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 the inflation landscape seems to be changing quickly now.

American inflation slowed more than expected in November, an encouraging sign for Federal Reserve officials who are now meeting in Washington to discuss the next steps in their policy campaign against rapid price increases. The headline rise was 7.1%, a drop from October's 7.7%. Markets had expected a 7.3% rate.

But more importantly, the change to November from October was at an annualised rate of less than 1.5%. And in actual, but not seasonally adjusted terms, it fell at about the same annualised rate. Either way, the impetus has gone out of the American inflation surge in November.

Core inflation rose at about a 2.5% annualised rate in November from October, but that too was less than expected.

All of these shifts do have markets wondering how the recently hawkish Fed will assess this data. Markets are expecting tomorrow's December rate hike to be +50 bps to 4.5%. But the view of how policy is to be set for 2023 will be the key factor markets will be watching for. After today's data, they seem to be betting there will be less need for the Fed to take as hard a stance as they did in 2022. Which means 2023 will face less inflation pressure and fewer rate hikes. And that a soft landing is much more likely now. Commodity prices rose. Bond rates fell. And the US dollar retreated on the rising risk appetite.

Meanwhile the US Redbook retail sales data for last week improved from the week before, but only slightly, and by less than inflation. It rose by +5.9% from the same week a year ago.

In China, one of the consequences of the eased pandemic response is that travel bookings for the January Spring Festival/Chinese New Year are surging. We may see a record internal migration around the January 23 event.

In the EU, they have agreed to impose a new import tax on imports based on the greenhouse gases emitted to make them, inserting climate-change regulation for the first time into the rules of global trade. The initial focus will be on cement, steel, aluminium, fertilisers, electricity production, and hydrogen. Brussels has said countries could be exempted if they have equivalent climate change policies to the EU.

Meanwhile, German investor sentiment improved much more than expected in the ZEW survey, but to be fair it is still sharply negative overall, just much less so. Stabilising energy markets, and wider confidence their winter stress can be handled in the face of Russian threats, and cooling inflation, are all helping improve the mood which is now its least negative in nine months.

In Australia, consumer sentiment bounced off its recent lows, an 'improvement' that wasn't very convincing or significant. But those in their 'mortgage belt' seemed to be noticeably cheerier, probably on the basis that they think the bulk of the RBA interest rate hikes are behind them. Good luck with that.

But the mood of businesses in Australia turned somewhat downbeat according to the NAB business confidence survey for the month. It was the first time this survey has turned negative in 2022. Sentiment about the future is deteriorating, but survey respondents agreed that current conditions are good.

The UST 10yr yield starts today at 3.50% and down a very sharp -12 bps from this time yesterday. 

The price of gold will open today at US$1808/oz and up +US$23 from yesterday.

And oil prices start today up +US$3 from this time yesterday at just on US$76/bbl in the US while the international Brent price is just over US$81/bbl.

The Kiwi dollar will open today at 64.8, and nearly +1¼c higher than this time yesterday. Against the Australian dollar we are soft at 94.3 AUc and down -¼c. Commodity currencies are back in favour today. Against the euro we are at 61 euro cents and up +½c. That all means our TWI-5 starts today at 72.9 and up +50 bps.

The bitcoin price is now at US$17,782 and up +4.6% from this time yesterday. Volatility over the past 24 hours has been moderate at just +/- 2.8%.

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.