Investors face stagflation, reassess returns

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.

Today we lead with its all about watching financial markets and their reactions to the US war on Iran and its long-term impact on US fiscal management - and their November election prospects. It is going to be volatile, yo-yo mix of gloom and temporary relief rallies.

During the pandemic crisis, we had essentially a fiscal and central bank 'put' policy to deal with that crisis, an implicit policy promise where the Government and central bank acted with programs to set a floor for employment and asset prices, typically by purchasing assets to inject liquidity during market downturns. But this time there seems little appetite to reprise that if things get really unstable.

In the week ahead, locally we will get some mortgage data for February, but apart from that, data releases will be light. Today's Fonterra results will be interesting however.

In Australia, Wednesday's February inflation data will be the key thing we are watching.

Globally, it will be all about actions and reactions during the fourth week of attritional conflict in the Persian Gulf and how that affects oil and natural gas flows.

In the US, there are a range of sentiment indicators for March out this week including PMIs, the University of Michigan consumer survey, and many regional Fed surveys.

In China, there isn't much data ahead this week, just industrial profit data. In Japan and Singapore, they too will update inflation data.

But we need to watch US Treasury yields which jumped at the end of last week, and to their highest level in nine months. Investors seem to be coming to realise that Trump doesn't know what he is doing, and the inflation impacts from these mistakes will likely deliver a much more hawkish US Federal Reserve, despite the Warsh and Miran inserts. We may all be in for rising benchmark interest rates.

And it won't help us that credit rating agencies are looking at these impacts and starting to consider downgrades, sovereign and corporate. Risk premium rises will be on top of the benchmark rises.

Meanwhile, the IEA says the market disruptions from the US/Israeli "conflict has triggered the largest supply disruption in the history of the global oil market". They say we should all work from home, and if we drive, drive slowly.

American petrol prices are up a third in just four weeks. That signal from the world's largest economy will be sharply inflationary. By a different means, Trump is effectively imposing a giant carbon tax on everyone.

And what will flow from from that? Sharply higher inflation, and sharply lower global economic activity. That is the definition of stagflation. Everyone suffers because monetary policy needs higher interest rates to restrain the inflation risk. And that undermines the global banking system because stagflation is the worst scenario for bank lending.

Meanwhile, Canadian retail sales rose in February by +0.9% from January to be +1.8% higher than year-ago levels.

But Canada's producer prices rose much less than expected in February. They were up +0.4% from January when a +1.1% rise was expected. For the year they are up +5.4% however.

Taiwanese export orders are still growing fast but the February rise was only +24% and by the standards of the +60% January rise, this seems a let-down. Analysts has expected another very large rise and so were disappointed. But anyone else would have been over the moon with a +24% rise.

In China, foreign direct investment inflows fell -5.7% in February from a year ago to ¥161 bln, -22% lower than the same period in 2025, and its lowest for this period since 2020. There were some positive sectors in high-tech, but mostly this is a weakness Beijing won't appreciate.

And Chinese customs data shows why the silver price jumped earlier in the year. China bought up 700 tonnes of the metal in January and February to shore up its strategic reserves. But the buying seems to have eased or stopped, and we are seeing the price dive now.

We should probably note that with the Australia-New Zealand "Closer Defence Relations" statement, there is growing expectations that the two countries will buy its replacement frigates from Japan.

In South Australia, the incumbent Labor state government has won re-election handily. Advance results show it winning 33 of 48 seats, with the Liberals suffering a heavy reduction (10). With 98% of polling booths counted, so far Pauline Hanson's One Nation Party is not ahead in any of them.

And we need to note that Fitch has changed their outlook for the New Zealand economy, shifting its AA+ rating from 'Stable' to 'Negative' on the basis that debt reduction is now far less likely for either the private or public sectors.

The UST 10yr yield is now just on 4.39%, unchanged from Saturday at this time, up +11 bps for the week.

The price of gold will start today down -US$83 from Saturday at US$4590/oz. That is down -$528 or -10.5% in a week. And that its its largest weekly fall in more than 40 years. Silver is down another-US$2 at US$67.50/oz, a -16% weekly retreat.

American oil prices are holding at just on US$98/bbl, while the international Brent price is up +US$1.50, now just over US$112/bbl.

The Kiwi dollar is little-changed against the USD from Saturday, down -10 bps at 58.3 USc. Against the Aussie we are also little-changed at 83 AUc. We are down -20 bps against the yen. Against the euro we are down -10 bps at 50.4 euro cents. That all means our TWI-5 starts today down -10 bps at just on 62 but up +40 bps over the past week.

The bitcoin price starts today at US$68,741 and down -1.3% from this time Saturday, down -3.3% from a week ago. Volatility over the past 24 hours has been modest at just on +/- 1.8%.

You can 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.