The US Fed warns of rising economic risks

Kia ora,

Welcome to Thursday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

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

And today we lead with news the global economy's track is no clearer today.

First up, the US central bank kept it key policy rate unchanged at 4.50% for a third consecutive meeting in line with expectations. They are keeping their wait-and-see approach but watching to see if the tariff taxes drive up inflation and slow economic growth. They say they still see expanded economic activity despite signs net exports are volatile. So far they haven't seen the jobless rate move "and labour market conditions remain solid". But they are seeing elevated inflation, and they foresee risks of higher unemployment and higher inflation.

Equity markets dropped on the release, as did benchmark bond yields. The USD hardly moved however.

Earlier, it was reported that US mortgage application volumes jumped +11% last week from the previous week, ending the three consecutive slumps from earlier in the month. The rebound came after there was another small drop in benchmark mortgage rates.

Across the Pacific, China's FX reserves rose in April to their highest level in more than six months (in USD).

And staying in China, their central bank said it will cut the reserve requirement ratio (RRR) by -50 basis points, injecting about ¥1 tln in liquidity into their domestic economy. But the cut won't come until May 15 and will then be the first RRR cut in 2025. They also said they will lower the rate on seven-day reverse repurchase agreements by 10 basis points to 1.40%, effective tomorrow, Thursday, May 8. This is the first cut to this key policy rate since September 2024 and could lead to cuts in market and other regulatory rates.

And despite denials on both sides, both China and the US said they will meet in Switzerland to discuss stuff on Saturday. Interestingly, the Chinese side will be represented by their lead person for China-US economic and trade affairs, but the US side won't be led by its USTR, but the more senior Treasury Secretary.

In the EU there were no surprises in their March retail sales volume data, holding flat again.

However, there was positive data out of Germany, where factory orders rose +3.6% in March from February, well above market expectations of a +1.3% gain and putting behind it February's lackluster result. It was their strongest increase since December, with broad-based gains across sectors.

Meanwhile, Poland cut its official interest rate by -50 bps to 5.25%. Falling inflation and weak economic activity prompted the move, but it was unusual because they have elections due on May 18 and they are battling Russian election interference.

In Australia, regulator ASIC said it has imposed additional conditions on Macquarie Bank's Australian financial services licence after multiple and significant compliance failures – some going undetected for many years and one for a decade.

And it seems Peter Dutton wasn't the only party leader to lose his seat at the weekend election. The Greens leader will too. In fact, like the Liberals, the Greens vote fell rather sharply at that election.

Separately, the OECD said the global trade in fake goods reached almost US$½ tln in the latest data they have - which is for 2021, posing risks to consumer safety and compromising intellectual property. The breakdown in trade cooperation since won't have lessened the problem.

The UST 10yr yield was at 4.28%, down -3 bps from this time yesterday before the US Fed announcement, then slipped slightly further to 4.27%.

The price of gold will start today at US$3384/oz, and down -US30 from yesterday.

Oil prices are firmer today, down -50 USc at just on US$58.50/bbl in the US and the international Brent price is now just under US$61.50/bbl.

The Kiwi dollar is now at 59.7 USc, down -30 bps from yesterday at this time. Against the Aussie we are unchanged at 92½ AUc. Against the euro we are down -20 bps at 52.6 euro cents. That all means our TWI-5 starts today just on 67.8 and down -20 bps.

The bitcoin price starts today at US$96,653 and up +2.2% from yesterday. Volatility over the past 24 hours has been modest at +/- 1.6%.

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

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

Kia ora. I'm David Chaston. And we will do this again tomorrow.