Markets celebrate US inflation no-change

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 relief is palpable in financial markets today.

First up today we can report that the American CPI inflation rate came in at 2.9% in December, almost exactly as expected and shrugging off some market fears of an upside to those expectations. The monthly change came in at 0.2% and also as expected. Their annual core rate came in at 3.2% and a tick less than expected. Still these levels are nine-month highs - but markets have ignored that fact.

There were no real surprises in any of the detail and this triggered a relief rally across equity, bond and currency markets. They are hoping an interest rate cut by the Fed is back on the agenda

But there was a big surprise in home loan activity during the week, built on growing interest rate fears. Mortgage applications surged by a third last week from the previous week and erasing the declines in application volumes from four prior weeks. It was the largest increase in weekly applications since 2020. And the surge occurred despite benchmark mortgage rates pushing through the 7% threshold. Potential house-buyers attempted to lock in borrowing ahead of fears that interest rates will rise even further. Applications to refinance a mortgage, which are more sensitive to short term changes in interest rates, soared by +43% from the earlier week. But still, applications for a loan to purchase a house rose by +27%. These are enormous moves.

There was also a large surprise in the New York Empire State factory survey, and a negative one. It was the result of a set of small shifts in all the components, none of them by themselves worrisome, but together they shifted the overall index. However, firms there don't think this month's result will last.

But that isn't holding back their big banks. Overnight the first three of them, JPMorgan Chase, Wells Fargo and Goldman Sachs, announced Q4 earnings, and they were "bumper".

In Japan, some central bank remarks from its Governor are raising the possibility that their might raise their policy interest rate at their meeting next week on Friday, January 24. The current policy rate is 0.25%. His remarks indicated he liked the current round of sharp wage increases in Japan.

In Indonesia their central bank unexpectedly cut its benchmark interest rate by -25 bps to 5.75% during its overnight meeting. Markets had expected no-change. The regulator said it moved to ensure their exchange rate and related inflation rate stayed within targets.

In Europe, November industrial production data released overnight showed a small +0.1% rise from October, but that still left it -1.7% lower than year ago levels.

There was inflation data out for Russia overnight too and their war economy is becoming increasingly unbalanced. They now have a CPI of 9.5%, a falling ruble, and a central bank cutting rates on Moscow's orders when they know this is the wrong thing to do. The imbalances will only worsen.

The UST 10yr yield is now at just on 4.66%, and down -15 bps from this time yesterday. 

The price of gold will start today at US$2687/oz and up +US$16 from yesterday.

Oil prices are up +US$1.50 from yesterday at just on US$79/bbl in the US while the international Brent price is now just over US$81.

The Kiwi dollar starts today just on 56.1 USc and up +10 bps from this time yesterday. Against the Aussie we are down -20 bps at 90.3 AUc. Against the euro we are up +20 bps at 54.6 euro cents. That all means our TWI-5 starts today still just on 67 and unchanged from yesterday.

The bitcoin price starts today at US$99,057 and up another +3.7% from this time yesterday. Volatility over the past 24 hours has been moderate at +/- 2.2%.

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.