Wall Street slumps fearing Fed's inflation-fighting turn

5m ·

Wall Street slumps fearing Fed's inflation-fighting turn

Kia ora,

Welcome to Tuesday’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 that markets now realise they need to reprice much more substantially, as the Fed is about to move to inflation-fighting mode again.

Wall Street has started its week with a severe case of the jitters. The S&P500 is down -3.6% in late afternoon trade and falling. That means for 2022 it is down -11.6% and in almost exclusively one-way traffic and you may recall it started the year at an all-time high. The NASDAQ is down -4.5% so far today, and the Dow down -3.0%, so it is a broad-based retreat, led by tech stocks.

The bond market is rallying in a minor but unconvincing way. The currency markets are in full risk-off mode.

The early report on January factory activity sees a small pull-back in their strong expansion but it is still healthy. But the services sector reported a much sharper pullback in January, barely expanding now after a strong run. Supply delays and Omicron-worsened labour shortages are getting the blame.

More or less confirming the PMI data, the Chicago Fed's National Activity Index dropped below expansion territory to -0.15 in December from an upwardly revised and strong +0.44 in the previous month, suggesting there was a contraction in economic activity in December following a two-month period of expansion. It is their first decline since April 2021.

The story in Japan is similar , with a sharpish contraction in their services sector, although Japanese factories are expanding a bit more vigorously. The net of the two means they are now going backwards in January.

Singapore reported consumer price inflation picking up for them, now up to 4.0% in the year to December. This was yet another inflation report that topped estimates.

Taiwan's industrial production posted another strong result, up +10% year-on-year to December and off a strong base which makes it doubly impressive. But their retail sales only rose +3.7% on the same basis although that was to a new record high.

In China, their central bank cut another benchmark interest rate . Meanwhile, Beijing is pushing local governments to issue be bonds faster, and they are responding, with early, fast and big increases.

And staying in China, the rise and rise of the lithium price has reached 'ludicrous' levels, topping US$56,500/tonne. That is a doubling in less than 3 months. Going 'green' is going to be expensive for consumers, a shift only the 'rich' will be able to afford.

In Germany , January’s ‘flash’ PMI data indicated an upturn in business activity across their economy, led by a stronger performance from the country’s manufacturing sector as supply bottlenecks showed further tentative signs of easing. Price pressures remained elevated however.

But they are a stand-out in the EU generally. Eurozone business activity growth slowed for a second successive month in January as the spread of Omicron took an increasing toll on the bloc's economy. Although supply chain delays eased and provided a boost to manufacturing production, renewed pandemic restrictions led to a marked slowing in service sector growth. Still, nothing is actually contracting.

The latest PMI data for January in Australia shows their private sector shrank for the first time in four months, affected by the latest surge in Omicron infections. 

Later this afternoon the Reserve Bank of Australia will release the results of its monthly review of monetary policy. It is very likely to signal a change of course. Whatever it does will almost certainly be market-moving.

The UST 10yr yield opens today at 1.72% and down -5 bps from this time yesterday. 

The price of gold starts today at US$1834/oz and -US$2 lower than this time yesterday.

And oil prices start today lower by -US$2.50/bbl at just under US$82/bbl in the US, while the international Brent price is now just on US$84.50/bbl. 

The Kiwi dollar will open today weaker yet again at 66.7 USc and another -½c drop. Against the Australian dollar we are firmish at 93.9 AUc. Against the euro we are a -¼c lower at 58.9 euro cents. That means our TWI-5 starts today at 71.2, and its lowest in 26 months. This sharp shift alone will be inflationary because it is a -5.6% devaluation over the past 11 weeks.

The bitcoin price has slumped lower again, down -3.8% to US$33,964 in a continuing selloff. It has now lost -27% since the start of the year, and lost -50% since its peak in July 2021. Volatility over the past 24 hours has been extreme at +/- 5.4%.

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.

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