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 nowhere is the change of economic mood sharper than in crypto markets.

The selloff in those markets has deepened over the weekend, and the bitcoin has now fallen below US$20,000 for the first time since December 2020. In New Zealand dollars, it is threatening NZ$30,000. That means it has lost three quarters of its "value" since its peak in November 2021. Engine-room companies in the crypto machine are laying off staff.

The cryptocurrency industry was built on swagger, enthusiasm and optimism. All three are in short supply these days as these losses and layoffs mount.

Meanwhile, American factory output slipped slightly in May from April, but remained up +4.8% from a year ago, in data released today. It was the first slip in four months and the second in eight months. Overall industrial output rose in May from April because of output from 'mining' and 'utilities'. That meant overall American industrial output was +5.8% higher than year-ago levels even though capacity expanded only +0.8%. Still, the small monthly slip does feed into the idea that the US economy's expansion is slowing down.

Canadian producer prices rose a heady +15% in May from a year ago, and the rise in May from April ran at a rate above that.

The Bank of Japan left its key short-term interest rate unchanged at -0.1% and that for 10-year bond yields around 0% during its June meeting, by an 8-1 vote, as widely expected.

But over the past three weeks, central banks around the Western world have changed direction faster away from easy-money and supporting economic activity, to focusing on fighting inflation. You could argue that the new 'cause' is a result of the prior one, but hindsight judgment is cheap. Either way, there will be an economic price to pay, one that was always ahead of us. This new resolve just means it is now front-and-center and will need to be worked through. Do democracies have the resilience to tolerate the pain involved? We have gotten so used to pain-free public policy moves (ones that kick the can), that it is hard to be optimistic.

Are we heading for a recession in the major global economies? Many CEOs think we are. Will that just give firebrand autocrats ammunition? Hopefully not, but it is a big risk.

It looks like central banks are in a rush to get control of inflation before the consequences of slowing or even contracting economic activity takes hold. It's a race they may not win. Certainly the effort will have some tough consequences for emerging markets, many of which could end up collaterally damaged.

Bond markets apparently saw this coming. Since January 2021, eighteen months ago, a global bond index of government and corporate debt paper has now fallen more than -20%. That is a relentless, longish term slippage. But the fight against inflation probably means this is just the start of a severe repricing of bonds, one that will take much more off their values. Bond investments are not 'conservative' in times when we are in a fight with inflation.

Volatility is high (although not extreme) while 'fear' is extreme.

It may be the end of high commodity prices too. We should also note that the copper price looks like it is about to fall out of the high range it has occupied for the past 18 months. And aluminium may not be far behind it. Tin and nickel are showing the same brittleness. And the carbon price, which raced higher in New Zealand and Europe until February has languished in both markets since.

And at the end of last week, iron ore prices slumped in China. Not only is demand tepid there, Beijing is holding back their buyers from bidding on Australian-sourced ore.

In Australia, the number of houses being brought to auction is rising fast. But the clearance rate is falling - to a low-for-them of under 60%, something they haven't had barring the pandemic, for three years.

Back to the global scene, multilateralism is struggling everywhere, including at the World Trade Organisation. But they have agreed over the weekend to the first change to global trading rules in yearsas well as a deal to boost the supply of COVID vaccines, in a series of pledges that were heavy on compromise. Here's what the conference has achieved.

The UST 10yr yield will start today down another -1 bp from this time Saturday at 3.23% in a shift lower that indicates bond markets think the run up ahead of the Fed meeting was excessive. 

The price of gold ended last week in New York at US$1840/oz. A week prior it was at US$1873/oz.

And oil prices have risen slightly from this time Saturday to just under US$109/bbl in the US, while the international Brent price is now just over US$111.50/bbl. A week ago these two prices were US$118.50 and US$120.50 respectively, so about a -9% weekly drop.

The Kiwi dollar will open today at just on 63.1 USc and more than -¾c lower then where we left it Friday. Against the Australian dollar we noticeably firmer 91.1 AUc. Against the euro we are still soft at 60.2 euro cents. That all means our TWI-5 starts today at just over 71.1, a gain solely due to the faster-falling Aussie.

The bitcoin price has fallen from this time Saturday and is now at US$19,403 and down -5.9%. Over the weekend it got down as low as US$17,602 and is trying another of its comebacks now, but recently such efforts have run out of steam quickly and a new low is then breached. A week ago it was US$ 28,976 so it has fallen by almost half in the past seven days. Volatility over the past 24 hours has been extreme at +/- 6.8%.

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.