Risk aversion jumps on Trump missteps

Kia ora,

Welcome to Monday’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 that 100 days of mayhem has not only killed the global leadership position of the US, Americans themselves (consumers and business) are reacting by turning sharply defensive.

The US dollar is under pressure, Wall Street is down sharply, and benchmark bond yields are dropping hard.

However, before we get into that, the week ahead will bring a relatively light set of data. In the US it will mostly be about durable goods orders in January, a second revision for the US Q4-2024 GDP, and personal income & spending updates. Elsewhere India and Canada will also update their GDP and Australia will release its CPI data. There will be business and consumer confidence data for New Zealand at the end of the week too.

Over the weekend, the US February PMI shows that output growth is faltering and payrolls are declining, as optimism slumped as costs rise. Their services sector is now contracting and at a 2 year low, their factory sector is expanding however but only back to its mid-2024 levels.

And it isn't any better for American consumers. The final survey results for the University of Michigan consumer sentiment tracking have come in weaker than the 'flash' result which indicated a sharpish turn lower. In fact it is now -10% weaker than in January, -16% weaker than a year ago. American consumers are spooked. One reason is that they see higher inflation ahead. The final reading for this indicates consumer prices are expected to be +3.5% higher in a year, a worsening of the 'flash' February result we reported earlier of +3.3%.

January existing home sales slumped nearly -5% too from December, although they were up slightly from the same month a year ago. But the year-on-year improvement is being whittled back.

And new homes are likely to get more expensive in the US with global tariffs to be imposed on softwood timber.

Now more of Trump's billionaire backers are having second thoughts about what they funded. And about-to-retire Warren Buffet issued his shareholder letter over the weekend, with some clear criticisms of Trump and his tax-avoiding accomplices. Buffet said paying taxes is patriotic and essential for a functioning society, and his companies paid US$26.8 bln in 2024, alone 5% of all corporate taxes in the US - and far more than all the tech companies combined. Trump is going into bat to ensure those tech companies don't have to pay any taxes in the foreign companies they operate in.

In Canada retail sales volumes were up +2.5% in December, up +3.9% in value terms from a year ago. This is actually quite an impressive result. This will be an interesting metric to watch in future given the nationwide push by Canadians to shift away from buying American-made products in protest at the insults launched by the US President.

In Japan, they finally have inflation, real inflation this time. It climbed to 4.0% in January from 3.6% in the prior month, which is their highest reading since January 2023. Food prices rose at the steepest pace in 15 months up 7.8%, with fresh vegetables and fresh food contributing the most to the upturn. No doubt their central bank will react to this sharper than expected move.

Despite that, the Japanese February PMIs show improvements in activity in both their services and factory sectors, with their services sector expanding at a healthy rate for a developed economy, and their factory sector contracting less.

India is still expanding fast. Their February PMIs show a better-than-January rise for their services sector, and a weaker-than-January expansion for their factory sector. Both expansions are the envy of most other countries, even if it is from a low base.

The EU PMI survey for February recorded a small expansion, but it also records their fastest input cost inflation since April 2023. The overall expansion recorded is largely due a recovery in the German factory sector.

And speaking of Germany, they have been voting in federal elections this weekend. Counting is underway and it seems no party won a majority. The conservative CDU won the largest boc and the far-right AfD came in second according to exit polling. But as all other parties have declared they won't work with the revivalist Nazi party, they are in for a long negotiation period trying to form an MMP government. A grand coalition remains a possibility.

In Australia, who will probably go to the polls themselves in May, their February PMIs report an improving economic activity situation, with their services activity at a six month high, and their factory PMI at a 27 month high. However, to be fair, neither levels are particularly strong compared to other countries.

The UST 10yr yield is at 4.43%, up +1 bp from Saturday at this time. 

The price of gold will start today at just under US$2935/oz and down -US$3 from Saturday.

Oil prices are down -50 USc at just under US$70.50/bbl in the US and the international Brent price is now just under US$74.50/bbl. These markets are looking at a future of lower demand and higher output and inventories.

The Kiwi dollar is now at 57.4 USc and down -10 bps from Saturday. Against the Aussie we are up +10 bps at 90.3 AUc. Against the euro we are down -20 bps at 54.8 euro cents. That all means our TWI-5 starts today just over 67.1, and down -10 bps from Saturday.

The bitcoin price starts today at US$95,618 and down -1.8% from this time Saturday. Volatility over the past 24 hours has been low at +/- 0.7%.

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.