Inflation risks move back to center-stage

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.

And today we lead with news the trade chaos and tariff-war skirmishes have markets worldwide watching for inflation signals as much as growth signals.

First, in the US their Redbook retail index was up +6.1% last week from the same week a year ago, driven increasingly by tariff-tax price increases, which is why this metric is diverging so much from the formal retail sales volume data.

American mortgage applications fell last week from the prior week. That is consistent with the benchmark 30 year mortgage rate rising, now almost touching 7% again.

The Richmond Fed's regional factory survey came in negative again in May with activity slowing and new order levels still quite weak. The service sector report for the same mid-Atlantic region was weaker too. In both cases they recorded price pressures over +6%.

The Dallas Fed services survey was just as negative, in fact even more so. Input prices are a real issue here too, over 5%..

The well-supported US Treasury 5 year bond auction continued the trend of bidders wanting and getting higher risk premiums. This one delivered a median yield of 4.01%, up from 3.93% at the prior equivalent event a month ago.

The minutes of the May 8 (NZT) Fed meeting released overnight revealed policymakers are uncertain on how to assess the future risks of inflation and their labour market, and how they can meet their dual mandate when forces are pushing in different directions. They seem to see the inflation risks are the key priority. They are also watching the USD depreciation because that too brings inflation risks. For them, it is a waiting game.

India's April industrial production expansion slowed from March, but not by as much as was expected. It seems to be settling in at an under +3% rate which is far more modest than the overall economic expansion there. India's economic rise isn't really being built on manufacturing prowess. Of course the trade and tariff-war backdrop won't be helping.

Euro area inflation expectations are rising again, and came in at 3.1% in the latest survey (in April) for the ECB, results they won't have liked. These expectations are back to early 2024 levels, unwinding the progress the ECB policymakers had thought they had won.

In Australia, their monthly inflation indicator, also for April, shows it stuck at 2.4%. A small easing was expected but didn't eventuate. But 2.4% isn't a killer level and probably doesn't change expectations that the RBA will keep reducing its cash rate target, currently at 3.85%, by another -25 bps at their next meeting on July 8, 2025. A lot could change in between however, and analysts will be watching for upside risks.

The UST 10yr yield is now at 4.48%, and up +4 bps from yesterday.

The price of gold will start today at US$3,296/oz, and down -US$6 from yesterday.

Oil prices are up +US$1.50 at just on US$62/bbl in the US and the international Brent price is now at US$65/bbl.

The Kiwi dollar is down at 59.6 USc, a small +10 bps rise from yesterday at this time. Against the Aussie we are up +50 bps at just under 92.8 AUc. Against the euro we are up +30 bps at 52.8 euro cents. That all means our TWI-5 starts today still just under 67.9 and back up +30 bps from yesterday.

The bitcoin price starts today at US$107,462 and down -2.6% from yesterday. Volatility over the past 24 hours has been modest at just on +/-1.4%.

You can get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston. And we will do this again tomorrow.