Economy Watch

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.

Today we lead with news New Zealand's ambitions to be a green hydrogen superpower are making real progress.

But first up we should note that today is a national holiday in the US, "Juneteenth", commemorating the end of slavery, an end that started in Texas in 1865. (Until last year, it had only been a regional holiday.)

Meanwhile, Chinese authorities reviewed their Prime Loan rates yesterday, and left them unchanged. In late May, their Premier released a 33-point rescue package to avoid an economic contraction in Q2-2022. But rate hikes by global central banks make it difficult for them to ease monetary policy to boost a weak domestic economy. However, analysts expect rate cuts in the second half of 2022 anyway.

The impact of that package of stimulus measures hasn't kicked in yet. One consequence may be that with car sales struggling there, the lithium price is wavering. A sudden new rush in supply seems to have overwhelmed demand and a price correction is expected soon.

And the Chinese price of iron ore is still sinking. And that isn't helping the share price of Aussie miners.

This weakness is also showing up in Chinese consumer sentiment. The latest data released officially is for April and that showed their survey reporting a very sharp drop in confidence from a positive +13 in March to -13 in April. In a record that goes back to 1991, we have never seen a plunge like this in the official survey. Kudos to them for actually releasing such survey data that shows a vast leakage in confidence in the Middle Kingdom.

After a surprise dip in April, Taiwanese export orders bounced back to +US$55 bln and +6.0% higher than a year ago. Orders from American and ASEAN customers were very strong. They were very weak from China and have been all year, a traditional source of strength.

Annual producer price inflation in Germany surged to almost +34% in May from the same month a year ago, breaking a new record peak for a 6th straight month and fractional higher than in April or market forecasts. The figures reflect the effects of the Ukraine war so they are not really a surprise.

In key progress for Southland, Southern Green Hydrogen, a joint venture between Contact Energy and Meridian, has announced that Western Australia's two largest miners would enter final negotiations to develop what could be the world’s largest green hydrogen plant with a reported cost of about NZ$5 bln.

The UST 10yr yield has started the week unchanged at 3.23%. 

The price of gold ended yesterday at US$1836/oz and down -US$4.

And oil prices are little-changed from this time yesterday to just over US$108.50/bbl in the US, while the international Brent price is now just over US$112/bbl.

The Kiwi dollar will open today at just on 63.2 USc and +20 bps firmer than this time yesterday. Against the Australian dollar we holding 91.1 AUc. Against the euro we are also holding at 60.2 euro cents. That all means our TWI-5 starts today at just under 71.3, a gain solely due to the retreating greenback.

The bitcoin price has moved sideways from this time yesterday and is now at US$19,866 and up +2.4%. Volatility over the past 24 hours has been very high again at +/- 4.2%.

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.

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 nowhere is the change of economic mood sharper than in crypto markets.

The selloff in those markets has deepened over the weekend, and the bitcoin has now fallen below US$20,000 for the first time since December 2020. In New Zealand dollars, it is threatening NZ$30,000. That means it has lost three quarters of its "value" since its peak in November 2021. Engine-room companies in the crypto machine are laying off staff.

The cryptocurrency industry was built on swagger, enthusiasm and optimism. All three are in short supply these days as these losses and layoffs mount.

Meanwhile, American factory output slipped slightly in May from April, but remained up +4.8% from a year ago, in data released today. It was the first slip in four months and the second in eight months. Overall industrial output rose in May from April because of output from 'mining' and 'utilities'. That meant overall American industrial output was +5.8% higher than year-ago levels even though capacity expanded only +0.8%. Still, the small monthly slip does feed into the idea that the US economy's expansion is slowing down.

Canadian producer prices rose a heady +15% in May from a year ago, and the rise in May from April ran at a rate above that.

The Bank of Japan left its key short-term interest rate unchanged at -0.1% and that for 10-year bond yields around 0% during its June meeting, by an 8-1 vote, as widely expected.

But over the past three weeks, central banks around the Western world have changed direction faster away from easy-money and supporting economic activity, to focusing on fighting inflation. You could argue that the new 'cause' is a result of the prior one, but hindsight judgment is cheap. Either way, there will be an economic price to pay, one that was always ahead of us. This new resolve just means it is now front-and-center and will need to be worked through. Do democracies have the resilience to tolerate the pain involved? We have gotten so used to pain-free public policy moves (ones that kick the can), that it is hard to be optimistic.

Are we heading for a recession in the major global economies? Many CEOs think we are. Will that just give firebrand autocrats ammunition? Hopefully not, but it is a big risk.

It looks like central banks are in a rush to get control of inflation before the consequences of slowing or even contracting economic activity takes hold. It's a race they may not win. Certainly the effort will have some tough consequences for emerging markets, many of which could end up collaterally damaged.

Bond markets apparently saw this coming. Since January 2021, eighteen months ago, a global bond index of government and corporate debt paper has now fallen more than -20%. That is a relentless, longish term slippage. But the fight against inflation probably means this is just the start of a severe repricing of bonds, one that will take much more off their values. Bond investments are not 'conservative' in times when we are in a fight with inflation.

Volatility is high (although not extreme) while 'fear' is extreme.

It may be the end of high commodity prices too. We should also note that the copper price looks like it is about to fall out of the high range it has occupied for the past 18 months. And aluminium may not be far behind it. Tin and nickel are showing the same brittleness. And the carbon price, which raced higher in New Zealand and Europe until February has languished in both markets since.

And at the end of last week, iron ore prices slumped in China. Not only is demand tepid there, Beijing is holding back their buyers from bidding on Australian-sourced ore.

In Australia, the number of houses being brought to auction is rising fast. But the clearance rate is falling - to a low-for-them of under 60%, something they haven't had barring the pandemic, for three years.

Back to the global scene, multilateralism is struggling everywhere, including at the World Trade Organisation. But they have agreed over the weekend to the first change to global trading rules in yearsas well as a deal to boost the supply of COVID vaccines, in a series of pledges that were heavy on compromise. Here's what the conference has achieved.

The UST 10yr yield will start today down another -1 bp from this time Saturday at 3.23% in a shift lower that indicates bond markets think the run up ahead of the Fed meeting was excessive. 

The price of gold ended last week in New York at US$1840/oz. A week prior it was at US$1873/oz.

And oil prices have risen slightly from this time Saturday to just under US$109/bbl in the US, while the international Brent price is now just over US$111.50/bbl. A week ago these two prices were US$118.50 and US$120.50 respectively, so about a -9% weekly drop.

The Kiwi dollar will open today at just on 63.1 USc and more than -¾c lower then where we left it Friday. Against the Australian dollar we noticeably firmer 91.1 AUc. Against the euro we are still soft at 60.2 euro cents. That all means our TWI-5 starts today at just over 71.1, a gain solely due to the faster-falling Aussie.

The bitcoin price has fallen from this time Saturday and is now at US$19,403 and down -5.9%. Over the weekend it got down as low as US$17,602 and is trying another of its comebacks now, but recently such efforts have run out of steam quickly and a new low is then breached. A week ago it was US$ 28,976 so it has fallen by almost half in the past seven days. Volatility over the past 24 hours has been extreme at +/- 6.8%.

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.

By Gareth Vaughan

By late 2020 it was clear central bank and government monetary policy and fiscal policy responses to the Covid-19 pandemic had prevented a major economic downturn, and thus the Reserve Bank should've been looking to move monetary policy to a neutral rather than super easy setting, says Grant Spencer.

Spencer, Adjunct Professor at Victoria University's School of Economics and Finance, is also a former Reserve Bank Deputy Governor, and was Acting Governor for six months up to his departure from the central bank in March 2018.

Spencer spoke to interest.co.nz about inflation in the second episode of the Of Interest Podcast, where we delve into big issues and new developments in the economic and financial worlds.

New Zealand's March quarter Consumers Price Index (CPI) inflation came in at 6.9%, the highest it has been since 1990, and well above the Reserve Bank's 1% to 3% target range. CPI inflation is even higher in other parts of the world, reaching 9% in the United Kingdom, 8.6% in the United States, 8.1% in the Eurozone, and Australia's last reading of 5.1% is expected to rise.

Inflation, Spencer says, is always driven by persistent excess demand.

"And in this situation over the past two-and-a-half years we've had persistent excess demand resulting from an adverse supply shock and expansionary demand policies, in particular monetary policy and fiscal policy."

By about September-October 2020 Spencer says it was apparent the emergency Reserve Bank and government policies had been successful in preventing the high unemployment and "drastic economic downturn" people had feared was coming in early 2020.

"I think it was around September-October 2020 when bond rates, interest rates, that had been falling, started to move up again. And that was in response to emerging economic indicators both here and internationally, which were saying the out-turn for real activity in the global economy is not going to be as bad as we thought, unemployment's not going to be as bad as we thought. "

After that Spencer says the Reserve Bank should've been thinking about moving the Official Cash Rate (OCR) back gradually towards a more neutral position rather than waiting until October 2021 to increase the OCR from its record low of 0.25%, where it had been reduced to in March 2020.

"Different countries had different sets of indicators. But I think that shape of the trend in bond rates was generalised across the major markets, it wasn't just New Zealand. So that's when the information started to turn," Spencer says.

"The key is the interpretation of that so-called inflation, price increases. Is this a temporary shock, supply side blip, or is it something that policy should respond to with a generalised firming of policy? And that's always the nature of the discussion. And it's very easy to be biased in one direction and just sit pat until you've got a convincing case that overall core inflation, or underlying inflation, is moving therefore we need to move."

"It's difficult for policymakers to turn policy because as soon as you turn policy the markets will expect that you're going to continue to tighten. And the whole shape of the interest rate curve will change and you can have a significant effect on things just by that decision to start to make one increase rather than being on an easing mode," says Spencer.

"That's why they're nervous about shifting from an easing to tightening cycle until they can see the whites of the eyes of inflation. But that's also the challenge, because as it has turned out they really should've been tightening earlier."

He says the Reserve Bank should've started shifting the OCR back towards a neutral setting sooner than October last year, but won't give a specific time when he thinks this should've started.

"They should've been moving back to neutral. The default should be seen as neutral, not as super easy," Spencer says.

The neutral OCR rate is the level where it's deemed to be neither stimulating nor constraining economic activity. The Reserve Bank currently considers the neutral rate to be about 2%. That's where it's now at, after a 50 basis points increase on May 25. It was at 0.25% as recently as October last year. Spencer says the neutral OCR may be higher than 2%.

The record low OCR wasn't the only aspect to easy monetary policy. Between March 2020 and July 2021 the Reserve Bank bought $53.5 billion worth of NZ government bonds and local government bonds on the secondary market off banks in its first foray into quantitative easing. This was aimed at suppressing interest rates.

"You know if you've got super easy policy you should be moving back towards neutral if you think that things are starting to change, and you shouldn't be just focused on one of the dual mandate objectives," Spencer says.

The Reserve Bank's monetary policy remit states that it must both maintain price stability and support maximum sustainable employment.

In the podcast Spencer also talks in detail about what is causing the high inflation, what his outlook for inflation is, the role of the NZ housing market, Russian invasion of Ukraine and China's zero Covid policy in this, and whether we're in for a hard landing, or a marked economic slowdown or downturn.

"It's a very difficult situation to manage through," Spencer says of the current situation.

Kia ora,

Welcome to Friday’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 global markets are shuddering today as the Fed's rate hike has been followed by other central banks, and investors worry that the very sharp rises in interest rates will bring recession. Most benchmarks are falling.

But first, initial American jobless claims rose last week from the prior week but the rise was minor - and it was less than expected. There are now 1.27 mln people on these benefits, also a weekly rise, but in turn also near their all-time lows.

However both housing starts and new residential building consents fell sharply in May, even as completions jumped to an all-time high. Now both consents and starts are below year-ago levels.

US mortgage rates are rising fast again, and their benchmark 30yr rate is threatening 6% all of a sudden. These rates are now at their highest since just before the GFC in 2008.

And the Philly Fed factory survey has turned negative in June. The indicators for current activity and new orders dived, and the shipments index also fell but remained positive. However, firms reported continued increases in employment. Both price indexes declined but remained elevated. Expectations for growth over the next six months deteriorated, as the future general activity, new orders, and shipment indexes fell sharply.

Meanwhile a heatwave is baking the middle part of the US and thousands of beef cattle have died in parts of Illinois, Indiana, Missouri and Kentucky.

In Canada, wholesale sales fell in April when a rise was anticipated, so the change from March has been rather sharp on this front.

In South Korea, manufacturing giant Samsung Electronics has moved to reduce its ballooning inventories, cutting orders from suppliers.

In China, house prices fell the most in almost seven years. Average new home prices in China's 70 major cities fell -0.1% year-on-year in May 2022, reversing from a 0.7 percent gain a month earlier. The latest figure represented the first drop in new home prices since September 2015, as tighter COVID-19 restrictions dented buyer confidence in their property market. Only 25 of those 70 cities recorded any gain from the prior month, only two over +½%. Existing home sales prices fell much faster than new construction.

The demise of freedoms in Hong Kong is seeing an exodus, and a major move of Chinese entrepreneurs, professionals and their families moving to Singapore is underway. It is not minor.

Meanwhile, the Hong Kong Monetary Authority raised its benchmark rate by +75 bps to 2.0%, matching the US Fed as it usually does on a formula basis. 

Taiwan also moved its policy rate higher, up to 1.5% as expected, a small rise from 1.375%.

But in an unexpected move, the Swiss National Bank hiked its policy rate by +50 bps to -0.25% at its June 2022 meeting, surprising markets that expected the interest rate to be held constant. They did not rule out further rate increases in coming meetings. It was their first rate hike since 2007.

In Britain, the Bank of England raised its policy rate by +25 bps to 1.25% at its June 2022 meeting, a fifth consecutive rate hike and pushing borrowing costs to their highest in 13 years as it tries to control soaring inflation. There was dissent. Three policymakers voted for a larger +50 bps rise. That is because English inflation is now over 9% and is expected to rise above 11% in October. Further, they forecast economic activity to slow sharply over the first half of their forecast period.

In Australia, in May their labour market expanded by more than +60,000 jobs, all of them full-time. Their participation rate blipped up with a small but impressive rise to 66.7%, and their jobless rate held at 3.9%. Analysts were impressed. (The NZ, out participation rate is 70.9% and our jobless rate is 3.2%, just saying.)

Aussie inflation expectations jumped markedly in June, now running at 6.7% and up from 5.0% in May. This is a very sharp shift. But this same survey recorded that consumers thought their pay would rise a measly +1.2% in the next 12 months. Despite this, Australians are still planning to spend like it is 2021. They might have to change their tune at some point; some of these survey results will have to change.

The decline in container shipping rates out of China continues, but it remains small. But rates for bulk cargoes have stopped falling.

The UST 10yr yield will start today down -6 bps from this time yesterday at 3.33% in a further settling after the Fed moves. 

On Wall Street, the S&P500 is has resumed its selloff, down -3.5% in Thursday afternoon trade and down -6.1% for the week so far. 

The price of gold is up US$16 in New York, now at US$1850/oz.

And oil prices have risen back some today from this time yesterday and are now up +US$2 at just on US$115/bbl in the US, while the international Brent price is now just on US$118/bbl.

The Kiwi dollar will open today very firmer at just on 63.9 USc and more than +1c higher. Against the Australian dollar we are more than +½c higher at 90.5 AUc. Against the euro we are up at 60.4 euro cents. That all means our TWI-5 starts today at just under 71.3, and up +70 bps since this time yesterday.

The bitcoin price has firmed from this time yesterday and is now at US$21,016 but up only +0.9%. Volatility over the past 24 hours has been extreme again at +/- 6.7%.

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 on Monday.

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.

Today we lead with news we now have a better idea of how the Americans are going to tackle their surging inflation problem.

The US Fed has raised its policy rate by +75 bps to 1.75% in a strong lean against their inflation threat. It is the largest increase by them since 1994. But it is not as strong as it could have been. They said they are "strongly committed to returning inflation to its 2 percent objective" which given that inflation is 8.6% is now a long way off and will require a lot more than a 75 bps hike. So they have begun quantitative tightening on an unprecedented scale.

Their dot-plot (p4) is now 3.5% for later this year, so another +175 bps of rises are likely coming over coming the coming four reviews in 2022, but then up only another 25 bps in 2023 before slipping back to 3.5% in 2024. The bottom line is that they themselves see a very high policy rate for the next two years plus.

They have also baked in an expectation that this will slow the expansion of the American economy and raise their jobless rate.

Meanwhile, American retail sales were up +8.1% from year-ago levels, but actually slipped marginally and unexpectedly in May from April. The near-term culprit is weak vehicle sales. The annual increase barely matches inflation.

US business inventories were higher in May but the rise was less than for April and largely because dealer lots have building unsold cars. The important inventory/sale ratio is not showing any warning signals.

US mortgage applications actually rose sharply last week from the prior week, the first rise in more than a month and the largest rise since April. This came despite another rise in home loan interest rates.

In Canada, May data show house prices there are falling and sales volumes are down.

Across the Pacific, China's retail trade fell by -6.7% in May from the same month last year, compared with market expectations of a -7.1% fall and after a -11% drop in April which incidentally was the steepest decrease since March 2020. This May data is the third straight month of falling retail trade.

China's industrial production unexpectedly grew by +0.7% in May from the same month a year ago, easily beating market consensus of a -0.7% drop and reversing from a -2.9% fall in April.

But in a more telling release, they said electricity production fell -3.3% in May from the same month in 2021. So it doesn't really support the claim that industrial production grew. They say there was a fall in coal-based generation, the growth in hydro- and nuclear power rose, but the change in wind power turned from an increase to a decline, and the growth rate of solar power slowed down. 

European industrial production rose more than expected in May from April, although is still lower than year-ago levels.

Australian consumer confidence is now falling towards historic lows as inflation bites harder there and the RBA seems very late to implementing any meaningful resolve.

The Australian "Fair Work Commission" has ruled that this year’s minimum wage by AU$40 per week, up +5.2%. It will affect 182,000 workers and be effective from July 1. But for the 2 mln workers earning above the minimum will increase +4.6%. Both a well below current inflation. 

Also getting worse is the electricity situation on their eastern seaboard. Their regulator has suspended the spot market and now requires all operators to run at a loss to keep the lights on. It will get uglier from here.

And the new Australian government has summoned business and industry leaders to witness formalising its campaign pledge to reduce emissions by -43% over 2005 levels to 2030.

Join us later this morning when we bring you the outcome of the Q1-2022 GDP result. Expected is a +1.2% rise from a year ago, well down on the +3.1% rise we had for Q4-2021.

The UST 10yr yield will start today down -14 bps from this time yesterday at 3.36% after the Fed moves. 

The price of gold is up US$23 in New York, now at US$1834/oz.

And oil prices fell sharply on the US Fed news and from this time yesterday are now down -US$4 at just over US$113/bbl in the US, while the international Brent price is now just on US$116.50/bbl. 

The Kiwi dollar will open today firmer at just on 62.7 USc. It rose overnight and slipped after the Fed, but since has risen strongly in the circumstances.  Against the Australian dollar we are -½c lower at 89.8 AUc because their firming against the USD was more. Against the euro we are up +½c at 60.1 euro cents. That all means our TWI-5 starts today at just under 70.6, and up +60 bps since this time yesterday. 

The bitcoin price has fallen again from this time yesterday and is now at US$20,825 and down another -7%. Volatility over the past 24 hours has been extreme again at +/- 6.1%. Below US$30,000 there is no technical support. If it goes below US$20,000 the speed of the fall could be sudden.

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.

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 reasons your mortgage payments are rising sharply are all in today's global news roundup here.

The US equity markets are lower today, but by less than yesterday. That leaves them well in bear-market territory. And American bond markets are still haemorrhaging losses. Both are waiting for tomorrow's US Fed rate decisions. Markets have priced in a +75 bps rise to 1.75%.

The Fed seems sharply focused on fighting inflation, prepared to take the risks of triggering a recession.

Meanwhile, American producer prices rose sharply again in May, but the rate of annual increase was unchanged from April at just over +10%. But as high as that is, it is actually its least acceleration of 2022. And the underlying rate rose its least since October 2021. So perhaps some sting is going out of the inflationary impulse in business activity. But that doesn't hide the fact that a +10% increase rate is damagingly fast.

Still holding up however are American retail sales gains. Last week's survey shows them little-changed from the year-on-year rise of about 11%. Much of this will be inflation however.

In Japan, an unexpected remark by the Bank of Japan Governor has made waves, as some consider it a subtle message that the central bank may be starting to explore an eventual end to its large-scale monetary easing.

Japanese industrial production fell -4.9% in April, data that had pretty much been signaled in an earlier 'flash' release.

Hong Kong industrial production also fell, but they are now reporting Q1-2022 changes.

Chinese foreign direct investment inflows are slowing, and slowing fast. They revealed that for the five months to May, +US$87.8 bln flowed in. But if that is correct, that means they had only +$13.3 bln arrive in May, the lowest month flow since October 2021, and almost -20% less than in May 2021. This is probably neither a reduction they want given their slowing economy. Not is it a signal they want widely known which is why they only focus on the year-to-date numbers.

Indian producer prices rose faster in May, up +15.9% from a year ago.

German investor sentiment as measured in their ZEW survey remains very low in June, although it wasn't as low as in any of the prior three months. The Russian invasion of Ukraine is a sever depressant for them.

In Australia, the widely-watched NAB Business Confidence report was "strong", but not quite as positive as for April. Cost rises eased back in what they hope is an early signal. That overall sentiment is this good despite high inflation, rising interest rates and cost pressures is somewhat remarkable, especially in the face of global expectations of recession.

The UST 10yr yield will start today up another +9 bps from this time yesterday at 3.50%. 

The price of gold is down another -US$18 in New York, now at US$1811/oz, still knocked around by the strong US dollar.

And oil prices are falling too, from this time yesterday, now down -US$1.50 at just under US$117/bbl in the US, while the international Brent price is now just on US$119.50/bbl. 

The Kiwi dollar will open today sharply lower again at just on 62.1 USc and another -¾c fall from this time yesterday. Since the start of June that is now a -4.9% devaluation. Since the start of the year it is now an -9.1% devaluation. Against the Australian dollar we are unchanged at 90.4 AUc. Against the euro we are down -½c at 59.6 euro cents. That all means our TWI-5 starts today at just under 70.3, and down another -50 bps since this time yesterday. 

The bitcoin price has fallen again from this time yesterday and is now at US$22,393 and down another -3.3%. Volatility over the past 24 hours has been extreme again at +/- 7%. Below US$30,000 there is no technical support. If it goes below US$20,000 the speed of the fall could be sudden.

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.

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.

Today we lead with news that is still dominated by American [high] inflation and Chinese [low] demand. Everything now depends on American employment levels. As long as they stay high (for them), then the world may get a softer landing than otherwise. But the Chinese situation isn't helping. Trouble in both the #1 and #2 economies in the world has ripple impacts globally. Together they account for more than 42% of the world's economic activity.

Today's financial markets are acting like a herd stampede, one that is changing direction. No-one seems to want to believe the 2022 direction so far is the right way.

Equity prices are diving. Bond yields are jumping (bond prices are sinking). And the US dollar is rising fast. Commodity currencies are being devalued. It is another sharp re-rating lower, the fifth such event in 2022 alone. Only once (in the second half of March) has there been a recovery from one of these shifts lower. They are becoming much more frequent, and that tells you something important. In 2021 there was only one of these selloffs. In 2020, there was only the sharp pandemic selloff. In both 2020 and 2021 there was a full recovery pushing equity prices to the record highs that ended at the end of December 2021. The track has been down from there, in these increasing selloff events.

Since the market high right at the start of 2022, the S&P500 has fallen more than -20%, so it is now a bear market for equities.

And many now expect the main rate curves to invert soon.

Further, commodity prices are almost all falling today.

Last week markets were confident the US Fed will raise its policy rate by +50 bps at their next meeting on Thursday. Yesterday, that expectations went up to +75 bps. Today, markets seem to be expecting a reasonable chance a +100 bps hike is coming. This is "fluid" as they say, or others may say "panicky".

Meanwhile, in their large and regular survey, the New York Fed's consumer expectations report showed that inflation expectations over the year ahead rose in May, but only back to the +6.6% level they were at in March. They were last at this level in June 2013. Those surveyed thought their incomes would rise only +3% in a year, but they seemed unusually bullish about their spending, saying this would rise by +9%. At the same time, they expect access to consumer debt to get harder. Something has to give, because the overall sense of these expectations hardly makes a lot of sense in the current economic climate.

In China, street protests broke out in Shanghai over the rolling lockdowns. They were relatively small because the risks for doing so are so high, but that they happened at all reveals the extreme pressure on small merchants.

India's consumer inflation rate actually fell in May from April, down to 7.0% from 7.8% which was an eight year high. A correction like this was anticipated. However, food prices rose at an 8% rate.

The British economy shrank -0.3% in April from March, following a -0.1% contraction in March from February. The April result missed market expectations of a +0.1% expansion.

In Australia, their energy regulator is raising its warnings and has introduced price caps and ordered generators to keep running, as it signals that parts of Queensland face possible blackouts as early as today.

Meanwhile, world trade in services is facing a huge threat. At the World Trade Organisation summit of 120 ministers in Geneva, India, Indonesia and South Africa are refusing to renew a rolling two-year “moratorium” that bans the WTO’s 164 member countries from imposing customs duties on ecommerce. The fear is that a round of taxes are coming for global ecommerce. The inflationary impact would be huge.

The UST 10yr yield will start today up a remarkable +24 bps from this time yesterday at 3.41%. 

The price of gold is down a sharpish -US$43 in New York, now at US$1829/oz, knocked around by the strong US dollar.

But oil prices are little-changed from this time yesterday, still at just under US$118.50/bbl in the US, while the international Brent price is now just over US$120.50/bbl. However, because it is holding its price in US dollars, it is an effective rise for most other buyers.

The Kiwi dollar will open today sharply lower at just on 62.8 USc and a -¾c retreat from this time yesterday. Since the start of June that is now a -3.9% devaluation. Since the start of the year it is an -8% devaluation. The Australian dollar is being hit slightly harder and we are a little firmer at 90.4 AUc. Against the euro we are down at 60.1 euro cents and now at month-ago levels. That all means our TWI-5 starts today at just under 70.8, and down another -50 bps since this time yesterday. But that is only at a level we were last at on May 19, 2022. So it really is all about the outsized gains by the greenback rather than anything to do with the NZD.

The bitcoin price has fallen by a remarkable -17% from this time yesterday and is now at just US$23,163. And it has been a very rough ride down, at one point in between it got as low as US$22,602. Volatility over the past 24 hours has been unprecedented at +/- 12%. It is now below NZ$40,000 for the first time in 18 months, and it is well below. Not helping was that a major crypto network froze withdrawals and transfers, causing widespread alarm in these markets.

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.

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 financial markets, regulators and households worldwide are battling the lurking thief that is inflation. And regulators face a stark choice: inflation or recession?

The last time Stats NZ looked at our consumer inflation level it was as at March and it was running at 6.9% then. It is surely higher now. Our June rate won't be known until July 19. No analysts have yet forecast that level recently. The RBNZ's last MPS picked a 7% June rate (and lower after that) and that will clearly be way out. Our own Grocery Price Monitor, a weekly series, suggests June 2022 quarter prices will be +12% higher than the equivalent level a year ago. However there is more to CPI inflation than just grocery prices.

There are plenty of things to blame, and partisan commentators are choosing them all. But the cost of energy is behind almost all the food, transportation and product price rises, so the most credible culprit, given when this scourge took off, is the 'Putin tax', out-weighing the pandemic effects, or even QE. Everything contributes in its own way but the war shock is the trigger.

How to fix the problem, one that steals from wallets and household budgets? If we can't stop the war on Ukraine, we have to quell demand significantly, so that price hikes don't stick. The problem is that this remedy hurts.

But we see it in action in China.

Chinese consumer prices were up just +2.1% in May from a year ago, but of concern will be that prices actually fell from April, a whiff of deflation there. Food prices fell, and as a part of that, prices for sheep meats actually fell rather a lot, down -1.4% in a month and taking the year-on-year retreat to more than -6%. Pork and vegetable prices fell much faster however, and it is clear that their livestock farmers will be in no position to pay sky-high animal feed prices on the international market.

Chinese producer prices were virtually unchanged in May from April, and that dragged the annual PPI increase down to +6.4% and its lowest in more than a year (February 2021). Raw material price rises are still very high there, but prices for consumer durables at the factory gate actually fell in May from a year ago. It's a squeeze that will hurt.

China may be struggling in the real economy with sinking demand, but they still know how to flood new loans on to companies. New yuan loans rose sharply in May, up by +11%, partly because they are switching out of foreign currency loans. Their banking system now has NZ$49 tln in lending on their books (¥210 tln). That is 183% of Chinese GDP. For perspective, New Zealand's total lending is 154% of our economic activity, and for the US, it is just 70% on the same basis.

Russia cut its policy rate by -1.5% to 9.5% over the weekend. They can see demand retreating fast and, fearful of an over-reaction, are easing up. They last recorded CPI inflation up +17%, but a collapse in economic activity will have it fall as fast as it rose. Also falling and fast is the Russian population. Deaths exceeded births by 311,200 people in the first four months of this year, according to data published by their Federal Statistics Service.

In the US, the 'feared' surprise in American inflation has been recorded for May. Overall the headline rate came in at 8.6%, a new 40 year high. But worse, food price inflation came in at 10.1%, and also a 40 year high. Markets were expecting a headline rate of +8.3% and food prices up about 9%, so the actual results have shocked financial markets into some sizeable reactions. Equity prices fell, bond yields jumped, and the US Dollar gained sharply.

One likely reaction is that the Fed will raise its policy rate by +75 bps on Thursday, June 16 (NZT). Until now, the best estimate has been +50 bps.

With that as backdrop it is hardly surprising that consumer sentiment has dived. There was a survey out on Saturday (NZT) and it recorded its lowest level on record. Sticker shock is pervasive, especially for petrol prices. And this survey suggests that the public is more sceptical the Fed's policy actions are likely to get inflation back down.

However, not all data released overnight was negative. The remarkable repair of the US Federal Government finances continues with a greatly improved May deficit. Analysts had expected a deficit of -US$120 bln for the month. But the actual result was just -US$66 bln. Over the past year, this deficit has shrunk more than half to just over -US$1.1 tln from -US$2.8 tln in the prior fiscal year. That is probably the fastest budget repair ever accomplished, all while their economy expands.

Canada released its May employment data and that was generally positive, coming in better than expected. There was a big shift toward full-time employment in May, and a smaller shift away from part-time work. Their jobless rate fell to 5.1%. Canada's consumer price inflation was running at 6.8% in April.

Separately, India reported that its industrial production rose faster in April than was expected. It was up a creditable +7.1% from a year earlier when a +5.1% rise was expected. India's consumer price inflation was running at 7.8% however.

In Argentina, there seems to be some sort of bank run underway. Savers fear the country will default and are pulling money out of inflation-linked savings accounts to protect themselves from the prospect these balances are growing so fast the Government can't possibly pay. On Thursday alone, almost -NZ$400 mln was withdrawn. They risk making it self-fulfilling. Argentina has an inflation rate of 58% and rising fast (+6% per month). It's as toxic there as in Turkey (who have a CPI running at 73% pa).

In Australia, their CPI rate for March was 5.1% and their June rate won't be known until July 27, 2022. It's going to be very much higher, also for energy reasons.

A key coal-fired power plant is out of action due to a technical failure, and it won't be restarted until late September. This will test an already-brittle eastern-seaboard power system. Certainly it will bump up power prices.

And in Queensland, the national energy market operator has capped electricity wholesale prices in the state for what is thought to be the first time ever after a sustained period of extreme prices.

Meanwhile, the great Australian fintech export, Buy-Now, Pay-Later, seems to be imploding worldwide. Rising bad debts and losses can't seem to be stemmed and investors have lost faith that the idea can be profitable. That idea is cemented with rising interest rates on the debt they must carry to back up their interest-free balances.

The UST 10yr yield will start today up +1 bp from this time Saturday at 3.17%, and that is a +20 bps rise for the week. 

Last week on Wall Street, the S&P500 fell -5.1%. Over the weekend, the S&P500 futures indicated than when they reopen tomorrow, they will start down another -2.8%. Monday trade may open with a rough tone everywhere, starting in New Zealand of course. And markets are now also battling a social phenomenon, where it is suddenly fashionable to be a market bear.

The price of gold was up +US$23 at the close of trade in New York, now at US$1872/oz. A week ago it was at US$1849/oz.

And oil prices are little-changed from this time Saturday, now just under US$118.50/bbl in the US, while the international Brent price is now just over US$120.50/bbl. Both levels represent about a +US$1 gain for the week.

The Kiwi dollar will open today little-changed at just over 63.5 USc. For the week that is a -2.2% devaluation. Against the Australian dollar we are at 90.2 AUc. Against the euro we are at 60.5 euro cents. That all means our TWI-5 starts today at just under 71.3, and down -60 bps for the week as the greenback strengthens, now at a 20 year high.

The bitcoin price has fallen by -3.0% from this time Saturday and is now at US$28,115. It's been volatile and at one point in between it got as low as US$26,878. Volatility over the past 24 hours has been high at +/- 3.5%.

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.

Kia ora,

Welcome to Friday’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 that the ECB has turned hawkish and is now focused on fighting inflation rather than propping up some of their large slow growing economies.

But first, new American jobless claims rose to +185,000 last week, a very minor rise. There are now 1.255 mln people on these benefits, still an all-time record low even if little-changed from the prior week.

Tomorrow, all eyes will be on the American CPI inflation rate. It is expected to come in at +8.3%, for May, the same as for April. But there will be special interest on the food component which could well come in higher than overall prices. Other countries are about to release monthly CPI data too. But New Zealand only releases this data quarterly and we will have to wait until July 18 to get our June data. Our weekly grocery price monitor suggests our prices are now starting to rise very fast, up +13% in a year.

There was a US Treasury 30yr bond auction a few hours ago, well supported, but the median yield rose to 3.11%, up from 2.91% at the prior equivalent event a month ago. That a +20 bps rise and above today's secondary market level, an unusual outcome.

In China, exports were expected to recover somewhat in May after a tepid change in April. But in fact they jumped by much more than expected, up almost +17% to US$308 bln. That is their highest increase in shipment in four months and easily beat market forecasts.

Chinese imports were little-changed, so their trade surplus jumped to almost +US$80 bln, well above the expected US$58 bln, and far above the April US$43 bln. Their concentration on shifting high-value exports as a priority after the lockdowns in Shanghai, and using alternative ports, appears to have been a positive initiative.

This may be positive for their exporters, but their general population is feeling very glum. China’s consumer confidence index slumped to 86.7 in April from 113.2 in March, hitting the weakest level since the data was first available in 1991. Their core problem isn't inflation, it is income reductions. This is yet another indication as to why Premier Li appears so worried about their economic situation.

Japanese machine tool orders rose strongly again in May, up almost +24% above the same month a year ago and essentially maintaining their fast paced rise.

The ECB said during its June meeting that it will end net asset purchases under its Asset Purchase Program in July and it intends to raise the key ECB interest rates by 25 basis points next month. It will be the first increase in borrowing costs in more than ten years, as inflation in the Euro Area shows no signs of easing. It said it is likely to raise them the same amount in September.

European bond yields rose and equity prices fell on the ECB announcement that the easy money of their QE is ending. But they are not emptying the reservoir, only not adding to it from here on.

But there are doubts the ECB can remain hawkish if economic expansion turns to contraction there.

Container shipping rates eased a tiny amount again last week, but nothing meaningful. Bulk cargo rates eased as well.

The UST 10yr yield will start today up +2 bps at 3.04%. 

The price of gold is down -US$5 today from this time yesterday, now at US$1849/oz.

And oil prices are down -US$1/bbl from this time yesterday, now just under US$120/bbl in the US, while the international Brent price is now just under US$122.50/bbl.

The Kiwi dollar will open today sharply lower at just under 64 USc. The daily retreat is the most since the pandemic shock on March 19, 2020. Against the Australian dollar we are marginally firmer at 89.9 AUc. Against the euro we are just under 60.2 euro cents. That all means our TWI-5 starts today at just over 71.2 and down -100 bps in a week mostly due to the rising greenback.

The bitcoin price has slipped by a tiny -0.2% from this time yesterday and is now at US$30,293. Volatility over the past 24 hours has been modest at +/- 1.3%. 

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 on Monday.

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.

Today we lead with news that with the oil price up over US$120/bbl and the benchmark UST 10yr yield above 3%, the risks that global stagflation poses have risen sharply.

But first, the fall away in US mortgage applications picked up speed again last week - and are now at more than a 20 year low - as did the rise in their mortgage interest rates.

And American wholesale inventories rose +21% in April from a year ago, but that rise was less than in March. Part of that rise includes inflation of course. But as a ratio to sales, the new levels are still relatively low in an historical context. As we noted yesterday however, some large retailers are feeling high-inventory pain.

There was another well supported US Treasury bond auction earlier today, this one for the 10 year benchmark bond. The median yield rise to 2.95%, up from 2.85% at the previous equivalent event a month ago.

In China, parts of Shanghai are back in strict lockdown as pandemic cases are recorded.

Taiwanese exports grew less in May than in April, but at about what was expected. Their trade surplus was marginally smaller too as imports rose faster.

The Reserve Bank of India raised its key repo rate by +50 bps to 4.9% during its June meeting, after May's surprise +40 bps off-cycle hike. Yesterday's rise was more than the repeat +40 bps markets had expected. These moves up are to battle "steep" inflationary pressures, running now at 7.8% and rising.

Russia said its inflation rate in May was 17.1%, marginally less than for April. Turkey reported a May inflation rate of +73%, another rise.

In Australia, their Treasury Secretary said in a post-election speech said spending pressures from social programs that were freely promised in the election campaign need to be controlled to manage the inflation risks they pose. And he called for a major crackdown on tax breaks worth billions of dollars for both wealthy individuals and companies. He said 'growth' will not be enough on its own to tackle their AUS$1 tln debt levels or build back buffers for the next economic downturn.

The OECD has a positive view of Australia's economy and prospects, but it says tax reform to reduce their heavy reliance on taxation of personal incomes would help decrease the vulnerability of public finances to an ageing population.

But the war in Ukraine has made the global growth outlook far bleaker even though the world should avoid a bout of 1970s-style stagflation, the OECD said, mirroring the World Bank. It slashed its growth forecasts and jacked up its inflation estimates. About New Zealand, they said growth here will ease to +3% this year and +2% next year, both results regarded by them as 'solid'. Inflation will decline in 2023 but remain high they report, as firms pass on global commodity price inflation and workers demand higher wages.

Demand and capacity for air cargo fell in April. It was down about -10% year-on-year and is lower still that the equivalent 2019 comparison. The retreat in the Asia/Pacific region is greater,

The UST 10yr yield will start today up +6 bps at 3.02%. 

The price of gold is up +US$2 today from this time yesterday, now at US$1854/oz.

And oil prices are up +US$3.50/bbl from this time yesterday, now just under US$121/bbl in the US, while the international Brent price is now just under US$123/bbl.

The Kiwi dollar will open today lower at just on 64.5 USc. Against the Australian dollar we are marginally lower at 89.6 AUc, again our lowest against the Aussie dollar in nearly four years. Against the euro we are also lower at 60.2 euro cents. That all means our TWI-5 starts today at just under 71.5 and held up by strength against the yen and the English pound.

The bitcoin price has risen by +1.5% and is now at US$30,360. Volatility over the past 24 hours has been moderate at +/- 2.8%. 

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.