Stagflation sniffs a comeback

Kia ora,

Welcome to Friday’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 all about American GDP and reactions to the first quarter results.

US economic activity expanded an annualised +1.6% in Q1-2024, compared to +3.4% in the previous quarter and below forecasts of +2.5%. It was the lowest growth since the contractions in the first half of 2022, the advance estimate showed, although there are two more revisions due (an in the Q4-2023 set, they rose with each revision). The result was held back by a decrease in inventories and a rise in imports. However, disposable personal income rose an impressive +4.5% according to today's release.

However, the PCE data released with this shows inflationary pressures unabated. So the US 10-year Treasury note yield rose to above 4.7%, the highest since early November, as traders to scale back their expectations regarding the timing of a Fed rate reduction, with the the first cut now not priced in fully until December.

We should note that lower growth with still-high inflation equals stagflation, a gnarly public policy problem, as history shows.

Further, today's US Treasury 10 year bond auction reveals median yields rise to 4.47% in yet another well-supported offer. That was +37 bps higher that the prior equivalent event a month ago. (But it does seem curious that the secondary market prices these at 4.7% however, especially when demand is so strong in the primary market.)

Meanwhile the number of initial US jobless claims fell to just 201,000, a bigger than expected retreat and the second-lowest weekly level in the past 13 weeks. That means there are now 1.82 mln people on these benefits the lowest since mid-December.

US mortgage applications fell rather sharply last week, down -2.7% from the week prior and are now -15% lower than the same week a year ago. So it will be a surprise to know that March pending home sales rose +3.4% from February although they are virtually unchanged from a year ago.

New orders for durable goods surged by +2.6% in March from February, following a downwardly revised +0.7% growth in February. The March rise was more than expected, but the year-on-year change is still a negative -2.2%. It was the largest monthly advance in durable goods orders since last November, primarily propelled by robust demand for transport equipment. Orders for non-defence capital goods rose too.

Canada released retail sales data for February, and in real, inflation-adjusted terms, they fell -0.3%.

All eyes are now turning to the Bank of Japan which is meeting today. They have important policies to balance regarding rising inflation, an expanding economy, but a currency that the being depreciated in USD terms, the one relationship that motivates them. But then, many countries are struggling with the rising USD at present.

In China, the Shanghai prime office vacancy rate has hit a 20 year high - at over 20% vacant. That is a lot of spare capacity and it will worry policymakers that it is continuing to swell.

In Australia, Warren Hogan, who was ranked 2023’s most accurate economic forecaster, predicts their rising economy will force the RBA to lift rates to 5.1% this year. He is an outlier, but part of a growing cohort of analysts who don't see inflation beaten yet and the economic expansion rolls on in many of the world's major countries with its pressures.

Better income expectations, economic prospects and a rising 'propensity-to-buy' among consumers has shifted the German GfK Consumer Climate Indicator to it's 'highest reading' in two years (well actually its least negative reading in two years). But they will take the progress.

We should note that copper prices have surged recently and now top US$10,000/tonne and that is its highest since April 2022. (It is now only 6% below the all-time high, also in 2022)

Global container freight rates were unchanged last week on average, making them +55% higher than year ago levels. Bulk cargo rates fell -4.9% in the past week, but they remain little-change from long-run averages.

The UST 10yr yield is now at 4.70% and up +10 bps from this time Wednesday, and that is its highest level since late October 2023. 

The price of gold will start today a little firmer, up +US$7 from this time Wednesday at US$2333/oz.

Oil prices are little-changed from Wednesday to just under US$83.50/bbl in the US while the international Brent price is still at just over US$87.50/bbl. In between however it has been volatile.

The Kiwi dollar starts today little-changed at just under 59.5 USc. Against the Aussie we are -¼c softer at 91.3 AUc. Against the euro we are little-changed at 55.4 euro cents. That all means our TWI-5 starts today just on 69.1 and little-changed from Wednesday.

The bitcoin price starts today virtually at US$64,762 and down -3.0% from this time Wednesday. Volatility over the past 24 hours has been modest however at just on +/- 1.6%.

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 on Monday.