Kia ora,

Welcome to Monday’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 the iconic 2022 inflationary pressures from rising commodity prices seem to be easing, and as fast as they rose earlier in the year.

But first, in the US it is their Labor Day long weekend holiday, essentially signaling the end of their summer holiday season. Markets will return to regular mode on Wednesday, NZT and volumes traded will be more regular.

Global food prices retreated again in August to their lowest level in seven months, due to a broad-based fall, Cereal prices went down -1.4%, led by a -5.1% drop in international wheat prices on improved production prospects, especially in Canada, the US and Russia. Dairy prices fell -2% and meat prices fell -1.5% from the prior month.

In China, three state banks have been ordered to lend ¥200 bln (NZ$45 bln) to property developers so that they can complete projects underway, so that buyers off the plan can get their properties. Laudable as it may be, it crystalises the losses involved. Those developers are also bust, having burned through the cash from the original sale (mainly other, earlier bank loans). The new loans to complete the projects guarantee they will deliver the projects at huge losses (¥200 bln or more?). The Chinese property development sector is a huge drag and drain on their economy. It is very hard to see how those three state banks will ever get their money back. The losses are to be socialised, it seems.

Construction machinery manufacturers in China are seeing orders and profits plunge.

In the US, the headline non-farm payrolls data reported a +315,000 rise, pretty much as analysts had anticipated. But is was less than the outsized July gain although similar to May and June. The jobless rate ticked up to 3.7% on a higher participation rate. This is the seasonally adjusted data, but the 'actual' data is very similar this month (+309,000) taking their employed labour force to just under 153 mln and its highest ever.

Average hourly wages rose +5.2% from a year ago.

It is hard to image a recession when employment and wage growth is strong. The Fed will be emboldened to push ahead against inflation knowing their labour market remains tight despite all the inflationary hurdles. Equity markets retreated on this thought.

But American July factory orders slipped when they weren't expected to. They fell -1% in July from June, but remain +11.6% higher than year-ago levels

But there is evidence supply-chain pressures are easing, including for carmakers. Ford has been posting strong year-over-year gains on climbing electric-vehicle sales and improved deliveries of trucks and SUVs. The company’s EV sales increased fourfold from a low base a year earlier, while sales of ICE vehicles rose by a quarter.

In Canada, Vancouver is reporting that sales of houses are down -45% from year-ago levels in August, and prices are now dropping month-on-month. Toronto's report was little better.

In South Korea, inflation seems past its peak. It rose 5.7% year-on-year in August, slowing from a 24-year high of 6.3% in July and below the consensus forecast. Energy and food prices have started declining from elevated levels. The country’s annual inflation rate also slowed for the first time since January and marked the slowest pace in three months.

The most dramatic data has been from the EU. Their producer price index surged +3.7% in July alone, to be up +38% in a year. That means it is accelerating at a truly stunning pace. But even among that, one country stood out - Ireland, who reported that their producer prices rose +26% in one month! to be +48% higher than a year ago. "Interesting" statistical data collection there. Ignoring the crazy Irish data, Italy (+6.5%) and Germany (+5.6%) led the month-on-month rises by Europe's large economies, whereas Spain (+0.0%) and France (+1.6%) were the most restrained of the remaining large economies.

Germany is instituting an excess profits tax on energy suppliers there. That is part of a much wider program of "support" to deal with the impending winter pressures.

We should also note that prices for some commodities are sinking, some back to their July lows, others well below. For example, copper is retreating and heading towards its July low again, but aluminium is now near an 18 month low. Nickel, zinc and lead are back to July lows, but tin is also approaching 18 month lows. Iron ore is heading for year-ago lows. All are weak because markets judge Chinese demand will remain weak.

The UST 10yr yield starts today at 3.20% and up +1 bp from this time Saturday. 

We haven't updated movements in the US Fed balance sheet recently. Quantitative tightening is well underway, with more than US$140 bln shed from their holdings since mid April. It is likely the pace will pick up a bit on this sell-down, draining liquidity, and on its own, and independent of their policy rate signals, putting pressure on yields.

Junk bond yields are rising fast again too, and probably related go the Fed actions. The recent peak was in early July and they fell from there. But over the past week they have surged higher again. Although benchmark rates are rising sharply, these junk bond yields are another marker to watch as losses build for the holders of this script.

The price of gold will open today at US$1713/oz and little-changed from this time yesterday, but down -US$25 in a week.

And oil prices start today marginally firmer at just on US$87/bbl in the US while the international Brent price is now just over US$93/bbl. A week ago these prices were US$93/bbl and US$99/bbl respectively so a sharpish -7% fall in a week.

American petrol prices are still slipping. They are currently averaging NZ$1.64/L nationwide after having been NZ$1.67/L a week ago and NZ$1.79/L a month ago. They peaked at NZ$2.13/L in June, so down a quarter from then and releasing significant inflationary pressure because they are now almost back to February levels.

The Kiwi dollar will open today at 61.1 USc. From a week ago it is virtually unchanged as well. From a month ago it is down -3.3%. Against the Australian dollar we still up at 89.8 AUc and up +0.8% in a week. Against the euro we are up to 61.4 euro cents and little-changed in a week. That all means our TWI-5 starts today at 70.7 and up +20 bps for the week.

The bitcoin price is now at US$19,841 and down -0.6% from this time Saturday. But it is -3.5% lower than this time last week. Volatility over the past 24 hours has been low at just on +/- 0.9%.

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.