Surpluses and tax cuts now, deficits later

Economy Watch

Kia ora,

Welcome to Wednesday’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 about the latest and pre-election Aussie Budget delivered overnight.

But first, the American retail Redbook Index rose +6.3% last week from the same week a year ago, suggesting buoyant trading in physical stores, gains well ahead of inflation. It is not only the strongest gain of 2024, you need to remember that it is on the back of a rising 2023 which itself was rising strongly in 2022.

Their SME sentiment index rose in April, slightly recovering from a 12-year low in March and better than the forecasts which assumed it would slip again.

Meanwhile, factory prices rose more than expected in April, up +2.4% from the same month in 2023. But this is about average over the 15 year history of this data tracking (excepting the pandemic distortions, of course). But if there is a cloud it is that the month-on-month rise seems slightly elevated.

American household debt rose +3.8% in Q1-2024, just marginally more than the CPI inflation rate over the same period of +3.5%. And this excess brought a small, but noted, rise in delinquencies. As you might expect, mortgage debt rose less than inflation (+3.3%) given their hibernating residential property markets. Car loan balances rose at inflation's level. Student loan balances fell, the only sector to recede. But credit card balances zoomed higher, up a concerning +13% over the year and the basis of the rise in delinquencies. Total consumer debt (including mortgages) is now US$17.7 tln. That is about 65% of US GDP and near the lowest share since these records started in 2005. Back before the GFC it was over 100%.

The American CPI inflation rate gets updated tomorrow and financial markets seem parked up until this data is known. Markets currently expect a very minor improvement, down to 3.4%. Variations from that or the "core rate" expectation could well be market-moving.

US Fed boss Powell was speaking overnight in The Netherlands, but he had the same message again - that inflation is stickier than the central bank wants to see and that rate cuts from them are some way off. But he also repeated that it is very unlikely that their next move will be a hike.

In China there are some signs elements of stress are spreading to insurers now. Several insurance companies have chosen to pay higher interest rates on their capital bonds rather than exercise an option to redeem them early, a sign they are facing solvency problems. Policymakers are focusing on the wider stress points, but still basically about their troubled property markets.

In Germany, their widely-watched ZEW Indicator of Economic Sentiment rose more than expected in May to its highest since February 2022. Improving economic conditions in the EU and China have contributed to a better outlook, analysts say. Expectations for domestic consumption, as well as the construction and machinery sectors, have brought substantial improvements in sentiment.

But today it is all about the Australian Budget, delivered overnight. With the Australian economy the weakest it has been in 23 years, their Treasurer has handed down his third Federal Budget delivering its second consecutive surplus, and setting the Government’s agenda as they head into an election cycle. That election is due in May 2025, so this Budget has to be seen as the last major policy setting before then, that could deliver results before polling. Initiatives such as the "Future Made in Australia" program were at the forefront. Not only is this Budget 'political' (including "tax cuts for all" and a $300 rebate for household power bills), the reviewing media assessments are highly politicised as well.

The surplus announced of +AU$9.3 bln this year is off the back of generous company tax receipts – a pleasant surprise after the -AU$1.1 bln deficit forecasted in the Mid-Year Economic and Fiscal Outlook in December. However, this will swing into a -AU$28 bln deficit in 2024-25 (-1.4% of GDP), with larger deficits in the years following than previously forecasted.

And following up yesterday's note, the copper price is now officially up at an all-time high, US$10,977/tonne.

The UST 10yr yield is now at 4.45% and down -4 bps from this time yesterday.

The price of gold will start today back up +US$20 from yesterday at US$2355/oz.

Oil prices have fallen -UA$1 to just on US$77.50/bbl in the US while the international Brent price is now just on US$82/bbl.

The Kiwi dollar starts today marginally firmer than yesterday at just over 60.3 USc. Against the Aussie we are also a tad firmer at 91.2 AUc. Against the euro we are little-changed at 55.8 euro cents. That all means our TWI-5 starts today just on 69.6 and up +10 bps from yesterday, partly on a weaker yen.

The bitcoin price starts today at US$61,251 and down -2.4% from this time yesterday. Volatility over the past 24 hours has been modest at just on +/- 1.7%.

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.