Breakfast briefing: Higher yields are here to stay

Economy / news

US Fed rate decision headlines the week; Japan too; Japanese PPI very high; US CPI lacks cred; US consumer sentiment drops again; UST 10yr at 4.98%; gold holds, oil eases on talks hopes & lower demand; NZ$1 = 58.1 USc; TWI-5 = 61.4

14th Sep 26, 7:19am by David Chaston

Here's our summary of key economic events over the weekend that affect New Zealand, with news the price of money just keeps going up. Others have pointed out it is not only US policy management that is causing this trend, but also the generational shift of boomer savings starting to run down as they are used, generating a global imbalance. There are fewer savings for the investment demand in the global economy, so a fundamental supply/demand imbalance is growing. The US administrative incompetence is making this shift faster, however.

This week will feature the US Fed's rate decision on Thursday as the key upcoming event. Financial markets are pricing a 75% chance of a +25 bps hike. Economists have the full +25 bps as their central expectation. The reason is clear - inflation isn't under control, not even close.

Locally, Thursday will bring our Q2-2025 GDP result, expected to be +2.3% and up from Q1's +1.8%. But such is the disconnect between consumers lived experience, and sectors like farming, that it is likely to be dismissed as electioneering even if it is accurate. We will also get retail (electronic card) and inflation (selected price) updates this week too. And in the middle of this we will likely get the August REINZ data this week as well.

In Australia, the key data releases will be minor, mainly for tourism and population, but they will both be grist for their culture war debates.

China will report a broad range of data this week, and most of it is expected to deliver minor improvements. We will be especially watching their new lending data to see what has happened after the unexpected July decline.

Japan will report inflation (2.1% expected) and its central bank rate review later in the week (+25 bps to 1.25%).

On Friday, Japan said its producer prices rose +7.6% in August from a year ago, following an upwardly revised +7.7% increase in the prior month, which had been the fastest pace since February 2023. Although fuel is a big part of these rises it isn't the only part, and the outsized rises have been consistent now in each month since April. Despite that, Japanese business sentiment rose to its highest level since 2021, in a report out Friday.

In the coming week, the US will release retail sales, trade terms, and industrial production data. But this is all being overshadowed by the fast-rising fuels costs, even if there is yet another 'hope' that talks can replace fighting in the Persian Gulf.

Over the weekend the US released its official CPI for August (from the same agency that brought you the wildly optimistic non-farm payrolls data), and it shows no change at 3.4%. Apparently food prices were up +2.7%, fuel costs up +16.3%, electricity up +4.0%, drugs down -2.7% and rents up +3.0%. From July to August however, the overall rate rose +0.4% which is an accelerating recent rise.

However, it is doubtful US consumers believe this sanguine official assessment. The widely-watched University of Michigan consumer sentiment survey for September reported a sharpish and unexpected fall, now to its lowest level since the record low in May. That is a -7.5% retreat since August and a -13.7% drop from a year ago. Year-ahead inflation expectations jumped to 4.6%, the highest since June. Year-ahead expectations for personal finances and business conditions deteriorated, as consumers anticipate greater pressure on household budgets amid rising fuel prices and trade tensions.

US petrol prices have risen +4.0% in just the past week and are now up +45% since the start of Trump's war. Diesel prices are up to US$6.06/gal and an all-time record high. (In some parts of the country, diesel is touching $10/gal - which is a technical problem because most signboards and fuel pumps are not designed for $10+ rates there. Of course most places are nowhere near that yet so they have time to figure out how to adjust.)

In some earlier reviews we had noted that the copper price had hit a new record high of US$15,000/tonne. However since then it has pulled back on the prospects for a sharp increase in supply and an easing of demand as the world's two largest economies hesitate. The current price is now US$14,250/tonne so a -5% drop in the past three days.

The UST 10yr yield is now just on 4.98%, unchanged from Saturday, up +20 bps for the week. The 30 year yield is at 5.35%, up +2 bps. The key 2-10 yield curve is now at +33 bps (unchanged). Their 1-5 curve is now at +45 bps (also unchanged) and the 3 mth-10yr curve is at +112 bps (+1 bp). The China 10 year bond rate is up +1 bp at 1.69%. The Japanese 10 year bond yield is now at 2.99%, unchanged but up +8 bps for the week. The Australian 10 year bond yield starts today at 5.36%, down -3 bps from Saturday to be up +17 bps for the week. The NZ Government 10 year bond rate is now at 5.06%, unchanged for a weekly jump of +24 bps.

All this sudden rise in benchmark interest rates is going to do extensive and expensive damage to government budgets which depend on high debt levels and more borrowed money. A reckoning is closer.

The price of gold is now at US$4350/oz, and up a minor +US$4 from Saturday at this time, down -US$74 for the week. Silver is unchanged at just under US$64.50/oz, down -US$1.50 for the week.

The Gulf Cooperation Council is expected to meet their Iranian counterparts later today to discuss a possible temporary arrangement for managing shipping through the strait. Adding to downward pressure, the US EIA raised its 2027 crude production forecast while the IEA sharply cut its global oil demand outlook.

Oil prices have eased -50 USc to a still very high US$100/bbl in the US, while the international Brent price is little-changed just over US$104.50/bbl. A week ago these prices were US$91.50 and US$96.50/bbl so a net +9% rise in that time. Hormuz transits are still very low today with just four ships exiting over the past 24 hours, no tankers escorted (0 dark with transponders off) and six entering for new loads (0 dark). The Red Sea activity is a little more from Saturday with more than 20 each way at the Yemen chokepoint, rushing to beat the coming danger.

The Houthis reached the strategic island of Perim in the Bab el-Mandeb Strait on Friday, moving to tighten their grip on a vital global shipping route in the widening Middle East war. And the Houthis keep attacking the Saudi Arabian East-West pipeline that bypasses Hormuz, so they have temporarily shut it.

The Kiwi dollar is unchanged from Saturday, still just over 58.1 USc but down -70 bps for the week. Against the Aussie we are also still just under 81.1 AUc. Against the euro we are holding at 50.1 euro cents. That all means our TWI-5 starts today at just over 61.4, unchanged from Saturday, down -70 bps from a week ago.

The bitcoin price starts today at US$77,260 and up just +0.2% from Saturday at this time but down -3.0% from this time last week. Volatility over the past 24 hours has again been low at just under +/-0.6%.

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11 Comments

by JimboJones | 14th Sep 26, 7:58am 1789329502

Locally, Thursday will bring our Q2-2025 GDP result, expected to be +2.3% and up from Q1's +1.8%

PDK told me GDP growth was impossible so I'm expecting -1.8% or less for the quarter to get us back under 0%

Seriously though if this GDP comes in at 2.3% annual I think that would seal the election for the coalition.

by powerdownkiwi | 14th Sep 26, 8:10am 1789330237

We could all go out with baseball bats and smash each other's windscreens. GDP would go through the roof.

But by any meaningful count, that would be putting us, collectively, backwards.

And if that confusion drives an election, it merely reflects voter ignorance.

by Jonny.Foe | 14th Sep 26, 8:48am 1789332492

We are at the stage where gdp is simply counting the net money created by bank lending and Govt deficit spending as it washes through the economy on its way into the savings accounts of rich folks.

The last two quarters all of the increase in that surplus has gone to business owners. This quarter will be the same.

by powerdownkiwi | 14th Sep 26, 8:07am 1789330024

Thoughts

It wasn't the Houthis who hit that pipeline - someone in Iraq did it. A good read, once you factor-in his US bias, is an anonymously-authored (he clearly worked in the CIA, and clearly on Afghanistan) 2004 book: Imperial Hubris; Why the West is Losing the War on Terror. Alongside those trained in Afghanistan to be suicide-martyrs, were many, many more trained as good asymmetric soldiers. They are the current Houthi, Hezbollah, Hamas - but also soldiers-in-waiting civilians in much of Islam.

Just how thick/thin the autocratic crust is, atop Muslim public anger at the US, is the open question?

Chokepoints - are now 3. Panama is flow-restricted, and bidding is favouring fuel over Amazon according to what I've read. Tatt is about to get less cheap.

AI - So few people put two topics together. Robots still have to comply with the 2nd Law. They will need batteries and will have to wait for charging (unless they swap-a-battery, as per 1912 Chicago taxis). Also requires electricity supply - either atop or displacing existing users. Either way, there are switches, and off is off, usually. Given that all this makes us need to exercise out minds less, off should be now (and the young are starting to go analogue; dump social media - maybe a trend).

It seems we have boiled down to a race between societal collapse (via growth no longer being possible vs the plethora of forward bets) and robotic annihilation. I'd bet on the former, but have no faith in a denomination worth doing that betting in.

by Colin Maxwell | 14th Sep 26, 9:25am 1789334745

I agree, PDK, that it wasn't the Houthis who physically hit the pipeline - the Saudis themselves have now established that the drones were launched from Iraq, apparently from Maysan province, and Iraq has even seized the launch platform and dismissed senior security personnel.

But I think that may actually be the more interesting part of the story.

I'm beginning to wonder whether we are looking at something considerably more sophisticated than a conventional "Iranian proxy attack". Iran may not need to centrally direct every operation when it has an increasingly extensive network of aligned or sympathetic actors capable of creating simultaneous pressure from multiple directions.

Look at the strategic picture facing KSA now. Hormuz is effectively compromised - the Houthis have moved into the Bab el-Mandeb and seized Mayun Islandm - Houthi attacks are coming from Yemen, and now Saudi Arabia's alternative East-West pipeline has been attacked from Iraqi territory. The latter is particularly significant because that pipeline was precisely the strategic escape route designed to allow Saudi oil to bypass Hormuz.

So I don't think the really important question is necessarily "Did Tehran order this particular drone attack?" It is whether Tehran and its regional network have succeeded in creating a situation in which Riyadh cannot readily identify where the next attack will come from, who it can retaliate against, or even which of its supposed allies will actually come to its assistance.

And that is a much more formidable form of asymmetric warfare.

Saudi Arabia is now in an extraordinary predicament. If it attacks Yemen, it escalates the Houthi war. If it attacks Iraq, it attacks the territory of a nominally friendly Arab state. If it attacks Iran, it risks converting a distributed proxy conflict into a direct Saudi-Iranian war. And if it does nothing, its strategic vulnerability is being demonstrated in real time.

Notice also what happened with the pipeline - Riyadh has specifically refrained from retaliating, at Baghdad's request, giving the Iraqi government the opportunity to deal with attacks originating from its territory.

Then there is the rather extraordinary position of the new Mecca Alliance. An alliance may promise Saudi Arabia collective security, but that doesn't necessarily mean Pakistan or Turkey are prepared to inherit and fight Saudi Arabia's 12-year-old Yemen war.

And this is where I think your "thin crust" observation becomes particularly important.

The West has spent decades treating the Middle East as a collection of governments, armies and borders. But underneath that sits a much deeper reservoir of historical grievance, religious solidarity and asymmetric military experience. If those forces increasingly begin operating independently but in broadly convergent directions, the problem for the Gulf monarchies becomes enormous.

They don't necessarily need to be defeated militarily.

They simply need to discover that their economic model cannot function reliably when every critical artery can be threatened from a different direction.

And your chokepoint observation is spot on. Hormuz, Bab el-Mandeb and now the Saudi land route around Hormuz are all under pressure - while Panama is becoming increasingly constrained for completely different reasons.

That is beginning to look less like a series of isolated incidents and more like the emergence of a very different global strategic environment.

The really uncomfortable question for Riyadh and Abu Dhabi is therefore not simply "Who attacked us?"

It is:

"Who, exactly, can we still rely upon to protect us — and how many fronts can we realistically defend at once?"

by slowlearner | 14th Sep 26, 9:38am 1789335522

When that bone grinder in charge of KSA gave Potus a call, said hey mate, can you give those Houthis some medicine for us, Potus said not today. I can imagine some future time, Canberra has created some chasm thinking that it is doing gods work, then needs some assistance, and finds Potus is playing golf that day.

by powerdownkiwi | 14th Sep 26, 9:42am 1789335742

Great post CM.

Add in Trump urging Zelensky not to take out any more Russian refineries...

There will be a brigade who fixate on their tea-leaves - but the big picture is what's left in the teapot, and who gets to pour how much into whose cups?

by Colin Maxwell | 14th Sep 26, 10:04am 1789337085

Plus, PDK, we can add to the mix a fascinating historical wrinkle to my MBS (KSA leasdership) theory. I'm not claiming there is evidence that Washington has already selected his replacement, but there is certainly a precedent for the US intelligence establishment having a preferred Saudi security partner.

Mohammed bin Nayef, whom MBS displaced as Crown Prince in 2017, was described by Brookings as the CIA's closest Saudi partner in the fight against al-Qaeda, and in February 2017, just months before MBS took his position, the CIA awarded bin Nayef its George Tenet Medal for his counter-terrorism cooperation.

So the idea of Washington preferring a Saudi leadership figure deeply integrated with its intelligence and security apparatus isn't some wild invention. That relationship demonstrably existed.

The unanswered question is whether history is now being set up to repeat itself in a different form. If MBS becomes sufficiently compromised by the Yemen disaster, attacks on Saudi infrastructure and the apparent failure of the Western security umbrella, might Washington decide that the man it once backed as the great moderniser is now more trouble than he's worth?

I have no evidence that such a succession operation is underway, but given the extraordinary strategic circumstances developing around Saudi Arabia, I certainly wouldn't dismiss the possibility.

The question I'd be asking is - who imagines they benefit if MBS becomes the scapegoat for the collapse of the old Saudi security arrangement — and who is waiting in the wings?

by Jack Lumber | 14th Sep 26, 2:22pm 1789352571

All of this stems from reliance on their oil by our systems. As forecast oil demand is falling, price driven, this may drive more alternative energy, albeit limited by cost, efficiency etc and will change what we the masses can have and do.

A lot of unrest, as we are seeing around the rich world, and crazy ideas, Greens supermarkets nationalisation etc, but more expensive energy tied in with far higher expectations t of what we can have as of right, is a potent cocktail.

Lucky to be here in a much more benign growing climate me feels.

by Let me be Frank | 14th Sep 26, 6:20pm 1789366826

"this may drive more alternative energy,"...all underpinned by fossil fuels (predominantly oil).

by Averageman | 14th Sep 26, 10:16am 1789337761

Yields up = equals debt up or the cost of everything imported pours petrol on stagflation and extendss its grip. Put protecting bank debt before everyone or let the risk taking overleveraged take gheir pepto pills..

What to do.... 🍿