US Fed rate cuts closer now

Economy Watch

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.

Today we lead with news we may now be much closer to rate cuts in some major economies.

But first, this week we are looking at some big set-piece data and policy items from the US, mainly at the end of the week. The week will end with their non-farm payrolls and another +185,000 gain is expected there. Before that, Thursday's (NZT) US Fed decision will no doubt give some greater clarity as to when their rate cut is coming. Inflation and labour-market developments should allow them to signal that a cut is very possible at their following meeting, in September. And the upcoming third week of their Q2 earnings season will be full of majors reporting.

Elsewhere there will be important data coming too. Japan, Brazil and England will deliver central bank rate reviews. CPI data will come from Australia, the EU and South Korea. And Q2-GDP will come from the EU. And there will be a wider set of PMIs for July released, including from China.

And over the weekend, China said profits earned by their industrial firms rose by +5.6% in June from the same month a year ago. But that was a weak base. From June 2022 they were actually down -8.4%. These latest figures came amid a fragile economic recovery in the face of sluggish domestic demand, deflation risks, and a persistent property weakness. Profits in state-owned enterprises rose a mere +0.3% while those in private sector continued to rise, up +6.8%.

Although we should note that steel rebar prices have sunk to their lowest level in over seven years, amid poor demand and ample supply in China, we also need to know that the Chinese government mandated fresh quality standards for steel rebar to start in late September, driving mills and traders to flood their market with old stockpiles before the new standards for the metal are applied. Export rebar will also be unusually cheap at present. All this is coming while their general economy is weak.

Staying in China, they have some other rather serious flooding problems. We haven't made a big deal about this because it happens every year. But this year is extreme even for them, and it has come earlier. Beijing is worried and had a special meeting about these risks. Also unusual is that they issued a statement after the meeting. “China's climate conditions are abnormal, with frequent and prolonged heavy rainfall, early and rapid development of river floods, and some areas repeatedly hit by heavy rains, making the flood control situation severe and complex” they said.

And this is a guess on our part, but the Chinese data on foreign direct investment is unusually late for June. Perhaps it doesn't look good?

In the US, their annual PCE inflation rate released over the weekend eased to 2.5% in June from 2.6% in May, in line with market forecasts. The month-on-month change was minor. The core PCE rates are marginally higher than the overall rates, but trending lower. Markets are assuming the US Fed will like this data, and reacted accordingly.

Inflation expectations In the Euro Area remained unchanged at 2.8% in June. (A year ago, these inflation expectations were running at 3.5%.) Inflation Expectations in the Euro area have averaged 3.4% from 2020 until 2024, reaching an all time high of 5.8% in October 2022 - and a record low of 1.9% in October 2020.

The Russian central bank hiked its policy rate +200 bps to 18%. This was not unexpected however. They are seeing domestic demand outstripping the limited supply capacity that the Russian economy is able to offer, triggering aggressive inflationary pressures and warranting higher borrowing costs. Besides the pressure on supply capacity from Western sanctions, they also noted that labour shortages are building fast in the fallout from the military mobilisation and the resulting sharp diaspora of working-age men.

The UST 10yr yield is now at just on 4.20% and unchanged from Saturday.

Week two of the Wall Street earnings season shows that more companies are delivering earnings results above analyst estimates, but investors are rewarding that out-performance less than they usually do.

The price of gold will start today with a small +US$3 shift up from Saturday at US$2386/oz.

Oil prices are 50 USc softer at just over US$76/bbl in the US while the international Brent price is just over US$79.50/bbl. These are the lowest levels since early June.

The Kiwi dollar starts today marginally softer at just under 58.9 USc. A week ago it was at 60.1 USc so -1¼c lower since. That is a -3.4% devaluation since the start of the month. Against the Aussie we are holding at 89.9 AUc. Against the euro we are softish at 54.2 euro cents. That all means our TWI-5 starts today at 67.9 and unchanged from Saturday and near a two year low. This is down -110 bps from the start of last week.

The bitcoin price starts today at US$67,772 and up a +0.4% from this time Saturday. A week ago this price was US$66,552 so up +1.8% since then. Volatility over the past 24 hours has been modest, at +/- 1.8%.

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.