Debt deal delays to bring higher interest rates

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.

And today we lead with news the Americans seem to have a deal on their Debt limit - at least until the extreme party members are overcome in a vote. They have enough funding authorised to last until June 5.

In the week ahead, we will get the US non-farm payrolls report on Saturday, and before that the JOLTS job openings numbers, the ISM Manufacturing PMI, and the Conference Board consumer confidence survey results. We will also get inflation rates for April for the EU, Germany, France, Italy, Spain, and South Korea. In addition, Q2 GDP growth rates will be released for Canada, India, Brazil, and Turkey, along with factory PMIs for China, Italy, Spain, Canada, Russia, India, and South Korea.

Over this past weekend China's industrial profits data was released for April and it was weak. It fell almost -21% in the January-April period from the same time frame in 2022 although the drop was slower than a decline of slightly more than -21% for the first quarter. The marginal improvement in April alone will be of little real comfort because this is when a 'recovery surge' was hoped for on their opening up. But it isn't happening. Private firms are doing much worse than State-owned enterprises.

And Taiwan lowered its economic growth forecast for the year to +2.0%, the slowest pace in nearly eight years, after the island slipped into a recession in Q1-2023 reporting a -2.9% annualised drop in Q1-2023 after a -0.8% retreat in Q4,-2022.

Singapore’s industrial production dropped more than forecast in April, down -6.9% year on year and -1.9% from March. This was the seventh consecutive month of year-on-year decline and the worst streak since 2015.

Japan's economy is standing out with its impressive resurgence.

Across the Pacific and as we have noted, there is a US debt deal, and even though it has yet to pass Congress, most think it will - after all, it always has in the past. But assuming it does, there will be a catch-up mode. The US Treasury now has very low cash reserves due to the consequences of the impasse and this will need to be made up. They will do that by rushing to raise funds in the Treasury Bill market, maybe as much as US$1 tln. And that will suck up liquidity temporarily until it is spent, all at the same time the US Fed has been selling down its own bond holdings. With the Treasury and the Fed both competing with banks for cash, lenders may see their own short-term funding rates rise, forcing them to boost the borrowing costs they impose on businesses and households.

In the real world, American personal spending jumped +0.8% in April from March, the most in three months, and double the market forecasts of a +0.4% gain. It is a clear sign consumer spending remains solid. And it is supported by higher wages which have consistently risen more than spending (just not in April), and a tight labour market.

If there is a downside, PCE inflation is hovering around the +5% pa mark and not retreating much yet.

Durable goods orders rose by +1.1% in April from a month earlier following an upwardly revised +3.3% growth in March and easily beating market expectations of a -1.0% retreat. But year-on-year there was virtually no gain. Capital goods orders were even stronger for their recent rises, but again, little year-on-year.

Rising economic activity however is making the US trade balance higher in nominal terms as it raises the demand for all goods including imported goods. Over the past year to April the US has run a merchandise trade deficit of -US$1.1 tln. However that is -7% lower than in the same year in 2022. And the deficit as a proportion of GDP has fallen from -4.8% to -4.2%. Of course their overall trade deficit is much less when services are also taken into account.

The IMF has been reviewing the US economy and said American interest rates will likely need to remain higher for longer to tame inflation, and that Washington needs to tighten fiscal policy to bring down its federal debt. But overall it has been impressed with the way the US economy has been managed over the past few years.

In Turkey, they have had a final round of voting this weekend and although only half of the votes have been counted, President Erdogan has claimed victory. But financial markets have also been voting with their money, driving the Turkish lira to 20 to the USD, an all-time record low. Erdogan had to come out and deny there were cash withdrawal problems at banks as people got skittish.

Australian retail sales didn't change in April from March and were +4.2% higher than year-ago levels. That means in volume terms they will be lower because Australian inflation is running at 6.3%. (Their April CPI will be released on Wednesday.)

And in Canberra, MPs from the new Labor Government tackled RBA Governor Lowe in a private meeting over what they see as his 'demonising' of wage increases. But Lowe held his ground, warning them that generous wage rises they were backing would make inflation worse unless they were accompanied by increases in productivity. And if that is what turns out - wage rises without productivity increases - he said rates would rise in response. It was probably an unhappy and tense meeting, and probably seals the end of his time as RBA governor when his term expires in September. Being right is no defence in politics.

In the background, an Australian Fair Work Commission decision on the 2023 Minimum Wage/Awards application is due soon.

The IEA says global investment in clean energy is on course to rise to US$1.7 tln in 2023, with solar generation set to eclipse oil production for the first time.

The UST 10yr yield will start today at 3.80% and probably hold given it is a holiday in the US. A week ago this benchmark was at 3.69%.

The price of gold will start today at US$1946/oz and up +US$3 from Friday. A week ago the price of gold was US$1976/oz so a -1.5% fall from then.

And oil prices are +50 USc firmer from Saturday to be just under US$73/bbl in the US. The international Brent price is still just under US$77/bbl. For the week that is +US$1 firmer.

The Kiwi dollar starts the week at 60.5 USc. That devalues it -3.8% in a week, and -4.8% in a year. Against the Aussie we are still 92.8 AUc. Against the euro we are at 56.4 euro cents. That means the TWI-5 fell -20 bps to 69.4. So overall the NZD has devalued -2.7% for the week, and the same since the start of 2023.

The bitcoin price is a little higher today, now at US$27.359 and up +2.2% from Saturday. Volatility over the past 24 hours has stayed modest at just on +/- 1.3%.

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.