Episode Details

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