Financial markets drive interest rates up

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.

And today we lead with news today is Budget Day. Join us at 2pm for full coverage of the new government's first full Budget.

More broadly, US mortgage applications sank -5.7% last week from the previous week, the most since mid-February, and ending three consecutive rises. The retreat follows a fresh rise in benchmark mortgage rates, above 7% and following the rise in long-date Treasury yields.

Meanwhile, American retail sales continue to expand. The Redbook index of physical locations was up +6.3% last week from the prior week, the fastest week-on-week gain of 2024, and far better than can be explained by inflation. It is actually quite impressive because a year ago these sales were also expanding.

There was another US Treasury bond auction earlier today, this one for 7 year Notes was equally well supported as the previous ones. The median yield today was 4.59%, down marginally from the 4.66% at the prior equivalent event a month ago. Financing their swelling deficits isn't facing market pushback yet, and probably won't so long as their economy continues to expand at a healthy clip. (News reports of 'weak demand' just aren't in these result sheets.)

But the May Beige Book survey by the US Fed regions paints a more restrained picture of their expansion.

In China, the yuan is trading at a six-month low against the dollar, at 7.25, highlighting the divergent monetary policies of the world's two biggest economies. Authorities in Beijing are trying to speed things up from a weak base. In the US they are trying to slow things down from a very long expansion that just won't give in.

And staying in China, the IMF revised their GDP growth outlook to 5% for 2024 and 4.5% for 2025, both 0.4 of a percentage point higher than its April projections. The upgrades reflect stronger first-quarter results and recent policy measures. In the first quarter, GDP grew 5.3%, keeping China on track to meet its growth target of "around 5%" this year.

Japanese consumer confidence stumbled in May, slipping when a small improvement was expected. This will be a disappointing result for them because the stumble was across the board. But help may be on the way, with pay rises expanding everywhere.

However German consumer confidence is recovering. In May consumers' economic outlook increased significantly, their income expectations rose moderately and their propensity to save decreased noticeably. However, the propensity to buy increased only minimally. But these are building trends of turnaround in consumer attitudes there.

The German CPI inflation rate edged higher in May to 2.4%, a marginal increase from their 2.2% April rate. But there are no surprises here; this is what was expected and inflation rising in the low 2% range seems to be their immediate future.

In April 2023, Australia's monthly inflation indicator was rising at a 6.7% rate. One year later it is down to just 3.6%. But the headlines feature its rise from March when it was at 3.5% and the three prior months at 3.4%. Insurance and foods costs are the main culprits. An up-trend is being sensed and that probably means the RBA may have to double-down on its inflation-fighting pressure. This just adds to the international sense that getting inflation back to the mid-point of the various target rates is hard, and keeping it there even harder. Don't expect central banks to throw in the towel on their core mandate.

And staying in Australia, mining giant BHP has walked away from a proposed AU$75 bln takeover of Anglo-American after the British miner rejected a last-ditch request to extend talks. The key sticking point was how Anglo's South African assets were to be included.

Meanwhile, South Africa has gone to the polls, ending a fractious and dangerous election campaign period. Voter turnout is high.

The UST 10yr yield is now at 4.63% and up another +9 bps from yesterday.

The price of gold will start today down -US$15 from yesterday at US$2343/oz.

Oil prices are softish but really, little-changed at just under US$79.50/bbl in the US while the international Brent price is now under US$83.50/bbl.

The Kiwi dollar starts today down more than -¼c from yesterday at just under 61.2 USc. Against the Aussie we are firmish at 92.5 AUc. Against the euro we are also marginally firmer too at 56.6 euro cents. That all means our TWI-5 starts today at 70.6 and down a mere -10 bps.

The bitcoin price starts today at US$67,441 and down -0.5% from this time yesterday. Volatility over the past 24 hours has been 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.