Breakfast briefing: Markets bet the Fed has won its battle against inflation

Economy / news

Markets bet the Fed will cut at each remaining 2024 review; Japan wins more machinery orders; eyes on China LPRs; Australia sees lower iron ore price; UST 10yr 3.87%; gold holds while oil drops; NZ$1 = 61 USc; TWI-5 = 69

20th Aug 24, 7:19am by David Chaston

Here's our summary of key economic events overnight that affect New Zealand with news that US dollar has fallen to a seven-month low as American disinflation extends in their economy and that is raising expectations of rate cuts in each of the Fed's remaining three reviews this year.

US equity markets are rising on the same expectation, with the S&P500 moving back to again challenge its mid-July all-time high. They seem to be voting with their money that the US Fed has in fact engineered a soft-landing, or better, and that the trajectory from here is 'up' on the back of an aggressive easing cycle from the Fed.

However, the US Conference Board's leading indicators slipped a bit more than expected in July, but they also said the six-month trend no longer indicates a recession ahead.

Meanwhile, the Atlanta Fed's GDP Now tracker still sees good +2% growth in Q3-2024 for the US economy, better than the 'blue chip' analysts that they benchmark against.

Japan said core machinery orders, which exclude those for ships and electric power companies, rose by +2.1% in June from May, better than expected. It was on the back of an upturn in orders for the service sector. In JPY, these orders were up +2.6% from the same month a year ago.

Later today, China will release its latest review of its Loan Prime Rates but no changes are expected. These rates are already at all-time lows.

The lackluster Chinese economy has sharp consequences for Australia. Australia shipped AU$138 bln of iron ore in the year to June. A Canberra report projected that to fall to AU$114 bln in the next 12 months and AU$102 bln in the following as prices continue to fall. That could leave a AU$3 bln hole from royalties in the Australian Federal results. The wider Australian economy will have downside risks from this too.

The UST 10yr yield is now at just on 3.87% and down -1 bps from this time yesterday. The key 2-10 yield curve inversion is slightly deeper at -19 bps. Their 1-5 curve inversion is little-changed at -75 bps. And their 3 mth-10yr curve inversion is now at -146 bps and marginally less. The Australian 10 year bond yield starts today at 3.96% and up +2 bps. The China 10 year bond rate is down -3 bps at 2.16%. The NZ Government 10 year bond rate is now just on 4.22% and up +6 bps.

Wall Street has opened its week with the S&P500 up +0.7%. Overnight European markets were also all up +0.5%. Yesterday Tokyo closed its Monday session down -1.8% however. But Hong Kong was up +0.8% and Shanghai up +.05%. Singapore was only up +.01%. The ASX ended its Monday session up +0.1%, but the NZX50 fell -0.5%.

The price of gold will start today down -US$6 from yesterday at US$2502/oz.

Oil prices are down -US$2 at just on US$73.50/bbl in the US while the international Brent price is now just on US$77.50/bbl.

The Kiwi dollar starts today up +½c from yesterday at 61 USc. Against the Aussie we are a tad softer at 90.7 AUc. Against the euro we are up +20 bps at 55.1 euro cents. That all means our TWI-5 starts today at 69 and up +20 bps from yesterday.

The bitcoin price starts today at US$59,252 and down -0.5% from this time yesterday. Volatility over the past 24 hours has been modest at just on +/- 1.7%.

Daily exchange rates

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Source: RBNZ

Source: CoinDesk

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36 Comments

by bdogg | 20th Aug 24, 8:07am 1724098031

🤡 - “NZD will tank if Orr cuts! He can’t do it, inflation will rocket up!”

Anyone could see it was priced in off the back of Orr’s dovish commentary at the meeting prior. And now with the US market pricing in cuts at every meeting, the inflation/high import price clown show on here, can head out of town in their Mini.

by bw | 20th Aug 24, 8:20am 1724098828

3 years ago interest rates were low, and headed lower "Don't fix now! The OCR could go negative!" was that right? If so, why did the OCR go to from 0.25% to 5.5%? And the RBNZ wasn't alone in that move. All Central banks acted in unison (perhaps that's a clue?)

2 years on from that. "Interest rates are too low and headed higher! The OCR is going up!" Was that right? Looks like that was just as wrong.

So why would we think, given both extreme policy views, that today's calls of "Interest rates are going lower! The OCR must be cut!" will be any more right than any recent call?

But one thing a commentator did note yesterday, "Term Deposits are falling. I'm off to put a Ferrari on the mortgage!" (or words to that effect). So what happens when interest rates fall? People spend. And what does that do to the CPI and other Global interest rates? (Not to mention the current Global exchange rate levels. What happens to the Yen and the Nikkei if US interest rates are cut? The same for the Chinese economy? etc)

We are about to find out.

by Pa1nter | 20th Aug 24, 8:19am 1724098772

So what happens when interset rates fall? People spend. And what does that do to the CPI?

*Looks at OCR moves vs CPI for the last 20 years*

Uhhh, nothing definitive?

by bw | 20th Aug 24, 8:29am 1724099344

20 years? I'm not sure any of us have lived through the uncertain times that we have today, on many levels. And that perhaps is why we have been oscillating between extremes of all things. No one knows what might happen next. They never do. And that...doesn't fit anyone's charts or past stats. But perhaps there is more possibility for the unexpected now, than recently. Who is going to take the White House? What will Hamas and Iran do? Taiwan? Ukraine? How do we deal with Global unpayable Debt? What happens if 20 million people in Sudan starve? And the list goes on.

by Pa1nter | 20th Aug 24, 8:34am 1724099671

Your musing was what lower rates does to the CPI (presumably that it makes it go up).

There's not a very strong 1:1 relationship there.

As your subsequent list highlights, inflation is just as likely to be influenced by externalities.

by bw | 20th Aug 24, 8:41am 1724100095

If lower interest rates aren't supposed to stimulate the economy - spending - what are they supposed to do? Taking pressure off current Debt holders can't be the answer, or the Lenders wouldn't lend out more Debt. They'd keep the Money Supply fixed. But they won't - they never do. The name of the Game is to lend more.

And you know my view - Inflation is an expansion of the Money Supply NOT a rise in the CPI, which is a measure of Price Movement fundamentally caused by a change in the amount of Money (Debt) in the System

by Pa1nter | 20th Aug 24, 8:52am 1724100768

The CPI is measuring price movement full stop, there's supply and demand components influencing it either way, it's not just an indicator of debt in the system.

The expansion of the money supply in NZ, will cause inflation if the supply of goods is fixed. Arguably, more demand can decrease the cost of imported goods, because we're such a minnow player and higher purchasing volumes can lower the per unit cost.

Or, something else is going on well outside our borders causing supply movements.

Or our currency is higher or lower in value.

by sgtshortcut | 20th Aug 24, 10:47am 1724107646

Below the NIR is stimulating…we are still miles above that so these cuts are not stimulatory, they are meant to get an economy back on an even keel? Are suggesting that they will cut deeper than the NIR?

by Hastings | 20th Aug 24, 8:33am 1724099634

Great points…perhaps the mythical soft landing or perpetual can kick requires that every average Joe needs to be permanently wobbled off balance or wrong footed.

by John from Bunnings | 20th Aug 24, 8:37am 1724099848

Just accept you and the others screaming the NZD would tank, were wrong. It’s really embarrassing.

by phalanax | 20th Aug 24, 8:57am 1724101020

"I'm off to put a Ferrari on the mortgage" ...therein lays the problem.... credit and depreciation...enjoy the Ferrari...as soon as you drive it off the lot you've lost a packet.. but you will look cool doing 110kph on the expressway like everyone else ...... lol

by ChrisOfNoFame | 20th Aug 24, 9:11am 1724101905

"We are about to find out."

Indeed. We are about to find out it'll be little different from what's happened many times before.

"Those that do not study history are doomed to repeat it."

by Yvil | 20th Aug 24, 9:31am 1724103064

That's a really confused post bw.

by OldSkoolEconomics | 20th Aug 24, 8:22am 1724098961

Always best to wager on the opposite of Orrs predictions. I agree he went too low then too high then started dropping too soon.

I think the guy over thinks things and overcomplicates everything. He ought to stick to simply raising the ocr a little at the first sign of inflation and lowering when it falls.

We don't need multi year economy guesses, tree based economic strategies or wagers on going lower than the rest of the world when black swans appear. Also drop 90% of the commentary and focus on what we know now and leave the future to the future.

Just do the basics Adrian. We are a Lil country in the back end of nowhere and a rounding error for the global economy - just stick to easy decisions based on facts.

by 26@Main | 20th Aug 24, 9:10am 1724101813

Posters often refer specifically to Adrian Orr but it's the Monetary Policy Committee that makes the OCR decision and that's made up of 7 people (two recently appointed by Nicola Willis). Adrian Orr does make the casting vote if a majority isn't reached though (happened once, in May last year).

by OldSkoolEconomics | 20th Aug 24, 11:01am 1724108478

A committee. But Adrian is the leader. And needs to be accountable for the groups decision.

by ChrisOfNoFame | 20th Aug 24, 9:17am 1724102245

"He ought to stick to simply raising the ocr a little at the first sign of inflation and lowering when it falls."

99% THIS !!!

To get 100% I'd prefer it to say "... and lowering it as it falls."

by talking sense | 20th Aug 24, 8:32am 1724099547

Not sure a massive 0.25% cut is much to hang a theory on

But it looks like you agree with the clowns that inflation is less likely to rocket up if the US is cutting rates

which is precisely the point

by Squishy | 20th Aug 24, 8:07am 1724098030

Oil prices are down -US$2 at just on US$73.50/bbl in the US while the international Brent price is now just on US$77.50/bbl.

Let the good times roll.

by Pa1nter | 20th Aug 24, 8:11am 1724098300

Putin's holding all the cards!

Watch whatever Israel's doing pump up barrel prices!

by HouseMouse | 20th Aug 24, 8:16am 1724098593

Lol

by Audaxes | 20th Aug 24, 8:14am 1724098476

They seem to be voting with their money that the US Fed has in fact engineered a soft-landing, or better, and that the trajectory from here is 'up' on the back of an aggressive easing cycle from the Fed.

In defending the deranged and experimental notion of an “ample reserves regime,” the Fed is defending continued misalignment between monetary aggregates and economic output. It is defending exactly the element of monetary policy that contributed to a decade of yield-seeking financial speculation, forced $8 trillion of uninsured deposits into the banking system, encouraged the passive acceptance of enormous government deficits, leaves in place the fuel for future episodes of inflation, and has already produced trillions of dollars of losses both in commercial banks and in the Fed itself – invisible because the assets are not marked to market. Even as the Fed battles the flames of a fire-breathing dragon, it insists on keeping that dragon as a house pet Link

by IT GUY | 20th Aug 24, 8:19am 1724098762

Batman always turns his back on the evil villain

by bw | 20th Aug 24, 8:31am 1724099487

"It is defending exactly the element of monetary policy that contributed to a decade of yield-seeking financial speculation, forced $8 trillion of uninsured deposits into the banking system, encouraged the passive acceptance of enormous government deficits, leaves in place the fuel for future episodes of inflation"

Exactly.

by HouseMouse | 20th Aug 24, 8:17am 1724098638

Ok, calls on the much anticipated HPI?

I say down 1.6%

by IT GUY | 20th Aug 24, 8:38am 1724099921

SA 1.39 AB 2.9 -7.5 line

The average of this and the next 2 HPI is going to tell a lot and will set the tone for summer trading, even more so if they all print similar numbers as it reinforces the trend. So the cheapest you can really fund a purchase is 6.85% ish at 6 months? That's the effective rate across the three months. Hardly stimulatory, in winter, with overhang. By 1st Dec that rate will be about 6.25%, place your bets

2024

9^th October – Monetary Policy Review & OCR
27^th November – Monetary Policy Statement & OCR

2025

19^th February - Monetary Policy Statement & OCR
9^th April - Monetary Policy Review & OCR
28^th May - Monetary Policy Statement & OCR

by Audaxes | 20th Aug 24, 8:25am 1724099128

China's July exports to Mexico at $8.2 billion/month up from $3.5 bn in 2020. China is assimilating the biggest economies of the Global South: Mexico, Brazil, Indonesia, Vietnam. Chinese exports to India "only" doubled. Link

by phalanax | 20th Aug 24, 10:05am 1724105111

Not sure there's much left to extract from the exploited masses but those anticipating a sharp reverse of fortunes might find the Ferrari wont start ,it needs new fuel pumps , and the injectors are clogged with bad debt ...lol

by Yvil | 20th Aug 24, 11:24am 1724109897

Good morning Jfoe and J.C.. I think you are two of the most knowledgeable posters, and I wonder if you would be kind enough to share your views on Colin Maxwell's (edited) interesting late post of 9.09pm last night about the state of our economy and particularly BRICS+ on David Hargreaves article: https://www.interest.co.nz/economy/129281/bnz-head-research-stephen-top…

Many thanks

by Pa1nter | 20th Aug 24, 10:00am 1724104817

I think too many people are viewing it over optimistically in light of American/Western decline.

I'm more inclined to agree with you; it's a club of countries who's only commonality is they don't want to operate within the American dominated system so much. How binding that interest is, I guess we'll only find out in time.

by rastus1 | 20th Aug 24, 12:00pm 1724112011

It's global decline.

I remain optimistic that the democratic countries with decent human rights for all will prevail.

How many folk are illegally entering the BRIC's?

by Yvil | 20th Aug 24, 2:22pm 1724120579

"How many folk are illegally entering the BRIC's?"

Do you understand what BRICS is?

by Baywatch | 20th Aug 24, 4:45pm 1724129150

DO you?

by 26@Main | 20th Aug 24, 10:25am 1724106351

It's Colin Maxwell not Colin Cameron, important distinction because Colin M comments about corporate sponsored democide on his Facebook page, probably best to ignore and will likely be banned in time. (Edited to add - read his bio on Interest - the reason I Googled him)

by Yvil | 20th Aug 24, 11:24am 1724109861

Bummer, you're absolutely right, my bad, and thanks for correcting me. I'll amend my post now.

by profile | 20th Aug 24, 10:31am 1724106701

Hunga hanging around.

"Given that the Hunga stratospheric hydration came atop a robust moistening trend, it seems likely that the stratosphere will remain in an anomalously humid state for decades.

...The importance of stratospheric water vapor (SWV) in Earth’s climate system is well established. As a potent greenhouse gas, its radiative forcing affects temperatures locally (e.g., Forster & Shine, 1999) and at the surface (e.g., Solomon et al., 2010). It influences the stratospheric circulation via thermal wind balance (e.g., Maycock et al., 2013) and plays a crucial role in ozone chemistry as the reservoir of odd hydrogen (Evans et al., 1998; Dvortsov & Solomon, 2001; Stenke & Grewe, 2005)."

https://essopenarchive.org/users/536865/articles/737456-the-evolution-o…