US Fed slightly more hawkish. Markets struggle to absorb signals. US mortgage applications rise. US home sales fall. China cuts petrol price. RBA nurses big losses.
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's all about the Fed who not only raised rates today, they also see more big rises before the end of the year.
As expected, the US central bank has raised its policy rate by +75 bps to 3.25%. Interestingly, that is now above the RBNZ policy rate (of 3%) for the first time since March 2020, and outside the pandemic period and the period immediately before it, the first time in more than 20 years. It is also their highest since early 2008.
The US Fed has also significantly raised its sights on where its policy rate is headed in its battle against inflation. By the end of 2022 they expect this rate to rise to 4%. Markets have priced in more with a year-end rate of 4.25%. A year out they now see a 4.6% Fed Funds rate, up sharply from 3.8%. And their view of how that comes down from there is now much more restrained.
This is a slightly more hawkish view than they had at previous reviews.
Markets initially responded by bidding up the value of the US dollar. Our currency fell -40 bps on the news but is now back up. The UST 10 year benchmark bond rate rose to a new high since 2010 on the news but then sunk to below its pre-announcement level. The S&P500 which was up +0.8% just before the news turned down by -0.6% and is now back up. Oil prices fell.
In other data released overnight, US mortgage applications actually rose last week from the week before, a rare rise in a declining trend and is down about -30% from the same week a year ago. A large part is due to fast rising interest rates, with the benchmark 30-yr rate at 6.25%, and up +25 bps in just one week.
American existing home sales slipped in August, although not be as much as they did in July. But it does extend the streak of declines to seven straight months. Rising mortgage rates got the blame here, and of course it won't get any easier after today's Fed moves.
The Asian Development Bank has downgraded its forecast for China's 2022 growth to +3.3% from +5.0% in April. The bank also cut its projection for next year to 4.5% from 4.8%. At the same time, it said, the emerging Asian region is forecast to grow at a +4.9% rate, instead of its earlier April +5.3% forecast. It has been rare for China's expansion to be significantly less than its much smaller neighbours. In fact the last time that happened was 30 years ago as Deng Xiaoping was working to recover from the disastrous Mao Tse-tung years. It was a foundation that served them well - until Xi Jinping, it seems.
China is cutting the regulated price of petrol again, its seventh reduction so far in 2022.
In Australia, their central bank says it will not pay a dividend to their government “for a number of years” as it nurses balance sheet losses relating to its bond purchase program that could top AU$58 bln.
The UST 10yr yield starts today at 3.51% and despite some sharp initial reactions higher has now fallen to a lower level than this time yesterday.
The price of gold will open today at US$1684/oz. This is up +US$18 from this time yesterday, moved only after the Fed news..
And oil prices start today down -US$1 from yesterday at just under US$83/bbl in the US while the international Brent price is now just on US$89/bbl.
The Kiwi dollar will open today at just on 59.1 USc and +20 bps higher than this time yesterday, following the US Fed signals. Against the Australian dollar we are slightly firmer at 88.3 AUc. Against the euro we are actually up almost +½c to 59.5 euro cents. That all means our TWI-5 starts today at 68.8, and up +20 bps.
The bitcoin price is now at US$19,422 and firmer than this time yesterday. Volatility over the past 24 hours has been moderate at just on +/- 2.2%.
You can find links to the articles mentioned today in our show notes.
And get more news affecting the economy in New Zealand from interest.co.nz.
Kia ora. I'm David Chaston and we’ll do this again tomorrow.