US hits stubborn 'last mile' inflation challenge on way down

Kia ora,

Welcome to Wednesday’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 financial markets are now turning their eyes to the US Fed meeting results tomorrow after it became clear today that while still easing, wringing the last bit of inflation's impulse from their economy could be tougher than first thought.

The US Fed targets 2%.

The American November inflation rate came in exactly as expected, at 3.1% and down marginally from 3.2% in October. Their core rate (without food or energy) was unchanged at 4%. This unchanged result has markets reassessing those 2024 rate-cut bets. Inflation in the world's largest economy is sticky at the end of its cycle and getting it back to 2% isn't going to be as straight forward as anticipated by financial markets. The Fed's caution is being justified.

Food prices rose +2.9% and fuel prices fell -5.4% so they are not weighing on the overall level. But rent is, up +6.5%. And airfares are up more than +10% in the year.

The Redbook index of bricks & mortar retail store sales on a same-store basis rose +3.4% last week, so the engine of American retail sales is still expanding on a volume basis.

American small business owners are still feeling the pressure however, but more from a tight labour market than from demand. 40% of all owners reported job openings they could not fill in the current period, keeping them glum even if business is expanding faster.

In Canada, they have a housing crisis - and perhaps a back-to-the-future solution. Home prices and rents have soared in part because housing starts have not kept pace with record immigration, and the official estimate is that 3.5 million more dwellings will be needed by 2030 to restore affordability. A 'new' policy has been announced, one with echoes of the housing-building boom after WWII. Standardised units will get blanket building consent approval with the idea that this will speed construction. This time however, the focus will be on density.

In India, the monsoon has been weak this year and that is affecting food prices. Overall, consumer prices rose 5.6% in November, the first increase in four months, up from 4.9% in October. Food inflation however went up to 8.7%, the highest in three months, up from 6.6% in October so the pressure is on, on that front.

India also reported October industrial production which was up +11.7% from a year ago, a much stronger rise than in the prior month and more than expected.

In China, a couple of random points to note: it seems banks are reluctant to ease loan conditions for home buyers in distress. Only a handful of Beijing controlled banks have shown any sympathy.

Also, the child walking pneumonia crisis apparently became a national issue due to very widespread antibiotic resistance, making a mild condition very much worse.

In Germany, sentiment as measured by the widely-watched ZEW survey rose in December. It is now at a new high since March. Despite their current budget crisis, the assessment of the situation and economic expectations have improved again, as more respondents expect interest rate cuts by the ECB in the medium term, and inflation to stay down.

In Australia there were two sentiment surveys out yesterday. The Westpac MI consumer survey found low but improving sentiment in December as the holiday season approaches. The icon NAB business survey recorded a sharp dip in sentiment in November to its lowest level since the pandemic in early 2020.

The UST 10yr yield is softer on secondary markets at 4.21% and down -6 bps from yesterday at this time. 

The price of gold will start today just on US$1980/oz and down -US$2/oz from this time yesterday.

Oil prices are down -US$2.50/bbl from yesterday at just over US$68.50/bbl in the US. The international Brent price is now down at just over US$73/bbl.

The Kiwi dollar starts today at 61.3 USc and little-changed from yesterday. Against the Aussie we are up +10 bps at 93.4 AUc. Against the euro we are down -10 bps at 56.8 euro cents. That all means our TWI-5 starts today just under 70.4, +10 bps higher than yesterday at this time.

The bitcoin price starts today at US$41,298 and down -1.1% from this time yesterday. Volatility over the past 24 hours has been moderate at +/- 2.3%.

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.