Kia ora,

Welcome to Tuesday’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 news that is still dominated by American [high] inflation and Chinese [low] demand. Everything now depends on American employment levels. As long as they stay high (for them), then the world may get a softer landing than otherwise. But the Chinese situation isn't helping. Trouble in both the #1 and #2 economies in the world has ripple impacts globally. Together they account for more than 42% of the world's economic activity.

Today's financial markets are acting like a herd stampede, one that is changing direction. No-one seems to want to believe the 2022 direction so far is the right way.

Equity prices are diving. Bond yields are jumping (bond prices are sinking). And the US dollar is rising fast. Commodity currencies are being devalued. It is another sharp re-rating lower, the fifth such event in 2022 alone. Only once (in the second half of March) has there been a recovery from one of these shifts lower. They are becoming much more frequent, and that tells you something important. In 2021 there was only one of these selloffs. In 2020, there was only the sharp pandemic selloff. In both 2020 and 2021 there was a full recovery pushing equity prices to the record highs that ended at the end of December 2021. The track has been down from there, in these increasing selloff events.

Since the market high right at the start of 2022, the S&P500 has fallen more than -20%, so it is now a bear market for equities.

And many now expect the main rate curves to invert soon.

Further, commodity prices are almost all falling today.

Last week markets were confident the US Fed will raise its policy rate by +50 bps at their next meeting on Thursday. Yesterday, that expectations went up to +75 bps. Today, markets seem to be expecting a reasonable chance a +100 bps hike is coming. This is "fluid" as they say, or others may say "panicky".

Meanwhile, in their large and regular survey, the New York Fed's consumer expectations report showed that inflation expectations over the year ahead rose in May, but only back to the +6.6% level they were at in March. They were last at this level in June 2013. Those surveyed thought their incomes would rise only +3% in a year, but they seemed unusually bullish about their spending, saying this would rise by +9%. At the same time, they expect access to consumer debt to get harder. Something has to give, because the overall sense of these expectations hardly makes a lot of sense in the current economic climate.

In China, street protests broke out in Shanghai over the rolling lockdowns. They were relatively small because the risks for doing so are so high, but that they happened at all reveals the extreme pressure on small merchants.

India's consumer inflation rate actually fell in May from April, down to 7.0% from 7.8% which was an eight year high. A correction like this was anticipated. However, food prices rose at an 8% rate.

The British economy shrank -0.3% in April from March, following a -0.1% contraction in March from February. The April result missed market expectations of a +0.1% expansion.

In Australia, their energy regulator is raising its warnings and has introduced price caps and ordered generators to keep running, as it signals that parts of Queensland face possible blackouts as early as today.

Meanwhile, world trade in services is facing a huge threat. At the World Trade Organisation summit of 120 ministers in Geneva, India, Indonesia and South Africa are refusing to renew a rolling two-year “moratorium” that bans the WTO’s 164 member countries from imposing customs duties on ecommerce. The fear is that a round of taxes are coming for global ecommerce. The inflationary impact would be huge.

The UST 10yr yield will start today up a remarkable +24 bps from this time yesterday at 3.41%. 

The price of gold is down a sharpish -US$43 in New York, now at US$1829/oz, knocked around by the strong US dollar.

But oil prices are little-changed from this time yesterday, still at just under US$118.50/bbl in the US, while the international Brent price is now just over US$120.50/bbl. However, because it is holding its price in US dollars, it is an effective rise for most other buyers.

The Kiwi dollar will open today sharply lower at just on 62.8 USc and a -¾c retreat from this time yesterday. Since the start of June that is now a -3.9% devaluation. Since the start of the year it is an -8% devaluation. The Australian dollar is being hit slightly harder and we are a little firmer at 90.4 AUc. Against the euro we are down at 60.1 euro cents and now at month-ago levels. That all means our TWI-5 starts today at just under 70.8, and down another -50 bps since this time yesterday. But that is only at a level we were last at on May 19, 2022. So it really is all about the outsized gains by the greenback rather than anything to do with the NZD.

The bitcoin price has fallen by a remarkable -17% from this time yesterday and is now at just US$23,163. And it has been a very rough ride down, at one point in between it got as low as US$22,602. Volatility over the past 24 hours has been unprecedented at +/- 12%. It is now below NZ$40,000 for the first time in 18 months, and it is well below. Not helping was that a major crypto network froze withdrawals and transfers, causing widespread alarm in these markets.

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’ll do this again tomorrow.