Rising yields colour global markets

Economy Watch

Kia ora,

Welcome to Wedenesday’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 global markets are putting upward pressure on interest rates and that is spilling over to our local markets.

In the US, and somewhat unexpectedly, consumer confidence rose in May in the latest Conference Board survey. This mirrors the University of Michigan version, although analysts were expecting this latest one to show a retreat. The rise was because those surveyed had a brighter perception of the future. But, equally significantly, consumers cited prices, especially for food and groceries, as having the greatest impact on their view of the U.S. economy. Notably, average 12-month inflation expectations ticked up from 5.3% to 5.4%. The last time actual inflation was reported, for April, it was running at 3.4% with food at 2.2%. So perception and reality are a bit disjoined at present.

But the key point is, consumer perceptions of inflation are high, and markets expect the US Fed to hold the line until a more realistic view is adopted in these perception surveys. In fact, overnight an influential regional Fed boss said he wants to see ‘many more months’ of positive inflation data before a rate cut. These were comments that moved markets.

In another very well supported US Treasury bond auction, this one for the five year maturity, the median yield fell to 4.48% pa from the prior event's 4.59%. It seems financial markets are persuaded that inflation is decreasing now and higher yields are not required. It is only consumers who remain to be convinced.

But the US Treasury two year bond auction was considered 'soft' by market observers despite its even better support levels. Median yields were unchanged at 4.85%. It is had to understand the market sentiment on this but secondary market yields are now up to 4.98% immediately after the formal auction, so something is going on.

Markets thought demand for both issues were 'weak' but if you look at the actual results, they really aren't. "Little-changed" is the best conclusion you could come to.

Canadian producer prices were up a chunky level in April from March, the third consecutive month-on-month rise, and they are now up +1.4% from a year ago. That is their first year-on-year rise since September last year and the most since the beginning of 2023. Still, these rising levels remain low and are no inflationary threat there.

In China, two first-tier cities are cutting home loan rates to spur housing demand. Shanghai and Shenzhen both made these moves.

The overnight GDT Pulse milk powder auction brought mixed results for the 1652 tonnes of product offered by Fonterra. SMP slipped -1.1% from last week's full auction event but WMP rose +0.4%.

The UST 10yr yield is now at 4.54% and up a sharp +8 bps from yesterday.

The price of gold will start today up +US$4 from yesterday at US$2358/oz.

Oil prices are up another +US$1 at just over US$79.50/bbl in the US while the international Brent price is now over US$83.50/bbl.

The Kiwi dollar starts today little-changed from yesterday at just under 61.5 USc. Against the Aussie we are softish at 92.3 AUc. Against the euro we are also marginally softer at 56.5 euro cents. That all means our TWI-5 starts today still at 70.7.

The bitcoin price starts today at US$67,809 back down -3.2% from this time yesterday. Volatility over the past 24 hours has been moderate at just on +/- 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 tomorrow.