The cost of long term debt is rising

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 long term interest rates are rising and have much further to go.

But first, American private businesses added +122,000 workers to their payrolls in December, the least in four months, compared to 146,000 in November, according to the precursor ADP Employment Report. That was below forecasts of +140,000. Hiring slowed in several industries and employment in manufacturing shrank for the third straight month. Employment growth was strong among large businesses in the West. Pay gains slowed slightly but are actually quite high, up +4.6% for those who stay in a job, up +7.1% for those who change jobs.

Meanwhile, initial jobless claims rose on the expected seasonal basis to 305,000 last week, but much less than those seasonal factors would have indicated. 2.175 mln people are on these jobless benefits now, almost exactly the same level as a year ago. (On a headline, seasonally-adjusted basis, initial claims 'fell', and by more than expected.)

Also falling were American mortgage applications, the fourth straight weekly retreat. Their benchmark 30 year fixed home loan rate almost touched 7% last week, deterring potential borrowers. Until the Trump risk goes out of long term benchmark rates, this is going to be a problem for the American housing market - and in fact all real estate transactions and other asset purchases that are valued based in yield.

And those rising yields are now extending to very long-dated maturities. The US Treasury 30 year bond auction today came in with a yield of 4.87%, up from the 4.48% at the prior equivalent event just a month ago. The auction was well supported, but less to than that earlier one.

The rise in longer term bond yields and interest rates is a global one. At its core is a demographic shift and ageing populations. But the Trump return has focused investors on the long term risks and they are back demanding a premium for that. Companies are also issuing more longer term debt, so there is a supply element to the trend. The Biden Treasury tended to prioritise shorter maturities in its fund raising, but the incoming Trump Treasury has already signaled it will go long. That will add to the supply pressure, and will spill out internationally. Pity American homeowners with 30 year mortgages.

In China, they are getting more proactive ahead of the expected Trump Tariffs, and reactive about their stuttering economy. They announced an expanded set of taxpayer subsidies for a wider range of consumer products, hoping to spur sluggish consumer spending. They have expanded the eight-category subsidy program to now twelve categories, now including dishwashers, rice cookers and microwaves, which will get a 20% discount from existing sales prices.

Overall, it is a program that has grown to NZ$2.8 bln, and still expanding.

In fact, this announcement was part of a much wider stimulus effort. They are battling consumer anxiety, a tougher challenge than the previous democratic yearnings.

Meanwhile, China is aggressively defending the yuan. It has held the official rate to the USD fixed since early November at 7.19. It last had a fixed peg in 2008-2010. Unfortunately for them offshore trading has it now at 7.35 and depreciating.

In the EU, producer prices rose +1.7% in November from October, the biggest monthly rise since September 2022. A seasonal rise in energy costs was the cause. Year on year, the EU PPI was -1.1% lower.

And staying in the EU, economic sentiment which had been stable for most of 2024, fell in December. Not a huge dip, but a notable one.

In Australia, their monthly CPI indicator rose +2.3% in November from a year ago, after a +2.1% rise in the prior two months. Analysts estimates were for a +2.2% rise and the November since August, partly due to the timing of government electricity rebates. Most households received a single rebate payment instead of two in November. Still, the latest inflation level has remained within the central bank's target range of 2 to 3% for the 4th month in a row.

And in maybe something of a surprise, there were 344,000 job vacancies in November in Australia, up by +14,000 from August. That is up by +4.2% and was was the first rise since May 2022, when job vacancies reached their historical peak. However, year-on-year the declines is almost -10%.

In New Zealand we got the benefit of strong commodity price gains in 2024. ANZ reports that overall commodity prices finished 2024 up 15% from a year ago. All sectors except forestry achieved gains during the year but the largest were made by dairy (+19%) and meat (+23%). However, these sectors were more subdued in the December month. In NZD the rises were even more impressive, up +29% for dairy and up +35% for meat, year on year.

The UST 10yr yield is now at just on 4.68%, and little-changed from yesterday.

The price of gold will start today at US$2669/oz and up +US$18 from this time yesterday.

Oil prices are down -50 USc from this time yesterday at just on US$73.50/bbl in the US while the international Brent price is at just under US$76.50.

The Kiwi dollar starts today still at 56.1 USc and down -40 bps from this time yesterday. Against the Aussie we are down -10 bps to 90.3 AUc. Against the euro we are up +20 bps at 54.4 euro cents. That all means our TWI-5 starts today at just on 66.9 and down -20 bps from this time yesterday.

The bitcoin price starts today at US$94,646 and down -3.2% from this time on yesterday. Volatility over the past 24 hours has been modest at +/- 1.7%.

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.