Economy Watch

New Zealand's nascent private credit industry could account for up to 5% of business lending to operating companies over time, suggests Aotea Asset Management (AAM) executive director Will Carnachan.

AAM, which launched three years ago, is a corporate debt fund manager organising wholesale investorsto contribute to direct secured loans to businesses. Private credit, a form of shadow banking, has made headlines in the US, Europe and Australia over the past couple of years. The International Monetary Fund estimates the fast growing "opaque" and " highly interconnected" private credit market topped US$2.1 trillion globally last year, and over time "could become a systemic risk for the broader financial system."

In a new episode of interest.co.nz's Of Interest podcast, Carnachan says in NZ the largely unregulated private credit industry's probably a decade behind where it's at in larger economies, including Australia's.

"I don't necessarily think this industry will, or should, become heavily regulated over time because a big part of the driver here is to move risk away from deposit taking institutions which carry systemic risk. But it is really important, I think, for the longevity of the industry that managers are being really transparent around how they're conducting themselves, how they're valuing their assets," Carnachan says.

"There is huge potential for this industry to grow...If you look at that business lending segment in New Zealand, it's roughly $120 billion, a lot of that's property linked. If you say half of that relates to operating companies, $60 billion, I think realistically where private credit investors like ourselves could come in to help manage some of the risk it's really between 2% to 5% of that over time. A relatively small chunk of the market, but will create options for those great kiwi businesses that are looking to grow, looking to expand, looking to acquire."

In the podcast Carnachan talks about who the private credit investors and borrowers are, the interest rates they earn and pay, how the floating rate loans are priced, loan covenants and syndications involved, the fees AAM charges, the impact of high interest rates and falling interest rates on private credit, where the sub-investment grade borrowers rank in S&P Global Ratings' methodology, how AAM's portfolio currently has no credit loss issues or impairment issues, and more.

"In terms of the return profile that we offer, we're a floating rate product, so we provide a spread or a margin above. We use the Official Cash Rate as the benchmark because it's well understood. So what that means is we are an inflation hedge because as inflation rises or falls, typically market rates move commensurately. But we can always lock in an attractive margin over that benchmark rate," says Carnachan.

"And I think it's important to understand in terms of that marginal credit spread, we do a lot of work around ensuring that that is driving really good risk adjusted returns for our investors, and also taking into account the fact that these underlying investments are relatively illiquid. So it's not a product that you can trade in and out of. It's a hold to maturity product."

"We are effectively a fixed income product that provides, we think, a really attractive diversifier away from bonds and yield stocks."

*You can find all episodes of the Of Interest podcast here.

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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 American data is improving in a steady way without deficit or labour market stresses, so conditions seem right for monetary policy 'normalisation' to be completed.

First, American mortgage applications rose an unusual +3.9% last week from a week ago to be -14% lower than the same week a year ago. Pushing things along was a drop of the benchmark mortgage interest rate to under 6.9% from just over 7%.

Meanwhile, US housing starts rose more than expected in June (from May) to be -4.4% lower than year ago levels. But this is still a lowish level. Completions in June were unusually strong, adding more availability.

And American industrial production beat estimates too, rising +1.6% from a year ago, the biggest gain since November 2022.

The US Fed's Beige Book surveys paints a picture of a modest expansion with some uneven variations across the Fed Districts. It also confirms cooling inflation - but little labour market stress yet.

There was a well-supported but relatively small US Treasury 20yr bond auction earlier today and that delivered a median yield of 4.41%. That is very little different to the 4.40% median yield at the prior equivalent event a month ago. Because US deficits are actually shrinking, and quite fast, the pressure is off this fundraising.

More Fed officials are signaling that they are moving closer to a rate cut, and markets are starting to price that in. They seem to have beaten inflation without crashing their labour market. 'Normalisation' can proceed now, it seems.

In Japan, the Reuters/Tankan sentiment index for the factory sector jumped to +11 points in July from +6 in June. It was the first rise in 4 months. Meanwhile, the index for the service sector cooled, reflecting a patchy economic outlook. The latest survey comes two weeks before the Bank of Japan’s July policy meeting where it could raise interest rates again and announce its bond purchase tapering plans. 

In China, which dominates the global rare-earth minerals processing industry with its state-owned enterprises, it is finding it hard-trading as prices sink sharply and losses pile up.

We should also note that China's rebar steel prices have slumped to 2017 levels, now just over half the level they were at the peak in 2021.

And the World Trade Organisation says China is backsliding on key reforms and lacks transparency on subsidies. (Para 23, page 12.) They say China's secret subsidies could top US$900 bln.

Homebuilding is at a low ebb in Australia - but the March results released yesterday suggest it picked up in Q1.

The UST 10yr yield is now at 4.14% and down -3 bps from yesterday. 

The price of gold will start today down -US$9 from yesterday at US$2453/oz and now off its all-time record high.

Oil prices are up +US$1 at just on US$81.50/bbl in the US while the international Brent price is just under US$84.50/bbl.

The Kiwi dollar starts today recovered somewhat at 60.7 USc and and up +¼c. Against the Aussie we are up +½c at 90.3 AUc. Against the euro we are unchanged at 55.5 euro cents. That all means our TWI-5 starts today at 69.4 and up +10 bps from this time yesterday.

The bitcoin price starts today at US$64,350 and virtually unchanged (-0.1%) from this time yesterday. Volatility over the past 24 hours has been modest at just on +/- 1.7%.

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.

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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 IMF seems the global economy in a "sticky spot".

But first up today we can report that the overnight dairy auction defied recent trends and the futures market. Instead of another retreat, in fact it held, virtually unchanged (+0.4). But the two key powders did decline, just not as much as expected. SMP was down -1.1% (less than the -2% expected) and WMP was down -1.6% (much less than the -6% expected). The event was rescued by the +6.2% rise in Cheddar cheese and to a lesser extent the +0.8% rise in the butter price. The small +0.4% gain in USD was enhanced to +0.8% in NZD.

Now all eyes will turn to the New Zealand consumers’ price index for the June quarter, which will be released at 10:45am today. Check back then because we will have full coverage of data that could well be market-moving.

Overnight, American retail sales rose +2.3% in June from a year ago, not quite enough for this to be a 'real' gain, but closer than recently. There was no change between May and June, because car sales took a breather.

So far in 2024, American car repossessions are up +23% compared with the same period last year, according to data from Cox Automotive. That comes after a long low period however, but they are up +14% from pre-pandemic levels.

And last week, retail sales as measured by the Redbook Index for physical stores rose much less than recently, although the year-on-year gain was still an impressive +4.8%. But is was the weakest gain since late March.

Slowing American retail sales growth its putting upward pressure in business inventories, although again, this is relatively minor in the grand scheme of things. In May they were +1.7% higher than a year ago, but related to current sales levels they are unchanged.

In Canada, CPI inflation for June was released overnight and it eased to 2.7% from 2.9% in the prior month. This wasn't expected because markets ad assumed it would remain at the 2.9% mark. The Canadians have already started their easing cycle in their policy interest rate, even though they target a 2% midpoint in a 1-3% range.

Perhaps the 'early start' is needed because they had a rather sharp drop in new housing starts in June, down by more than -20,000 or -9% from May. Vancouver fell -13%, due to sharp falls in multi-unit starts; Toronto crashed -37% for the same reason.

The IMF expects the global economy to grow 3.2% in 2024, the same as in the April outlook but the 2025 growth forecast was revised higher by 0.1 percentage point to 3.3%. For 2024, they revised their forecasts for the US down to 2.6% (vs 2.7%), reflecting the slower-than-expected start to the year. In Europe, growth for the Euro Area is seen higher (0.9% vs 0.8%). In Asia, growth forecasts were also revised higher for both China (5% vs 4.6%) and India (7% vs 6.8%) while the Japanese GDP in seen expanding at a slower pace (0.7% vs 0.9%). For Australia, they marginally lowered their 2024 estimate -0.1% but left 2025 unchanged. New Zealand did not get a mention in this report. Meanwhile, they warned that services inflation is holding up progress on disinflation, which is complicating monetary policy normalisation.

The UST 10yr yield is now at 4.17% and down -5 bps from yesterday. 

The price of gold will start today up +US$42 from yesterday at US$2464/oz and that is an all-time record high.

Oil prices are down -US$1 at just on US$80.50/bbl in the US while the international Brent price is just over US$83.50/bbl.

The Kiwi dollar starts today sharply lower at 60.4 USc and down nearly another -½c. Against the Aussie we are down at 89.8 AUc. Against the euro we are down at 55.5 euro cents. That all means our TWI-5 starts today at 69.3 and down -30 bps from this time yesterday.

The bitcoin price starts today at US$64,426 and up +1.8% from this time yesterday. Volatility over the past 24 hours has been moderate at just on +/- 2.2%.

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.

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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 of the unavoidable reporting of a Chinese economic stumble.

But first up today, we should note that Fed boss Powell was speaking and said the three American inflation readings in the June quarter do "add somewhat to confidence" that the pace of price increases is returning to the Fed's target in a sustainable fashion. They were remarks that suggest interest rate cuts may not be far off for them.

In their real economy, the NY Empire State survey of factories wasn't particularly positive, although to be fair it was little-changed in June. And expectations in this survey continue to be quite positive however.

Indian goods exports in June were little-changed from a year ago at a modest US$35 bln, up +2.6% from the same month in 2023. Services exports rose +8.9% however. Services exports are at about the same value as for goods, in India.

China's economy faltered in Q2-2024, keeping alive expectations Beijing will need to unleash even more stimulus.

Despite expectations that CCP discipline would press China's Q2 GDP result to the party's target, in fact they published a much lower than expected growth result. The Chinese economy expanded +4.7% in Q2 from the same period in Q3, missing market forecasts of +5.1% and slowing from a +5.3% growth in Q1. It was the weakest yearly advance since Q1-2023, and comes amid their persistent property downturn, weak domestic demand, a falling yuan, and trade frictions with the West. Irt also comes on the opening days of the CCP "Third Plenum", a huge set piece of Chinese policy making. Real reform is not anticipated however.

Underscoring the real estate industry problems, China said new dwelling sales were -25% lower in June than a year ago. New house prices in 70 cities declined by -4.5% year-on-year in June, after a -3.9% equivalent fall in the previous month. It was the 12th straight month of retreat and the fastest pace since June 2015. Only one of those 70 cities recorded a year-on-year rise. None recorded rises for second hand home sales. Some cities are now recording -12% sales price falls.

China also said June retail sales were up +2.0% from the same month a year ago, up +3.0% in you exclude car sales. At least this is better than inflation, so it records 'real' gains.

And China reported that electricity production rose +2.3% in June from year-ago levels. It is crude, but this may be a better indicator of 'growth' than the official GDP data. Still, they claim industrial production rose +5.3% in June on the same basis. It seems unlikely unless they are making impressively large energy efficiency gains nationwide. (Maybe readers know how to reconcile these various data claims better than us? Please clarify for all in the comment section below.)

The EU reported May industrial production levels in May, and those fell -2.5% from the same month a year ago, down -2.9% in the Euro Area..

And perhaps we should note that the electrification of the world will require more copper than can be produced, according to a recent study. EV demand to meet 100% net zero by 2050 would need that. But if instead vehicle demand shifted to hybrids, there may be enough copper to achieve the goal.

In Australia, all eyes seem to be on how a major union, the CFMEU, turned itself into a bikie gang complete with standover tactics. This isn't 'news' as such, just that it is now in public discussion in efforts to clean out their leadership and culture.

The UST 10yr yield is now at 4.22% and up +3 bps from yesterday. 

The price of gold will start today up +US$12 from yesterday at US$2422/oz.

Oil prices are down -50 USc at just on US$81.50/bbl in the US while the international Brent price is just under US$84.50/bbl.

The Kiwi dollar starts today sharply lower at 60.8 USc and down nearly -½c. Against the Aussie we are down at 90 AUc. Against the euro we are down at 55.8 euro cents. That all means our TWI-5 starts today at 69.5 and down -40 bps from this time yesterday.

The bitcoin price starts today at US$63,314 and up +5.4% from this time yesterday. Volatility over the past 24 hours has been high at just on +/- 3.2%.

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.

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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 other than the crazy American political campaign which just seems to feed conspiracy narratives. We will ignore that and just concentrate on the data.

This coming week, all eyes will be on the New Zealand CPI rate for Q2-2024 which will be released on Wednesday. Preview here. Japan, Canada and the UK will all also release June CPI data. Later today we will get the China GDP result for Q2 and it is likely to confirm to the CCP designated targets. But of more interest will be their retail sales, industrial production, and electricity production data. We will also get Australia's June labour force data this week. And from the US it will be retail sales, housing starts, and industrial production. Also, Wall Street will get to see the second week of their Q2 earnings season. The first week was very positive.

Over the weekend, China reported new yuan data for June and it wasn't especially strong. Chinese banks extended +¥2.1 tln in new yuan loans in June, a sharp contraction from the +¥3.1 tln in June the previous year, and slightly below market expectations of ¥2.2 tln. The slip aligned with the sharp slowdown in outstanding loan growth, dropping to +8.1% in June from +9.3% in the previous month, to mark the smallest amount of loan growth since data started being recorded in 1998. A year ago it grew at +11.3%. Total 'social financing' in June was -22% less that the same month a year ago.

China's exports were expected to rise +8% in June ahead of new American tariffs. But they actually rose +8.6% to a 15 month high. Their imports fell -2.3% however when a +2.8% rise was expected. That divergence meant they reported another big surplus - which will undoubtedly spread the fear of Chinese dumping from its over-capacity situation.

They reported they imported almost -16% less from New Zealand in June than in the same month a year ago. They exported +2.4% more to us. For Australia, imports were down -5.2% and exports down -4.9%. For the US, their imports from them were down -4.9% and exports to them up +1.5%. Overall trading with China is pretty muted now. The only destinations that China has good exports to were Brazil, Vietnam, Indonesia, and surprisingly Taiwan. Everyone else - Russia included - is very ho-hum. And total trade (imports and exports) is only healthy with Vietnam, Malaysia, and Brazil.

Japanese industrial production rose +3.6% in May from the prior month to be up +1.1% from a year ago, solidifying the evidence of an improving Japanese economy. No doubt the recent lower yen has helped, especially at the pressure from energy prices has waned substantially.

India's inflation rate rose to 5.1% in June. up a rather startling +1.3 in June alone. From a year ago, food prices were up +9.4% however within that. This rise was not expected, although their central bank is not expected to react to it because they have given themselves a very generous 2% to 6% target range for inflation. But they are now well above the 4% midpoint and the froth developing in their breakneck economic expansion will need to be dealt with soon.

Industrial output in India rose +5.9% in May from a year ago, well above market expectations of a +4.9% gain and marking the highest growth rate since October 2023. Manufacturing which accounts for nearly 80% of total industrial production, expanded by +4.6% with surged growth noted in the pharmaceutical sector (+7.5%), basic metals (+7.8%), mining (+6.6%) and electricity (+13.7%).

American producer prices rose +2.6% in June from a year ago (+0.3% for the month), the most since March 2023, and rising from an upwardly revised 2.4% rate in May. Markets had expected a rise of 2.3%. Under the hood, inflation pressures still lurk but remain at a much more manageable level.

But despite all the vastly improved economic signals, American consumer sentiment still lags. According to the widely-watched University of Michigan survey, it fell for a fourth straight month in July to its lowest since November. Nearly half of consumers are still concerned about high prices and economic uncertainty persisting as their upcoming election looms.

In Australia, the number of permanent arrivals in the country is now almost at a new record high in a very sharp rebound. +12,680 people arrived in the country in May, taking the annual level to +161,000. The record high permanent arrival level was +163,400 in February 2009.

The UST 10yr yield is now at 4.19% and unchanged from Saturday. A week ago it was at 4.28% so a -9 bps net fall since then. 

The S&P futures, which actively trade through the weekend, suggest Wall Street will open tomorrow with a +0.9% gain.

The price of gold will start today down -US$4 from Saturday at US$2410/oz. So far, no safe haven rush.

Oil prices are still at just under US$81.50/bbl in the US while the international Brent price is still at just on US$84.50/bbl. A week ago these prices were US$83/bbl and US$86.50/bbl respectively. Earlier today, Kuwait said it has discovered very large new oil reserves in a marine environment and it plans production "as soon as possible".

The Kiwi dollar starts today still at 61.2 USc and back nearer the week-ago level of 61.4 USc. Against the Aussie we are still at 90.2 AUc. Against the euro we are still at 56.1 euro cents. That all means our TWI-5 starts today at 69.9 but down from the 70.6 of a week ago.

The bitcoin price starts today at US$60,044 and up +2.6% from this time Saturday. Volatility over the past 24 hours has been moderate at just on +/- 2.6%.

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.

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The Reserve Bank surprised the market on Wednesday by dropping hints it was open to cutting rates sooner than planned, due to signs the economy was getting too weak.

While the tone shift was unexpected, the central bank was reacting to the same data which had caused ASB’s economics team to change their own interest rate forecast the week prior.

Nick Tuffley, the retail bank’s chief economist, said economic data was sending very different signals in July than it had been prior to the RBNZ’s meeting in May.

Monetary policymakers had then been facing consecutive inflation data releases which showed domestic pressure tracking well above forecasts, he said. 

“When we roll forward to where we are now, it's just clear that the economy is performing weaker than what they had been anticipating [in May]. We are now forecasting another mild double dip recession; that may not occur but it just highlights how weak things look”. 

The RBNZ had been forecasting slight economic growth from here, picking up momentum in each subsequent quarter, but fresh forecasts look like there will be further contractions. 

Tuffley told the Of Interest podcast that the Monetary Policy Committee would have been looking at new forecasts, even though they don’t get released to the public.

“When the Reserve Bank does these monetary policy reviews, it will have re-cranked its forecasts again and will be working on an updated view,” he said. 

“Undoubtedly, what that view is showing is that GDP is going to be much weaker over the course of this year than they anticipated”. 

This would likely mean higher unemployment, slower wage growth, and disinflation happening faster than forecast as well. Tuffley expects annual inflation was 3.3% in June.

“The other thing we are mindful of is that [monetary policy] is like an oil tanker going at full speed, when you put it in reverse you don’t see much impact on momentum for a while”.

For a long time, the Reserve Bank has been most worried about cutting rates too soon and leaving the embers of inflation smoldering, ready to bust back into flames.

Now the central bank was becoming very confident inflation was coming under control and was shifting focus to the risk that interest rates are damaging the economy unnecessarily.

Since the Coalition Government removed RBNZ’s employment mandate, the policymakers are nominally not required to consider economic damage in their decisions. 

However, inflation may drop below 2% if they allow the economy to become too weak and the committee is tasked with avoiding “unnecessary volatility” in output and employment.

Tuffley expects the Official Cash Rate to be cut in November, while the RBNZ most recently suggested it was planning to hold off until next August — although that is likely to change.

Bond traders and other financial market participants have priced in a decent change of a rate cut at the RBNZ’s next meeting this August, and possibly a 50 basis point cut in November. 

Tuffley said this sort of gap between the central bank and the market was fairly common.

“Markets tend to forecast rate cuts tomorrow, whilst the Reserve Bank might be looking at next year, and often you end up meeting a bit in the middle,” he said.

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New Zealand exporters to the United States might be at greater risk of being disrupted than those exporting to China, according to one trade expert.

Despite talk about the need to diversify away from China due to geopolitical differences, it may be the United States that hits Kiwi businesses with tariffs intended to shut them out.

Stephen Jacobi, the executive director of the NZ International Business Forum, said a second Trump presidency was a “sword of Damocles hanging over the global economy”. 

Speaking on the Of Interest podcast, Jacobi said the 45th president had imposed “enormous tariffs” during his first term and plans to go further if elected for a second time in November.

“This time, the big thing is the 10% tariff he keeps talking about. If a 10% tariff was imposed on New Zealand exports to the United States across the board, a lot of trade would be killed off,” he said. 

As part of his election campaign, Donald Trump has proposed a 10% tariff on all imports and a 60% tariff on imports from China. This would go much further than what he did after 2016. 

Earlier tariffs of between 10% and 15% were applied to a specific list of goods, which were largely targeted at China but also included various other countries. 

New Zealand was subjected to a 15% tariff on steel and aluminium, for example. This was bad enough, but a blanket tariff would hit much more important exports such as beef and dairy. 

Jacobi said these sectors already faced strong competition from local US producers and there was also a risk that some international competitors might be able to dodge the tariff. 

For example, Australia was exempted from the steel and aluminium tariffs because it had a free trade agreement with the United States — which NZ does not have.

“Go figure. This is the country that won't give us a trade agreement,” Jacobi said. 

“I spent 10 years of my life trying to argue for an FTA with the United States and thought we had it in TPP, only to see them leave when President Trump got elected”.

It was this lack of guaranteed market access that makes the United States look like a riskier bet than China, where NZ does have a free trade agreement.

“Look, it's not always easy doing business with China, let's face it. But they have opened the market to us and it has transformed our economy”.

Chinese consumers were often the only ones who wanted to buy Kiwi products at the volumes and prices businesses require, he said. 

Jacobi said he was not supportive of efforts to shift trade away from China, or join the AUKUS security agreement — which was clearly directed at China.

“Well, the risk [of disruption] is greater from the United States, potentially with a change of government”.

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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 inflation's pressures seem to be cooling in all the world's major economies.

But first, in seasonally-adjusted terms, the number of people claiming American unemployment benefits fell last week by -17,000 from the prior week and a 5-week low, and below market expectations of 236,000. In actual terms, there was little-change. Either way, the levels are low and not indicating impending labour market stress.

The all-important American consumer inflation rate fell to 3.0% in June, and lower that the expected 3.1%. Their core inflation rate fell too. Food costs rose just 2.2% and energy costs just 1.0%. Petrol prices actually fell -2.5%. Keeping it up were airfares (+9.4%) and rent (+5.2%).

Clearly the conditions for a US Fed rate cut are getting closer. Financial markets however displayed mixed and muted reactions after the release. Bond yields fell, and the USD had a small move lower. And Equity markets decided they might have over-priced future rate cut effects so pulled back from its record-high pricing.

The UST 30yr bond auction today was reasonably well supported at a median yield of 4.33%. This is very similar to the 4.35% at the equally well-supported prior equivalent event of a month ago.

The US Federal government had a monthly deficit of -US$66 bln in June, which takes its full deficit to -$1.57 tln for the past twelve months. That makes it now equivalent to -5.5% of GDP. As large as these levels seem, they record a remarkable improvement. At the end of the Trump term, the annual deficit was running at US$2.7 tln or -9.3% of their GDP. They have clearly made progress cleaning up some of their mess. But overall levels of Federal debt to third parties is still growing, although no longer as fast as economic activity.

In Japan, machinery orders fell in May from April when a small rise was anticipated. Japan's core machinery orders, which exclude those for ships and electric power companies, fell -3.2% month-on-month. This also missed market expectations for a +0.8% gain. The decrease in capital spending was driven by a sharp decline in the non-manufacturing sector, although machinery orders from manufacturers rose +1% from April to be +10.8% higher than year-ago levels. Orders including the big lumpy items rose sharply, however.

By the way, the very weak Japanese yen recovered somewhat (+2%) after the June US CPI data was released. Markets think the Bank of Japan intervened to generate the rally.

Meanwhile, Germany said its CPI inflation rate fell to 2.2% in June

Australian consumer inflation expectations barely edged lower to 4.3% in July from 4.4% in June. This is no progress because they averaged less than 4% from 2012 to 2019. They seem stuck at over 4%, well above the RBA's target range.

And staying in Australia, mining giant BHP is mothballing its Western Australia nickel mines, including the country's only smelter for the key battery metal. They said the move was due to a global oversupply that has crashed nickel prices over the past year. The glut has been driven by a surge in production from Indonesia, where many operations are bankrolled by Chinese investors. Thousands of Aussie jobs are at risk.

Global container freight rates may be reaching their peak. They rose just +1% last week from the prior week, staying in the stratosphere. But at least the impetus seems to have stopped. But when will they fall back to reasonable levels? Canal pressures are the key to that. Bulk cargo freight rates eased slightly.

The UST 10yr yield is now at 4.19% and down -9 bps from yesterday. 

The price of gold will start today up +US$41 from yesterday at US$2413/oz. The last, and only, time it was over US$2400 was in mid-May. It record high is US$2,450/oz.

Oil prices are still at just under US$81.50/bbl in the US while the international Brent price is up +50 USc at just on US$85/bbl.

The Kiwi dollar starts today little-changed from yesterday and now at 60.9 USc. Against the Aussie we are still at 90.2 AUc. Against the euro we are marginally lower at 56.1 euro cents. That all means our TWI-5 starts today down -10 bps at 69.8.

The bitcoin price starts today at US$57,888 and again, virtually unchanged from this time yesterday (+0.3%). Volatility over the past 24 hours has stayed modest at just under +/- 2.0%.

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 on Monday.

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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 global trade distortions seem to be growing.

But first, after three weeks of gains (some quite minor though), last week US mortgage application levels fell again, and are now down -13% lower than the same weak week a year ago. The push back up of benchmark mortgage rates - above 7% - is an effective barrier for many potential house buyers there.

Another well supported UST 10yr bond auction brought a median yield of 4.22% and sharply lower than the 4.37% at the prior equivalent event a month ago.

In the Wall Street equity markets, both the S&P500 and the Nasdaq hit new all-time record highs today. Ditto Tokyo. All this comes ahead of tomorrow's US CPI data for June when a 3.1% rate is anticipated.

Meanwhile in Hong Kong, equity markets are going the other way. They peaked in 2018 and it has been downhill from there since. It's gloss has certainly faded the closer it is tied to the PRC. And Shanghai's peaks were back in 2007 and 2015. Neither are places to find equity gains recently.

In China, their CPI inflation is still positive, just. It came in at 0.2% from a year ago in June. Analysts had expected it to rise +0.4% from the April and may rates of +0.3%. Beef prices are still falling hard, now down -13% from a year ago. Lamb prices are down -7% on the same basis. Milk prices are down -1.8%.

China's producer prices are still deflating, down -0.8% in June from a year ago. That was as expected and less than the -1.4% annual rate in June.

'Ordinary' demand and the coming on-stream of new supply, especially from Chinese-owned mines in West Africa, has the prospects for the iron ore price to slip below US$100/tonne soon. There are implications for Australia here although their high-grade product and shorter shipping distance are advantages that won't go away.

Tomorrow we will get China's export data for June, expected to be strong in advance of new American tariffs. But Chinese over-capacity is causing a spreading backlash and countries from Mexico, Brazil, Chile, and the EU are racing to protect themselves from the dumping flood. And now Southeast Asian nations like Indonesia, Thailand, Vietnam and South Korea are also weighing restrictions on Chinese exports. But some countries are so closely tied to China's orbit that it will be hard to resist China's pushback. This is a trade pressure that just won't go away and may reshape the global trade landscape - again.

Stubbornly high freight rates, partly in response to the over-capacity/export imbalances, aren't helping either. De-risking has a long way to go, it seems.

The UST 10yr yield is now at 4.28% and down -2 bps from yesterday. 

The price of gold will start today up +US$21 from yesterday at US$2372/oz.

Oil prices are +50 USc firmer at just under US$81.50/bbl in the US while the international Brent price is little-changed at just on US$84.50/bbl.

The Kiwi dollar starts today -40 bps lower than this time yesterday and now at 60.8 USc after the RBNZ MPR. This takes it back to the level we had at the start of the month. Against the Aussie we are fallen almost -¾c to 90.2 AUc. Against the euro we are down -½c at 56.2 euro cents. That all means our TWI-5 starts today down -60 bps at 69.9.

The bitcoin price starts today at US$57,692 and virtually unchanged from this time yesterday. Volatility over the past 24 hours has stayed modest at just on +/- 1.8%.

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.

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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 US Fed is setting the scene for rate cuts down the track. When remains uncertain but financial markets have priced one in fully by November. The next big piece of relevant US data is Friday's CPI release.

But first up today, even though futures markets indicated WMP would hold in this week's GDP Pulse event but there would be downside risk to SMP, in fact both fell. In the event, WMP slipped -1.2% from last week's full auction, and SMP fell -1.4%. That puts both back to late April levels. The lack of gains might worry some of the analysts who forecast next season' farmgate payout levels.

American retail sales are rising faster now. The weekly Redbook report on sales activity at physical stores was up an impressive +6.3% from the same week a year ago. Obviously that is a way faster rise than inflation. We haven't seen a surge since more than that since the end of 2022 when the base was very weak.

And that is reflected in SME business attitudes. The NFIB Small Business Optimism Index rose in June to its highest level of the year, although to be fair it is only back to 2023 levels again, and in a longer context current levels are not high.

In his semi-annual monetary policy report to Congress, Fed boss Powell told the Senate Banking committee that the central bank does not expect it will be appropriate to reduce interest rates until it has gained greater confidence that inflation is moving sustainably toward 2%. He said data in the first quarter did not support a rate cut. But he did note that the more recent inflation readings have shown some modest progress. He said reducing policy restraint too late or too little could unduly weaken economic activity and employment while doing it too soon or too much could stall or even reverse inflation progress to date. His core message was however that the US economy is no longer overheated.

Today's UST 3yr bond auction was very well supported again, delivering a median yield of 4.35%. That compares with the prior equivalent event a month ago at 4.59%.

Taiwan reported surging exports overnight, up more than +23% from the same month a year ago. It was their strongest growth in export demand since 2022, on the back of technology products. Analysts had expected an +11% rise which itself would have been strong. Twice that is something special.

China might also be about to report a surge in exports, but that will be more about trying to get ahead of new American tariffs - after which a shadow will follow.

In China, giant property developer Vanke warned that its losses grew sharply in Q2-2024, saying that investment in some projects “has been over-optimistic.”

In Australia, the Westpac-Melbourne Institute Consumer Sentiment survey index fell in July from June. That leaves it broadly in line with the very low levels that started in July 2022. Pre-pandemic these levels were generally +20% higher. So far their 'stage 3' tax cuts have done little to improve sentiment. The biggest declines were among middle income earners, Victorians, and hospitality and construction workers. About 60% of those surveyed now expect the RBA to raise its policy rate, a big rise from 41% expecting that in the June survey.

According to the widely-watched NAB business sentiment survey, business conditions ease further in June, but business confidence bounced up. It is surprising that business confident is now back into positive territory and at its highest level since early 2023 when conditions continue to deteriorate. What business owners see to justify that is uncertain but to be fair the rise is hardly out of the margin for error.

India is about to overtake China as the top driver of global food demand over the next decade, according to recent estimates from the FAO. Southeast Asian nations are on the rise too. The fading of China, due in part to demographic shifts and an about-to-fall population, is a key global trend.

Global food prices were low and stable in June, and lower than any of the past three years. Given inflation over that period, the real cost of food is back to levels it first reached in 2007. For meat it is back to levels first reached ten years ago; for dairy back to levels first reached in 2010. Food prices are no longer a global stress point. By just about any measure, farmers should be paid more.

The UST 10yr yield is now at 4.30% and up +3 bps from yesterday. 

The price of gold will start today up a minor +US$5 from yesterday at US$2351/oz.

Oil prices are -US$1 lower at just under US$81/bbl in the US while the international Brent price is down at just on US$84.50/bbl.

The Kiwi dollar starts today -10 bps softer from yesterday and now at 61.2 USc. Against the Aussie we are slipped to 90.9 AUc. Against the euro we are holding at 56.7 euro cents. That all means our TWI-5 starts today just under 70.5 and little-changed overall.

The bitcoin price starts today at US$57,435 and up +2.4% from this time yesterday. Volatility over the past 24 hours has been modest at just on +/- 1.8%.

Join us at 2pm later today for the RBNZ's Monetary Policy review. No change is expected but a tone change could move markets. We will have full coverage.

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