Markets now accept higher interest rates are here to stay

<p>Kia ora,</p><p>Welcome to Tuesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.</p><p>I'm David Chaston and this is the International edition from Interest.co.nz.</p><p>Today we lead with news we are heading into a key week for economic data.</p><p>In the week ahead we will get the US CPI next on Saturday, June 11, and it is expected to hold at 8.3% as the headline rate. Along with last weekend's rise in non-farm payrolls, that probably locks in the next two +50 bps rate hikes from the US Federal Reserve, and a CPI number coming in as expected probably locks in one for September as well. Bond markets seem to be assuming that, and benchmark rates are rising today.</p><p>And later today, the Australian central bank will review its policy rate at 4:30 pm, likely to raise it from 0.35% to 0.60% - a +25 bps gain is the consensus. But don't be surprised if it is a bit more than that, perhaps taking it to 0.75%.</p><p>Tomorrow morning, we have another dairy auction, and prices there are expected to be quite a bit higher, perhaps with both WMP and SMP gains exceeding +5%. Low supply seems to be driving the trend, and if China is really opening up again, that won't hurt. But other regions seem better prospects.</p><p>China's <a href="https://www.pmi.spglobal.com/Public/Home/PressRelease/88590b41ccad46b392da7fb3e5e39d55" target="_blank"><strong>private sector survey of their services PMI 'improved'</strong></a> but is still contracting. It is just contracting less. On it's own the May result would have been seen as a disaster, but because April came in at a fast-shrinking 36.2 (50 is steady state), the May reading of 41.4 just looks "better". Not really. They are going backwards fast. And don't forget their <a href="http://www.stats.gov.cn/tjsj/zxfb/202205/t20220531_1857815.html" target="_blank"><strong>official services PMI</strong></a> was at 47.8, so it appears the official data was boosted by some Beijing gloss. No wonder Premier Li is worried.</p><p>With Shanghai l