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.

And today we lead with news events in Russia are something of a gawkish sideline for us. It is China we should be watching.

But first this week, in the US the spotlight will be on the Fed's big bank stress test results out Thursday, NZT. There will also be data released on May personal income and spending, as well as the PCE price indexes. Additionally, we will be following durable goods orders this week, and among other things May's new and pending home sales.

Elsewhere, CPI inflation data for Canada, the EU, Germany, Italy, France, and Spain are all due. And in China, the official factory and services PMIs will be released on Friday, while locally we get both consumer and business confidence data, also on Friday.

In Western financial markets, Greed trumps Fear at the moment. Investors seem bullish, even if equity markets took a bit of a reversal last week.

Over the weekend in the US the first of their PMIs for June has become available and it told the tale of slowing growth, but a continuing expansion nonetheless. The factory sector is still contracting however and at a faster clip than in May. But their service sector is still expanding although that too is at a slower pace than for May even if it is still a good moderate expansion. New order growth eased, but was still the second-fastest in just over a year, while the pace of job creation slipped to its slowest since January.

Perhaps we should also note that China isn't the only place where commercial property is in trouble. The rise and rise of interest rates along with growing vacancy rates is depressing the value of retail and office buildings globally. A value-quake is close.

Internationally, there does seem to be a thaw in US-Chinese relations. Blinken broke the ice, and now Janet Yellen has been meeting senior Chinese leaders. Both are announcing broader cooperation deals. It is a good time for the NZ Prime Minister to visit. China's economic stumbles are making them more open to trying to build back trade with Western nations. It is very early days and it may only be tactical rather than strategic, but it seems both parties are willing to see what they can make of a thaw.

China needs a thaw. On Friday, yet another large real estate developer, Central China Real Estate Limited, told the stock exchange that it could not pay interest on a bond even after the grace period. They are not the only one this week, also CIFI Holdings. It has been estimated that total Chinese developer debt is 12% of Chinese GDP which is a huge burden. This type of news is driving down their whole equity markets. Only a big redirection can weight against such drags.

The Hang Seng China Enterprises Index of Hong Kong-listed Chinese companies gauge slumped more than -6% last week, its steepest weekly drop since March. The CSI 300 Index of mainland shares fell -2.5% through Wednesday before markets closed for holidays. The yuan also fell to the weakest since November, with analysts bracing for more declines.

And around the world, China is having to face up to its aggressive funding of third-world infrastructure projects gone-wrong with a growing list of debt writeoffs.

China might have been on the long Dragon Boat Festival break, but in northern China it is no fun at present. A temperature of over 41oC was recorded in Beijing late last week, its second highest on record (the highest was in July 1999). And it is expected to hit those same highs again at the end of this coming week. And it is not just Beijing being hit. The same heatwave is sweeping across vast areas of northern China. Officials are being exhorted to save farmland.

Maybe that was a reason travel spending during the holiday fell short of pre-Covid levels, but the shortfall does underscore the slowdown in consumption.

In Japan, the June PMI story is similar to the US except perhaps things are still running higher/better there.

Japanese inflation ran at 3.2% in May, now the 14th straight month it has been over the Bank of Japan's 2% target. But there was no change in May from April, leading to suggestions it might be topping out. But the yen slid anyway.

Singapore's CPI inflation rate dipped to 5.1% in May from 5.7% in April. The April-to-May pace was running lower than the annual levels. Food and energy prices are keeping it up, services are lower than the average.

In Europe, their flash PMIs also record a contracting factory sector and an expanding services sector, but they are underperforming both the US and Japan.

The Australian factory sector is still contracting too. But the retreat was less so in June than in the prior two months amid improvements in supply conditions. However, new orders are still retreating which isn't a good sign. And their services sector is no longer expanding, even if it is yet to contract.

Local observers are starting to see more cracks opening up in the Australian economy. Apparently AirBNB reservations are sliding, the number of home builders going bust is rising, and about half of small businesses are concerned about their financial future, according to a survey there by Xero. It isn't helping that the RBA's official cash rate at 4.1% is lagging most other central banks by at least 100 bps and that is keeping the Aussie dollar weak and importing inflation.

There is much talk that RBA Governor Lowe is about to be replaced in July. It is hard to know if that will turn confidence around or push more instability. Certainly, Lowe's defenders are now out saying now would be a bad time to make a change.

The UST 10yr yield will start today still at 3.74% and unchanged for the week. 

The price of gold will start today at US$1920/oz, but down -US$37/oz or -1.9% for the week.

And oil prices are staying low although +50 USc firmer from Saturday to now be just over US$69.50/bbl in the US. The international Brent price is now just on US$74.50/bbl. That is a -US$2.50 drop for the week.

The Kiwi dollar starts today at 61.4 USc and unchanged from Saturday. But that is a full -1c lower than this time last week. Against the Aussie we are firm at 92.1 AUc and up more than +1c in a week. Against the euro we have changed little at 56.4 euro cents. That means the TWI-5 is still just on 69.8, also little-changed, but down a minor -20 bps for the week.

The bitcoin price has eased from this time Saturday and now is at US$30,536 with rise dip of -1.4%. It actually didn't close on any day at NZ$50,000, falling fractionally short. Volatility over the past 24 hours has been low at just under +/- 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.