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 a miss on US core inflation has markets moving a lot today.

The highly anticipated American inflation rate for January fell back to 3.1% at the headline level following a brief increase to 3.4% in December, but the more important core rate came higher than forecasts of 2.9%. The monthly rate edged up to 0.4%. Markets were expecting better 'progress' than this and have reacted sharply to the news, realising the US Fed may not trim official rates as soon as they expected - and that they should have listened to the Fed's signals that it is a time to be cautious on progress in the fight against inflation. The next FOMC policy meeting is not until March 21 (NZT) however.

The USD rose, benchmark bond yields jumped, and Wall Street reacted badly with a sharp selloff. 

Meanwhile, there was a jolt lower in retail sales growth last week, as measured in same-store bricks & mortar outlets. It was aup, but only by +2.5% from the same week a year ago, the first time it hasn't risen in real terms in five months.

Across the Pacific there was another unexpected jolt lower. Japanese machine tool orders slumped in January, coming in at their lowest level since early 2021.

The ZEW Indicator of Economic Sentiment for Germany rose for a seventh consecutive month in February, reaching its highest level in a year and bettering market expectations, largely based on hopes that major central banks will start cutting interest rates this year.

In Australia, the Westpac-Melbourne Institute Consumer Sentiment Index rose +6.2% to 86 in February, from 81 in January. This is the biggest monthly gain since April last year, when the RBA paused its rapid series of interest rate rises, and takes the Index to its highest level since June 2022.

Australian business confidence, as monitored by the NAB survey, rose just 1pt to +1 index point, and still well below its long-run average. The improvement was largely driven by manufacturing and construction, partly offset by falls in wholesale and retail confidence. Confidence remained negative across all the states however.

The UST 10yr yield starts today at 4.29% and an +12 bps shift up on the changed views following the US CPI data. 

In Wall Street's Tuesday trading session, the S&P500 is down a sharp -1.2% on the same driver. 

The price of gold will start today down -US$21/oz from yesterday at US$1993/oz and a sharp reaction lower after the US CPI data was released.

Oil prices are up +US$1 at US$77.50/bbl in the US while the international Brent price is now just over US$82.50/bbl.

The Kiwi dollar starts today at just under 60.6 USc and down more than -¾c from this time yesterday. But that is mainly a USD shift up. Against the Aussie we are little-changed at 93.9 AUc. Against the euro we open at just over 57.5 euro cents and a -½c fall. That all means our TWI-5 starts today at just over 70.3 and down -40 bps.

The bitcoin price starts today at US$48,482 down -2.0% from this time yesterday but still over NZ$80,000 after the NZD retreat. Volatility over the past 24 hours has been moderate at just under +/- 2.0%.

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.