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 this week brings the final chance by central banks to tackle inflation.

In the upcoming week, some influential data and policy positions will be released. First we will get the REINZ housing transaction data for November tomorrow and it is widely expected to be weak. Next we will get Chinese new yuan loans data on Wednesday which is expected to swell as Beijing pushes its state-owned banks to shore up struggling property developers. Then the US will release its November CPI data which is expected to show inflation easing somewhat. And that will be followed by the US Fed who will raise its policy interest rate, probably by +50 bps. But their commentary will be hugely influential. Bond markets have already priced in a more dovish stance.

That will be preceded by the New Zealand current account position (which should be important, but it is unlikely to move markets), then the NZ Q3 GDP which might show a +5.5% growth rate off a low base, and followed by Australian labour market data for November.

We will end the week with US retail sales data and an ECB rate review, expected to bring a +50 bps rise to 2.5%. That ECB rate hike will be the last official central bank effort to tackle inflation in 2022. 2023 will start with the Bank of Japan's first review on January 18 who will kickstart a year of tough choices for central bankers.

However, investors are now favouring funds that would benefit from slowing inflation and falling rates, in a sign that markets think a soft landing is now the more likely outcome in 2023.

Over the weekend, China said its CPI inflation fell to +1.6% in November from 2.1% in the prior month. This shift lower was as expected. It was the lowest level since March, mainly due to a sharp slowdown in cost of food, rising +3.7% which was down from the +7.0% in October. A lot was due to pork prices which eased further after authorities released national reserves into the market. Beef and lamb prices changed little in November, milk prices eased up slightly.

On the factory front, producer prices are deflating now in China. They fell at a -15% annualised rate in November to be level-pegging with year-ago levels. That is two consecutive months of a sharp deflation in their PPI, and it is hard to see it ending any time soon. The only 'positive' in these November numbers are that analysts had expected an even sharper fall.

There may be some positive signs emerging for China's economy however. For example, deliveries of the construction equipment, rose +2.7% in November, breaking a 10-month losing streak. But it also should be noted that this gain is off a depressed base. Separately we need to be careful of Chinese reports of economic gains; many local jurisdictions are turning to subsidies and incentives to try and restart their retail impulse.

But their shift to trying to treat Covid "like the flu", which will undoubtedly be welcomed locally because of the reduced heavy hand of the State, is likely to reveal a widespread hesitancy about venturing out, for large numbers of people. That will stunt their recovery until confidence in safety returns.

Also over the weekend, American producer prices rose a bit more than expected. But they rose at an annualised rate of just +3.6% in November to be +7.4% higher than a year ago. Both were lower than the +8.1% year-on-year rise in October. Markets had expected the November annualised rise to be as low as +2.5%. Producer inflation is ebbing, just not as fast as expected.

American wholesale inventories also rose, and slower than expected at an annualised rate of +6% and probably still tracking inflation. However they are +24% higher than year-ago levels, so this overhang remains substantial.

Improving is the mood of American consumers, at least according to the widely-watched University of Michigan survey. It also reported lower inflation expectations. These improvements weren't expected.

In Europe, they seem increasingly confident that their electricity supplies will be stable at reasonable prices over the coming winter. The disengagement from Russia has taught them valuable energy supply lessons, even if the costs have been high and wouldn't otherwise have been chosen.

The UST 10yr yield starts today at 3.59% and up +6 bps from this time Saturday. 

The price of gold will open today at US$1798/oz and down -US$2 from Saturday. A week ago it was at US$1796, so little net movement from then.

And oil prices start today up +50 USc from this time Saturday at just on US$71.50/bbl in the US while the international Brent price is down to just over US$76.50/bbl. These are down -US$10 from a week ago and are back to year-ago levels. In fact we first were at these levels in 2006.

The Kiwi dollar will open today at 64.1 USc, and little-changed from Saturday. Against the Australian dollar we are still firm at 94.4 AUc. Against the euro we are still at 60.9 euro cents and holding its Saturday rise. That all means our TWI-5 starts today at 72.5 and little-changed.

The bitcoin price is now at US$17,164 and essentially unchanged from this time Saturday. Volatility over the past 24 hours has also been very low at just +/- 0.3%.

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.