Information breakfast; It’s all about the Fed

Here’s our roundup of key overnight economic events affecting New Zealand, with news all focused on the US Fed today.

In the waiting period before the US Fed’s policy announcement on Thursday (NZT), the american dollar is on the rise and is at its highest level for 20 years. This is a distortion that has global repercussions. Benchmarks of US bond yields are also pushing higher, to 11-year highs. But stocks were little changed, nervously waiting to see if they priced in the expected Fed hike correctly. At this point, we expect an increase of +75 basis points, bringing the US federal funds rate to 3.25%. Markets have now priced +80bps and expect their benchmark rate to hit 4.5% in mid-2023. This means they expect another +125bps over the next nine months indicating that they think most of the work has been done and after this week it will mop up Fed operations. Yet the last time the US federal funds rate was at 4.5% was in 2008.

There was a slight dip in US homebuilder sentiment in September, but this was the ninth consecutive decline for this sector. It is a sector on the front line of any impending recession.

Canada has reported that its producer prices in August fell, which gave it three consecutive monthly declines and reduced the annual increase to + 10.6%. Recall that the annual increase was greater than +18% in March, so the recent declines are accelerating. The fall in the cost of raw materials is a characteristic of this reversal.

But from the Fed’s perspective, inflation continues to stalk their economy. U.S. retail gasoline prices could be -6.2% lower than a month ago, but are still 15% above year-ago levels. It’s a big improvement, but probably not enough.

What worries policymakers more is that inflation is taking root in wider parts of their economy and that the risk of wage inflation remains high.

China has reported a good influx of foreign direct investment in August, +14.5 billion US dollars and +11% more than in the same month a year ago. In a longer perspective however, this level only equates to a +5% rise per year from 2018. Good but not special.

It has now been two months since many Chinese buyers stopped paying their mortgages to protest against the blocking of the construction of their properties. A lack of progress on more sites now threatens to escalate the boycottdespite the assurances of the authorities.

Later today, Japan will release its August CPI rate. It was 2.6% in July, including 2.4% for its “core rate”. Markets expect the base rate to rise to 2.7% in August. The Bank of Japan has maintained its ultra-accommodative monetary policy for a very long time now, and one wonders if this type of rate will be enough to induce any change.

The 10-year UST yield starts today at 3.49% and up +3 basis points from the same time yesterday. This is touching an 11-year high. The UST 2-10 yield curve is more inverted at -47 bps. Their 1-5 curve is unchanged at -35 bps. And their 30-day-10-year curve steepened further to +90 basis points. Australia’s 10-year bond is unchanged at 3.72%. The 10-year Chinese government bond is also unchanged at 2.69%. And the New Zealand 10-year government will start today at 4.05%, down -3 basis points from the same time yesterday.

Wall Street began the week uncertain of its new direction, and the S&P500 was down an insignificant -0.1% for most trades today. But towards the end it started to rise and is up +0.5%. The European markets overnight closed on a mixed note, marked by the fall of -0.6% in London and the rise of +0.5% in Frankfurt. Yesterday Tokyo was on vacation, Hong Kong closed -1.0% and Shanghai closed -0.4%. The ASX200 ended its Monday session down -0.3% and the NZX50 fell -0.4%.

The price of gold will open today at US$1671/oz. That’s -US$5 below what it was at this time yesterday.

And oil prices start today with little change from yesterday at just over US$85/bbl in the US, while the international price of Brent is still slightly lower at US$91/bbl. .

The Kiwi Dollar will open today just at 59.6 USc and almost -½c lower than yesterday at this time. Against the Australian dollar, we are also down -½c at AUc 88.7. Against the euro, we also fell to 59.4 euro cents. All of this means that our TWI-5 starts today at 69.2, down -40 basis points and a two-year low.

Bitcoin price is now at US$18,987 and -3.5% lower than yesterday at this time. Volatility over the past 24 hours has been very high at just +/- 4.0%.

The easiest place to keep up to date with the risks of events today is to follow our economic calendar here.”

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