Eyes on US CPI for Fed-friendly result

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 all eyes are now on tomorrow's US CPI release for August.

But first, there was surprising news from the US. August producer prices rose far less than any analyst has forecast. In fact they fell -0.1% in August from July, following a downwardly revised +0.7% gain in July, driven by a sharp decline in margins for machinery and vehicle wholesaling as importers absorbed some of the tariff taxes. On an annual basis, headline producer inflation slowed to 2.6%, while core producer inflation eased to 2.8%. Analysts had expected the year-on-year change to be up +3.5%.

Markets took these changes at face value, ignoring the "new management" at the agency compiling the data. It is being seen as "Fed-friendly" for a rate cut next week. Although to be fair far more will depend on tomorrow's CPI release where rates closer to 3% are anticipated.

Also unusually positive was last week's data on US mortgage applications. They jumped +9.2% from the prior week to be +11.6% higher than year-ago levels. Driving the turnaround was a -15 bps plunge in benchmark mortgage rates, which fell to their lowest in nearly one year as a wave of pessimistic labour market data drove yields on long-dated Treasury securities to retreat. Applications for a loan to refinance a current mortgage, which are more sensitive to changes in interest rates, surged by +12.2% from the previous week to their highest level in one year. In turn, applications for a mortgage to purchase a new home rose by +6.6%.

And there was another US Treasury 10 year bond auction earlier today and that resulted in a median yield of 3.99%, down from 4.20% at the prior equivalent event a month ago. But a feature of this latest event was the declining demand, down -8.5% which is a notable pullback.

Across the Pacific, Japanese manufacturers are feeling bullish, especially about export prospects. The Reuters Tankan index rose to a very positive level in September, its highest level since April 2022. Easing trade uncertainties following the Japanese-US tariff deal that sharply eased the tariff rate is behind the shift. Sentiment improved across six of nine manufacturing industries surveyed.

In China, they reported that consumer prices dropped -0.4% in August from a year ago, after being unchanged in the prior month and missing market expectations of a -0.2% decline. It was the fifth episode of consumer deflation this year and the sharpest drop since February. China has a similar period of deflation in the second half of 2023, but escaped those pressures in 2024. But they are back again. Food prices fell -1.2%, but beef prices were down -4.3% and lamb prices down -3.6% on that annual basis. Milk prices fell -1.4%.

Meanwhile Chinese producer prices dropped -2.9% in the year to August, less than the -3.6% drop in July, which was the steepest decline since July 2023. Producer prices have now deflated for 35 consecutive month although the latest data is the smallest decline since April.

Despite growing civil unrest and street demonstrations in Jakarta, Indonesian consumer sentiment was little-changed in August, although it is maintaining its recent low that started in May. However in a longer term perspective, it is +20% higher than it was a decade ago. (The last thing Canberra want to see is an unstable Indonesia as a neighbour.)

Fitch Ratings has raised its world growth forecasts for 2025 moderately since the June Global Economic Outlook on better-than-expected incoming data for 2Q-2025. But there is now evidence of an underlying US slowdown in ‘hard’ economic data and positive surprises on eurozone growth have partly reflected US tariff front-running, they say. Fitch still expects world GDP to slow significantly this year.

Global growth is now forecast to be 2.4% in 2025, up 0.2pp since June but a sizeable slowdown from 2.9% last year and below trend. China’s forecast has been raised to 4.7% from 4.2%, the Eurozone’s to 1.1% from 0.8% and the US’s to 1.6% from 1.5%. World growth for 2026 is 0.1pp higher at 2.3%.

The UST 10yr yield is now over 4.03%, down -4 bps from yesterday at this time.

The price of gold will start today at a new high at US$3,645/oz, up +US$4 from yesterday.

American oil prices are up +US$1 at just over US$63.50/bbl with the international Brent price is similarly higher at just on US$67.50/bbl. American crude oil stocks jumped, and for a second week in a row, when declines were anticipated, indicating weaker demand than expected.

The Kiwi dollar is now at just over 59.5 USc and up +20 bps from yesterday. Against the Aussie we are down -20 bps at 89.8 AUc. Against the euro we are up +20 bps at 50.8 euro cents. That all means our TWI-5 starts today at just over 66.8, down -20 bps from yesterday.

The bitcoin price starts today at US$113,721 and up +2.4% from this time yesterday. Volatility over the past 24 hours has been moderate, also at just over +/- 1.4%.

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.