China grumpier with Australia

Kia ora,

Welcome to Thursday'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 China is signaling more action is coming from it to punish Australia.

But first, the US Fed minutes were released today and all eyes were on tapering signals. The market caution with the risk-off mood has been largely attributed to hesitation ahead of this release. And in fact, these minutes show that they sense a move to tapering is getting closer (page 11). The minutes also showed they are seeing 'progress' on the inflation front too. That resulted in an overall signal of two interest-rate hikes for 2023, according to the median of their projections, while seven of 18 wanted to raise interest rates next year. Thirteen officials viewed inflation risks were weighted to the upside, up from five in March, their forecast showed.

The rise analysts had expected in job openings in June hasn't happened, holding steady at 9.2 mln.

Separately, the US booked total vehicle sales in June at the annual rate of 15.4 mln, which was a sharp drop from the 17 mln annual rate in May. The US is the second largest vehicle market in the world after China which sold 25.8 mln vehicles in the year to June.

US mortgage application activity fell for the second week in a row, and on top of earlier falls, now reaching the lowest level since the beginning of 2020. A lack of houses for sales is restraining mortgage activity. Low interest rates are on the sideline now.

But despite these current hesitations, both regular analysts, and the AI models are indicating that Q2-2021 economic growth in the US will be stellar and far north of a +7% pa rate - and maybe closer to +8%. Even their CBO officials are seeing upgraded prospects.

In Europe, the European Commission raised its growth and inflation projections quite a lot for the euro area for 2021. They say the euro area is set to expand by +4.8% this year and +4.5% in 2022.

In China, their State Council seems to be directing their central bank to cut its reserve ratio requirement for banks to spur more economic activity. It is not unprecedented, but it does indicate that at the highest levels they are feeling pressure to act over the slowdown that has been evident in their economy in the past few months.

China also released its June foreign exchange reserve data showing a small rise to US$3.21 tln, marginally more than expected, but also marginally less than for May.

In Beijing, in response to an early patsy question from a local reporter, their Foreign Ministry spokesperson has warned Australia more trade actions are coming their way, and the specifically noted the idea is to hurt Australians as a way to get "the message" through to Canberra that is it not to be trifled with. "It is the people that pay for misguided government policies".

But that is not deterring the iron ore trade, or the iron ore price.

In Australia, NSW has extended its Greater Sydney's lockdown for seven more days after the state recorded 27 new COVID-19 cases, taking it out to July 17.

The UST 10yr yield starts today at 1.32% and down another -5 bps, and extending their retreat. 

The price of gold is now at US$1803/oz which is up +US$8/oz from this time yesterday.

Oil prices have fallen again today, down by -US$1.5. In the US they are now just over US$71.50/bbl, while the international Brent price is now just over US$73/bbl.

The Kiwi dollar opens today just under 70.2 USc and marginally above this time yesterday. Against the Australian dollar we are slightly firmer again, at 93.7 AUc. Against the euro we are similarly firmer at 59.4 euro cents. That means our TWI-5 starts today at just on 73.

The bitcoin price is now at US$34,538 and up +2.0% from this time yesterday. Volatility in the past 24 hours has been a moderate +/- 2.1%.

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.