By Jason Wong*
Following a stagflation-like US GDP print, the market focused on the higher inflation component, driving US Treasury yields higher. A stronger USD after the release wasn’t sustained and it is flat on the day, with commodity currencies modestly outperforming, seeing the NZD just under 0.6150. Higher rates have done no harm to US equities, which have bounced back, supported by stronger earnings from big tech.
US first quarter (Q1 GDP) data conveyed a picture of stagflation, with weak growth, softer than expected, and strong inflation, higher than expected – annualised growth of 1.1% and a core PCE (personal consumption expenditure) deflator of 4.9%, the latter implying a stronger monthly read of 0.5% month-on-month (m/m) for March (in data to be released tonight) unless the earlier months for the quarter are revised up. Weak growth was driven by a 2.3% contraction in inventories, falling residential investment, and sluggish business investment, offset by strong growth in government spending and a 3.7% surge in consumption – the latter reflecting the 8.7% cost-of-living boost to social security payments and the warmer winter. Neither of these forces will help current quarter estimates, where some project an outright contraction in growth signalling the beginning of economic recession.
In separate reports, initial jobless claims unexpectedly fell last week to 230k, against the prevailing trend, which probably just represents noise in the data. And pending home sales fell 5.2% m/m, the largest drop since September, against expectations for a 0.8% rise.
The market focused more on the inflation than growth message from the GDP print, driving rates higher, with the 2-year Treasury yield currently up 14 basis points (bps) for the day to 4.10% and the 10-year rate up 8bps to 3.53%. The data cemented in expectations for a 25bps Federal Reserve hike next week (23bps priced), while paring the scale of easing priced for the second half. Tonight’s employment cost index is arguably more important than the GDP release – if wage inflation shows further signs of slowing or stabilisation then that will support the view that next week’s hike will be the last, while an upside surprise would be unhelpful for that view.
US equities have bounced back from weakness earlier this week, with the S&P500 up nearly 2%, encouraged by the strong earnings reports from big tech so far this season, with Meta’s share price up 15%, and less worry about the banking sector, the KBW banking index performing in line with the market.
In a reversal of the previous day, commodity currencies have modestly outperformed, while the euro is on the weaker side of the ledger against a backdrop of a flat USD – the initial boost to the USD in response to higher inflation and rates not sustained. The NZD trades just under 0.6150 and the AUD at 0.6630, with the cross steady at 0.9270, after a failed attempt to sustain a break above 0.93. Other NZD crosses are modestly stronger. NZD/EUR has pushed up to 0.5575.
Yesterday, the ANZ NZ business outlook survey painted a picture of ongoing weakness in activity indicators and moderating pricing indicators, albeit the latter still remaining well above historical averages and too high for comfort.
PM Chris Hipkins delivered a pre-Budget speech where the emphasis was on a “no-frills” Budget, viz “the government is committed to reducing our proportion of spending to dampen demand in the economy”. He ruled out new taxes or a levy to pay for recovery from Auckland floods and Cyclone Gabrielle, with the rebuild to be covered from the annual operating and capital allowances, savings and reprioritisations and “some debt”.
Global forces sent domestic rates higher, with NZ swap rates up 5-6bps across the curve, seeing the 2-year rate close at 4.97% and the 10-year rate at 4.15%. Ahead of month-end, NZ government bonds outperformed, with rates up just 1- 3bps across the curve, following another successful bond tender with solid demand – bid/cover ratios around 3x-4x, and pricing just under prevailing mids.
The calendar for the day ahead is action packed. Another rock-bottom NZ consumer confidence reading wouldn’t surprise but during NZ trading hours the Bank of Japan policy update will be of some interest, the first led by new Governor Ueda. Given his comments to Parliament earlier this week, where he defended the Bank’s current ultra-easy policy stance, a continuation of that policy is widely expected, with only some tail-risk of a surprise announcement, that would trigger higher rates and a stronger yen.
European and Canadian GDP figures are released tonight, as well as German CPI data. But as previously noted, the US employment cost index is the key release, with the market expecting 1.1% in Q1 after 1.0% in Q4, which would see annual wage inflation fall further, as a 1.4% figure drops out from last year. The prior consensus estimate of 0.3% m/m for the core PCE deflator now looks too light, given the stronger quarterly figures released overnight, so any updated figure is probably closer to 0.5%. The release should also see real personal spending down in March.
The easiest place to stay up-to-date with economic events is by following our Economic Calendar here ».
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*Jason Wong is BNZ's Senior Markets Strategist. David Chaston is away this week.
44 Comments
Don't anybody waste their time talking about what is good or bad for us, or what is good or bad for NZ, or what is good or bad for our economy. Only talk about what is good or bad for for our current government's reelection prospects. If high inflation and low interest rates are reported by their consultants to enhance their prospects, then that is what will be done. And visa versa.
Agreed. Not sure why we tolerate inflation at all given the now real risk of central bank-produced asset price inflation if monetary policy is too loose.
If central banks want to panic about wage-price spirals then they can't be allowed to preside over highly inflationary environments that produce the need for sharp increases in wages. You can infer that a drop in real incomes is the main desired outcome here, other than protecting their own racket.
lol, dont you get their tactics by now? They spent money on consultations, reports and researches but once the results come out, they do nothing about them. What did they actually do or are going to do with those reports / researches / about super markets monopoly, interest rate combat unsustainable housing price, wealthiest New Zealanders paying 8.9% taxes? Nothing...
If labour costs aren't the driver of the inflation... which I would suggest is the case here, because the inflation kicked in and wages have only recently started following.
Of course this gets to the fundamental question of what has caused the inflation in the first place. Supply chains vs Ukraine vs profiteering vs (my suspicion) the 'wealth effect' of a once-in-a-lifetime asset bubble...
ECB wakes up to #Greedflation as key culprit in price struggle. Profit margins outpacing wages as #inflation driver since 2021. Swelling earnings generated >2/3rd of inflation at end of last year. ‘Tit-for-tat’ dynamic risks stoking second-round effects. https://bloomberg.com/news/articles/ Link
But can you have a recession in the case of your suspicion? If everyone is out spending their new wealth, why would we have a recession?
I can't really see how we can get stagflation unless we have imported inflation. And while we started out with imported inflation, I am not sure that is what is driving inflation now.
Yeah, and unless unemployment went above 10% then we won’t see big big drop-offs in spending when looking at the population snd economy as a whole.
But if we get to 6-7% unemployment then spending drop offs will start to get more significant and you will get feedback loops happening.
Something else that is important to factor in with recessions is reduced hours. People keep their jobs and are not unemployed, but work 10-20% less hours. That happened around the GFC, and that can really whack spending in the economy. For many people affected it means they can pay their basic costs but discretionary spend gets nuked.
As far as I can see, even with high unemployment, we may continue to get high domestic inflation because of supply shocks (cyclone, egg shortage), plus there'll also be elements of imported inflation that directly affect domestic inflation - i.e. fertiliser, feed, car parts etc will continue to get more expensive as our NZD slides. Companies aren't going to set low prices if it means making a loss, even if no one is buying.
Maybe our trade balance won't improve any time soon because we're overestimating future tourism, international students and China's purchases from us. We may get downgraded which will cost us more to borrow (more inflation fuel to the fire).
Maybe they'll cut oil output again to allow for an expected recession. Maybe China will do something stupid with Taiwan or they have a debt crisis - whatever China does will affect us more than most.
As far as I can see, NZ is incredibly exposed to stagflation because of our reliance on almost everything being imported, our fickle NZD, and massive private debt.
And you can have inflation while unemployment rises in a lot of sectors. Takes training and time to see someone working in a cafe become a nurse (if they don't go straight to Aussie). In the meantime nurses salaries will rise.
With the pay parity work going on (which was needed) there will be plenty of wage inflation and there are cascades that have just begun.
Still a fair bit of shaking out to do.
But stagflation doesn’t imply the economy turns to crap. It implies ongoing weakness / mediocre growth, or slightly negative growth. Which seems to be where we are right now.
If the economy turns south, and we hit a moderately bad recession, then that is worse than economic stagnation. Unemployment will rise and inflation will fall. Stagflation starts falling away.
But as per Swingtrader’s excellent comment above, inflation could still prove stubborn despite recession and rising unemployment, for the reasons he outlines. But it will be stubborn around the 3.5-4.5% range rather than the 6-7% range.
JJ - it's to do with energy going into the system - or not - same as the 70s.
Labour takes about 4.5 years of hard yakka, to equate to a barrel of oil - a reduction in the latter, even marginal, has huge consequences for labour. While there was surplus energy, labour was 'noise', and the idiot economists who fretted about 'labour productivity' were merely noise-studiers.
Ultimately, there will be no more fossil energy, and most of us will be applying our energy to food-production (it has to be a positive energy-in-energy-out equation; positive EROEI); from here on in, we're all fully 'employed', but productivity will fall off a cliff.
And stagflation is likely, probably presaging a collapse (due to mounting disbelief).
24 hour basis at what time?
as of 09:46 NZST i see 3.9% up
and if we look at 7am when this breakfast breifing was written, it's actually dropped vs 7am yesterday.
Old ratty has been running ragged over the last few days, flying up to 31k before dropping to 27k and rapidly returning to 29k.
Some attributed it to the US government and Mt Gox moving some coins, but that actually happened after the drop. Insider knowledge maybe?
Either or, doesn't bother the Hodlers who are stacking about 15,000 Btc per month.
https://www.newsbtc.com/news/bitcoin/bitcoin-accumulation-hodlers-buyin…
Argentina is scheduled to receive a $45 billion bailout from the International Monetary Fund (IMF) but the assistance comes with a catch that the country must adopt an anti-cryptocurrency position.
This requirement underscores the IMF’s concerns about the possible adverse impact of cryptocurrency on financial stability and economic recovery efforts.
LOL
Why is there never any economic news from our south pacific backyard. Fiji etc. I would like to know more about those countries prosperity etc and I am not from there. What of those who are.
Aus looks to US and other big countries for updates, rarely if ever to NZ. We do the same here, we don't look at smaller economies because we think they are insignificant. Forgive me if that's a wrong assumption.
https://www.oneroof.co.nz/news/heartbreaking-tenants-in-tears-over-chri…
While people were still buying investment properties, Webb said they were looking for ones where they could add value such as multi-income properties or that need renovating.
“If you’ve got a standard three-bedroom house rented out to a family, no one wants to buy that. The returns aren’t good enough with what the Government has done with all the expenses it’s costing. The fact that you can’t claim your interest as an expense just costs a huge amount of money – you end up with a massive tax bill.”
So yields have to improve by a combination of price drops, rental increases and improved tax situation....
Anyone else hear Chris Bishop on the Hosk show this am?
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