Central banks on back foot in inflation fight

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 so far, central bank brakes on inflation or optimism don't seem to be working yet.

First up today, global food prices were stable in February from January according to the FAO monitoring. That puts them -8.1% lower than year-ago levels when they were rising sharply. They are now -19% below their March 2022 peak and back to levels we first saw in October 2021.

In China, their National Congress, which marks the end of the road for Premier Li, is underway in Beijing, and has set its lowest economic growth target in decades, aiming for "about +5%" GDP growth this year, a relatively conservative target for them. But this comes after just a +3% advance in the tough 2022 year wracked by pandemic and big-power rivalry stresses - not to mention the property sector woes which are still high on their risk agenda.

But they are off to a positive start. China's private Caixin service sector PMI reported a good expansion in February, a bounce-back from January and confirming the official measure. New orders and employment rose in a direct response to their re-opening.

The expansion in the services sector was even stronger in India in February, out-shining both the US and China.

Singapore is doing it tough however. Their PMI turned negative in February as firms there pulled back, and the retail sales dived worryingly from the prior month in a report for January.

In the US, there were two respected services PMIs out over the weekend, both positive. The widely-watched local ISM one didn't dip from its strong January expansion when a dip was expected. Its employment component was especially strong. New order levels however were what really starred.

The internationally-benchmarked Markit one moved from a contraction to a minor expansion. They said new orders contracted but that employment rose.

Both reported that cost pressure reduced, although one noted that firms are still taking the opportunity to raise prices.

This coming week Fed chairman Powell is testifying in Congress and will use the opportunity to warn (that is, 'lay the groundwork') that interest rates still have some way to rise from here.

And other Fed speakers also said (and here) they will need to raise rates to higher levels than previously anticipated to prevent inflation from rising further, if the recent strength in hiring and consumer spending continues. ECB officials are saying similar things. Oddly both the bond and equity markets ignored the warnings last week.

In Canada they get a central bank rate review this week, currently at 4.50% and likely to rise. But the expected bounce back in building consents didn't happen in January after the sharp fall in December. They got another fall. So maybe the Bank of Canada will hold off. Inflation is falling quickly there now, down to 5.9%.

Germany reported that its exports rose in January from December to be +8.6% higher than the same month a year ago. Meanwhile they say their imports fell, mainly because their imports from Russia dropped -37% in January. They are learning fast how to do without Russian energy.

In the EU, they say producer prices fell in January from December and the year-on-year rise is moderating fast. This was a much larger monthly fall (-2.3%) than was expected (-0.3%).

In Australia, home lending was weak in January, dropping the most month-on-month since July 2022. Lending to investors fell the most. House price declines are suppressing listings and are likely to reduce loan sizes, putting downward pressure on total lending.

And tomorrow, their central bank will almost certainly raise their policy rate again, going from 3.35% currently to 3.60%. Pushback forces are growing, but until inflation looks like it is beaten, they are unlikely to sway the RBA. Markets have now priced in rises to 4.20% by September. (Those same markets have priced in the New Zealand OCR rising to 5.50% by August.) It is worth remembering that RBA rises pack more punch and have an immediate impact solely because most borrowers are on floating rates and are leveraged more.

The UST 10yr yield starts today at 3.96% and down -1 bps from Saturday but little-changed in a week. 

The price of gold will open today at US$1857/oz and up +US$10 since Saturday. It is up +US$46/oz for the week, or a 2.5% rise.

And oil prices start today up +50 USc at just under US$80/bbl in the US. The international Brent price is now just under US$86/bbl. These are weekly rises of +US$4/bbl.

The Kiwi dollar is little-changed at 62.2 USc. Against the Aussie we are still at 92 AUc. Against the euro we are also little-changed at 58.5 euro cents. That all takes the TWI-5 to 70.5 and up only up +30 bps in a week.

The bitcoin price is virtually unchanged from this time Saturday, still at US$22,453. And 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.

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

Kia ora. I'm David Chaston and we’ll do this again tomorrow.