• Inflation and employment in the United States are starting to turn
  • Has the Chinese yuan currency adjustment run its course?
  • Australia continue to have a big lead over sleepy New Zealand

U.S. inflation and jobs data begins to turn around

Global financial and investment markets are still reeling after the US Federal Reserve’s onslaught two weeks ago for interest rates to rise longer to fight inflation.

Tough talk and hawkish speeches and statements from Fed Governors Daly and Bullard ahead of the Jerome Powell Jackson Hole blitz have been followed by similar hawkish messages from Governors Williams and Fester over the past week.

As a result, US 10-year bond yields rose again from 3.10% to 3.20% and US equity markets continue to head south with the Dow Jones at 31,318, down 8 % from July/August “bear market” peak. rally” in mid-August. In these “risk averse” market conditions, the US Dollar strengthened again to reach new highs of 109.60 on the US Currency Index.

The Kiwi Dollar is hanging on to it to some degree, breaking out of a low of 0.6056 at some point on September 2 and returning back above 0.6100 by market close.

Until there is a change in direction towards lower US bond yields and higher US equity markets, the NZD/USD exchange rate will struggle to make meaningful gains. However, the negative reaction to the Fed has already played out in the markets, so we still see a low probability that the NZD/USD exchange rate will break below 0.6000.

It became clear that the timing and rationale for the Fed’s further hawkish intervention was that it was unhappy with bond yields falling to lows of 2.60% after July’s weaker-than-expected inflation outcome. . US mortgage interest rates had risen sharply from 3.00% at the start of the year to 6.00% in July (reflecting a rapid tightening of monetary conditions). However, falling bond yields caused bank lenders to cut mortgage interest rates below 5.50%. According to the Fed, this was a premature easing of monetary conditions and it acted aggressively to stop it. Mortgage interest rates were quickly adjusted upwards, which will slow demand for consumer spending in the US economy.

The question that will arise over the coming weeks and months is whether the US emerging economic data that is being released supports the Fed’s view that inflation has not peaked and the labor market remains robust (or not). Evidence is mounting, with oil prices falling below USD 90/barrel and food prices falling, that the annual inflation rate in the United States, which rose from 3.00% it 12 months ago at more than 9.10% in June, could decline over the next few years. month as fast as it increased. As discussed in detail in last week’s report, the cost of housing (“housing”) component of the US CPI inflation index holds the key.

With all indicators pointing to the U.S. housing market rapidly sinking into recession, rent costs and implied rent costs cannot continue to rise 0.50% per month as they have for the past six last months. Inflation figures for August are due out on September 14 and consensus forecasts call for a decline of 0.10% for the month. This outcome will again reduce the annual inflation rate to somewhere near 8.0% from the current 8.50%. Two months of annual rate cuts may not be conclusive evidence for the Fed that inflation has peaked, but markets will quickly begin to reflect that the Fed will eventually be forced to pivot and signal that interest rates don’t need to drop any higher. Ahead of the Fed’s next meeting on September 22, retail sales data from the 16th and the NAHB housing index from the 20th will be key indicators for the markets. The Fed will raise its official interest rate from 0.75% to 3.25% on the 22nd, but this will not be news for the markets and it is already priced in.

US employment figures for August were released on Friday 2 September. While the 315,000 increase was in line with earlier consensus forecasts, it provided early warning signs that the labor market was also beginning to slow. The jobless rate rose from 3.50% to 3.70%, the first rise since the Covid shock in March 2020. In the detail of the jobs data were pockets of weakness. The increases were for part-time jobs and full-time jobs actually went down. Unemployment rates for Hispanics and Blacks rose well above the overall 0.20% increase, to 4.50% and 6.40% respectively (previously 3.90% and 6.00%).

The jobs data is beginning to confirm anecdotal evidence that major US corporations are now implementing hiring freezes and are being far more cautious as consumer spending declines. Joe Biden in the White House won’t be happy if the Fed’s renewed hawkish stance causes a hard landing in the economic recession and thus a spike in the unemployment rate ahead of the upcoming congressional midterm elections on Nov. 8.

Has the Chinese yuan currency adjustment run its course?

It seems that the Chinese monetary authorities are not so happy with the current level of speculative bets on the short selling of the yuan which has lowered the value of USD/CNY to 6.9000. There are several avenues available to the PBOC to wear down speculators, from adjusting the daily yuan peg to something different from what was expected, or changing foreign currency bank deposits/reserve requirements. Watch out for subtle interventions to stabilize the yuan over the next few weeks. The 8% depreciation of the yuan from 6.4000 in April to 6.9000 currently has contributed to the 11.5% depreciation of the Kiwi dollar from 0.6900 to 0.6100 against the strengthening of the USD during the same period (see table below). With the USD so strong and the Chinese wanting to ease monetary policy, the depreciation of the yuan has been a tool to help their exporters, as China suffers from Covid shutdowns and an energy crisis (due to drought).

A continued appreciation of the USD against all currencies seems less likely given the developments in US inflation and employment described above. Therefore, the USD/CNY rate should stabilize below 7.0000. As Chinese economic data (retail sales and industrial production) improve over the next few months, the need for looser monetary policy with yuan weakness diminishes. However, the more recent closures of megacities under the Covid-Zero policy will be another obstacle to improving Chinese economic data.

Australia continue to have a big lead over sleepy New Zealand

From the outset, when the shock of Covid hit us in March 2020, Australians always seemed to be one step ahead of a complacent and sometimes overly cautious New Zealand. Their economy is stronger and outperforming New Zealand in the post-Covid era, as evidenced by the NZD/AUD cross rate below 0.9000. Australian exports are booming, resulting in massive trade surpluses overseas. New Zealand has gone from an overseas trade surplus a year ago to a deficit today as our export volumes are hampered by chronic labor shortages.

At last week’s jobs summit in Australia, news broke that the Albanian Labor government had the backing of unions to raise its annual immigration cap from 165,000 to 195,000 to immediately address job shortages. workforce. The Ardern ad government here in New Zealand has an opposing immigration policy. Our government announced last week the reopening of our borders to international students. We are far too behind on this again, as the Australians did a year ago and all the overseas students went.

It is suspected that Australians will now hold job promotion events in the UK and Europe to attract young skilled/professional immigrants to Australia. The outlook and prospects for young people in the UK and Europe currently look particularly bleak, so now is the perfect time to be in front of them by encouraging immigration. Such forward-thinking action to help the economy would not have penetrated the heads of our increasingly incompetent government (think of the recent botches with Kiwi Saver charging the GST and Jacinda’s helicopter money).

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*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has been writing commentaries on the New Zealand dollar since 1981.