As the US enters stagflation, the USD is being sidelined

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 commodity prices are falling away across the board, along with crypto, as a risk-off mood builds in financial markets.

In the week ahead, the most interesting developments will be close to home. There will be the usual monthly dump of February data from the RBNZ later today, and the real estate industry will start reporting its March results and listing levels. And in Australia, their central bank will be reviewing its monetary policy settings. But because they are in an election campaign it would be surprising indeed if they may any moves either way that might influence voters.

The week will end with American labour market data for March. But because the impacts of DOGE cuts or tariff hikes are yet to be felt, little-change is anticipated here either. But more PMI reports will start to reveal new order levels, which will give important early warning signals.

There will be PMIs out for China too, Japan business sentiment, EU inflation, and German factory orders, which will all help paint a picture of how the global economy is coping.

But first up today, there will be a lot of interest on tomorrow's Wall Street open. It ended its Friday session with the S&P500 down -2.0% and no signs of recovery late in the session. The Nasdaq fell -2.7% on the day. Weekend futures trading has the S&P500 recovering +0.8%, but that basically embeds the Friday retreat. Risk-off sentiment is strong with major investors selling, seeing this as a time to hold cash.

The core reason Wall Street is risk-off is that American consumers are increasingly anxious about their jobs, and the inflation pressures ahead. And both of those worries are over what higher tariffs will do to them. Town-hall meetings across the country are giving the message to Congresspeople that they aren't too happy about the self-serving government- by-billionaires either.

The final University of Michigan March sentiment survey was revised lower from its already low 'flash' result. Consumers are in full defensive mode, expecting inflation to jump, and job security to worsen. Wall Street can't ignore these signals.

Other data out over the weekend didn't help. The core US PCE inflation indicator for February rose its most since January 2024, and of course this doesn't include the effect of the recent policy missteps. This data is a little signal magnified by current policy settings.

US consumer spending came in lower than expected. Consumer savings rates rose. This is consistent with consumers shifting to a defensive mood ahead of their expected rough economic weather.

It isn't any better in Canada where their monthly GDP indicator for February revealed no net expansion, following a positive January expansion.

In China, talk about rate cuts that officials don't like brings prosecution. They say "the local public security organs" have dealt with two such people.

In Australia, they are off and running for their May 3, 2025 federal election. Like most elections, it will be fought on "cost of living" issues. The campaign starts with the incumbents in a strong and rising position on their two-party-preferred basis. Expect a sledge-a-thon for the next five weeks.

And for the record, when we are thinking of drought and rainfall in Australia, this resource is useful to keep perspective.

Commodity prices are under pressure. Worth watching is the price of copper. It is very high at present, but lower economic activity in both China and the US could bring about 'a collapse'. It would not be the only commodity to suffer.

We should also possibly note that the US Fed balance sheet shrunk again last week to be -US$745 bln lower than this time last year. So far we haven't seen any slacking in the pace of their tightening.

We should also note that in this current risk-off phase, the US dollar has not risen. This is very unusual and may portent a diminished role for the greenback in the global economy.

So far, the world has kept buying US Treasury paper, but the more the Federal finances are twisted by Trump, the less likely that demand will hold. But remember less than 24% of total US federal debt is held by foreigners (US$8.512 tln of US$36.218 tln in gross terms), so the impact from foreign demand will be muted. However, markets will notice any substantial pullback by this group, and that will colour its market status and price. The big impacts will come from the locals’ willingness to absorb this debt.

The UST 10yr yield is now at 4.25%, unchanged from yesterday at this time. 

The price of gold will start today at just on US$3085/oz and up another net +US$5 from Saturday. Although off it at the moment, gold keeps challenging it's all-time high levels.

Oil prices are little-changed from Saturday at just under US$69.50/bbl in the US and the international Brent price is now just over US$73.50/bbl.

The Kiwi dollar is now at 57.2 USc and unchanged from this time Saturday. Against the Aussie we are unchanged at 90.9 AUc. Against the euro we are also unchanged at just under 53 euro cents. That all means our TWI-5 starts today still just over 66.7.

The bitcoin price starts today at US$82,272 and down -1.9% from this time Saturday. Volatility over the past 24 hours has been modest at +/- 1.1%.

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.