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.

And today we lead with news the global economic slowdown is coming but it might not be like every other slowdown.

There is more evidence that the giant American economy isn't expanding as fast as previously. First, the National Activity Index released by the Chicago Fed delivered a weakish result for June when it saw "little economic growth".

And the internationally-benchmarked Markit flash PMI for the US reported a more modest expansion in July. Their service sector is still in a modest expansion, and the factory sector's contraction is now only very minor, which is an improvement for manufacturing but a slowdown for the service sector.

However a strong majority of business economists now say the odds of the US entering a recession in the next 12 months are 50% or less, according to a new survey that was taken in the first half of this month.

How does all this square with the steep inversions in bond yields? More professional economists are explaining that the yield curve actually signals the slowdown in inflation that typically accompanies a recession, but not the actual recession itself. Without a weak labour market they may not actually get the 'usual recession'.

It still may come of course. One indicator is that there has been a flurry of junk-bond credit rating downgrades recently. They reached a three year high of 120 in the June quarter (since the pandemic). Risky debt is getting riskier and it is a US$1.4 tln market overall.

In Japan, their Markit PMI recorded a good expansion. Activity at Japanese private sector firms increased for the seventh successive month. Key was a sustained and solid improvement at Japanese service providers, while manufacturers noted a slightly softer downturn at the start of the third quarter and the survey found that new order growth slowed rather sharply.

Singapore's CPI inflation fell from 5.1% in May from a year ago to 4.5% in June. But the May to June rate was uncomfortably high for them.

Taiwanese retail sales continue to hold up strongly, expanding far faster than inflation. But the same is not the case for their industrial production which remains on a sharply shrinking track.

In Europe, their flash PMI signaled a steeper downturn and cooling price pressures at start of the third quarter. They have slipped back to where they were a year ago. France reported an especially steep downturn, and Germany slipped into a contraction in the month.

In Australia, business activity in their private sector fell for the first time in four months during July according to the Markit PMI. This retreat was due to a renewed contraction in their service sector as interest rate rises hit customer confidence and budgets. More positively, manufacturing output ticked higher and actually recorded only a tiny contraction.

The UST 10yr yield will start today at 3.86% and up +2 bps from this time yesterday. 

The price of gold will start today at US$1959/oz and down a mere -US$2 from yesterday.

And oil prices are up +US$1.50 at just over US$78.50/bbl in the US. The international Brent price is now at US$82.50/bbl.

The Kiwi dollar starts today up +¼c at just on 62 USc. Against the Aussie we are slightly firmer at 91.9 AUc. Against the euro we are up +½c at 56 euro cents. That all means the TWI-5 has risen to 69.8 and is up +30 bps from this time yesterday.

The bitcoin price has fallen a lot since this time yesterday. It is down -3.5% and now is at US$29,046. Volatility over the past 24 hours has been moderate at just over +/- 2.5%.

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.

Kia ora,

Welcome to Monday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the international edition from Interest.co.nz.

And today we lead with news China is starting to roll out more industry support to bolster its flagging economy.

But first, this coming week will be a busy one. And it will be dominated by the US Fed rate decision on Thursday (NZT). Analysts expect a +25 bps rise to 5.50%.

The Americans will also release their first estimate of Q2 GDP growth, and there will be more earnings results for more large companies. Other important releases to watch out for include the US PCE price index, durable goods orders, and many PMI survey results for July.

Both the ECB and the Bank of Japan will also review their benchmark rates and we will get Q2 inflation rates for Germany, France, Spain, and Australia.

Over the weekend data showed that Canadian retail sales stalled in June following a small rise in May. Things would have been worse if it wasn't for strong new car buying.

In China, their economic weakness is spreading and now coming out in corporate earnings. Listed companies, especially in industrial sectors, have issued profit warnings for the first half of the year, raising questions about the government's optimistic depiction of the economy. Analysts say almost a third of mainland-listed companies have released first half earnings previews, with less than half making positive announcements. Basically there is no 'recovery', or if there is one, it is weak. Beijing is clearly rattled.

Beijing outlined a ten-step program to support their car-making industry, emphasising electric vehicles. A lot of it involves local government becoming a big buyer, and extending EV infrastructure into the countryside.

In Japan, inflation continues to run above their central bank's 2% target. It edged up to 3.3% in June from 3.2% in May but less than market forecasts of 3.5%. Core inflation also ticked higher to 3.3% in June from 3.2% in May. It has been higher than 2% for 15 straight months now. Note that Japan's 3.3% CPI rate is higher than the US's 3.0%. That is a generational rarity.

In other media, a lot has been made about the potential 'surging' wheat price after the Russian abandonment of the grain deal with Ukraine and the subsequent missile strikes on port facilities. But it seems like the wheat market is ignoring the chatter, focusing on the rising wheat output in many other countries. Yes the price rose but the recent rises were modest in the perspective of the past year.

In the US, their cattle herd shrank more than expected to the lowest seasonal levels since 2014. That will underpin good prices for beef for the next few years. The decline was -2.7% in this latest survey, more than the -2.3% expected. In an industry are large as that, this is a significant shortfall.

Also shrinking rather fast are asset values for icon office buildings. Bloomberg has a scary story for Korean investors who bet big a while ago in London, Paris and New York. They are facing a disastrous outcome now. And big banks are raising their provisioning for loans for commercial real estate, expecting a wave of defaults.

And in Australia, Jardens are noting that investors are increasingly selling properties to reduce leverage and improve cash flow, as the fastest interest rate tightening cycle in a generation makes it increasingly difficult for them to service multiple loans. The trend is strong enough for analysts to worry that it could reverse the recent rises in prices there.

The Spanish are voting today in snap national elections. It is expected to be close but with the right taking power this time. Voter turnout is reported as low. Early indications are that the swing right isn't as strong as anticipated. But it is early; polls have just closed. Of special interest will be the extent of influence the far-right party (Vox) gains. There has been a shift right in southern Europe in recent elections, from Greece to Italy and now Spain, mostly based on anti-immigrant sentiment. So far, the resulting governments seem to have been more moderate than feared.

The UST 10yr yield will start today at 3.84% and exactly where it was a week ago. 

The price of gold will start today at US$1961/oz and little-changed.

And oil prices are holding at just under US$77/bbl in the US. The international Brent price is now at US$80.50/bbl.

The Kiwi dollar starts today unchanged from Saturday at just under 61.7 USc. But a week ago it was 63.8 USc so the cumulative fall is more than -2c, or a -3.4% devaluation. Against the Aussie we are slightly lower at 91.7 AUc. Against the euro we are down at 55.5 euro cents. That all means the TWI-5 has fallen to 69.5 and is down -150 bps from a week ago.

The bitcoin price is still in in its recent yoyo pattern and now is at US$30,115 and back up +1.1% from this time yesterday. A week ago it was at US$30,316 so a -0.7% slip from then. Volatility over the past 24 hours has been low at just over +/- 0.9%.

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.

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.

And today we lead with news Australia may be facing more rate hikes.

But first, the tight American labour market is still showing its resilience. The number of Americans filing for jobless benefits fell slightly last week to 258,000 when a seasonal rise was anticipated. However the number of people on these benefits rose to 1.89 mln as they are staying on longer now. But these overall levels are very low given their employed workforce is 161.6 mln.

The factory survey in the huge Pennsylvanian rust belt did not improve as expected in July. The Philadelphia Fed Manufacturing Index was little changed and continuing to point to an overall decline in manufacturing activity in the region. New order inflows remained negative.

Existing-home sales dropped -3.3% in June from May to an annual rate of 4.16 mln. Sales were down -18.9% from one year ago.. Sales declined in the South (-5.4% and the West (-5.1%), held steady in the Midwest and rose +2% in the Northeast.

So it will be surprise that a key leading indicator index fell in June. And it wasn't its first fall. The decline was driven by gloomier consumer expectations, weaker new orders, an increased number of initial claims for unemployment, and a reduction in housing construction. This index is pointing out a slowing economy and that it isn't about to pick up.

In China, their central bank left its Loan Prime Rates unchanged after cutting them in June, with the medium-term lending facility used for corporate and household loans still at 3.55%; while the five-year rate, a reference for mortgages still at 4.2%.

Japanese exports rose +1.5% in June, compared with market forecasts of a +2.2% rise after a +0.6% gain in May. This was the 28th straight month of growth in shipments.

Taiwanese export orders sank a whopping - 25% in June from a year ago, coming worse than market expectations of a -20% drop and a -17.6% fall in the previous month. It marked the tenth consecutive month of deteriorating orders as demand continued to decline for all product groups, particularly electronic products.

Although it is still deeply negative, European consumer sentiment continues to improve and did so again in July with a solid gain again.

Meanwhile, German producer prices were little-changed in June from both May and from a year ago. That signals that at the producer level at least, they are getting on top of inflation.

In Turkey, their new leadership of their central bank is moving to unwind the disastrous policies of recent years, raising their policy interest rate by +250 bps to 17.5%. But that was less than the 20% rate markets were expecting. The Turkish lira stabilised at its sharply devalued state in a wait-and-see attitude.

The Australian labour market added +32,600 jobs in June, double the +15,000 expected. +39,300 of those were full time positions, and part-time positions fell -6,700. Their jobless rates stayed unchanged at 3.5%. In NSW their jobless rate fell to a remarkably low 2.9%. (New Zealand releases its June quarter labour market data in two weeks on August 2, 2023. Our jobless rate in March was 3.4%.)

And staying in Australia, their prudential regulator has told it superannuation funds that they must reassess the value of their unlisted assets every quarter. That could be an earthquake for that funds industry as they have AU$650 bln in these illiquid unlisted asset classes, especially commercial property.

Unless inflation falls in Australia, the strong jobs market could well mean another RBA rate hike, and that will compound those super fund valuation miseries.

In global shipping we may be at the bottom for freight rates. Rates for containerised shipping rose slightly last week, a second week that has happened. But rates for bulk cargoes are slipping again although they remain near their long run average (which is actually very low because that average doesn't adjust for inflation).

The UST 10yr yield will start today at 3.85% and up +10 bps from this time yesterday. 

The price of gold will start today at US$1970/oz and down -US$8 from yesterday.

And oil prices are unchanged from this time yesterday at just under US$75.50/bbl in the US. The international Brent price is still just under US$79.50/bbl.

The Kiwi dollar starts today down slightly from yesterday at just under 62.3 USc. Against the Aussie we are lower at 91.9 AUc. Against the euro we are firmish at 56 euro cents. That all means the TWI-5 has slipped -10 bps from yesterday to 69.9.

The bitcoin price is still in in its recent yoyo pattern and now is at US$29,748 and down -1.0% from this time yesterday. Volatility over the past 24 hours has been modest at just over +/- 1.3%.

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

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

Kia ora. I'm David Chaston. And we will do this on Monday.

2023 has become the year of AI. Hype and doomsaying about AI, or artificial intelligence, is hard to avoid.

A key catalyst was OpenAI's release of AI chatbox ChatGPT late last year. So should we be excited or fearful about the rise of AI, or both? 

I discussed this with Michael Timothy Bennett, an AI researcher at the Australian National University, in the latest episode of our Of Interest podcast. Bennett is recently returned from a major Artificial General Intelligence conference in Stockholm where he both presented and won an award.

He described the mood at the conference as "feverish and exuberant," noting "suddenly there's a whole lot of money and power at stake" in the AI industry.

So what are we to make of all the hype around AI, and what might it mean for our lives?

"It's sort of the next step in the industrial revolution more than a lot of what we'd see in, say Terminator," Bennett says.

"AI is like a collection of black swan events that are going to play out over the next several decades as we see different sorts of jobs and industries hit with a lot of automation. Things will get much easier for some people and a lot harder for others."

In the podcast he talks about just what AI is, its origins, ways we've been using it for years, predictions of AI-derived productivity gains and job losses, and whether the New Zealand government should be looking to regulate AI technology.

He also offers suggestions on how young people heading into the workforce or considering career options should think about AI, how middle aged workers should think about it, what it means for business owners, and how investors should be considering AI.

Bennett also weighs in on the debate over whether AI is an existential threat or could be humanity's salvation.

Kia ora,

Welcome to Thursday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the international edition from Interest.co.nz.

And today we lead with news China is struggling to attract new foreign direct investment.

But first, American new housing starts were expected to be a bit soft in June, but they fell more than expected, down -8.0% from May and down -15.3% below the June 2022 level. It was weak all round with single-family housing starts, which account for the bulk of homebuilding, dropped by -7.0% and starts for multi-unit homebuilding went down by -11.6%. Building consent levels retraced too.

But there was a minor uptick in new mortgage applications last week, up +1.0% from a week earlier, but they are still -21% lower than year ago levels. Perhaps the weekly gain related to the fall-back in the benchmark mortgage interest rate which spiked to over 7% the week before last but fell back to levels it has broadly been at since early June.

China confirmed that its foreign direct investment fell in the six months to June by -2.7%. The rise in June from May was only +US$13.7 bln, the lowest increment since the pandemic for that period.

That continuing weakness underscores the overall lackluster direction of their economy. Yesterday they had to issue a pledge to improve conditions for private businesses in an attempt to reassure the business sector they are serious about finding ways to rekindle their economic momentum. It is going to take more that Beijing talk however. Its recent moves to limit access to data, court documents, and academic journals has cast a pall over how investors assess the world's second largest economy. Also toxic have been raids on industry networks that serve business knowledge also in the name of 'national security'. None of this enhances investor confidence, and so it should be no surprise foreign direct investment is languishing.

In the EU, their consumer price inflation rate was confirmed at 5.5% in June, the lowest level since January 2022, mainly due to the decline in energy prices. However, the core rate, which excludes volatile food and energy, picked up to 5.5%. But any way you look at this it is far lower than the ~9% rate of a year ago. Meanwhile in the UK, their CPI inflation rate fell to 7.9% in June from 8.7% in May (and 9.4% a year ago). They may not be making the progress that their EU neighbours are, but markets cheered the direction anyway. Their core rate is now down to 6.9%. 

The UST 10yr yield will start today at 3.75% and down -5 bps from this time yesterday. 

Wholesale markets are building back a chance of another RBNZ OCR rate hike by the end of 2023, now a 50/50 chance in the latest pricing.

The price of gold will start today at US$1978/oz and up +US$3 from yesterday.

And oil prices are little-changed from this time yesterday at just under US$75.50/bbl in the US. The international Brent price is still just under US$79.50/bbl.

The Kiwi dollar starts today down -¼c from yesterday at just under 62.5 USc. Against the Aussie we are little-changed at 92.3 AUc. Against the euro we are still at 55.9 euro cents. That all means the TWI-5 has stayed down at 70.0, unchanged from yesterday.

The bitcoin price is still in in its recent yoyo pattern and now is at US$30,057 and up +0.8% from this time yesterday. Volatility over the past 24 hours has also been low at just over +/- 0.8%.

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.

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.

And today we lead with news central banks may be increasingly happy with the tame data released today.

But first, today's dairy auction was a lame affair. Analysts had expected prices to rise +1.9% but in the event they fell -1.0%. Buyer demand is soft even as indications grow that the global milk supply may start falling. Nine of the past twelve dairy auctions have delivered price falls. Making them slightly worse in that prices fell -2.2% in NZD. The big loser today was the cheddar price - again, down a massive -10%. This is its lowest since December 2020 and is down a massive -39% since its peak in April 2022. That probably says a lot about China's foodservice industry. On its own this auction won't be changing farmgate milk payout prices, but it is adding to downside pressure.

Meanwhile American retail sales rose less than expected in June to be up +1.5% above year-ago levels. That obviously isn't more than inflation so they are dragging worryingly. Holding them up was another modest advance in car sales.

The US Redbook retail sales tracking of general merchandise (on a same-store basis) fell last week from the same week a year ago, and at -0.2% this is entirely consistent with the official stats. It is likely that the Fed officials will find this lower retail impulse "just what the doctor ordered' and be happy it is quelling inflation.

Also retreating is American industrial production in June. It was expected to show a +1.1% gain from the same month a year ago, but it actually recorded a -0.4% retreat.

US inventories are holding at historical levels in relation to sales, so no special pressure point here.

More positive was homebuilder sentiment in the US.

The overnight data was even more positive north of the border. Canadian housing starts came in with another strong result in June.

And CPI inflation in Canada fell more than expected, taking it down to just 2.8% year-on-year, and that fast progress is likely to take the wind out of any more central bank rate hikes there. It is back in their 1-3% target range for the first time in two+ years. However we should note that it is fast-falling energy costs that are pushing this rate down. Food cost growth remains high.

Join us later this morning for the release of the New Zealand Q2 CPI data. It is expected to come in at 5.9% which would be another miss to the downside from the RBNZ's earlier estimate of a 6.1% rate. It too is likely to feature much lower energy costs and sticky-high food cost inflation. Any significant variances from market expectations could have wide financial market implications - and perhaps that is being foreshadowed by today's retreat in the NZD.

The UST 10yr yield will start today at 3.80% and unchanged from this time yesterday. 

Wall Street has opened its Tuesday trading with the S&P500 up +0.8%. Upbeat earnings reports keep coming and encouraging equity investors. 

The price of gold will start today at US$1975/oz and up +US$20 from yesterday.

And oil prices are up +US$1.50 from this time yesterday at just on US$75.50/bbl in the US. The international Brent price is now at just under US$79.50/bbl.

The Kiwi dollar starts today down -½c from yesterday at just under 62.8 USc. Against the Aussie we are down -¾c to 92.2 AUc. Against the euro we are down -½c to 55.9 euro cents. That all means the TWI-5 is now down at 70.0 and a sharpish -70 bps lower from yesterday.

The bitcoin price has fallen in its recent yoyo pattern and now is at US$29,812 and down -0.8% from this time yesterday. Volatility over the past 24 hours has been modest at just over +/- 1.2%.

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.

Kia ora,

Welcome to Tuesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the international edition from Interest.co.nz.

And today we lead with news those unlisted Aussie funds are going to get a hurry-up on proper valuations from their prudential regulator via their superannuation system.

But first, in the US, the New York State manufacturing survey dipped in July from June but the shift was in fact minor and much less than was expected. Activity held steady in July and minorly positive. New order levels are still positive.

Meanwhile, applications by consumers for 'credit' (debt) are falling and are now at their lowest level since October 2020. And that means that those who are applying are increasingly likely to get turned down. In fact the rejection rate jumped to almost 22% in the year to June 2023.

China's economy expanded by +6.3% in the second quarter from a year earlier, fueled by recoveries in retail sales and the service sector, and partly thanks to a low base effect. This was lower than the expected +7.3% but was higher than the +4.5% rise in Q1-2023. Between Q1 and Q2, up just +0.8% (annualised at +3.2%) and emphasising the size of their challenge to regain momentum.

Electricity production however only grew +2.8% from a year ago in June. Some use this metric as a more insightful indicator of actual economic activity in China. It rose +5.6% in May, and this June result is the lowest since February.

Retail sales were another weak point in today's data releases from China; there were up +3.2% from a year ago in June with the re-opening surge seemingly having passed through their economy now.

Separately, their central bank did not change its 1-year Medium-term Lending facility rate at 2.65%.

In Singapore, their graft scandal isn't the only issue rocking the ruling Peoples Action Party. Now two more senior MPs have had to resign over a secret affair, and one the Government has been trying to resolve in secret. One was being groomed for the PM role. Recently there have been accusations levels at their Foreign Affairs minister and their Home Affairs & Law minister, but the ruling party managed to deflect those.

The Russia/Ukraine grain deal that allowed exports though the Black Sea has collapsed with Russia refusing to renew it. Prices for wheat rose on the news, but good supply in the rest of the world has kept the rises relatively minor and nowhere near the levels even in June.

In Australia, prudential regulator APRA has been pushed into a crackdown on their superannuation funds, and how they value unlisted assets. The suspicion is that many of these assets are being carried a values that can't be achieved in a high yield market. And that is even after many funds wrote as much as 15% off their extensive unlisted office property investments in their end-of-financial-year valuations. There is more to come it seems, and it will hurt.

The UST 10yr yield will start today at 3.80% and down -3 bps from this time yesterday. 

The price of gold will start today at US$1955/oz and up just +US$1 from yesterday.

And oil prices are -US$1 from this time yesterday at just on US$74/bbl in the US. The international Brent price is now at just under US$78.50/bbl.

The Kiwi dollar starts today down -¼c from yesterday at just over 63.4 USc. Against the Aussie we are down similarly to 92.9 AUc. Against the euro we are down a bit more to 56.4 euro cents. That all means the TWI-5 is now down at 70.7 and -30 bps lower from yesterday.

The bitcoin price has fallen in its recent yoyo pattern and now is at US$30,050 and down -1.1% from this time yesterday. Volatility over the past 24 hours has stayed low at just on +/- 0.8%.

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.

Kia ora,

Welcome to Monday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the international edition from Interest.co.nz.

And today we lead with news investors are getting nervous about their exposure to office buildings in the commercial real estate sector.

But first, after retreating over the past year, average new home prices in China's 70 major cities were unchanged year-on-year in June. There were rises, including in Beijing, Chongqing, Shanghai, and Tianjin. But there were falls in both Shenzhen and Guangzhou, along with 40 other large cities. Prices for home resales went backwards with only 6 of the 70 recording any gains or standstills. But the official falls are nothing like New Zealand's retreat. The worst Chinese city is only recording a -7.5% year-on-year fall.

Later today we will get the PBoC 1yr Medium-term Lending Facility rate announcement and that may give clues of new stimulus for the Chinese economy, one that may be helpful to the property development sector.

We should also note that some zombie property developers are now being delisted from local stock exchanges. And things are not getting any easier for commercial landlords there either. In Shanghai, overbuilding means vacancy rates are rising and rents are dropping for this tier-1 city.

In the US there has been a surprisingly positive shift in consumer sentiment. The widely-respected University of Michigan survey improved for a second month in July to its highest level since September 2021, and well above the anticipated outcome. Both current economic conditions and consumer expectations improved, largely because of the slowdown in inflation along with stability in their jobs markets. To be fair though the overall level is still low, but it is well off the mat now.

Singapore’s GDP grew by +0.7% in Q2-2023 from year-ago levels, quite tepid levels again for an 'Asian Tiger' economy but it was stronger than a final +0.4% growth in Q1. This was the 10th consecutive quarter of increase however, but the second smallest. On a quarter-on-quarter seasonally adjusted basis, their GDP grew +0.3%, reversing a -0.4% contraction in the first quarter. So no recession there either.

Also in Singapore, their anti-corruption body has moved against a minister and a major property/hotel tycoon. Both have been arrested. It is their most serious graft case to be prosecuted in more than 35 years.

In Europe, their heat wave is getting worse and it is deadly serious for the people involved (Athens hit 39oC earlier today for example, Rome might hit 42oC early this week, Madrid too). And about a third of Americans are also facing deadly heat extremes (Dallas is touching 40oC now as well). These follow the heat dome that hurt northern China last week but hasn't really gone away; Beijing is expected to swelter in 37oC+ heat for most of the next week. We would be wise to start preparing for high summer temperatures here.

And one consequence may come from the insurance industry. In the US major insurers are pulling back on homeowner policies from California to Florida, in many cases declining to renew existing policies. Climate change consequences are becoming uninsurable. And with reinsurance companies doing the same, agencies like our EQC and other government-supported programs could find their long-term futures threatened. In the US, high premiums aren't enough to entice insurers to offer any coverage in many places.

In Australia, one of their largest real estate investment trusts (REIT) has had to limit redemptions in a fund that specialises in office properties. It's a AU$2.5 bln fund and it received redemption requests equal to 15% of its equity, and only paid a quarter of what was requested in February (the latest disclosure). It is unlikely to be the only large commercial real estate fund to run into liquidity trouble. The problem for the industry is that this type of 'temporary difficulty' (when managers won't sell assets to fund redemptions because they believe 'real value' is way above what the market values their asset) is just the type of reaction to spook investors, who then rush to redeem to protect their capital.

And staying in Australia, their government named Michele Bullock as governor of the Reserve Bank of Australia, making her the first woman to take the role. Treasurer Jim Chalmers announced that Bullock, currently deputy governor, would head the central bank for a seven-year period starting in mid September, a day after incumbent Philip Lowe's term ends. In the end Lowe was sacrificed in the name of 'change', but Bullock isn't expected to change monetary policy direction. Her initial focus will be on internal reorganisation that has been earlier flagged (and making it a bit more like the RBNZ).

The UST 10yr yield will start today at 3.83% and unchanged from Saturday. 

The price of gold will start today at US$1954/oz and down -US$5 from Saturday.

And oil prices are unchanged from Saturder at just over US$75/bbl in the US. The international Brent price is now at just on US$79.50/bbl.

The Kiwi dollar starts today little-changed from Saturday at just under 63.7 USc. Against the Aussie we are unchanged at 93.2 AUc. Against the euro we are firmish at 56.8 euro cents. That all means the TWI-5 is now still at 71 but up +70 bps from a week ago.

The bitcoin price has risen slightly in its recent yoyo pattern and now is at US$30,399 and up +0.7% from this time Saturday. Volatility over the past 24 hours has been low at just on +/- 0.6%.

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.

Central banks' use of monetary policy to fight inflation is working, but in New Zealand we need to look at evidence demand and prices are being impacted rather than current inflation data, says ANZ Banking Group Chief Economist Richard Yetsenga.

Speaking in the Of Interest podcast, Yetsenga says news of an inflation fall in the United States suggests the Federal Reserve is close to an extended pause having increased its Federal Funds Rate to between 5% and 5.25% from 0% to 0.25% since March 2022.

US consumer price index (CPI) inflation rose 3% in the June year, down from 9.1% a year earlier. Yetsenga expects another 25 basis points increase from the Fed, after which he expects a period of pause.

"It's not obvious that pause will be followed by further hikes, but neither is it obvious that that pause will be followed by cuts. And I think that's a good signal," says Yetsenga.

In New Zealand, where March quarter CPI was 6.7% and June quarter CPI, due out July 19, is expected to be about 6%, Yetsenga says the current inflation rate isn't necessarily the key thing to look at in the inflation fight. On Thursday Statistics NZ said food prices rose 12.5% in the June year, a 35 year high.

"When you've hiked [interest rates] by 400 or 450 basis points, the current inflation rate, yes it's still important, but it's less additive to your information set. What is more additive is can we see the signs that demand and price pass through is being crimped by the policy moves that we have done? And the answer is unambiguously yes," Yetsenga says.

He acknowledges higher interest rates are a blunt tool and may not impact the economy the way we'd ideally like.

"Certainly there are other policy tools available. But in the absence of somebody else stepping up and delivering those other policy tools, it's up to our central banks that have their inflation mandates. And so far I think they're doing a good job at trying to balance getting inflation back to target without crimping the economy too much."

In the podcast Yetsenga also talks about the Reserve Bank of Australia's approach to the inflation fight in comparison to the Reserve Bank of New Zealand, evidence central bank monetary policy is working, whether central banks need more inflation fighting tools, China's "remarkable" 0.0% CPI, and the impact of a higher frequency of extreme weather events on inflation.

"We are talking about deflation there [China]. We need to separate our expectations for China, I think, in the next 20 years [from] what China has looked like in the last 20 years. I don't think those two things will be in any way comparable," says Yetsenga.

Climate challenges, meanwhile, are "a supply side shock which will tend to boost inflation and will tend to worsen incomes. And so it hits productivity as well, and it reduces standards of living."

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

Kia ora,

Welcome to Monday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the international edition from Interest.co.nz.

And today we lead with news more rises to our OCR may be off the table now but that doesn't mean our interest rates will stop going up.

This coming week, the big international focus will be on the US CPI change for June. We get that on Thursday, NZ time and an increase of 3.1% is expected, down from the May 4.0% rate. That would count as good progress, but markets still expect two (or three) more US Fed rate hikes in 2023 based on recent Fed speaker signals.

Later today we will also get China's June CPI inflation report, and that isn't expected to show any increase. India releases their June CPI result on Thursday.

This coming week we will also get central bank rate reviews from Canada on Thursday where a +25 bps rise is expected, and South Korea also on Thursday. And of course we will get our own RBNZ releasing their decision on Wednesday, and no change is expected here.

Australia's business and consumer sentiment survey results come out this week too and will be influential.

But most influential has been the US headline non-farm payrolls expanded +209,000 when analysts had expected +225,000. This headline June expansion is the lowest in almost three years.

Although the headline numbers cooled, economic activity hasn’t slowed as much as Fed officials expected, likely keeping the central bank on track to raise interest rates later this month to combat its persistent and above target inflation. The labour market has their backs for an increase.

Canada also released its June labour force data and that came in better than expected, up +59,900 in June from May when a +20,000 rise was anticipated. In fact, they had a +109,600 rise in full-time employment and a fall of -49,800 in part-time employment. So the net quality of the new jobs improved. This probably paves the way for another central bank policy rate hike there too on Thursday (NZT). Their policy rate it is already 4.75%.

For all its economic recovery issues, China's foreign exchange reserves rose in June when no change was expected. Yes, the rise was small in USD terms but is was a rise. They are now at US$3.193 tln, with less than US$0.9 tln held in US government debt.

Total vehicle sales in China came in at almost the same level as a year ago for June, but that built on their large May recovery. Total sales are now running at an annual rate of 26 mln, making this the world's largest vehicle market by some margin over the second place US. More than 2.5 mln vehicles were sold in June 2023 alone.

Taiwanese exports fell sharply in June from May, down more than -10%, and an uncomfortable -23% lower than June a year ago. Ameliorating the pain was that imports fell even more.

Japanese household spending remained low in May and is falling, with households there prioritising saving. If this trend embeds it will be hard for Japan to maintain its recent economic expansion, and it will be up to their Government to convert those savings into some sort of spending.

The latest update to the FAO world food price index shows prices continuing to retreat with the pressures well and truly behind us. It fell for a second month in June and to a fresh low since April 2021. The May increase was downwardly revised. Obviously global food supply and cost pressures have eased a lot since their peak in March 2022, falling by almost a quarter. Meat prices have remained stable since October last year, but dairy prices continue to ease.

The UST 10yr yield will start today at 4.07%, unchanged from Saturday but it is up +22 bps in a week and that is a big move, and to its highest level since the brief March spike and before that, November. 

For all the turmoil, we should note that the Fear & Greed Index is now strongly on the 'greed' side of things. Investors are shrugging off their fears, despite the bond market signals. But an upcoming earnings season that might deliver wavering results could quickly upend that.

The price of gold will start today at US$1924/oz and down -US$2 from Saturday. This price isn't signaling 'fear' either.

And oil prices are holding at just over US$73.50/bbl in the US. The international Brent price is now at just over US$78.50/bbl.

The Kiwi dollar starts today just over 62.1 USc and unchanged from Saturday. Against the Aussie we are still firm at just under 92.9 AUc. Against the euro we are holding at 56.6 euro cents. That means the TWI-5 is now just over 70.3, little-changed from Saturday but up +50 bps in a week.

The bitcoin price has risen marginally from this time Saturday and now is at US$30,276 which is a minor +0.4% shift up. Recall, this time last week this price was US$30,316, so little change from then too. Volatility over the past 24 hours has been low at just under +/- 0.6%.

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.