Kia ora,

Welcome to Wednesday’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 the BA.5 Covid risk is rising 'significantly' and threatens how our economy will operate.

But first up today, we need to report another weak dairy auction. It was down -5% in US dollar terms and down -6.3% in NZ dollar terms. The falls were led by SMP which was down -8.6% followed by WMP which was down -5.1% from the prior event two weeks ago. These reductions are compounding now; in the ten events since the start of March there have been eight with losses and the net fall is now -23%. That is doing to change minds when it comes to pay-out forecasts, and especially as the retreats for SMP and WMP have been at the sharp end. Somewhat unusual has been the recent firming of the NZD, and that can only be a 'bad thing' for pay-out forecast estimates.

In the US, early data for last week's retail sales were stronger than the usual positive levels.

There were also a string of quite positive earnings reports out today, and that has juiced up Wall Street equities.

American data on housing starts wasn't so flash. Their housing sector has been cooling amid soaring prices and mortgage rates. New building consents also fell, but they are still high compared to pre-pandemic levels. Housing completions remained high.

China's holdings of American government debt have fallen below US$$1 tln for the first time since 2010, with concerns about the risk of Russia-style sanctions possibly accelerating a long-term financial decoupling driven by political tensions. The tally stood at US$981 bln at the end of May, shrinking by almost -US$23 bln from April and dropping -9% over six straight months of declines. Overall foreign holders of US securities now total US$7.4 tln, up +3.8% from year-ago levels.

China released data overnight that showed it citizens are prioritising saving over spending as the economic risks seem to be growing.

Those risks include sudden lockdowns as a result of their national pandemic policies. More than 20 provincial-level regions in China have reported locally transmitted COVID-19 cases in the latest round of outbreaks, and unlike the previous round, cases are found in some inland and small cities, posing challenges to the country’s epidemic control efforts.

In India, their currency is now at its weakest level ever against the US dollar. It has lost about -7% of its value against the greenback this year, a victim of higher energy prices and economic uncertainty. This stress is promoting it to try and ditch the USD for certain imports, especially with pariah states like Russia. (It still wants to be paid in USD for its exports however.) The rupee is also near historic lows against the NZ dollar although current levels have been around since the GFC.

The Turkish lira is in the same boat. And the rise in Turkish inflation just keeps on going.

The rising American interest rates are putting extreme pressure on many emerging market economies.

In Australia, plans to wind up its pandemic taskforce have been shelved as new variants of the virus sweep the country. Indoor mask wearing is now a new recommendation as the BA.5 variant imposes a 'significant' new threat to public health there. Sickness absenteeism is rife, limiting how companies can operate. New Zealand is facing the same threat.

The UST 10yr yield starts today at 3.01% and up +5 bps from this time yesterday. 

The price of gold will open today at US$1711/oz in New York which unchanged from this time yesterday.

And oil prices are up +US$2/bbl at just on US$100.50/bbl in the US, while the international Brent price is up even more at just over US$104/bbl.

The Kiwi dollar will open today up more than +½c at 62.3 USc. Against the Australian dollar we are little-changed at 90.2 AUc. Against the euro we are also little-changed at 60.8 euro cents. That means our TWI-5 starts today at just under 71.

The bitcoin price rose again from this time yesterday and by +6.7% to US$23,510 and a new one-month high. Volatility over the past 24 hours has been very high at just under +/-4.9%.

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.