NEW ZEALAND: VIEW: Westpac Expects Consumption To Rise As Mortgages Roll Over

The US bank weighs in on the policy outlook post the weekend inflation prints. It notes encouraging higher frequency data, but broader deflation pressures remain. 

J.P. Morgan: "In the near term, high-frequency tracking of LNY activity looks encouraging. Daily consumption-related sales rose 10.8% compared to the LNY holiday last year, led by strong sales of home appliances (+166.4%,) and communication equipment (+181.9%) on trade-in subsidy support. Passenger traffic hit a new record high (rising 6.0%), domestic tourism spending rose 7.0% and tourism-related services rose 37.5%. In addition, movie box jumped 18.6% to register a new record high.

In the broader picture, the deflation pressure in the Chinese economy will not fade away easily, in our view. On the domestic front, regarding the pork cycle, the steady upward trend in pork prices earlier in 2024 seems to have peaked and come off steadily in recent months. The demand-supply imbalance in the domestic economy will continue to weigh on the overall pricing trend, while US tariff hikes on imports from China will weaken China’s export activity (the key sector that has helped to partly absorb excessive industrial capacity in recent quarters). Following the LNY-related uptick in January, we expect CPI inflation rate to ease in the coming months. Our latest forecasts look for average CPI inflation of 0.2% in 2025 (vs. 0.2% in 2024), with average PPI deflation at -1.1% in 2025 (vs. -2.2% in 2024).

Regarding domestic policy, the need to boost consumption has been the area of increasing policy focus lately. The first batch of 81 billion yuan trade-in subsidy announced by the NDRC in early January, with an expanded list of beneficiary products, appears to be providing near-term support for retail sales. Overall, we think policy support for consumption will step up in 2025, taking the form of further expansion of the trade-in subsidy policy, support for urban and rural basic pensions and medicare insurance, fiscal transfer for low-income households, and support for newborns, though the magnitude of 400-600 billion yuan (0.3-0.5% of GDP) will likely be smaller than the trillions investors hope to see. In all, relatively weak corporate pricing power, ongoing deflationary pressure and weak nominal GDP growth will likely remain the key challenges faced by the Chinese economy in 2025."

US President Trump said that 25% tariffs on all imports of steel and aluminium imports would be announced today. Again Canada is in the firing line as its steel and aluminium make up the largest shares by far of US imports of these products. However, while the US is the world’s second largest steel importer, according to Tradeimex, it is not a major US import but domestically fabricated metals are the 7th largest sector by value added 

• Steel imports accounted for only 1.1% of total 2023 imports and aluminium was only 0.9%. Thus these tariffs are unlikely to be a major inflationary issue for the US but will still significantly impact certain sectors who use them as inputs to production, such as autos.
• According to Tradeimex, electronics (14.6% of the total), nuclear reactors & machinery (14.5%), vehicles (12.0%), fuel & oil (8.4%) and pharmaceuticals (5.6%) were the largest categories imported into the US in 2023. Steel and aluminium didn’t feature in the top 10 but it is not surprising that Trump has been vocal on autos.
• The main impact is likely to be felt by the key exporters with Canada and Mexico in the top three for both steel and aluminium. In 2023, Canada accounted for 25% of US steel imports and 39% of aluminium, while Mexico was 11% and 7% respectively.
• 10% of aluminium imports came from China and last week the US already announced a 10% universal tariff on all Chinese imports, according to TrendEconomy. It doesn’t feature in the top source of steel imports but they may be coming through a third country, such as Mexico.
• Other APAC countries impacted include Korea, Japan and Taiwan for steel and India, Korea and Australia for aluminium. For Australia, overall aluminium exports accounted for only 4% of total exports and so US tariffs will have a minimal impact. 

US steel imports by source % total 2023

US aluminium & articles imports by source % total 2023

Early yen outperformance has unwound as the morning Asia Pac FX session unfolds. The USD BBDXY index is holding around 0.20% higher at this stage, last near 1302.75, but the dollar is away from best levels against most currencies (except JPY). 

• Headlines from US President Trump that tariffs of 25% on all steel and aluminium imports, which would be announced on Monday, (albeit with no mention of when they would be enacted) saw the USD rally in early dealings.
• Follow through has been modest though, AUD/USD got to lows of 0.6231, but now sits higher at 0.6260/65, off around 0.20% for the session. NZD/USD is off a little as well, last near 0.5650. 
• USD/CAD is up around 0.25%, last near 1.4325/30 (earlier highs in this pair were 1.4380). Canada has exposure to the US via steel and aluminium exports.
• EUR/USD got to lows of 1.0280, but is now back near 1.0315/20.
• USD/JPY got to 151.16 earlier, although this was above Friday intra-session session lows of 150.93. We were last 151.70/75 (session highs today are at 151.89).
• US equity futures opened weaker, but are now back in positive territory, likely weighing on yen outperformance. US yields are sitting down modestly in early dealings, but the 10yr at 4.48% is within recent ranges.
• The data calendar is reasonably light for the remainder of today's Asia Pac session.