cut, a -25 bps reduction to 4.75%. Markets expect the ECB will make similar signals, and also a -25 bps rate cut to 4.25%. We'll see. If so, these signal a new trend of major central bank rate cuts, led by this Canadian one. But will the US move? And Japan may increase, and possibly Australia too. So the trend isn't broad yet. The US decides on June 13 (NZT) and markets expect no cut presently. Japan decides on June 14, and Australia next on June 18.

Interestingly, the Canadian rate cut has not brought expectations it will revive their housing markets.

The private Caixin services PMI for China came in better than expected for May and a bit better than the official services PMI. Meanwhile the Japanese services PMI has risen in its final version from its flash result. It too is a similar and good expansion.

Meanwhile, Japanese pay rose +2.1% in April from a year ago, and well above the expected +1.7% gain.

In India, their PMIs for May (factory, services) both revealed slowdowns in their expansions on weaker order levels. But to be fair, both are still strong expansions, just less so.

And perhaps we should note that Prime Minister Modi's embrace of Indian billionaires prior to the election actually ended badly for him at the polls - and unexpectedly so. Other populist politicians who embrace billionaires should probably take note - but of course they won't.

In Australia, yesterday's release of quite weak Q1 GDP growth has brought fears of stagnation there. GDP per capita has fallen by -1.6% since mid-2022. But financial market traders pushed back the timing of rate cuts to July next year after “material” revisions in GDP data indicated household finances were actually stronger than many feared.

The UST 10yr yield is now at 4.29% and down another -4 bps from yesterday. 

The price of gold will start today up +US$23 from yesterday at US$2353/oz.

Oil prices are up +50 USc at just on US$74/bbl in the US while the international Brent price is now just under US$78.50/bbl and a slightly larger rise.

The Kiwi dollar starts today marginally firmer from yesterday at just under 61.9 USc. Against the Aussie we are almost another +¼c firmer at 93.1 AUc. Against the euro we are marginally firmer at 56.9 euro cents. That all means our TWI-5 starts today at just under 71.2, up more than +20 bps from yesterday and its highest since late February.

The bitcoin price starts today at US$71,624 and up almost +1.4% from this time yesterday. Volatility over the past 24 hours has been modest however at just on +/- 1.2%.

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.