Wall Street goes into reverse

Economy Watch

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.

Today we lead with news that despite good economic data, Wall Street equity prices are tanking today as it downs in investors they have been far too bullish on AI prospects.

But first, there were July 'flash' PMIs released today. The American one is quite positive, especially for their service sector. There new order growth rose its fastest for the year, and that drove the overall PMI to its best result since April 2022, a 27 month high. The factory sector wasn't so positive, basically marking time. Encouragingly however, despite the rise, price pressures have waned. But there are suggestions employment has stopped growing.

Retail inventories might be becoming a bit of a problem however, up +5.3% from a year ago. But because wholesale inventories are well contained (+0.2%), there is no reason to panic at this point.

Meanwhile, things are so bright in their housing markets. Mortgage applications fell last week from the week before to be -15% lower than the weak week a year ago, even though mortgage interest rates retreated and are now near their lowest of the year.

And new home sales came in quite low in June, well below anticipated levels. But this isn't a new situation. Overbuilding over quite some time means that they have a stunning nine months of inventory of new unsold homes at the current rates rate. The main problem area is in the North-East states.

American exports rose +4.0% in June from a year ago. Imports were up +3.0% on the same basis, meaning their merchandise trade deficit shrank a little. The still-rising import levels also means the healthy demand in the US economy is still the main driver of world trade.

There was another very well supported US Treasury bond auction overnight, this time for their 5 year Note. That delivered a 4.05% yield, down from 4.27% at the equivalent event a month ago. General market support for these debt issues remains impressive.

In Canada their central bank cut its policy rate by -25 bps to 4.5% at its overnight meeting, a second cut in a row. Another cut in September seems a live possibility. They say the reduced rates could contribute to a slowdown in mortgage and shelter costs, which have been a large component of inflation there.

Japan's July factory PMI actually slipped slightly below expansion levels to a very small contraction, an unexpected result of their Markt/S&P survey. But their services PMI went the other way with a solid expansion recorded for July.

In India, new orders and business activity surged in July, driving both their services and factory PMIs to very fast expansions. And that brought their best expansion of employment in over 18 years. But because these pressures have been rising for some time, they are starting to get strong inflationary pressures from them now.

India's soaring share prices, and the earnings growth by Indian companies have pushed this country to just under a fifth of the MSCI emerging markets index while China has fallen to a quarter, down from more than 40% in 2020. India this threatening China as the main emerging market.

South Koreans are increasingly confident, according to a survey released by their central bank. Their composite index rose to its highest level since June 2023. Consumer sentiment regarding current living standards rose, as did their future outlook.

In Europe, their flash PMIs show July sagged to a five month low. In Germany, while their service sector is still expanding a a good clip even if it is less, their factory sector is really struggling now and contracting at a rather sharp pace which will worry Berlin policymakers.

In Australia, their July PMI also recorded a weaker rise in services activity and a sharper decline in manufacturing production. Persistent demand weakness led to a second consecutive monthly decrease in total new business and the fastest fall in new export orders in nearly four years.

The UST 10yr yield is now at just under 4.29% and up +4 bps from this time yesterday.

The price of gold will start today up another +US$9 from yesterday at US$2412/oz.

Oil prices are +50 USc firmer at just on US$77.50/bbl in the US while the international Brent price is just on US$81/bbl.

The Kiwi dollar starts today softish, down another -10 bps at 59.4 USc. Against the Aussie we are up +10 bps at 90.1 AUc. Against the euro we are down -10 bps at 54.8 euro cents. That all means our TWI-5 starts today at 68.4 and down -10 bps from yesterday.

The bitcoin price starts today at US$66,573 and up +1.1% from this time yesterday. Volatility over the past 24 hours has been modest 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.