Very weak US retail sales and industrial production play to theme of economic recession; Soft PPI plays to theme of weaker inflationary pressure. As a spoiler on the inflation outlook, oil prices continue to recover with IEA forecasting record demand

There has been plenty of news to digest, the net result being weaker US equities and lower global rates. JPY saw a big swing after the BoJ stood pat on policy and the unchanged policy decision supported the move lower in global rates alongside some weak US data overnight. The NZD peaked at 0.6530 but has fallen back smartly to 0.6440.

US economic news overnight has been generally bad. Retail sales were much weaker than expected in December with the headline and the ex-auto and gas sales series down 1.1% m/m and 0.7% m/m respectively, alongside some downward revisions, so now backing up similar moves seen in November.  Industrial production slumped further, with the manufacturing sector down 1.3% m/m in December, backing up a downwardly revised 1.1% fall in November. The data play to the theme that the US economy is on the verge of economic recession, if not already there. The only positive economic news was the NAHB housing sentiment index for builders breaking a run of 12 consecutive monthly declines. The 4pt lift to 35 was off a rock-bottom level, still consistent with poor conditions in the housing market.

Adding to the gloom, Microsoft joined the wave of job layoffs in the tech sector, planning 10,000 job cuts or close to 5% of its workforce “in response to macroeconomic conditions and changing customer priorities”. Bank of America paused new hiring except for the most vital positions, in a banking sector which has generally seen job layoffs announced.

On the inflation side, headline PPI was weaker than expected, falling 0.5% m/m in December while the core increase of 0.1% was in line, supporting the view that inflationary pressure is now much weaker. Respected Fed President Bullard, who won’t be a voting member of the FOMC this year, maintained his hawkish credentials, favouring a 50bps hike in a couple of weeks compared to market expectations and other members preferring to dial down the rate increase to 25bps, adding that he forecast a peak of 5.25-5.5% target range for the Fed Funds rate this year.

Lower oil prices through the second half of last year have been instrumental in driving inflation pressures down but, of note, there has been some recovery over the past couple of weeks. Brent crude traded at its highest level since early December, just under USD88 per barrel. In its latest outlook, the IEA reported that demand is expected to reach a record daily average this year, with about half of the growth coming from a rebounding China. A further lift in oil prices – with some suggesting that a return to USD100 per barrel could happen – would spoil the lower inflation narrative that has been emerging.

UK CPI inflation fell to 10.5% y/y in December, adding to confidence that the 11.1% print in October was the peak, although the core figure of 6.3% y/y was a tenth ahead of expectations, adding to the chance that the BoE will opt for another 50bps hike next month, rather than dial down to 25bps.

In other key news, yesterday the BoJ left its ultra-easy policy stance unchanged, with the Bank not opting to widen the trading range for the 10-year JGB further, after the surprise move at its pre-Christmas meeting. This was in line with the consensus view, but the market was positioned for another possible surprise move. There were only marginal changes to the growth and inflation forecasts, the Bank not seeing inflation sustaining above 2% beyond the current fiscal year. The Bank has been buying JGBs in record amounts at an unsustainable pace and the unchanged policy stance won’t budge market expectations that the yield curve control policy is coming to an end – arguably it is already well past its use-by date and is causing considerable market dysfunction.

Governor Kuroda has one last meeting before passing the baton to a new Governor, yet to be announced, which will be the next key BoJ event – the market then trying to second-guess how hawkish the new Governor will be and how he handles the “hospital pass” if Kuroda leaves policy unchanged in March.

The no-change decision saw some clean-out of long yen positions ahead of the meeting, with USD/JPY jumping as much as 2.4% to 131.58, before paring the gain, with the pair back close to the pre-meeting level, trading this morning at 128.60. NZD/JPY traded up to 84.80 and is now back below 83.

The NZD had a nice upward run post-BoJ and the weak US data added to the move, seeing a peak of 0.6530 overnight, but it has since sharply fallen back down to 0.6440. Yesterday we noted a resistance level of 0.6465, and without a close above that, it still seems appropriate for now. AUD showed a similar pattern, rising to a fresh 5-month high of 0.7063 but now a cent lower at 0.6960.  NZD/AUD has pushed a little higher to 0.9250. CAD has been the weakest of the majors despite the positive vibe in the oil market, down about 0.6%. Of the other majors, GBP has been one of the best performers, supported by solidified views on the BoE needing to do more work to rein in inflation.

Japan’s 10-year rate traded as low as 0.36%, as short positions were culled after the BoJ meeting but the rate rose back up to 0.46% and no doubt fresh short positions will be reloaded with further likely tests of the BoJ’s resolve to keep it no higher than 0.50%. The decision pushed US Treasury yields lower and the soft US data added to the move overnight. The US 10-year rate traded as low as 3.37% and is currently 3.41%, down about 7bps from the NZ close but a chunkier 14bps down for the day.

The NZ rates market caught some of the early move lower in global rates post-BOJ, seeing 10-year swap close the day down 3bps to 4.25% while the 2-year rate was unchanged at 4.98%. The 10-year NZGB closed down 2bps to 4.07%. Since the NZ close the Australian 10-year bond future has fallen 10bps in yield terms, which sets the scene for lower NZ rates on the open.

NZ economic data releases remained poor, with house sales volumes plunging to further depths (down 39% y/y in December) and house prices falling further and showing no sign of a spring/summer bounce.  The REINZ’s house price index was down 13.7% y/y, with much larger falls for Auckland and Wellington, both down over 20% from their peaks just over a year ago.  Electronic card transactions fell for a second consecutive month in December, with volumes likely lower in Q4 after adjusting for strong inflation, a soft end to the year for consumer spending.

In the day ahead there are a number of Fed speakers, with Harker this up this morning, followed by Logan later this morning and Collins tonight. NZ food price data will help up firm up our Q4 CPI estimate, which is shaping up to be a key local release next week, ahead of the RBNZ’s February MPS. Australia’s employment report is expected to show ongoing strength in the labour market. ECB President Lagarde speaks in Davos tonight while US data releases include building permits, housing starts, the Philly Fed business survey and jobless claims.