Kia ora,

Welcome to Monday’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 news it doesn't look like our trading partners are going to be that helpful getting us out of recession.

This week we will be watching for the Selected Prices inflation indications on Friday. And financial markets will be doing their final jostling for the following week's set of monetary policy decisions, first from the RBA on the Tuesday of that week, and the RBNZ the next day. But this coming week the US will release its CPI and PPI reports, and the Fed will face a partisan Congress to explain the Monetary Policy Report they released over this past weekend. India will release updated inflation data, and the EU its Q4 GDP growth result. And this week a set of sentiment surveys will be released in Australia.

Over this weekend there were some major releases from the US.

First, the Fed released its semi-annual Monetary Policy Report. Although it got almost no wider media coverage, it does point to some very interesting stresses they are going to have to work their way through. And they are issues that could have global consequences. While they see banks having 'ample' liquidity at present (previously they saw 'abundant' levels, so a shift), in fact as a proportion of their economy it is historically low. If banks have low liquidity, that puts the Fed in a tough spot if it want to keep shrinking its balance sheet. The Fed's 'normalisation' is an economic tightening process that only works without consequences if the banking system has excess liquidity. When that shrinks, as it seems it is, then overall low liquidity could jerk benchmark interest rates higher. Something will give, and the Fed may have to stop its QT process. Announcing that is a big market signal and this MPR suggests it is close.

Secondly, total US consumer credit surged by almost +US$41 bln in December, far exceeding the forecasted +US$$12 bln. In fact it was the largest increase in the history of this metric. Revolving credit, which includes credit cards and personal lines of credit, jumped by +US$23 bln. Meanwhile, non-revolving credit, which covers car loans and student debt, increased by +US$18 bln. The overall +2.4% year-on-year rise suggests consumers are only modestly taking on more debt however, similar to inflation's rise.

Third, US January non-farm payrolls growth came in less that expected, up +144,000 when the average of market estimates was +170,000. In 2024 that would have been regarded as a "big miss'.

The data collectors said that wildfires in LA and severe winter weather in other parts of the country, had “no discernible effect” on employment in the month.

Their jobless rate ticked down to 4.0% and average weekly earnings rose +4.2% from a year ago, so overall a mixed picture.

And fourth, the University of Michigan consumer sentiment survey for February fell from January and quite sharply. It's the second straight month of retreat and is now its lowest reading since July 2024. Both the 'conditions' and 'expectations' measures fell. There was also a large slide in buying conditions for durables, in part due to a perception that it may be too late to avoid the negative impact of their tariff policy. In addition, inflation expectations for the year ahead soared to 4.3%, the highest since November 2023, from 3.3%. This is only the fifth time in 14 years we have seen such a large one-month rise in year-ahead inflation expectations. Many consumers appear worried that high inflation will return within the next year.

Not only is this measure of sentiment down in February from January (-4.6%), it is down even more sharply from February a year ago (-12%).

And it is not going to get better. Trump is signaling 'reciprocal tariffs' on many countries, also expected to raise costs for Americans. It will be a major international escalation. No indication here on how that will affect New Zealand that basically doesn't have any tariffs with anyone. (In his alternate reality, he may just invent that we have some, of course.)

An uncertain and fearful American middle class may have a much bigger impact on the global economy than even their new public policy direction. Of course the two are related.

North of the border, Canada turned in a very strong jobs report again, it's second consecutive big gain. +76,000 new jobs were added in January, far higher than the +25,000 expected. Their jobless rate fell to 6.6%. Of course, this too is much more uncertain when looking ahead, for the same US-based reasons.

As the New Zealand dairy industry knows, Canada has an [illegal] trade protection scheme operating for its dairy industry, a system of "supply management". Their industry leaders "don't think it [is] being threatened" in the current stoush with the US.

And while we are reporting about dairy, we should note that American milk consumption rose +3.2% in 2024 while artificial 'plant milk' consumption fell -5.9% in the year. (Source.) That happening at a time when US milk production is steady (+0.7%) will no doubt create some interesting market supply stresses. But these signals may turn that around in the next season. The cost of feed for the mostly barn-housed industry will be the main indicator of how enthusiastic the response will be.

Japan is reporting that household spending jumped in December and by very much more than anticipated. It was up +2.7% in December from November when only a +0.5% rise was anticipated. That large monthly shift now means that the year-on-year rise is +2.3%. If Japanese consumers are opening their wallets, it is both a sign that sentiment is rising, and it will be some counterbalance to the US ructions and the Chinese slowdown. We should not forget that Japan is the world's fourth largest economy, larger than India. It is similarly important for New Zealand exports.

India cut its policy rate by -25 bps to 6.25%, its first cut since April 2020. Their forecasts indicate rising growth and falling inflation. Although that will be what PM Modi wants to hear, they may be 'brave' forecasts. But they are juicing up the stimulus, with this rate cut part of a two-part action to compliment last week's income tax cuts.

In China, their January CPI inflation is meandering close to zero, although it picked up to +0.5% from a year ago in this latest update, and that was because of the +0.7% rise in the month from December. So perhaps they have avoided deflation - in this official data at least. But beef prices were little changed month-on-month but down -13% from a year ago. Lamb priced were up marginally, to be -5.6% lower than a year ago. Their milk prices fell rather sharply in January, taking the annual dip to -1.7%. China's producer prices remained disinflationary, down -2.3% year-on-year.

China said its official reserves rose marginally in January, now at US$3.2 tln. US$769 bln of that is US Treasury debt, and falling (Nov-24). (Those holdings may now be lower than those the UK holds in US Treasuries.)

Global world food prices were little-changed in January and are still running lower than a year ago. There was a small dip in sheepmeat prices, a rise in beef prices, and big rise in dairy prices. In fact dairy prices are now at two year highs, but are still -10% lower than when they peaked in June 2022.

The UST 10yr yield is at 4.50%, up +5 bps from Saturday at this time.

The price of gold will start today at US$2860/oz and little-changed from Saturday. But this is up +US$50/oz from a week ago. In between, gold hit its record high of US$2883/oz. Also note, China is now allowing its insurers to 'invest in gold'.

Oil prices are little-changed at just on US$71/bbl in the US and the international Brent price is still at US$74.50/bbl. But these levels are -US$1.50 lower than week-ago levels.

The Kiwi dollar is now at 56.6 USc and up +10 bps from this time Saturday. Against the Aussie we are unchanged at 90.2 AUc. Against the euro w...