Wall Street goes into reverse

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 that despite good economic data, Wall Street equity prices are tanking today as it downs in investors they have been far too bullish on AI prospects.

But first, there were July 'flash' PMIs released today. The American one is quite positive, especially for their service sector. There new order growth rose its fastest for the year, and that drove the overall PMI to its best result since April 2022, a 27 month high. The factory sector wasn't so positive, basically marking time. Encouragingly however, despite the rise, price pressures have waned. But there are suggestions employment has stopped growing.

Retail inventories might be becoming a bit of a problem however, up +5.3% from a year ago. But because wholesale inventories are well contained (+0.2%), there is no reason to panic at this point.

Meanwhile, things are so bright in their housing markets. Mortgage applications fell last week from the week before to be -15% lower than the weak week a year ago, even though mortgage interest rates retreated and are now near their lowest of the year.

And new home sales came in quite low in June, well below anticipated levels. But this isn't a new situation. Overbuilding over quite some time means that they have a stunning nine months of inventory of new unsold homes at the current rates rate. The main problem area is in the North-East states.

American exports rose +4.0% in June from a year ago. Imports were up +3.0% on the same basis, meaning their merchandise trade deficit shrank a little. The still-rising import levels also means the healthy demand in the US economy is still the main driver of world trade.

There was another very well supported US Treasury bond auction overnight, this time for their 5 year Note. That delivered a 4.05% yield, down from 4.27% at the equivalent event a month ago. General market support for these debt issues remains impressive.

In Canada their central bank cut its policy rate by -25 bps to 4.5% at its overnight meeting, a second cut in a row. Another cut in September seems a live possibility. They say the reduced rates could contribute to a slowdown in mortgage and shelter costs, which have been a large component of inflation there.

Japan's July factory PMI actually slipped slightly below expansion levels to a very small contraction, an unexpected result of their Markt/S&P survey. But their services PMI went the other way with a solid expansion recorded for July.

In