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 China seems to be hamstrung with a flagging economy that is yet to respond to the stimulus administered so far.

First up, China reported its June CPI inflation rate at 2.5%, up marginally from May, and up from 1.1% in June 2021. But if it wasn't for a +19% rise in fresh fruit year-on-year, and fuel of course (+32%), the 2022 rate may have matched the 2021 rate. The cost of fresh milk rose +0.9% but lamb fell -6.0%. China doesn't really have an inflation problem at this time, 'aided' by an economy in the doldrums. But that 2.5% June rate is their highest in 23 months. Buying heavily discounted Russian oil and gas certainly helps.

They seem to have neither inflation nor an economic expansion.

China's producer cost rises are slowing. After rising at a rate exceeding +13% late last year, PPI inflation is now down to 'just' 6.1% in June, its slowest rise in 15 months. We should note that the pressure on the 'industrial sector' is higher (at 8.5%).

In Chinese society, nationalist fervour is building ahead of the CPC party Congress. But as we have reported before, their economy is struggling and major announcements on vast new stimulus are expected soon. Larger deficit spending is proposed. Local authorities are already distributing helicopter money to keep retail activity bubbling along. But in the industrial heartland things are serious. China’s steel mills are sounding the alarm over crisis conditions in the industry as margins plunge due to weak demand. The starkest warning yet has come from Hunan Valin Iron & Steel Group, which met this week to discuss the rapid downturn in the sector and the measures it needs to take to ensure the company’s survival, including halting unprofitable production. Citing industry experts, the mill based in southern China, said it expects the crisis to persist for five years. Iron ore prices fell again on Friday, weighed by the gloomy demand outlook in China.

In Taiwan, export data for June was very strong, rising more than +15% year-on-year to US$42.2 bln in the month, far better than the +13.6% rise expected and the +12.5% rise in May. The Taiwanese export juggernaut rolls on. They even managed to keep import growth lower than expected and lower than for May, even with the oil price pressures. The trade balance stumble in May is behind them now.

In the US, the market bears have been thinking they will finally have their day. But better-than-expected jobs numbers make it a very hard claim to sustain.

Markets were expecting a +268,000 increase, but the seasonally adjusted American non-farm payrolls rose +372,000 in June from May to be +6.3 mln higher than a year ago, and +1.1 mln higher than in the pre-pandemic June 2019. By this measure, this June 2022 data records substantial progress. But it is actually better than that. As regular readers know, we also look at the actual, rather than seasonally adjusted numbers, and June's employed labour force is actually +944,000 higher than May's and continuing a trend that exposes a very sharp rise in actual hiring.

All those extra paid workers buy stuff, and that is expanding their economy faster that many analysts are expecting. The Americans seem to have both inflation and a good economic expansion.

High inflation in a strong labour market is sure to keep the US Fed in its rate hiking mood, the next of which will come on July 28 (NZT), now probably +75 bps. Two of the Federal Reserve's most vocal hawks said they would support another big interest rate increase but a downshift to a slower pace afterward, even as both downplayed the risk of higher borrowing costs pushing the US into recession.

The rise in American wholesale inventories continued in May, but at a slower pace than for April. Their inventory-to-sales ratio remains low from an historical perspective, but as we have noted before, firms are moving to actively reduce this build-up, and that is affecting factory new orders worldwide.

The US reported that consumer debt (not housing) rose by +US$22 bln in May, less than expected (+US$32 bln), and much less than the April rise of +US$36 bln. They now collectively owe US$4.54 tln in consumer debt, a per capita rate of US$13,660 each. For perspective, New Zealanders owe NZ$2,600 each as a per capita average.

Meanwhile, the top has come off the recent rise in American mortgage interest rates.

Canada also reported jobs numbers for June, shedding -43,200 jobs in the month although almost all of those were part-time jobs. Canada has been shifting from part-time to full-time for most months in 2022, although this month there was not compensating growth in full-time jobs. Canada's jobless rate fell to 4.9% which is a record low for them. The US is at 3.6%. Australia is at 3.9%. New Zealand is at a 3.2% unemployed rate.

In Australia, the insurance claim costs of their on-going flood catastrophes in NSW are already at AU$100 mln. Some insurers are calling on immediate restrictions on rebuilding on flood plains. That may affect more than 15% of households there, perhaps thousands who can't return. New Zealand premium costs are sure to feel the impact from stressed Aussie insurers.

Globally, the UN FAO Food Price Index slipped in June from May as both vegetable oils and cereals slipped in price. But both dairy prices and meat rose again, meat to a new record high and dairy back close to its 2013 record level. What is interesting is that even on an inflation-adjusted basis, global demand for meat and dairy remains very strong, and alternatives seem to be making no headway into these markets. Perhaps the very sharp run-up in grain prices is putting them at a disadvantage. An early pioneer, Beyond Meat, has seen its share price crash -75% in a year. Its sales are dragging and costs skyrocketing as consumers loose interest in the product.

The UST 10yr yield starts today back up at 3.08% and a +19 bps rise in a week. 

The price of gold will open the week at at US$1743/oz. A week ago it was at US$1808/oz, so it has fallen -US$65/oz since.

And oil prices have moved back -50 USc to just under US$102.50/bbl in the US, while the international Brent price is still just under US$106/bbl. A week ago these levels were US$107 and US$111/bbl, so a -US$5 shift lower in a week week.

The Kiwi dollar will open today unchanged from Saturday at 61.9 USc. Against the Australian dollar we are also unchanged at 90.3 AUc. Against the euro we are still at 60.8 euro cents. That means our TWI-5 starts today at just on 70.6 and a minor +25 bps higher in a week. 

The bitcoin price has fallen since this time Saturday and is now at US$20,892 and down +4.3%. Volatility over the past 24 hours has been high at +/-3.0%.

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.