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.

Today we lead with news it's all about inflation and policy interest rates today.

American CPI inflation was up +8.5% in March, driven by rising petrol prices. This was almost exactly as markets had expected, and is a rise from +7.9% in February. Their 'core inflation' (without food or energy costs) was up +6.5%, a similar rise to what was recorded in February, and also the rise markets had expected. The lack of any surprise in this data has induced something of a relief in financial markets. But we should note that at these levels, American consumer prices are rising faster than anywhere else in the G7 major advanced economies, even in the EU.

However, because American inflation didn't surprise on the upside, financial markets pulled back on their interest rate bidding, and the US dollar slipped slightly.

The US retail expansion rolls on, with a key survey showing it rising at its second highest rate in the past six months, and far more than can be accounted for by inflation.

The US Treasury offered another tranche of 10 year bonds at auction today, a smallish US$34 bln was offered and that attracted bids of US$83 bln. However, the median yield for the winning bids was 2.62%, up sharply from 1.84% at the prior event a month ago.

Even the American monthly budget statement didn't surprise, coming in with a modest (for them) March deficit of -US$193 bln, almost exactly the same as for February. At this level it is half what it was in March 2021, and on track for an annual deficit of -US$1.7 tln and almost US$1 tln lower than for the same period a year ago. That turnaround is essentially because tax receipts are running +10% higher than the prior year, and spending is running -10% lower. It is a remarkable untold achievement in just one year. They will end the year with a budget deficit of -7.1% of GDP, so still a lot of repair required yet.

Part of the improved American economic performance is because their industrial sector is humming. And one part of that is due to aircraft sales. Boeing said it had sold 145 planes in the first three months of the year, after accounting for canceled orders. Almost all of the orders were for the 737 Max. The company has now had 14 straight months of net new sales as the travel rebound accelerates.

Japanese machine tool orders have come in very strong indeed, up +30% in March from a year ago, up +20% from February. It is their second best month ever, only pipped by the spectacular March 2018 level. It is an impressive result, far greater than can be explained by producer cost rises. And those overall producer costs rose +9.5% in March from a year ago, pretty much as expected and a similar level they had had for five straight months.

But supply chain issues are hurting as well. Toyota has told its major suppliers that it intends to reduce global output to around 700,000 vehicles for next month, down a little more than -10% from original plans. The move comes amid supply chain instability fueled by Russia's invasion of Ukraine and in China where the pandemic battle rages. The new total would be just above the 670,000 vehicles Toyota manufactured last May.

The expected turn up in Indian industrial production hasn't happened yet and certainly did not happen in March where a tiny +1.7% annual gain was recorded. At the same time India reported CPI inflation running at just under 7% and faster than what was anticipated. They central bank's recently announced pivot from supporting growth to fighting inflation becomes more understandable with today's data releases.

German CPI inflation also came in pretty much as expected in March as well, up +7.3% (+7.6% on a harmonised EU basis). But that was up from +5.1% in February, all induced by the cost of Russian energy supplies of course. That crisis has pushed economic sentiment sharply lower even if it isn't lower in March than from February.

It isn't much, but a fall in the lithium price is worth noting. Sagging Chinese demand as their economy stutters seems to be behind the small drop. It is the first retreat for this commodity since 2020 when it then took off.

In Australia, business conditions surged higher in March and confidence also strengthened. Trading conditions and profitability rose markedly, suggesting demand remains strong, and employment also rose. The improvement was largely driven by the retail sector. Overall business confidence rose, continuing the steady rise since December.

All eyes will be on today's RBNZ official cash rate review die out at 2 pm today. It seems to be a line-call whether the rise will be +25 bps or +50 bps with +25 bps marginally preferred by analysts. Later today the Canadian central bank is having a similar review and most observers there think +50 bps is likely for them.

The UST 10yr yield has given up all of yesterday's rise, today down -6 bps to 2.72%. (The long term average over the past 50 years has been 5%.) 

The price of gold starts today at US$1971/oz and up +US$24 from this time yesterday.

And oil prices are up +US$6 at just under US$100/bbl in the US while the international Brent price is now just on US$104/bbl.

The Kiwi dollar will open today +½c firmer at 68.7 USc. Against the Australian dollar we are marginally softer at 91.9 AUc. Against the euro we are at 62. euro cents an softer also. That all means our TWI-5 starts today at 74.6 and up +40 bps from this time yesterday.

The bitcoin price is down -0.8% from this time yesterday at US$39,994. Volatility over the past 24 hours has been modest at +/- 1.8%.

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.