Inflation eases but intransigence rises

<p>Kia ora,</p><p>Welcome to Tuesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.</p><p>I'm David Chaston and this is the international edition from Interest.co.nz.</p><p>And today we lead with news markets seem to be ignoring American debt default risks.</p><p>But first in the US, inflation expectations slipped lower to 4.4% at the one-year-ahead horizon but increased slightly to 2.9% and 2.6% respectively, at the three- and five-year-ahead horizons, according to the New York Fed's April <a href="https://www.newyorkfed.org/newsevents/news/research/2023/20230508" target="_blank"><i><strong>Survey of Consumer Expectations</strong></i></a>. The one-year-ahead result was 4.7% in the March survey, so that is a meaningful easing. The Fed seem to be making progress with its messaging and policy settings that inflation will be beaten back to its target range. Remember, about a year ago, these inflation expectations peaked at 6.8% for one-year-ahead. We are now that year on and the picture is very much different. The April CPI data will be released on Thursday, and analysts are picking an unchanged 5.0% rate.</p><p>The Fed's senior loan officer survey <a href="https://www.federalreserve.gov/data/documents/sloos-202304-fullreport.pdf" target="_blank"><strong>reported</strong></a> tighter standards and weaker demand for business lending and for households it was the same tighter standards and weaker demand for both housing and consumer debt applications. Access to business funding for SMEs may become an issue. This will become a very major issue if the House Republicans continue to block a resolution to their debt-limit standoff. You can measure market nervousness by the spike in the short-long yield curves. This intransigence could go horribly wrong, although we have been here many times before, and the [artificial] limit always seems to get raised. It just that this time there are more isolationists in Congress who don't care if the financial system gets shut down.</p><