Kia ora,

Welcome to Wednesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the holiday edition from Interest.co.nz, and our first for 2023.

Today we lead with news that 2023 is starting with wobbles.

China's pandemic stresses are growing and are the primary cause of the year starting with downbeat notes.

But first up today, the first 2023 dairy auction was another retreat, down -2.75% from the prior event on December 21, which itself was down -3.8%. This time, 33,478 tonnes were sold, the most at one of these events in more than two years. Butter (-2.8%), cheese (-2.7% and SMP (-4.3%) were the hardest hit this time, probably a reflection of stuttering demand out of China's food service industry. WMP fell -1.4%. This time, the currency came to the rescue to some extent, limiting the overall decline to -1.6% in NZD.

Dairy prices aren't the only commodity in retreat.

Perhaps this is what we are going to have to expect in 2023. The head of the IMF said the new year is going to be “tougher than the year we leave behind. Why? Because the three big economies – the US, EU and China – are all slowing down simultaneously,” she said.

She is not wrong.

The internationally-benchmarked American manufacturing PMI reports are sharpish contraction in their factory sector, with operating conditions deteriorating at their fastest rate since May 2020. Output fell at a sharper rate amid faster drop in new orders. Inflationary pressures ease notably however and the US Fed will have picked up on that fact. Employment rose only fractionally.

In China, their official PMI's were weaker than the weak ones anticipated. Their factories are contracting sharply now, but their service sector businesses are in very bad shape, especially their retail sector. It is nationwide and will have severe consequences on the global economy if it doesn't pick up soon with their new pandemic relaxations. From this data it is easy to see why our dairy auction sagged.

Their unofficial private sector factory PMI however, didn't paint anywhere near as dismal picture as the official survey. In this one, factories are contracting at only a minor rate - and less than the US retreat.

And the EU remains in contraction territory, even if inflation is easing slightly there.

In Germany, their inflation rate is retreating, falling to to 8.6% in December from 10% in November and below market forecasts of 9.1%. It was the lowest rate since August, but we should also note that their government paid December natural gas bills for some households and businesses, which will have impacted these results. In December alone, inflation actually fell -0.8% from November.

But not everywhere is in the doldrums. In India the picture is actually quite bright. Their factory PMIs report stronger December increases in factory orders and production. Output growth reached a 13-month high. They have their fastest rise in new orders since February 2021.generating job creation and boosting input purchasing.

And the world's third largest economy, Japan, is managing to hang in there, even if their overall expansion is hard to see at the moment. Their factory sector may be contracting, but their service sector is still expanding.

In Australia, their PMI slipped to be now barely expanding. Output and new orders fell in December. Buying activity and input inventories declined. Input cost and output price inflation rates dropped. This is a decline that has lasted nine months and doesn't look like it is about to end.

At least the Australian factory sector is doing better than their housing sectors. For all of 2022, house prices slipped -5.3%, more in the main centers. Annual value falls were the most significant in Sydney (-12.1%) and Melbourne (-8.1%) where conditions peaked early in the year. But what is eye-catching about this data is that in December, national prices fell at a -13% annualised rate.

The UST 10yr yield started today at 3.79%, and down -9 bps from the end of 2022. 

The price of gold will open today at US$1838/oz and up +US$17 from its ending 2022 trade.

And oil prices start today down -US$1 from Saturday's levels at just under US$78/bbl in the US while the international Brent price is just under US$83/bbl. European natural gas prices are now lower than before the Russian invasion of Ukraine.

The Kiwi dollar has started the year down a whole -1c at 62.5 USc from where we left it on New Year's Eve. Against the Australian dollar we fell another -½c to 92.8 AUc. Against the euro we are at 59.1 euro cents and a minor dip. The Japanese yen has appreciated sharply over the New Year break. That all means our TWI-5 starts today at 70.6, down -80 bps from New Year's Eve.

The bitcoin price is now at US$16,628 and barely changed from either this time yesterday or where we left it on New Year's Eve. Volatility over the past 24 hours has remained low at just +/- 0.5%.

You can find links to the articles mentioned today in our show notes.

And get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston and we will do this again tomorrow.