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 commodities are on the front line of a global economic shift.

The top ten commodities traded in the world are Brent crude (oil), Steel, WTI crude (oil), Soybeans, Iron, Corn, Gold, Copper, Aluminium and Silver, in that order.

But copper prices fell to US$7,716/tonne at the end of last week, a very long way down from the US$10,000+ level they reached at the start of June.

Aluminium prices fell to US$2,244/tonne, also a far cry from the peak in mid-March over US$3,800/tonne. They are now back to where they were in middle of 2021.

Iron ore prices are not going anywhere, despite all the talk of stimulus and rebounds in China. And that is also in the face of supply difficulties in China. World steel prices are flat-lining despite high energy costs.

Even wheat prices are falling, in this case based on fresh USDA planting data pointed to grain acreage and stock levels that were above market expectations.

Only corn, soybeans and oil are staying high. The rest are in a funk now, a developing fade.

You should note that it is a long weekend holiday in the US, their three day July 4 Independence Day weekend. Markets won't open there again until Wednesday our time.

Investors ended last week in a pessimistic mood, thinking a recession is imminent and acing accordingly. But we should be clear there is no imminent recession, only 'talk' at this stage. Whether investors talk themselves into one is yet to be seen. But one group, equity investors, ended last week questioning this negative herd view. They seem to be reassured that they can't lose - if a recession does come, that may delay or cancel the rate hikes and p/e ratios will stay high, underpinning current valuations. If recession doesn't arrive, those values may hold just based on good trading conditions.

Helping their mood was data out of China.

The private sector factory PMI recorded that manufacturing output rebounded as their pandemic restrictions receded, much like the official PMI reported on Thursday. But this one was actually a stronger result than the official one - not by much, but it is recording a better expansion. It was their best in more than a year. Japan and South Korea are still expanding, but the expansion in Taiwan has evaporated. All countries are reporting strong cost pressures and new order levels that are fading.

Hong Kong may have been on holiday on Friday 'celebrating' China's takeover of the territory and the current Emperor's visit, but before they did, they released some grim retail sales data showing just what a wet blanket the takeover has been for the people of the once-vibrant City.

In India they introduced export duties on petrol, diesel and jet fuel to help maintain domestic supplies, while also imposing a windfall tax on oil producers who have benefited from higher global crude oil prices. They also raised their import taxes on gold.

And not helping investors were reports that US factories were expanding at their slowest pace in two years in June.

The widely-watched local ISM factory PMI came in with a more modest expansion, one that was lower than expected however. New orders contracted for the first time in two years.

The internationally benchmarked Markit PMI came in marginally better than expected, but quite a drop from May. And this one is recording almost the same modest expansion as the ISM one. But it also recorded a fall in new orders. Stretched supply chains and elevated cost inflation have not gone away.

Both are evidence that customers are moving to reduce inventories in their systems. All eyes will be on how far that needs to go, but at this time it looks like a shortish correction. But it won't just affect American factories, it will have worldwide implications. So far that impact hasn't really shown up on the global stage, but it will.

Meanwhile, Eurozone inflation hit yet another record high in June at 8.6% as price pressures broadened, and its peak could still be months away, adding to the case for rapid ECB rate hikes, and probably starting this month at their next review on Friday, July 22, 2022 NZT.

Investors now seem to be racing to exit the Buy Now Pay Later sector. The rush away is highlighted by the crash in valuation of Swedish firm Klarna who once boasted a US$46 bln valuation. The latest update is US$6.5 bln. It is unlikely to rise from there. Similar retreats are underway in the Aussie BNPL sector. The sellers of AfterPay will be pleased with their timing; Jack Dorsey not so much.

BNPL is only the most visible of the retreats from many fintechs. Profitability is what investors are refocusing on, not just 'growth'.

Australia’s housing market is on track for a -15% year-on-year fall by the middle of 2023, the weakest performance in more than fifty years, and that is according to analysts at Deutsche Bank.

The storms gripping Sydney and eastern NSW are getting serious. Their giant Warragamba Dam is spilling, meaning it is no longer constraining downstream flooding. Thousands of homes in parts of Sydney that have never previously flooded were warned they could face significant threats. More than 40 evacuation orders, affecting about 32,000 people face evacuation. It is a big 'wet' that could last for all the rest of 2022, forecasters claim.

The UST 10yr yield starts today another -9 bps lower from this time Friday at 2.89% and it has ended the month in New York almost exactly about where it started, although it did get as high as 3.49% in between. 

The price of gold ended last week at US$1813/oz in New York. And as we mentioned earlier, India has raised its import taxes on gold from 7.5% to 12.5% which won't help the yellow metal's price.

And oil prices are little-changed at just over US$107/bbl in the US, while the international Brent price is just over US$111/bbl. A week ago these prices were very similar.

Russia has confiscated (without compensation) the minority shareholdings of the mainly Japanese partners in a large Far East gas project. It will be a long time (and after Putin) before any non-Russian company risks an investment in any Russian project.

The Kiwi dollar will open today softer at 62.1 USc and a -1c fall in a week. Against the Australian dollar we are firmer at 91.1 AUc. Against the euro we are unchanged at 59.6 euro cents. That means our TWI-5 starts today at just on 70.4 but down -70 bps in a week.

The bitcoin price has slipped only marginally since this time Saturday and is now at US$19,148 and down -1.3%. Volatility over the past 24 hours has been modest at +/-1.6%.

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.