Inflation fine as markets elsewhere lose confidence

Australia: 

WESTPAC-MI consumer inflation expectations were unchanged at an annual pace of 3.6% in February, indicating that inflation expectations remain well contained.

Share Markets:

Share markets took a turn for the worse overnight as the Fed reiterated its desire to 'normalise' US interest rates and as investor concerns over global economic growth heightened.

The Dow fell 1.5%, the S&P500 was down 0.8% and the Nasdaq fell 0.2%. Markets were also soft in Europe where the FTSE was down 2.4% and the Dax fell 2.9%.

Interest Rates: 

How low can they go? Fed Chair Janet Yellen noted in her comments to the Senate Banking Committee that the Fed had researched the potential for negative interest rates in the US during the GFC and that no tools for monetary policy could be ruled out.

One Senate committee member questioned the legality of such a policy in the US.

That said, the Fed's desire, in the face of low unemployment and signs of wage growth, remains to 'normalise' US interest rates over time. The current market turmoil suggests rate hikes will occur very gradually and not in the short term.

Overnight, risk-off trades dominated as US investors sought the relative safety of government bonds.

US ten year government bond yields fell a further 3 basis points to 1.64% and 2 year yields were down 4 basis points to 0.65%. US long bond yields are at their lowest since mid-2013.

Australian yields edged lower yesterday and futures trading suggests further small declines today.

Sweden's central bank cut its repo rate from -0.35% to -0.5%, despite a strong housing market and strong domestic activity.

The key factor given was low inflation (expected to remain near zero this year).It signalled further easing is possible.

Foreign Exchange:

The US dollar index fell to a four-month low overnight as markets reassessed the prospects for US rate hikes. The yen and the euro were stronger against the USD. The AUD spiked lower in early London trade but recovered in later trade.

Commodities:

The price of gold rose 4.3 % as turmoil gripped financial markets.  West Texas crude oil was down 4.7% to $US26.20 per barrel but copper remained steady.

The price of iron ore lifted to $US46 per tonne. 

New Zealand:

The BusinessNZ manufacturing PMI edged up from 57.0 in December to 57.9 in January, the highest in over a year. It suggests some pickup in momentum for New Zealand manufacturing.  

United States:

Filings for unemployment benefits in the US declined to a seven-week low as hiring managers demonstrated confidence in the outlook for the US economy.

Jobless claims dropped by 16k to 269k in the week ended 6th February.



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