The US gets its expected inflation twist

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 instability feared over the new US tariff approach is hitting their economy.

First up today, we need to note that US headline CPI inflation rose in January to 3.0% when no change from the December 2.9% was anticipated. Core inflation was expected to fall to 3.1% from December's 3.2%. But in fact it rose to 3.3%. Rents were a key factor. This has set financial markets on edge.

Although not as aggressive, this official data confirms the University of Michigan consumer sentiment survey that reported a sharp jump in consumer inflation expectations.

US mortgage applications rose slightly, almost all on refinancing demand. So it was driven by churn, rather than new demand. But overall levels remain very low; in the past two-plus years these levels have remained static, and down to levels last seen 25 years ago.

All this unwelcome data had a big effect on benchmark interest rates with the UST 30 year yield jumping +11 bps. Clearly the Fed is right to wait before cutting its policy rate. Markets aren't pricing any rate cut until December now. Wall Street equities turned negative after this news too. The USD firmed on risk aversion. None of this was liked by the US President who vented on social media. But behind it all are building fears about the effect of his very misguided tariff policies which everyone but him sees as sharply inflationary.

While all this was going on, there was a UST 10yr bond auction and that delivered a yield today of 4.56%, lower than the 4.63% at the prior equivalent event a month ago. Investor support isn't wavering but bids here were made before the CPI data release. There will be some large paper losses by these bidders now.

(And we should probably also note that with the new Administration kneecapping the Justice Departments monitoring and enforcement of the area, foreign lobbyists are pouring into Washington DC to plead their cases for special treatment. It's open slather.)

Across the Pacific, Japanese machine tool orders came in at an average level in January, up +4.7% from the same month a year ago, but nothing like the spurt in December.

In China, it won't be news to regular readers, but their property development sector woes are now in crisis territory. The fundamental problem has never been sorted and many companies can no longer hang on. They are going from the zombie phase to actual liquidation now.

India's industrial production is leaking growth and at a faster rate than expected. It was up +4.3% in December, down from +5.0% in November and well below what was anticipated. You can see why their recent Union Budget moved into stimulus mode, and the central bank cut its policy rate. India needs a boost to keep the expansion going.

Meanwhile, India's CPI inflation rate is easing, down to 4.3% in January from 5.2% in December. Food inflation fell sharply, but it is still at 6.0%.

In Australia, December home loan data revealed modest changes. The total number of new loan commitments for dwellings fell -0.4% in the December quarter while the value rose +1.4%. Owner occupier activity was positive, but investors pulled back. The number of new investor loan commitments for dwellings fell -4.5% in the quarter while the value fell -2.9%.

And staying in Australia, we should probably note the recently-retired NAB CEO, kiwi-Ross McEwan, has been appointed chairman of the board of Aussie heavyweight miner BHP. That is a long way up for an ex-ASB banker.

The UST 10yr yield is at 4.63%, up +9 bps from yesterday at this time.

The price of gold will start today at just under US$2894/oz and down -US$10 from yesterday..

Oil prices are down nearly -US$1 at just on US$73/bbl in the US and the international Brent price is now just under US$76/bbl.

The Kiwi dollar is now at 56.3 USc and down -30 bps from this time yesterday. Against the Aussie we are down -10 bps at 89.8 AUc. Against the euro we are also down -40 bps at just on 54.3 euro cents. That all means our TWI-5 starts today just on 66.7, down -10 bps from yesterday at this time, limited because we rose sharply against the yen.

The bitcoin price starts today at US$95,555 and again down -0.9% from this time yesterday. Volatility over the past 24 hours has been modest at +/- 1.3%.

You can find links to the articles mentioned today in our show notes.

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.