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.

And today we lead with news debt woes continue to bedevil the world's two largest economies.

In the US the debt-limit talks drag on, casting a pall over markets. Public statements are all positive about "progress", but there is no deal and markets are growing weary (and wary) about all the unnecessary theatrics. Trading volumes on equity markets have suddenly gone quiet.

US households are also feeling uneasy at their own financial situation. An updated Fed survey of household economic attitudes shows the effects of inflation on Americans' economic confidence. About 73% said they were doing "at least okay financially" in 2022 which is down a sharpish -5 percentage points, the most since the survey was launched a decade ago. It had stood at a record high the year before but now it is at its lowest since 2017.

China has reviewed its key policy rates and left them unchanged in its May reviews The People's Bank of China (PBoC) maintained its key lending rates steady for the ninth straight month at May fixing, as widely expected. The one-year loan prime rate, which the medium-term lending facility uses for corporate and household loans, was left unchanged at 3.65%; while the five-year rate, a reference for mortgages, was kept at 4.3%. The move came after the central bank held its medium-term policy rate at 2.75% last week.

But in the background, China's hidden local government debt, which could be as high at US$10 tln, is restraining the country. The non-hidden debt seems to be US$23 tln. Policy makers are struggling to know what to do, in part because there is no agreement about about the nature and size of the overall problem. The two combined is as much as the total American federal debt. And that is just for their local government.

Japan's core machinery orders, which exclude those for ships and electric power companies, fell -3.9% in March from February, improving slightly from the -4.5% drop in February. But analysts were expecting a small rise by +0.7% on this basis. Although this data is always quite volatile, it is considered as a leading indicator of capital spending in the coming six to nine months.

But investors think Japan has turned an important corner, economically. The value of Japanese stocks has leaped by +US$400 bn so far this year, the biggest increase in any Asian market and roughly double the gains of Chinese equities. Investors are taking a fresh look at Japan as an alternative to China.

Taiwan's equity market gains are outpacing China as well (even China+Hong Kong), despite the handicaps its claimant is placing on it. But orders for Taiwanese exports are still tracking a lot lower, down more than -18% year-on-year in April. Analysts had expected only a -14% decline and they came in just above the February level which was their lowest since the pandemic.

EU consumer sentiment improved slightly in April but it still remains deeply negative, just less so.

We should also note that the Greek election result surprised most observers. While there is another final round of voting to go at weeks-end, the incumbent conservative government has been surprisingly endorsed at the ballot-box. This has been a free and fair election. The same weekend Turkey is also holding a run-off vote. But to win that, its incumbent president has had to control the country's media and run hard on culture-war issues.

In Australia, there is now talk that Sydney house prices may surge more than 10% this year. Rental demand, immigration and FOMO are all driving prices up across the city. The irony is that this will likely push the RBA to raise interest rates further, causing wider household budget stress and bring more properties on to the market, but maybe not enough to quell the froth. Social pressures will rise.

The UST 10yr yield starts today at 3.71% and little-changed from yesterday. 

The price of gold will start today at US$1975/oz and down -US$3 from yesterday.

And oil prices are marginally firmer from where we left them yesterday to be just over US$72/bbl in the US. The international Brent price is now just over US$76/bbl.

The Kiwi dollar is little-changed against but firm the USD from yesterday and now just on 62.8 USc. Against the Aussie we are little-changed at just on 94.5 AUc although that is its highest of the year. Against the euro we are still at 58.1 euro cents. That means the TWI-5 is has crept up slightly to 71.4 and nearly a five month high.

The bitcoin price is virtually unchanged again today, now at US$26,867. Volatility over the past 24 hours has been modest at just on +/- 1.0%.

You can find links to the articles mentioned today in our show notes.

You can get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston. And we will do this again tomorrow.