Weaker than expected US PPI supports the inflation-is-heading-down narrative. Weaker China activity data looked-through, with focus on the better outlook on policy support

Market sentiment is positive, with gains across key asset classes and a weaker USD. There looked to be some anticipation of weaker US PPI data and the release delivered on that, sustaining the moves. US equities show gains of 1-2%, global rates are lower with the US 10-year rate some 6bps below the NZ close, and the USD is broadly weaker. The NZD spiked above 0.62 before retreating to 0.6175, up over 1% from this time yesterday.

There has been a deluge of global economic data to digest which has been mixed, with the market still trading in the afterglow of last week’s big downside miss to the US CPI. Of the key releases, weaker China economic data have been largely ignored, with the market more focused on government policies that will support growth. US PPI inflation data were much lower than expected but the market moves were already well advanced ahead of this release, seemingly in anticipation of a good result.

On the US PPI, the core measure (ex food and energy) rose 6.7 y/y the lowest since July last year, and 0.5 percentage points below consensus. The headline figure fell to 8.0%, its lowest level in over a year, after peaking at 11.7%. The data support the case that inflation pressures are receding. Pantheon Macroeconomics notes that the data shows a significant compression in margins is underway for wholesalers and retailers and leading indicators suggest plenty more downside from this component to come, paving the way for much lower PPI and CPI inflation ahead.

In other positive news, the New York Empire State manufacturing gauge rose 13.6pts to 4.5, the first positive reading since July. This is the first of the regional manufacturing indices and follows a run of weaker ISM manufacturing figures.

Walmart posted better than expected earnings. The company benefited from higher-end shoppers trading down and a shift to groceries from general merchandise.  Rather than being a gauge of economic strength, the strong result could be a sign of economic weakness, with the company’s reputation as a low-cost retailer and high inflation seeing consumers spend more on food and less on other goods and services. On inflation the company said it was focused on bringing its costs and prices down as quickly as possible but saw prices rising more than 3% over the next year, above the Fed’s 2% target.

Risk appetite was already marching higher in late Asian trading alongside lower global rates and a weaker USD and the US releases have seen those moves sustained. 
The S&P500 was up as much as 1.8% near the open and the gain has since been pared back to 1¼% as we go to print. US Treasuries show a flattening bias, with little change in the 2-year rate for the day, and the 10-year rate down 4bps, albeit closer to a 6bps drop since the NZ close. European equities are higher and rates lower as well.

Yesterday, China’s monthly activity data for October were mostly weaker than expected, with COVID-related lockdowns dragging annual growth in retail sales into negative territory. Controls were tighter leading into the five-yearly National Congress and the ramp up in COVID cases in November will likely see growth remaining under pressure. The government’s recent plan for more targeted restrictions will help the medium-term outlook, but could result in greater near-term economic disruption. Further support to the ailing property market, announced at the weekend, will help though. The market has been more focused on the outlook than the weaker economic figures.

Positive risk sentiment sees the USD broadly weaker. The USD took a dive on the PPI release, which saw big gains in all the key majors, before reversing course. The NZD and AUD saw no backlash from the weaker China data and have powered on up, adding to last week’s strong gains. The NZD spiked above 0.62 in the aftermath of the US PPI release, before settling down to 0.6175. The AUD almost reached 0.68 and currently sits at 0.6775, both currencies up more than 1% from this time yesterday.

GBP has also been on the strong side. UK labour market continued to show signs of a tight labour market, despite the economy heading into recession, with chronic job shortages, not helped by a lack of immigration, and rising wage inflation. There were hints of the economic slowdown starting to bite, but still early days, with the unemployment rising only 0.1 percentage point off its multi-decade low to 3.6%. GBP is up over 1% to 1.1880, after spiking up through 1.20 overnight. EUR and JPY show modest gains against the USD, and NZD crosses against these pairs are solid, up to 0.5950 and 86 respectively.

At the GDT dairy auction the price index rose 2.4%, breaking a 3-auction streak of chunky falls, with gains of just over 3% for whole milk and skim milk powder more than offsetting lower butter and cheddar prices.

The domestic rates market showed some large intraday movements, over 10bps at the long end of the swaps and NZGB curves. The net result was mainly lower rates, with NZGBs down 2-5bps across the curve with a flattening bias. This flattening bias was more evident in the swaps curve, with the 2-year rate unchanged at 4.96% and the 10-year rate down 8bps to 4.53%. The government successfully issued $3b of a new 2034 nominal green bond, meeting strong demand at the bottom edge of yield guidance.

REINZ data showed very weak house sales (down 35% y/y) and house prices continuing to decline. While the house price index rose 0.2% m/m in October, this reflected seasonal influences, with prices modestly lower once adjusted, and down 10.9% y/y, with larger falls in Auckland (down 14.3%) and Wellington (19.7%). With much higher mortgage rates still to filter through and the likelihood of recession next year, there is plenty more doom and gloom headed for the housing market.

It’s another full day on the economic calendar. Australian wages data will help shape how far behind the curve the RBA is on policy. An on-consensus 0.9% q/q increase would take wages inflation to a decade-high. UK and Canadian CPI data are released tonight, the former expected to show headline rate rising to 10.7% y/y, driven by higher energy costs. US retail sales are expected to rise 1% m/m, with a soft core.