Kia ora,

Welcome to Friday’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 both China and the US seem to be facing economic questions at the same time.

There are mounting concerns about the giant American economy’s resilience. Inflation is at 40-year highs, home sales are weakening but their red hot labour market has yet to show any sign of weakness.

New American jobless claims fell marginally last week, and there are now 1.44 mln people on these benefits which is still close to an all-time low.

But the initial 'flash' reading for real economic activity fell in the June-2022 quarter by -0.9%, on top of the -1.6% recorded fall for Q1-2022. If that is confirmed over the subsequent revisions, it will show the US economy has been in a shallow recession. In nominal terms it grew at an annual rate of +1.9% in Q2 but that was less than inflation. Over the past year it grew to US$24.85 tln and up +9.3% in nominal terms, up 7.8% at an annual rate in the second quarter alone. But that was less than price increases which for the household sector was a 9.1% inflation rate. The second estimate of this data will come in about four weeks.

The puzzle in all of this is their labour market - growing fast with widespread labour shortages. If a recession is in fact declared for this 2022 period it will be the strangest one in memory, one with a record low jobless rate. Today, the bond markets 'believes' the recession story, but equity investors don't. History shows though it is unwise to ignore bond market signals.

To confuse matters, the official arbiter of whether the US is in recession, the NBER, has always rejected the "two quarters down" rule. So the 'recession' designation is still up for grabs.

Meanwhile, the Kansas City Fed's factory survey came in more positive for July than for June, back expanding at a strong pace and a much better level than was expected.

And Mastercard reported stunning revenue growth, up more than +20% and far more than can be account for by inflation. This is not the sort of data that suggests recession.

But the latest US Treasury bond tender reflects the risk-off mood sweeping bond markets. Their 7-year tender was well supported but the median yield fell to 2.65% from 3.20% at the prior event a month ago.

In China, their top leadership has been meeting to address, the "complex and severe international environment and the arduous domestic reform" situation, a clear indication that their economy is not performing as it would like. The problems run deep, as they seem to acknowledge. But their "persistence is victory" mantra seems to indicate they will keep doing the same things that got them into this current trouble.

In Europe, German inflation is staying very high, up 7.5% year-on-year with the month-on-month rises running at an even faster pace. This July data was higher than analysts were expecting.

In Australia, retail sales activity disappointed in June. They rose a mere +0.2% from May after the May change was revised lower. This latest data was the softest rise in retail trade since a retreat in December 2021, and signals that retail volumes are shrinking as inflation bites harder. June's retail trade may be up +12% from year-ago levels, but the tepid May-to-June rise is the one catching the eye of analysts (up at an annualised rate of only +2.5%).

The decline in global container shipping rates continued last week. Bulk cargo rates fell too.

The UST 10yr yield starts today at 2.68% and down -5 bps from this time yesterday. 

The price of gold will open today at US$1753/oz in New York which is up +US$32 from this time yesterday.

And oil prices are little-changed today at just on US$96/bbl in the US, while the international Brent price is still at US$101.50/bbl.

The Kiwi dollar opened today up from this time yesterday to 62.8 USc. Against the Australian dollar we are up +½c to 90.1 AUc. Against the euro we are also +½c higher at 61.8 euro cents. That all means our TWI-5 starts today at 71.2.

The bitcoin price has risen sharply from this time yesterday, up almost +11% to US$24,010 and most of the gain coming after the US GDP announcement. Volatility over the past 24 hours has been extreme at just over +/-5.7%.

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 on Monday.