Breakfast briefing: Central banks will like today's tame data

Economy / news

Dairy prices fall again; US data tame although housebuilding stirs again; Canadian CPI falls back into policy band; eyes on NZ CPI; UST 10yr 3.80%; gold and oil up; NZ$1 = 62.8 USc; TWI-5 = 70

19th Jul 23, 7:21am by David Chaston

Here's our summary of key economic events overnight that affect New Zealand, with news central banks may be increasingly happy with the tame data released today.

Firstly, today's dairy auction was a lame affair. Analysts had expected prices to rise +1.9% but in the event they fell -1.0%. Buyer demand is soft even as indications grow that the global milk supply may start falling. Nine of the past twelve dairy auctions have delivered price falls. Making them slightly worse in that prices fell -2.2% in NZD. The big loser today was the cheddar price - again, down a massive -10%. This is its lowest since December 2020 and is down a massive -39% since its peak in April 2022. That probably says a lot about China's foodservice industry. On its own this auction won't be changing farmgate milk payout prices, but it is adding to downside pressure.

Meanwhile American retail sales rose less than expected in June to be up +1.5% above year-ago levels. That obviously isn't more than inflation so they are dragging worryingly. Holding them up was another modest advance in car sales.

The US Redbook retail sales tracking of general merchandise (on a same-store basis) fell last week from the same week a year ago, and at -0.2% this is entirely consistent with the official stats. It is likely that the Fed officials will find this lower retail impulse "just what the doctor ordered' and be happy it is quelling inflation.

Also retreating is American industrial production in June. It was expected to show a +1.1% gain from the same month a year ago, but it actually recorded a -0.4% retreat.

US inventories are holding at historical levels in relation to sales, so no special pressure point here.

More positive was homebuilder sentiment in the US.

The overnight data was even more positive north of the border. Canadian housing starts came in with another strong result in June.

And CPI inflation in Canada fell more than expected, taking it down to just 2.8% year-on-year, and that fast progress is likely to take the wind out of any more central bank rate hikes there. It is back in their 1-3% target range for the first time in two+ years. However we should note that it is fast-falling energy costs that are pushing this rate down. Food cost growth remains high.

Join us later this morning for the release of the New Zealand Q2 CPI data. It is expected to come in at 5.9% which would be another miss to the downside from the RBNZ's earlier estimate of a 6.1% rate. It too is likely to feature much lower energy costs and sticky-high food cost inflation. Any significant variances from market expectations could have wide financial market implications - and perhaps that is being foreshadowed by today's retreat in the NZD.

The UST 10yr yield will start today at 3.80% and unchanged from this time yesterday. Their key 2-10 yield curve inversion is deeper at -97 bps. Their 1-5 curve is slightly more inverted at -132 bps. And their 3 mth-10yr curve is little-changed at -151 bps. The Australian 10 year bond yield is now at 3.94% and down -4 bps from yesterday. The China 10 year bond rate is softish at 2.67%. The NZ Government 10 year bond rate is down -2 bps from yesterday to 4.54%.

Wall Street has opened its Tuesday trading with the S&P500 up +0.8%. Upbeat earnings reports keep coming and encouraging equity investors. Overnight European markets all closed up about +0.4%. Yesterday Tokyo ended its Tuesday session up +0.3%. But Hong Kong fell a sharp -2.1%. Shanghai ended down -0.4%. The ASX200 ended down -0.2% and the NZX50 ended little-changed.

The price of gold will start today at US$1975/oz and up +US$20 from yesterday.

And oil prices are up +US$1.50 from this time yesterday at just on US$75.50/bbl in the US. The international Brent price is now at just under US$79.50/bbl.

The Kiwi dollar starts today down -½c from yesterday at just under 62.8 USc. Against the Aussie we are down -¾c to 92.2 AUc. Against the euro we are down -½c to 55.9 euro cents. That all means the TWI-5 is now down at 70.0 and a sharpish -70 bps lower from yesterday.

The bitcoin price has fallen in its recent yoyo pattern and now is at US$29,812 and down -0.8% from this time yesterday. Volatility over the past 24 hours has been modest at just over +/- 1.2%.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

Daily exchange rates

Select chart tabs

Source: RBNZ

Source: CoinDesk

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

31 Comments

by Flying high | 19th Jul 23, 7:31am 1689708672

Inflation IS coming down today. When it drops to 2 percent interest rates will be lower than now

Commercial ppty investors will get the wins. Higher rents will be baked in and lower costs means higher net incomes. Lower yields and cap rates means higher values. The buzz word is "working from work" means higher occupancy or as per normal

Double or triple whammy

by HughJorgan | 19th Jul 23, 8:13am 1689711233

WFH = Higher Occupancy?

Please explain.

by Flying high | 19th Jul 23, 8:21am 1689711673

WFW isn't WFH

Does that help engage your mental organ

by IT GUY | 19th Jul 23, 8:30am 1689712239

Many large NZ Corps are looking at reducing floorspace, to remodel on a 3 day in office week..... more people in each day, but they need less and different space, favours high spec offices, with colab and breakout spaces etc. I do not see this as better for most landlords. Re Dairy, must be a concern, falling demand and high NZD. Add on rampant farm input costs inflation, and rate rises and its all not cool, many farmers shut their wallets a while back.

by Pa1nter | 19th Jul 23, 9:28am 1689715725

Many large NZ Corps are looking at reducing floorspace, to remodel on a 3 day in office week..... more people in each day, but they need less and different space, favours high spec offices, with colab and breakout spaces etc

I guess that highlights the divide between the sorts of firms who are experimenting with shorter work weeks and those who's income is contingent on bums in seats.

by Flying high | 19th Jul 23, 9:34am 1689716066

"We are considering working 4 day weeks, as we trust that you will be as productive over 32 hours as over 40 hours. Your weekly pay will stay the same as it is and not drop double digits. All in favour say Aye"

AYE!!!!

"Thats agreed then. Customers will love it"

by HughJorgan | 19th Jul 23, 8:43am 1689713015

Yes, thank you.

by nktokyo | 19th Jul 23, 7:26am 1689708415

I see in 'murcia that building costs are in month on month declines. Still my beating heart.

This excellent piece from a few years ago reminds us of another opportunity lost: https://www.newsroom.co.nz/fixing-housing-crisis-depends-on-breaking-bu…

by HughJorgan | 19th Jul 23, 8:16am 1689711380

Can you share the source/article about the declines? Does not appear to be above but maybe I’ve missed something. Thanks.

by nktokyo | 19th Jul 23, 8:21am 1689711680

https://eyeonhousing.org/2023/06/building-materials-prices-fall-for-sec…

by HughJorgan | 19th Jul 23, 8:44am 1689713041

Thank you.

by Audaxes | 19th Jul 23, 9:04am 1689714245

Stocks' Lengthening Duration Shows Markets Are Ignoring History

Wall Street’s worst-kept secret is that stocks are overvalued, but there is a cautionary tale from history.

The combined market capitalization of the Russell 3000 eclipsed $47 trillion on Monday.

By way of perspective, consider the value of US gross domestic product, which at last count was some $26.5 trillion. So investors were essentially saying that Corporate America is worth 1.77 times the combined output of everything that the US produces, corporate or otherwise.

Our pensions are being corralled for future failure.

by bw | 19th Jul 23, 8:55am 1689713740

the latest leg of America’s long bull market has been driven almost entirely by just seven stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla...these stocks are up 90pc on average so far this year, and collectively account for more than 70pc of the return on the S&P 500 index of leading US shares in that period....is this just another tech bubble about to burst on the anvil of speculative overvaluation and political assault?...Who knows when the gold rush might end, but end it will.

https://www.telegraph.co.uk/business/2023/07/18/magnificent-seven-tech-…

by Final Account | 19th Jul 23, 9:40am 1689716444

This run will end about 2030

by realterms | 19th Jul 23, 8:50am 1689713419

Canadian core inflation still north of 5%, headline figure just looks ok 'cause of fuel. I'm not so sure they're done yet.

by Audaxes | 19th Jul 23, 9:25am 1689715550

Chris Hipkins featured here:

Politics of hedging in the Indo-Pacific

by Audaxes | 19th Jul 23, 9:29am 1689715776

An aside after Yellen's China visit:

The US State Department website has dropped the word country from its travel advisory notice for Taiwan. Link

by Audaxes | 19th Jul 23, 9:34am 1689716044

Coincidentally the downward US government bond price spiral was arrested.

by Jonny.Foe | 19th Jul 23, 9:26am 1689715566

However we should note that it is fast-falling energy costs that are pushing this rate down [in Canada].

Also worth noting that it is high mortgage costs that is keeping Canadian inflation above 2%! Canada include mortgage interest costs in their CPI basket.

by Hamish | 19th Jul 23, 9:49am 1689716997

Excel would throw a circular reference error there.

by Jonny.Foe | 19th Jul 23, 10:22am 1689718961

Yes it would!

by Jonny.Foe | 19th Jul 23, 9:32am 1689715942

in the last year, higher wages have added about $10 billion to business costs as workers have struggled to afford to pay the bills (including higher mortgages). RBNZ have responded to the threat of a wage / price spiral by adding $10 billion to business credit costs. Friends, our economy is run by clowns.

by Independent_Observer | 19th Jul 23, 10:33am 1689719627

What about the reverse Jfoe?

The dropping of interest rates post GFC, continually reducing business debt/interest expense/costs, and allowing business and households to load up with excess debt relative to our incomes/productivity? (creating debt/asset bubbles).

Which is the clown part - the dropping the rates too low for to long (and the extension of too much debt), or now allowing them to moderate back to long term averages?

My argument is that the moderation of rates isn't the clown part - the clown part is what we did post GFC to 2021 where we created too much debt.

An analogy might be...is the problem the heart attack or is it the bad diet and lifestyle preceding the heart attack? My view is the problem was created in the years preceding the heart attack and not the event itself. The event is just the problem revealing itself due to poor care in the years before (even when people have been warning you to exercise and change you diet - and in return, the response was to tell people to stop being such a doom merchant..'my health is fine...in fact its never been so good!')

by Audaxes | 19th Jul 23, 9:42am 1689716546

Plan A?

Good Morning from #Germany where the people are getting poorer while Americans are getting richer. The @WSJ presents new shock figures on the econ decline of Germany & Europe: W/consumption spending in free fall, Germany tipped into recession at the start of the year, reinforcing a sense of relative econ, pol & military decline that kicked in at the start of the century. https://wsj.com/articles/europ Link

by JimboJones | 19th Jul 23, 9:52am 1689717143

Not allowed to have a recession any more?

by TronMVP | 19th Jul 23, 9:56am 1689717387

If New Zealand CPI in the 5s today, Orr is unlikely to raise the OCR next month. The big banks have already figured in another raise in OCR in their calculations, so if the OCR remains the same, those banks will likely reduce some of their fixed mortgage rates, while floating will likely remain the same. I notice that swap rates have already started to crash.

by JimboJones | 19th Jul 23, 10:00am 1689717625

"The big banks have already figured in another raise in OCR in their calculations" - have they? Westpac said its a very unlikely possibility, and I think all the others have said it won't happen. Some banks think there will be another raise later in the year.

by Zwifter | 19th Jul 23, 10:21am 1689718906

Yep. The brakes have locked up for many punters out there now rolling over to the new rates. Expect no rise in the OCR for the rest of the year.

by Independent_Observer | 19th Jul 23, 10:40am 1689720046

Had a catch up with a friend recently who was pre-approved for a loan. Sounds like banks are pulling the rug despite no change in income/circumstances. Pre-approved amount being reduced by around 25% so basically priced out of the houses they were looking at in Wellington - has left them in limbo. And perhaps the housing market is in the same place.

by sparrow | 19th Jul 23, 11:18am 1689722310

Well that's good. Prices will have to fall to the point people can afford them, so they get a house with a far smaller loan.

Unless of course NACT get in, in which case it's open slather - remove Brightline, restore interest deductibility, open the borders to anyone who wants to come here, and let foreign buyers back into the market. Oh and let residential landlords raid the lolly jar of people's Kiwisaver accounts.

by Zwifter | 19th Jul 23, 1:58pm 1689731905

No they won't have to follow, that's the crunch. Supply dry's up due to no new builds and prices hold. People are not going to sell at a loss unless the bank boots them out. Everything is on ice now anyway until after the election.