Kia ora,

Welcome to Thursday’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 China seems to be shaking off its pandemic handbrake faster than many expected.

China said both its factory sector, and its services sector, each expanded at a moderate rate in February, a key set of improvements. Both were outcomes better than expected. The services sector result was a two year high; the factory result was a ten year high. And backing that up was the private Caixin PMI survey which reported similar good improvements.

Meanwhile, there are some indications that local incentives are in fact luring more buyers back into their housing markets.

Those much better China PMI results mean that globally, the factory sector returned to an expansion mode. Output rose for the first time in seven months amid improving supply chains and China's re-opening. Business optimism also revived, rising to its highest level in a year. This expansion and mood is being led by India, China and South East Asia. Now Europe, Japan and the US are the laggards.

The hoped-for turnaround in the American mortgage market has been a mirage. After a brief revival in application activity in January when mortgage rates dropped to 6.2%, there has now been three straight weeks of declines in applications as mortgage rates have jumped 50 basis points over the past month. Those applications fell -5.7% last week and the benchmark mortgage rate rose to 6.71% plus points. Those applications are now running a spectacular -70% lower than year-ago levels.

The ISM manufacturing PMI edged higher to 47.7 in February from 47.4 in January, which was the lowest since May 2020, but fell short of expectations of 48. The reading pointed to a fourth consecutive month of falling factory activity with companies continuing to slow outputs to better match demand for the first half of 2023. It's not much, but the contraction in new orders eased off, if there is a bright spot in this data.

American construction spending isn't coming to the rescue, although to be fair it isn't a drag either.

The price pressures within the PMI data has markets raising their expectations on where the US Fed will have to go to with its policy interest rate. Now bond market pricing indicates a 5.5% Fed rate by September, from its current 4.5%. The next review is on March 23 (NZT) and it is expected to rise to 4.75% then.

German inflation isn't moderating. It came in at 8.7% in February, not far from a peak of 8.8% seen in October and November and above market expectations of 8.5%, its preliminary estimate showed. On an EU harmonised basis, prices rose +9.3%. Food prices are the driver as oil and gas prices ease off. This data is sure to steel the ECB for more rate hikes.

Australia reported its Q4-2022 GDP growth yesterday, coming it as expected at +2.7% from the same quarter a year ago. In Q3-2022 it was +5.9% so the rate more than halved.

Like New Zealand, Australia also reports its formal CPI on a quarterly basis, and for Q4, 2022 that was +7.8%. But they also have a monthly CPI indicator series and for December that came in at 8.4%. However that monthly measure fell back to 7.4% in January, their second highest level since this monthly CPI series started in 2018. Analysts had expected it to retreat to 8% so this is a bigger fall than expected.

The UST 10yr yield starts today at 3.99% and up +6 bps. 

The price of gold will open today at US$1841/oz and up +US$13 since yesterday and building on yesterday's move up.

And oil prices start today down -50 USc at just under US$77/bbl in the US. The international Brent price is now just under US$83.50/bbl.

The Kiwi dollar is up another +½c at just under 62.6 USc. Against the Aussie we are up +¾c at 92.5 AUc and a six week high. Against the euro we are firmish at 58.6 euro cents. That all takes the TWI-5 to 70.8 and up +50 bps.

The bitcoin price is now at the upper end of its recent range, now at US$23,719, up +1.1% from this time yesterday. And volatility over the past 24 yours has moderate at +/-2.0%.

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.