Kia ora,

Welcome to Thursday’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 it may be the summer holidays in the northern hemisphere, but that isn't making the economic news quiet. While they are holidaying the commercial world seems to be bleeding a bit.

Mortgage interest rates jumped in the US last week, taking the 30 year benchmark to 7.09% with a +16 bps rise in a week and their highest in eight months. Unsurprisingly, mortgage applications fell and it was quite a sharp weekly change. The availability of mortgage credit tightened too as banks prioritised quality lending.

One corner of the commercial office building market is in utter turmoil. WeWork shares suddenly became almost worthless yesterday after the one-time startup darling warned it could go bankrupt in a stunning reversal of fortune for a company that was once privately valued at US$47 bln. Co-working firms are finding life very tough in the post-pandemic world.

Canadian building consents continue to impress. In May they rose an outsized +12.6% and it was expected that in June they would fall back to even up. But in fact they rose another outsized +6.1%. It was commercial construction that shone, not residential construction. These may be strong recent gains, but in fact they were down -4.2% from June a year ago.

Japanese machine tool orders were weak in July. July isn't usually a strong month, but even the year-on-year comparison was weak, down almost -20%, principally due to low orders from China.

Taiwanese consumer inflation remained low at 1.9% in July, but was kept from falling lower by rising fresh food prices from a recent typhoon. Producer prices however fell -3.2% in July but that fall was much less than the -4.8% fall in June.

In China, we may be about to get a repeat of the Evergrande saga and collapse. Country Garden, another giant real estate developer has missed a bond payment, the same event that triggered the Evergrande collapse. Evergrande had liabilities of US$300 bln at its peak. Country Garden has liabilities of almost US$200 bln and large exposure in lower-tier cities. During the Evergrande saga Country Garden was viewed as a quality alternative, unlikely to follow Evergrande. The China property sector correction is far from over and will undoubtedly draw Beijing back in, to 'rescue' the wider industry - not that previous actions have stemmed the odour.

Making matters worse, Chinese banks are resisting Beijing 'encouragement' for trimming the mortgage load on millions of home loan lenders. Borrower expectations of relief are being dashed.

Deflation has arrived in China again for its consumer prices. They fell -0.3% in July from a year ago (the first time in two years) but rose a minor +0.2% from June, but given year-ago levels it is unlikely to repeat on a monthly basis in future months. Food prices are deflating, so is clothing. Beef prices are down -1.4% in a month, lamb prices are down -1.3%. Milk is holding however, unchanged from a year ago. Recently petrol prices have blipped up, but they are lower than a year ago.

China's producer prices fell -4.4% in July from a year ago, worse than market forecasts of a -4.1% decline, after a -5.4% drop in the prior month, which was the steepest decrease since December 2015. It was the tenth consecutive month of producer deflation amid weakening demand and wavering commodity prices. Yesterday's weak export data won't be helping.

World food prices rose in July, but only because vegetable oils turned up. Dairy and meat prices were little changed in the month on a global basis, cereal and sugar prices fell noticeably. Given the global weather (and war) pressures, perhaps this is all a bit surprising.

But this may all be about to change. Rice prices are suddenly rising fast in early August. There are drought conditions in Thailand, flood conditions in China, and export bans in India. Prices are suddenly back to levels than haven't been seen in 15 years. Wider grain prices are also affected by Russia's war on Ukraine.

In Europe, Italy has moved to calm market fears over its excess profits tax on banks. It has said the tax will be capped in some way, and that returned stopped the rout in bank shar valuations.

In Australia, their de facto sovereign wealth fund, the Future Fund, is under attack with a proposal (unofficial at this stage) to wind it up and use the funds to retire Australian Government debt.

The UST 10yr yield will start today at 4.01% and unchanged from yesterday. 

The price of gold will start today at US$1915/oz and down another -US$10 from yesterday.

And oil prices are up +US$1 and now at just over US$83/bbl in the US. The international Brent price is now at just over US$86.50/bbl.

The Kiwi dollar starts today unchanged at just on 60.6 USc. Against the Aussie we are still at 92.7 AUc. Against the euro we are also softish at 55.2 euro cents. That all means the TWI-5 is still at 69.2.

The bitcoin price is lower today since this time yesterday and now at US$29,466 which is down -1.1%. Volatility over the past 24 hours has been modest at just under +/- 1.3%.

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.