Inflation's pressure eases globally

Economy Watch

Kia ora,

Welcome to Friday’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 inflation's pressures seem to be cooling in all the world's major economies.

But first, in seasonally-adjusted terms, the number of people claiming American unemployment benefits fell last week by -17,000 from the prior week and a 5-week low, and below market expectations of 236,000. In actual terms, there was little-change. Either way, the levels are low and not indicating impending labour market stress.

The all-important American consumer inflation rate fell to 3.0% in June, and lower that the expected 3.1%. Their core inflation rate fell too. Food costs rose just 2.2% and energy costs just 1.0%. Petrol prices actually fell -2.5%. Keeping it up were airfares (+9.4%) and rent (+5.2%).

Clearly the conditions for a US Fed rate cut are getting closer. Financial markets however displayed mixed and muted reactions after the release. Bond yields fell, and the USD had a small move lower. And Equity markets decided they might have over-priced future rate cut effects so pulled back from its record-high pricing.

The UST 30yr bond auction today was reasonably well supported at a median yield of 4.33%. This is very similar to the 4.35% at the equally well-supported prior equivalent event of a month ago.

The US Federal government had a monthly deficit of -US$66 bln in June, which takes its full deficit to -$1.57 tln for the past twelve months. That makes it now equivalent to -5.5% of GDP. As large as these levels seem, they record a remarkable improvement. At the end of the Trump term, the annual deficit was running at US$2.7 tln or -9.3% of their GDP. They have clearly made progress cleaning up some of their mess. But overall levels of Federal debt to third parties is still growing, although no longer as fast as economic activity.

In Japan, machinery orders fell in May from April when a small rise was anticipated. Japan's core machinery orders, which exclude those for ships and electric power companies, fell -3.2% month-on-month. This also missed market expectations for a +0.8% gain. The decrease in capital spending was driven by a sharp decline in the non-manufacturing sector, although machinery orders from manufacturers rose +1% from April to be +10.8% higher than year-ago levels. Orders including the big lumpy items rose sharply, however.

By the way, the very weak Japanese yen recovered somewhat (+2%) after the June US CPI data was released. Markets think the Bank of Japan intervened to generate the rally.

Meanwhile, Germany said its CPI inflation rate fell to 2.2% in June

Australian consumer inflation expectations barely edged lower to 4.3% in July from 4.4% in June. This is no progress because they averaged less than 4% from 2012 to 2019. They seem stuck at over 4%, well above the RBA's target range.

And staying in Australia, mining giant BHP is mothballing its Western Australia nickel mines, including the country's only smelter for the key battery metal. They said the move was due to a global oversupply that has crashed nickel prices over the past year. The glut has been driven by a surge in production from Indonesia, where many operations are bankrolled by Chinese investors. Thousands of Aussie jobs are at risk.

Global container freight rates may be reaching their peak. They rose just +1% last week from the prior week, staying in the stratosphere. But at least the impetus seems to have stopped. But when will they fall back to reasonable levels? Canal pressures are the key to that. Bulk cargo freight rates eased slightly.

The UST 10yr yield is now at 4.19% and down -9 bps from yesterday.

The price of gold will start today up +US$41 from yesterday at US$2413/oz. The last, and only, time it was over US$2400 was in mid-May. It record high is US$2,450/oz.

Oil prices are still at just under US$81.50/bbl in the US while the international Brent price is up +50 USc at just on US$85/bbl.

The Kiwi dollar starts today little-changed from yesterday and now at 60.9 USc. Against the Aussie we are still at 90.2 AUc. Against the euro we are marginally lower at 56.1 euro cents. That all means our TWI-5 starts today down -10 bps at 69.8.

The bitcoin price starts today at US$57,888 and again, virtually unchanged from this time yesterday (+0.3%). Volatility over the past 24 hours has stayed modest at just under +/- 2.0%.

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 on Monday.