Episode Details

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.

Today we lead with news of a big call by the US Federal Reserve.

First up you should know that the US Fed cut its benchmark policy rates by -50 bps, to the 4.75%-5.00% range, a larger cut that most professional observers had anticipated, but in line with some advance financial market pricing. (And it might be notable, that for the first time in almost 20 years, one voting member dissented, preferring only a -25 bps cut.)

They say the key to the cut is their "greater confidence" that inflation is beaten.

The Fed’s so-called dot plot, which they use to signal its outlook for the path of interest rates, shows the median 2024 year-end projection for the federal funds rate fell to 4.38%. That implies another -50 bps in cuts are coming soon. The median estimate for the end of 2025 decreased to 3.38%.

Markets initially reacted with Wall Street rising, commodity prices rising, the USD falling, and UST bond yields moving relatively little at the long end but dipping at the short end. But conviction in these early market moves seems to be wavering.

Of course, the US Fed isn't the first to cut rates in this cycle. We have already seen them from the ECB, Canada and England. And yesterday, Indonesia delivered a surprise rate cut. But now the Fed has moved, and decisively, many others will no doubt follow. Global rates are in a clear easing cycle, now that inflation seems to have been tamed.

American mortgage applications leapt +14% last week from a week earlier, the fourth consecutive gain, marking the sharpest increase since the 18-month high of almost +17% in mid-August. The surge in home loan demand tracked the fall in borrowing costs, with the average interest rate on a benchmark mortgage falling by -14 bps from the earlier week to a two-year low of 6.15%.

And there was a good (but not great) rise in American housing starts in August. They were up almost +10% from the previous month to an annualised rate of 1.36 mln units in the month, firmly above market expectations of 1.31 mln units, and rebounding from the near 7% plunge in the previous period. It was the sharpest increase in nine months. Starts of single-family homes rose by nearly +16%. Despite all that, housing starts are still -6.5% below the year-ago level.

Japanese exports rose +5.6% from a year ago in August, slowing sharply from a 10.2% rise in July and falling short of market forecasts of another 10% rise. But it was the ninth successive month of increased export shipments.

In China, and in another sign of worsening tensions, China has 'blocked' a Taiwanese company manager from returning home, essentially kidnapping him at the border.

But that is minor compared to the economic signals. Mid-Autumn Festival mooncake sales were

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