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.

And today we lead with news expectations are gyrating around the upcoming US-China leaders meeting. Markets have high expectations and are pricing in a positive outcome. For US markets, this is relatively modest and a 'relief'. For Chinese markets, and Asian markets more generally, it is very positive.

A surge in market euphoria could well bring a surge in commodity prices, and in turn, inflation. This will complicate the US Fed's Thursday decision - but they won't know the final outcome of the Xi-Trump meeting when they make their decision later this week and that is awkward for them.

Even before the results of the key meeting are known, Chinese industrial firms' profits rose more than +20% in September from the same month a year ago amid ongoing policy measures to revive business and consumer sentiment. Private-sector earnings strengthened markedly, while losses among state-owned enterprises narrowed quickly.

Meanwhile, the stutter China had in foreign direct investment in the April to June period also seems to be over. In September, they attracted +¥68 bln in FDI, more than the +¥61 bln in the same month of 2024. But that earlier hesitation still means they are running more than -10% lower than last year, and 2024 was the weakest year they had for foreign direct investment in more than a decade. It may be improving slightly, but they are still in a serious shadow.

And we should probably note that the hesitation about relationships with the US are expanding. Countries may 'engage' with the US transactionally to hold on to trade links, but China is winning. This is clear from Indonesia ordering Chinese fighter jets for its air force, and other naval equipment.

In the US the data isn't quite so positive, although you wouldn't know it from the Wall Street signals today. Despite 'improving', the Dallas Fed factory survey is still reporting negative overall conditions. New orders shrank less, and manufacturing conditions remained below average. Perceptions of broader business conditions worsened somewhat in October and optimism about the next six months waned. But prices and wage pressures eased, the survey showed.

Over the weekend, the US released its September CPI inflation data and it rose to 3.0%, up from 2.9% in August. This was slightly less than the expected 3.1% but it is still its highest level since June 2024. Energy costs, food and rents came in higher than that but petrol prices were lower.

One factor to watch is that the rate of increase in the past two months is closer to +4% on an annualised basis. The number reported today relies on the low increases they had in 2024 and February to May. When those months work their way out of the annual calculation, the higher pressure outside those periods will come into play.

Meanwhile, the University of Michigan consumer sentiment survey reported that Americans feel inflation is running at 4.6% and they downgraded their earlier confidence reading to now be -24% lower than year-ago levels.

The internationally benchmarked PMI report for the US for October reported a strong start to the fourth quarter, with expansions in both the services (55.2) and factory sectors (52.2).

If there is a relaxation of trade tensions after the China-US meeting, Australia could be a big beneficiary. And markets are starting to price that in.

We should also probably note that the price of aluminium (or aluminum if you prefer) is rising fast again, back up to levels first reached in the pandemic spike. Causing this current surge is the price the Americans are prepared to pay because of their self-imposed tariffs, as producers avoid that market. Those American buyers are being hit twice.

Also worth noting is a sudden rise in the price of sulfur (or sulphur if you prefer). Causing this spike is a fall in supply from some key oil producers (sulfur is a bi-product), when demand is rising for fertilisers.

The UST 10yr yield is now at 4.00%, dipping -1 bp from yesterday. 

The price of gold will start today at US$3993/oz, down -US$118 overnight.

American oil prices are -holding from yesterday at just over US$61.50/bbl, with the international Brent price still just on US$66/bbl.

The Kiwi dollar is now at just on 57.7 USc, and up +20 bps from this time yesterday. Against the Aussie we are down -40 bps at 87.9 AUc. Against the euro we are up +10 bps at 49.5 euro cents. That all means our TWI-5 starts today at just under 62.2 and up +20 bps from yesterday.

The bitcoin price starts today at USD$115,614 and up +1.8% from this time yesterday. Volatility over the past 24 hours has again been modest at just on +/- 1.3%.

You can 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.