The US 'stars' align for the Fed

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 American data is improving in a steady way without deficit or labour market stresses, so conditions seem right for monetary policy 'normalisation' to be completed.

First, American mortgage applications rose an unusual +3.9% last week from a week ago to be -14% lower than the same week a year ago. Pushing things along was a drop of the benchmark mortgage interest rate to under 6.9% from just over 7%.

Meanwhile, US housing starts rose more than expected in June (from May) to be -4.4% lower than year ago levels. But this is still a lowish level. Completions in June were unusually strong, adding more availability.

And American industrial production beat estimates too, rising +1.6% from a year ago, the biggest gain since November 2022.

The US Fed's Beige Book surveys paints a picture of a modest expansion with some uneven variations across the Fed Districts. It also confirms cooling inflation - but little labour market stress yet.

There was a well-supported but relatively small US Treasury 20yr bond auction earlier today and that delivered a median yield of 4.41%. That is very little different to the 4.40% median yield at the prior equivalent event a month ago. Because US deficits are actually shrinking, and quite fast, the pressure is off this fundraising.

More Fed officials are signaling that they are moving closer to a rate cut, and markets are starting to price that in. They seem to have beaten inflation without crashing their labour market. 'Normalisation' can proceed now, it seems.

In Japan, the Reuters/Tankan sentiment index for the factory sector jumped to +11 points in July from +6 in June. It was the first rise in 4 months. Meanwhile, the index for the service sector cooled, reflecting a patchy economic outlook. The latest survey comes two weeks before the Bank of Japan’s July policy meeting where it could raise interest rates again and announce its bond purchase tapering plans.

In China, which dominates the global rare-earth minerals processing industry with its state-owned enterprises, it is finding it hard-trading as prices sink sharply and losses pile up.

We should also note that China's rebar steel prices have slumped to 2017 levels, now just over half the level they were at the peak in 2021.

And the World Trade Organisation says China is backsliding on key reforms and lacks transparency on subsidies. (Para 23, page 12.) They say China's secret subsidies could top US$900 bln.

Homebuilding is at a low ebb in Australia - but the March results released yesterday suggest it picked up in Q1.

The UST 10yr yield is now at 4.14% and down -3 bps from yesterday.

The price of gold will start today down -US$9 from yesterday at US$2453/oz and now off its all-time record high.

Oil prices are up +US$1 at just on US$81.50/bbl in the US while the international Brent price is just under US$84.50/bbl.

The Kiwi dollar starts today recovered somewhat at 60.7 USc and and up +¼c. Against the Aussie we are up +½c at 90.3 AUc. Against the euro we are unchanged at 55.5 euro cents. That all means our TWI-5 starts today at 69.4 and up +10 bps from this time yesterday.

The bitcoin price starts today at US$64,350 and virtually unchanged (-0.1%) from this time yesterday. Volatility over the past 24 hours has been modest at just on +/- 1.7%.

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.