Consumer Inflation in NZ Down, Falling FED Treasury Yields
In October, China’s Consumer Price Index (CPI) experienced a year-on-year decline of 0.2%, indicating a mild deflationary trend. Meanwhile, New Zealand’s Official Cash Rate (OCR) is expected to remain at 5.50%, and US Treasury yields are on a downward trajectory.
China’s CPI Trends:
Food Prices Dive, Non-Food Prices Rise:
- Food prices, especially pork, saw a sharp year-on-year decrease of 30.1%, accelerating from September’s 22% drop.
- Non-food prices exhibited a moderate year-on-year increase of 0.7% in October.
Monthly Consumer Fluctuations:
- On a month-on-month basis, food prices declined by 0.8% from September, primarily driving the monthly CPI decrease.
- The core CPI, excluding food and energy, rose by a modest 0.6% year-on-year, showing slight moderation from September.
Average CPI and Economic Impact:
- The average CPI for January to October experienced a year-on-year increase of 0.4%.
- Chief economist Wen Bin of China Minsheng Bank attributes the softened CPI to an oversupply situation due to a mild domestic demand recovery coupled with weak external demand. He anticipates a return to mild CPI increases in early 2023.
Producer Price Index (PPI):
Factory Gate Costs Decline:
- The Producer Price Index (PPI) for goods at the factory gate fell by 2.6% year-on-year in October.
- On a monthly basis, the October PPI remained flat, influenced by price fluctuations in international crude oil and non-ferrous metals, along with a high base from the same period last year.
New Zealand’s Economic Projections
Inflation Expectations Shift:
- Expectations for one-year-ahead inflation dropped from 4.17% to 3.60%, while two-year-ahead inflation decreased from 2.83% to 2.76%.
- House price inflation estimates for one-year-ahead and two-year-ahead surged significantly to 4.84% and 6.22%, respectively.
Monetary Policy Outlook:
The Official Cash Rate (OCR) is expected to remain at 5.50% by the end of December 2023 and decrease to 4.99% by September 2024.
Consumer Wage Changes and Unemployment Rate:
Expectations for one-year-ahead wage changes rose to 4.43%, while the unemployment rate is projected to rise to 4.51% in one year and 4.66% in two years.
GDP Growth Expectations:
Annual GDP growth is expected to increase to 1.26% in one year and 2.15% in two years.
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Impact of Falling Treasury Yields:
Tightening and Loosening Financial Conditions
Initially, falling Treasury yields triggered a stock market rebound and lifted U.S. government bonds. However, prolonged yield declines may lead the Federal Reserve to maintain a hawkish stance, affecting asset prices in the long run.
The relationship between yields and financial conditions, reflecting funding availability, has become a focal point recently.
Consumer Reversal in Trend
Previously, higher Treasury yields tightened financial conditions and impacted stocks negatively. Recently, as yields fell, the S&P 500 rebounded about 6.5%.
Concerns and Goldman Sachs Index
Some investors worry that if yields continue to drop, financial conditions could become too loose, prompting the Fed to keep rates higher for longer. The Goldman Sachs Financial Conditions Index saw a significant decline.
Potential Fed Response
Analysts caution that further easing in Treasury yields could prompt a more hawkish stance from the Fed if the market interprets it as dovish. Futures markets now anticipate a 90% chance of the Fed keeping rates steady in December.
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