The pace of US inflation cools slightly

Kia ora, 

Welcome to Wednesday's Economy Watch where we follow the economic events and trends that affect New Zealand.

I'm David Chaston and this is the International edition from Interest.co.nz.

Today we lead with news some inflation expectations are being reset in markets today.

The American inflation rate as measured by the CPI came in as expected at +5.3% for August, unchanged from July. But their core inflation rate - without food or energy - came in lower than expected at 4.0% and that was not expected. There has been a noticed tailing off in August from July, and markets have reacted to this.

For a number of months now the American economic expansion has seemed to be building while the Chinese one falling away, which is a turnaround in fortunes. But now, the situation has a sense it is turning again. Certainly the latest update to their live GDP trackers shows a rather fast moderation underway in the US. The OECD is also suggesting something similar is happening.

Both the US CPI and economic expansion cooling are suggesting to markets that US Fed tapering may be a ways off yet, and that corporate earnings may not continue strongly. That has seen equity markets fall, the benchmark UST 10yr rate slip - and the price of gold rise.

Meanwhile in China, property giant Evergrande is warning of the 'tremendous' financial pressure it is under. It's shares are sinking, taking others with it, and it has hired a restructuring team to guide it from here. Angry investors are besieging their headquarters because bond payments are overdue. Evergrande might be a Lehman Bros. for China, some fear.

And the worries about property are more widespread in China. Second-hand home transactions in Shanghai fell by a quarter in August amid stepped-up real estate restrictions. In the country's technology hub Shenzhen they fell more than -80% last month.

New Zealand has been ranked the third most free economy in the world, beaten only by Hong Kong and Singapore, but out-ranking the US (#6) and Australia (#9). Canada is #14. But the report is essentially for 2020 and it notes that Hong Kong's #1 position will likely fall when China's heavy hand in the territory is taken into account in its next report. China is #116 in this latest ranking. New Zealand has ranked #3 in this list for the past eight years.

In Australia, their central bank boss has challenged market expectations for interest rate hikes before 2024, and pushed back against suggestions hikes and tougher lending standards could be used to quell house prices, saying changes to tax, social security and planning regulations worked best.

Meanwhile, ANZ is also saying there’s a sharp disconnect between expectations for interest rate hikes by the RBA and RBNZ. They expect the RBNZ will increase the cash rate at its October 6 meeting, whereas they don’t expect the RBA to raise the cash rate until the first half of 2024. One reason for this is that even though both countries have seen "remarkable labour market recoveries" over the past year, only New Zealand has seen wage growth pick up significantly, alongside rising core inflation. They say this may be down to the stronger New Zealand labour market in the years prior to the pandemic, the larger increase in unemployment in Australia during 2020, and the sharper rebound in household inflation expectations in New Zealand.

The closely-watched NAB August Australian business confidence survey has it well into negative territory, even though respondents believe business conditions are still positive. But at least this August result wasn't worse than the July report. NSW and Victoria drive the overall negative sentiment there.

The UST 10yr yield opens today at just over 1.28%, so down a full -5 bps from this time yesterday. 

The price of gold has risen +US$15 today and now at US$1807/oz.

Oil prices have been pretty stable overnight so in the US they are now still just on US$70/bbl, while the international Brent price is still at US$73/bbl.

The Kiwi dollar opens today at just on 71 USc and marginally softer since this time yesterday. Against the Australian dollar however we are +40 bps higher at just under 96.9 AUc. Against the euro we are little-changed at 60.1 euro cents. That means our TWI-5 starts today at just on 74.1, and also little-changed. We are still right at the top of the 72-74 range of the past ten months.

The bitcoin price has risen today, now at US$46,596 and +4.8% higher than this time yesterday. Volatility in the past 24 hours has been moderate at just over +/- 2.9%.

You can find links to the articles mentioned today in our show notes.

And get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston and we’ll do this again tomorrow.