US inflation stubborn, equities revalue lower

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 all eyes this week will be on how equity markets react to stubborn US inflation and the expected Fed resolve.

But first, in China they are about to dump the respected technocrat boss of their central bank with new political appointments and giving Beijing even closer control over monetary policy. It is a shift that raises the risks of unexpected consequences in policy changes. It is also very noticeable how little economic data is being published by China these days. It was already quite light for a major power, but the flow is drying up even more. Their push to deny international news organisations visas has tightened the flow inexorably. China is more opaque than ever.

Separately, the central bank released a standard quarterly "implementation report" on Friday, saying it wants to avoid "flood irrigation" of new debt to support their recovering economy. But they also noted the external environment remains "severe and complex", adding that the basics of domestic economic recovery are "not solid". The report also said the property sector requires time to transition while the pressure of balancing local government fiscal revenue and expenditure persists.

This report is probably the final from the current bank leadership. You have to hope the new appointments retain a sense of realism to avoid boom settings that will just make the resulting bust arrive faster.

Japan reported CPI inflation in the year to January of 4.3%, up from 4.0% in December. This is their highest rate in 42 years, since December 1981. Food prices were up 7.3%. But generally it was driven by rises in the cost of imported raw commodities and yen weakness. The annualised rate of change between December and January was almost +5%, so the pace is quickening. There is now a greater chance the Bank of Japan will pivot away from its long-standing ultra-loose policies. Not only is there a new BofJ boss incoming, but major companies are starting to raise wages sharply, a key factor for the central bank.

Going the other way, Singapore's industrial production fell in January and by much more than expected. It was expected to dip slightly from December but the actual data was much worse and twisted the year-on-year result to a retreat.

Over the weekend we got data that shows the American policy response against inflation isn't working yet. Their core PCE price index, the Federal Reserve’s preferred gauge to measure inflation, rose by 4.7% annually, higher than 4.6% in December and surpassed market expectations of 4.3%. More concerning is that the annualised rise from December to January was at a rate above 7%.

"Better" or "worse" depending on your perspective, is that incomes are rising at the same rate. It is "good" that workers are not falling behind, and a tight labour market helps that. But it is "bad" because policy makers will see that wage claims are a driver, and wage-push inflation is settling in. The only way out of that is to induce a recession. But they don't look like they are anywhere near that yet.

Markets are nervous. Equity prices fell, bond yields rose, and the USD jumped. Markets are expecting the Fed will push on and do what it says it wants to go; kill off wage-push inflation. And that means tough times are ahead.

But just not yet.

Sales of new American homes in January came in higher than expected, and a boost to housing confidence.

More generally, the widely-watched University of Michigan sentiment survey also showed rising confidence. It not only rose from the prior month, it is up strongly from a year ago. Americans seem to be tolerating higher prices when they aren't being hurt on the income side.

Warren Buffett's Berkshire Hathaway reported its 2022 results, and they are an overall -US$22.8 bln loss, and unusual result for Buffett. He is dismissive of the formal accounting result however, saying "exclusive of capital gains or losses from equity holdings, [earnings] set a record at $30.8 billion". His Annual Letter to Shareholders was unusually short this year.

Across the Atlantic, Germany updated their interim Q4-2022 GDP result with a slightly bigger retreat than first indicated and a loss of momentum as the year ended. Weaker business investment was behind this shift

In Australia, another BNPL champion as reported a continuing cash burn and has been forced to retreat from more offshore markets to stem the flow. It is pulling out of Mexico, Singapore and the UK. And it will soon retreat from India, Turkey, the Czech Republic, South Africa, Poland and the Philippines. BNPL has hardly ever been a profitable business for anyone, lots of 'mystery' with no positive 'history'.

Elsewhere, it is interesting to note that the rare metal molybdenum has zoomed in price recently. It is the ingredient that hardens steel. There is a severe supply squeeze on at present. This one stands out as most other major metal prices are stable or soft.

The UST 10yr yield starts today at 3.95% and unchanged since Saturday but up +14 bps in a week. 

The price of gold will open today at US$1811/oz and unchanged since Saturday. But that is a -US$30 fall in a week.

And oil prices start today up +50 USc at just over US$76.50/bbl in the US. The international Brent price is still at US$82.50/bbl. Both are unchanged in a week. Interestingly, the North American rig count is falling again in direct response to low prices. Those are down -4% since the recent peak in November when prices were over US$90/bbl.

The Kiwi dollar is at 61.6 USc, and unchanged even if it is close to a three month low. Against the Aussie we are also little-changed at 91.7 AUc. Against the euro we are holding at 58.5 euro cents. That all takes the TWI-5 to 70.2 and also very little-changed.

Bitcoin has stayed pretty much unchanged over the weekend, now at US$23,188. And volatility over the past 24 yours 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.