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.

Today we lead with news that China's economic stumble is the real elephant in the room for the global economy, and not the Russian invasion of Ukraine.

But first in the US, there was a surprisingly negative regional survey of manufacturers in New York. The Empire State Manufacturing Index shrank to -11.6 in May from +24.6 in April, missing market forecasts of +17. This big miss comes after an unusually strong April result, as new orders decreased, and shipments fell at the fastest pace since early in the pandemic. Also, delivery times continued to lengthen, and inventories rose. Averaging out the past three months, this indicator is flat.

Going the other way, Canada posted a better-than-expected result for April housing starts, beating both the March level and analysts forecasts.

But house prices across Canada continue to slip under the weight of rising interest rates, with the nationwide average price of homes falling to C$746,000 in April, down -6.3% from March’s average of C$796,000, a dramatic -C$50,000 retreat in just one month.

Japanese machine tool orders for April came in very strongly again, up +25% year-on-year and a second stellar month in a row, suggesting the world's boardrooms are still investing in capital equipment. It was the second highest order level since 2018, only beaten by the March 2022 result.

Japanese producer prices surged +10%in April from a year ago, rising at a record rate as the Ukraine crisis and a weak yen pushed up the cost of energy and raw materials. "Worse" (but remembering, they are looking for inflation), the March to April rise was at an annualised +14.4% rate, so this shift up is accelerating.

Japan is expecting CPI inflation to hit 2% this year which is very unusual and is having an interesting debate about whether this will be 'transitory' or not. That assessment greatly affects how the Bank of Japan approaches its response to the current inflationary burst.

In China, retail sales in April were very grim. In February 2022 they were up +6.7% year-on-year. In March they fell -3.5% on the same basis, and that was bad. Analysts knew April would be worse thinking they would fall a massive -6.1% which itself would be a shocking retreat. But in the end they dived -11.1%. (And these are the official data.) You can almost hear the gasps in Beijing. This makes the recent warnings from Premier Li look inadequate. It will be no surprise to learn that their official jobless rate has risen from 5.8% to 6.1% with anyone's guess at under-employment.

The fall in China's industrial production in April was massive too. Take a look at this official chart. This is confirmed by looking at their electricity production data. In April, China produced 608.6 bln kWh of electricity, taking it back to 2019 levels, and the lowest since the pandemic-affected early 2020 levels. Given the expansion of their overall economic industrial base since then, a level of just 609 bln kWh is very low given it was almost 760 bln kWh in July 2021, a -20% fall from that peak.

China’s real estate investment also declined in April, as home sales, land purchases and housing prices all set new lows.

Analysts are now downgrading their expectations for calendar 2022 Chinese economic 'growth'.

The UST 10yr yield will start today -5 bps lower at 2.88%. 

The price of gold starts today up +US$4 since this time yesterday at US$1816/oz.

And oil prices are +US$3.50 higher today and now just under US$112.50/bbl in the US, while the international Brent price is now just under US$113.50/bbl.

The Kiwi dollar will open today unchanged against the US dollar, still at 62.9 USc. Against the Australian dollar we are softer at 90.5 AUc. Against the euro we still at 60.4 euro cents. That all means our TWI-5 starts today at 70.6 which is unchanged from this time yesterday.

The bitcoin price has fallen -0.9% from this time yesterday and is now at US$29,772. Volatility over the past 24 hours has been very high at +/- 4.0%.

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.