Rising inflation undermines asset valuations

Kia ora,

Welcome to Thursday's Economy Watch where we follow the economic events and trends that affect New Zealand.

I'm David Chaston and this is the International edition from Interest.co.nz.

Today we lead with news the reflation trade is back.

We start today with a major surprise. Inflation is rising much faster in the US than observers had anticipated. In March it rose at the +2.6% rate and nicely above the US Fed's target. Analysts had expected it to rise further to +3.2% in April. But in fact it has come in at a +4.2% rise from a year ago, a very much faster rise than almost anyone anticipated (except the hindsight analysts). It's their biggest jump since 2009 and the highest since 2008. Energy and transportation costs did the damage in April. Interestingly medical care, food, and rents all only rose a bit over 2% and all restrained the jump.

Bond yields jumped. Equity markets fell. The US dollar strengthened.

The US Treasury released its monthly budget update for April overnight. After a huge -US$660 bln deficit in March, the April -US$226 bln shortfall looks positively tame. Over the past twelve months this deficit is -US$3.6 tln (-16.2% of GDP) but that is lower than the full year to March deficit of -US$4.1 tln (-18.6% of GDP). At least they now have things going in a positive direction.

The US Treasury auctioned US$63 bln of 10yr notes today. They got US$123 bln in bids. US$23 bln was reserved for the Fed. The median yield was 1.63% pa at this event, up from 1.47% pa at the same (but smaller) auction a month ago.

The monthly US WASDE report was released overnight as well, assessing the global agricultural trade. The points of interest to us are that world grain production looks like it will hit another record high this year, but rising demand will keep prices elevated. The US is expecting their dairy output to rise as prices stay high. They also see beef imports softening from here.

The rise and rise of commodity prices just keeps extending, with iron ore prices now over US$230/tonne. A year ago they were at US$89/tonne. Two years ago and well before any pandemic they were at US$95/tonne. Copper is rising faster too, and now up over its 2011 record high.

In China, the April data for "new yuan loans" - their measure of bank debt growth - came in lower than expected and sharply less than in March. But year-on-year it still keeps loan growth above +12%. Debt there is rising much faster than economic activity, so the idea that things are "cooling" is probably overstating it.

And there is growing criticism of the reliability of that Chinese census - even within the CCP and Government.

And the Government is dampening down fears that Chinese CPI inflation is at risk of sharp rises. It says it is able to control "imported inflation".

And German inflation did not rise like the American data. It was up the expected +2.0% - unusually high for them, but not excessive.

And underperforming, EU industrial production was lackluster in March.

On Wall Street, the S&P500 is down another -1.7% in afternoon trade building on yesterday's big decline as their selloff broadens. Rising interest rates undermine asset valuations. 

The UST 10yr yield starts today at 1.68% and up +6 bps from this time yesterday. 

The price of gold starts today at US$1822/oz and that is down -US$13 since this time yesterday. It is an odd move lower given the inflationary backdrop.

Oil prices start today up almost +US$1.50 at just under US$66.50/bbl in the US, while the international Brent price is just under US$69.50/bbl. This is a big move, made larger by the sudden strengthening of the US dollar.

The Kiwi dollar opens today sharply lower at 71.6 USc and more than -1c lower overnight. Against the Australian dollar we are little-changed at 92.6 AUc. Against the euro we are -½c lower at 59.3 euro cents. That means our TWI-5 starts today at 73.4.

The bitcoin price is now at US$54,929 and -2.7% lower than this time yesterday. Volatility in the past 24 hours has been a high +/- 3.3%.

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.