Economy Watch

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 that mixed US data that doesn't show their labour market retreating, along with weak Chinese data, has the greenback rising but bond yields falling. Commodities are out of favour.

US mortgage applications fell last week to a three month low (and approaching only half the level of a year ago), held back by both a lack of inventory for sale in their residential market as sellers are reluctant to chase prices lower, and higher interest rates. The benchmark 30 year fixed rate is now 6.91% plus points, a +22 bps rise in a week (thanks to the debt-limit debate).

Meanwhile their labour market just keep surprising with its strength. We get the May non-farm payroll data on Saturday NZT. Today the April job openings data surprised with an unexpected rise when a modest fall was anticipated. That pressure will keep the Fed on edge.

And this is despite last week's retail data coming in only +1.2% higher than a year ago on a same-store basis, far less than inflation.

And despite the Dallas Fed's services sector weakening. And despite the Chicago PMI coming in sharply lower too.

However the Fed's latest Beige Book reported economic activity was little changed overall in April and early May. Four Districts reported small increases in activity, six no change, and two slight to moderate declines. Expectations for future growth deteriorated a little, though most in this survey still largely expected a further expansion in activity. The labour market is still tight, they report. Price pressures are easing.

In Canada, they also report a reasonable expansion. Their Q1-2023 economic activity expanded +3.1% from the same quarter a year ago. This was more than was expected and is sure to raise the pressure on the next Bank of Canada rate review.

They weren't the only one to report a better than expected economic expansion in Q1-2023 overnight. India did too. The Indian economy expanded +6.1% year-on-year in the quarter, higher than an upwardly revised +4.5% in Q4-2022 and well above market forecasts of +5%.

But it isn't so upbeat in China, Their official factory PMI contracted more in May than April and more than expected, reinforcing the lackluster - even failing - recovery there. The yuan is still under pressure. But their services PMI shows that side of their economy still expanding at a good rate, but a little less than expected and near the least of 2023.

Japan also reported a stuttering, with retail sales slipping in April, and industrial production falling when a rise was expected. But they are expecting both May and June to expand. They see their strongest consumer sentiment of the year. This is all reflected in a booking stock market.

Both France and Germany reported CPI inflation rates for May overnight (+5.1% and +6.1% respectively) and both say the pressure is easing - not as fast as they would like however. But they are both far lower than year-ago levels. And hope rise that ECB rate rises may now pause.

Australia' monthly inflation rate rose to 6.8% in the twelve months to April, which is a rise from the monthly indication of 6.3% in the March month.

And AUSTRAC says Bank of Queensland has breached prudential standards and fallen short in its compliance with anti-money laundering laws. For most customers, these requirements seem an unnecessary overreach. But they seem here to stay.

In international trade, air cargo demand in April continued its year-on-year decline but at a slower rate than the first three months of 2023, with volumes falling by -6.6% compared to April a year ago. The fall was about half that in the Asia/Pacific region however.

The UST 10yr yield will start today at 3.63% and down another -7 bps. 

The price of gold will start today at US$1967/oz and up +US$8 from yesterday.

But oil prices are -50 USc lower today from yesterday at just under US$68.50/bbl in the US. The international Brent price is now just under US$73/bbl.

The Kiwi dollar starts today -¼c softer at 60.1 USc. Against the Aussie we are marginally softer 92.6 AUc. Against the euro we are little-changed at 56.4 euro cents. That means the TWI-5 is down -20 bps at 69.1.

The bitcoin price is lower today at US$27,043 which is down -2.5% from this time yesterday. Volatility over the past 24 hours has been modest at just on +/- 1.9%.

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 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 we are in the shadow period until the US House votes on the debt deal. The chatter accentuates the risks of failure, so markets are holding their breath. But they also assume it will get passed.

Meanwhile, the data being released is all quite bland, and will be until the May non-farm payrolls report is available. American consumer sentiment as monitored in the Conference Board survey held in May when a small dip was anticipated. This is consistent with the good personal income data we had recently, and a declining inflation rate. But overall levels are still low; the Expectations Index has now remained below 80, a level associated with a recession within the next year, for every month since February 2022, with the exception of a brief uptick in December 2022. But the endless signals of recession just don't seem to materialise, probably because of the strong labour markets.

We get the May US non-farm payrolls report on Saturday NZT and it is expected to show a modest +190,000 gain - although don't be surprised if it beats that estimate yet again.

The Dallas Fed survey of factories in their oil patch is quite subdued in May which is probably no surprise given the languishing oil price. And with today's oil price retreat it will probably be even lower in June.

According to the US Federal Housing Finance Agency, American house prices rose in the year to March at about their long-run average of ~4%, ending the pandemic turmoil period when for a few years they were up almost +20%. Separately, the Case-Shiller index on house prices in major urban areas fell in the year to March and below their long-run average. Analysts tend to watch the Case-Shiller Index more.

In China, they have been getting a lot of late-season rain and that is causing havoc with crop harvesting. They have lost millions of tonnes of wheat right before harvest, with global price implications. The unseasonal rains have infected crops with blight and caused pre-harvest sprouting. That sets China up for some massive imports, disrupting global prices - and their own plans at a time when local food security is a high-level concern.

And staying in China, a strong echo from their brutal pandemic lockdown is starting to play out in their economy. Memories of that has reinforced the urge by households to save, and at such a level that it seems to be inhibiting their economy from recovering. They have a liquidity trap which is frustrating efforts by Beijing to expand domestic demand and increase consumption’s share of national GDP. And this is putting severe pressures on local governments.

These two big trends in the Chinese economy has seen their yuan devalue further.

In Japan, their jobless rate fell back to the 2.6% level it was a few months ago, which was a better result than expected. An expanding economy is having a positive effect on employment and wages now.

EU sentiment is still in the doldrums and fell in May to a six month low. There was little change in consumer sentiment, but manufacturer sentiment eased lower.

In Australia, they are about to hand down a NZ$485 mln financial penalty on the Crown casino business for breaches of its AML-CFT laws. As such it will be one of the largest money-laundering penalties imposed on a casina anywhere in the world. But no-one went to jail. Despite its size, Crown casinos won't be crippled financially - it just seems like a cost of doing business in the world of gambling.

The UST 10yr yield will start today at 3.70% and down -7 bps as Wall Street trades again after their holiday weekend. 

The price of gold will start today at US$1959/oz and up +US$3 from yesterday.

And oil prices are a lot lower today from yesterday at just over US$69/bbl in the US and that is down -US$4/bbl. The international Brent price is now just on US$73.50/bbl.

The Kiwi dollar starts today marginally softer at 60.4 USc. Against the Aussie we are marginally firmer 92.8 AUc. Against the euro we are softer at 56.3 euro cents. That means the TWI-5 is down -10 bps at 69.3.

The bitcoin price is almost unchanged today at US$27,739. Volatility over the past 24 hours has been low at just on +/- 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 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 we may be having a bear market rally in financial markets, always a very risky time even if the data doesn't shout risk warnings. (In the past, such events have ended with a panic selling period.) But of course every new event isn't the same as prior ones and this time we have strong labour markets and resilient households which were never present in similar prior periods.

But first, today is a holiday in the US, their Memorial Day. That will be a key reason financial markets will remain quiet today.

The Biden-McCarthy debt limit deal is heading for votes in Congress. The Senate is likely to approve. But the House vote will be more contentious, and that will likely take place on Thursday NZT. After that, attention will turn to financial markets as the US Treasury races to sell bonds to replenish their reserves. That amount will be huge but needs to be completed by June 5 (Saturday NZT) to avoid default. This rush will likely be destabilising in bond markets, although the Fed may have to step in with its balance sheet support to ease the strains on financial stability.

Yellen has told McCarthy that "We will make more than US$130 bln of scheduled payments in the first two days of June, including payments to veterans and Social Security and Medicare recipients. These payments will leave Treasury with an extremely low level of resources. During the week of June 5, Treasury is scheduled to make an estimated US$92 bln of payments and transfers, including a regularly scheduled quarterly adjustment that would result in an investment in the Social Security and Medicare trust funds of roughly US$36 bln. Therefore, our projected resources would be inadequate to satisfy all of these obligations." Essentially default is imminent. It is up to McCarthy to get his deal through the House. No wonder markets are nervous.

Across the Pacific, a gauge of Chinese shares traded in Hong Kong inched closer to a bear market as a wobbling economic recovery, intensifying geopolitical tensions and a weaker yuan kept investors away. The Hang Seng China Enterprises Index slumped -1.3% on Monday, taking its losses from a January 27 peak to a whisker away from reaching -20%. The Chinese carmakers' industry association said car demand remained weak and shares of many of these companies slid.

Also falling sharply have been Hong Kong exports in April, down -13% from year-ago levels but that too was less than was feared.

Singapore's producer prices are now more than -11% lower than year ago levels and at a three year low. This reflects the tough times that have fallen on their economy recently, but at least the pace of the fall eased considerably in April

In Australia, the turmoil at PwC is getting ugly. There are about 900 partners and many of them will be very angry at what a few of their tax partner colleagues have wrought for the firm. And partners are jointly and severally liable for the huge costs which are inevitably coming. Many good people are about to be hurt significantly. The firm has stood down the nine partners at the center of their troubles and the Chairman has been jettisoned. But none of this is going to save them. Now the Australian Prime Minister wants those partners at the center of all this named. And the MNCs who took the PwC tax advice will be sweating their situation.

Meanwhile in Western Australia, their very popular Premier, Mark McGowan has unexpectedly quit politics. He led the Labor Party there to an extraordinarily dominant win in the 2021 election. He is certainly going out on top.

The UST 10yr yield will start today at 3.77% and down -3 bps in off-Wall Street trading. 

The price of gold will start today at US$1943/oz and down -US$3 from yesterday.

And oil prices are unchanged from yesterday at just on US$73/bbl in the US. The international Brent price is still just on US$77/bbl.

The Kiwi dollar starts today marginally firmer at 60.6 USc. Against the Aussie we are marginally softer 92.6 AUc. Against the euro we are at 56.5 euro cents and little-changed. That means the TWI-5 is still at 69.4.

The bitcoin price is a higher again today, now at US$27,729 and up another +1.4% from this time yesterday. Volatility over the past 24 hours has been moderate at just on +/- 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 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 the Americans seem to have a deal on their Debt limit - at least until the extreme party members are overcome in a vote. They have enough funding authorised to last until June 5.

In the week ahead, we will get the US non-farm payrolls report on Saturday, and before that the JOLTS job openings numbers, the ISM Manufacturing PMI, and the Conference Board consumer confidence survey results. We will also get inflation rates for April for the EU, Germany, France, Italy, Spain, and South Korea. In addition, Q2 GDP growth rates will be released for Canada, India, Brazil, and Turkey, along with factory PMIs for China, Italy, Spain, Canada, Russia, India, and South Korea.

Over this past weekend China's industrial profits data was released for April and it was weak. It fell almost -21% in the January-April period from the same time frame in 2022 although the drop was slower than a decline of slightly more than -21% for the first quarter. The marginal improvement in April alone will be of little real comfort because this is when a 'recovery surge' was hoped for on their opening up. But it isn't happening. Private firms are doing much worse than State-owned enterprises.

And Taiwan lowered its economic growth forecast for the year to +2.0%, the slowest pace in nearly eight years, after the island slipped into a recession in Q1-2023 reporting a -2.9% annualised drop in Q1-2023 after a -0.8% retreat in Q4,-2022.

Singapore’s industrial production dropped more than forecast in April, down -6.9% year on year and -1.9% from March. This was the seventh consecutive month of year-on-year decline and the worst streak since 2015.

Japan's economy is standing out with its impressive resurgence.

Across the Pacific and as we have noted, there is a US debt deal, and even though it has yet to pass Congress, most think it will - after all, it always has in the past. But assuming it does, there will be a catch-up mode. The US Treasury now has very low cash reserves due to the consequences of the impasse and this will need to be made up. They will do that by rushing to raise funds in the Treasury Bill market, maybe as much as US$1 tln. And that will suck up liquidity temporarily until it is spent, all at the same time the US Fed has been selling down its own bond holdings. With the Treasury and the Fed both competing with banks for cash, lenders may see their own short-term funding rates rise, forcing them to boost the borrowing costs they impose on businesses and households.

In the real world, American personal spending jumped +0.8% in April from March, the most in three months, and double the market forecasts of a +0.4% gain. It is a clear sign consumer spending remains solid. And it is supported by higher wages which have consistently risen more than spending (just not in April), and a tight labour market.

If there is a downside, PCE inflation is hovering around the +5% pa mark and not retreating much yet.

Durable goods orders rose by +1.1% in April from a month earlier following an upwardly revised +3.3% growth in March and easily beating market expectations of a -1.0% retreat. But year-on-year there was virtually no gain. Capital goods orders were even stronger for their recent rises, but again, little year-on-year.

Rising economic activity however is making the US trade balance higher in nominal terms as it raises the demand for all goods including imported goods. Over the past year to April the US has run a merchandise trade deficit of -US$1.1 tln. However that is -7% lower than in the same year in 2022. And the deficit as a proportion of GDP has fallen from -4.8% to -4.2%. Of course their overall trade deficit is much less when services are also taken into account.

The IMF has been reviewing the US economy and said American interest rates will likely need to remain higher for longer to tame inflation, and that Washington needs to tighten fiscal policy to bring down its federal debt. But overall it has been impressed with the way the US economy has been managed over the past few years.

In Turkey, they have had a final round of voting this weekend and although only half of the votes have been counted, President Erdogan has claimed victory. But financial markets have also been voting with their money, driving the Turkish lira to 20 to the USD, an all-time record low. Erdogan had to come out and deny there were cash withdrawal problems at banks as people got skittish.

Australian retail sales didn't change in April from March and were +4.2% higher than year-ago levels. That means in volume terms they will be lower because Australian inflation is running at 6.3%. (Their April CPI will be released on Wednesday.)

And in Canberra, MPs from the new Labor Government tackled RBA Governor Lowe in a private meeting over what they see as his 'demonising' of wage increases. But Lowe held his ground, warning them that generous wage rises they were backing would make inflation worse unless they were accompanied by increases in productivity. And if that is what turns out - wage rises without productivity increases - he said rates would rise in response. It was probably an unhappy and tense meeting, and probably seals the end of his time as RBA governor when his term expires in September. Being right is no defence in politics.

In the background, an Australian Fair Work Commission decision on the 2023 Minimum Wage/Awards application is due soon.

The IEA says global investment in clean energy is on course to rise to US$1.7 tln in 2023, with solar generation set to eclipse oil production for the first time.

The UST 10yr yield will start today at 3.80% and probably hold given it is a holiday in the US. A week ago this benchmark was at 3.69%. 

The price of gold will start today at US$1946/oz and up +US$3 from Friday. A week ago the price of gold was US$1976/oz so a -1.5% fall from then.

And oil prices are +50 USc firmer from Saturday to be just under US$73/bbl in the US. The international Brent price is still just under US$77/bbl. For the week that is +US$1 firmer.

The Kiwi dollar starts the week at 60.5 USc. That devalues it -3.8% in a week, and -4.8% in a year. Against the Aussie we are still 92.8 AUc. Against the euro we are at 56.4 euro cents. That means the TWI-5 fell -20 bps to 69.4. So overall the NZD has devalued -2.7% for the week, and the same since the start of 2023.

The bitcoin price is a little higher today, now at US$27.359 and up +2.2% from Saturday. Volatility over the past 24 hours has stayed modest at just on +/- 1.3%.

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

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

Kia ora. I'm David Chaston. And we will do this again tomorrow.

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 that without both the US and China in a healthy economic state, it is hard for the world to prosper. Commodity prices measure that pullback.

As the US heads into its long Memorial Day holiday weekend, negotiators are still unable to sort out their made-up debt limit problem. Credit rating agencies are getting antsy. Stories about a deal being 'close' continue to circulate but that is probably just political spin. Still, at some point they will reach a deal. But even after they do, the costs will linger - probably with a higher risk premium for US debt meaning higher interest rates.

Meanwhile, US initial jobless claims were little-changed from the low 202,000 of the week before. There are still 1.6 mln people on these benefits. This data does not show the expected easing in their labour market.

The American released a second estimate of their Q1-2023 economic activity and this revised their initial estimate higher. The US economy grew by an annualised +1.3%, slightly higher than +1.1% in the advance estimate. Consumer spending rose more than originally estimated.

Also improving was the Chicago Fed's National Activity Index which reported a strong improvement, and one that wasn't expected. But it is consistent with the GDP result. The next regional Fed factory survey reported an improvement from their prior one.

US pending home sales disappointed in April however, which isn't anything new for their residential real estate market. They were unchanged in April after a -5.2% slump in March which was the biggest decline since November 2022. Analysts had expected a +1% rise in April. 

Meanwhile US corporate profits fell -6.8% to US$2.3 tln in Q1-2023, the lowest since Q2-2021. Analysts had expected only a -0.9% slip following a -2.7% fall in the previous period. It was the largest decrease in corporate profits since the provision-heavy Q1-2020 when they slipped -7.4%. Then you have to go back to 2009 for a larger retreat. So that paints a picture of an American economy with economic growth but a profit recession. A strong labour market will do that.

Across the Pacific, China's post-pandemic rebound seems to be running out of steam. Yes, they are reporting good year-on-year results but that is only because of a weak base. But their recovery is patchy at best, and their currency is weakening even against a weak USD. They have growing labour problems. And they are no longer the engine other countries in the region can rely on to bolster their activity.

Singapore's economy shrank -0.4% in Q1-2023 after virtually no growth in the prior quarter. It was a worse result than expected. They were weighed down by the manufacturing, wholesale trade, and the finance and insurance sectors, which contracted in response to weakness in the global economy and the electronics downcycle. They say the risks are to the downside from here so they are facing falling into recession in Q2-2023, which of course they are well into.

Germany said its economy is now in a recession. They contracted by -0.3% during Q1-2023 after a -0.5% drop in Q4-2022. Persistent high price increases and a surge in borrowing costs hurt household consumption which shrank by -1.2%. However exports were a bright spot.

Global container freight rates fell a little faster last week, driven as usual by the weakness in the trade from and to China. Freight rates for bulk cargoes, which had been holding up over the past few months, fell as well. They were down -9% in the past week, a chunky decline.

The UST 10yr yield starts today at 3.82% and up +9 bps from yesterday as investors discount US Government debt on the debt ceiling risks.

The price of gold will start today at US$1943/oz and down -US$19 from yesterday.

And oil prices are a lot softer from yesterday, down -US$1.50 to be just under US$72/bbl in the US. The international Brent price is now just under US$76/bbl.

The Kiwi dollar is a again softer against the USD from yesterday, down -½c and now ay 60.6 USc. Against the Aussie we are down less at just on 93 AUc. Against the euro we are down less again to 56.5 euro cents. That means the TWI-5 is has fallen -30 bps to 69.6.

The bitcoin price is little-changed today, now at US$26,349 and up a mere +0.2% from yesterday. Volatility over the past 24 hours has been modest at just on +/- 1.1%.

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.

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 global investment sentiment is weakening as the Americans look ready to score an own goal.

The US debt negotiations are getting sillier. But at least they are still talking. While the White House is offering a spending pause, congressional Republicans are hardening their demand for deep cuts - but just not in spending that will affect their favoured programs or districts. It looks increasingly likely there will be a government shutdown in early June. They have had them before under Clinton and Obama, but never against Republican presidents. (The largest increase in US government debt occurred under Trump.)

Unnoticed at this time is that the US regional banking crisis seems to be over.

But US mortgage applications fell yet again last week and benchmark rates rose by more than +10 bps to almost 6.7% plus points. None of this suggests the American housing market is out of its now long-running funk. Apart from a brief pandemic uptick, you have to go back to the Obama years to find a period of steadily rising mortgage demand.

The release of the May FOMC minutes showed Fed officials uncertain about how much more policy tightening may be still be required and many focused on the need to retain their options for changed in policy direction. Some members saw the need for more rate hikes while others anticipated that deceleration in growth would eliminate the requirement for further tightening. This collective uncertainty just added to the Congressional debt limit uncertainties.

Risk premiums for American funding are rising on the Congressional inaction, raising the cost of money worldwide.

Across the Pacific, Japan's real wage growth is expected to return to positive territory this year as prices stabilise and the largest pay hikes in three decades boost consumer purchasing power

And after four months of negative sentiment, Japanese manufacturers are feeling positive again with a sharp mood change. Ditto in South Korea.

But German investor sentiment is going backwards now after a period of seven rising months. And to be fair the May retreat is only back to where it was a year ago, so not net change over that period. However the mood of their investors is still a long way lower than pre-pandemic.

The EU is set to toughen up how the financial industry charge their clients. They now plan to ban them paying commission on sales of their products to brokers who gave no advice to customers. This is the latest attempt by regulators to address the hopelessly conflicted relationships between brokers and the financial industry where brokers get paid by these industries to pedal their products and still claim they work in their client’s best interests. It's a fiction. But brokers world-wide have proven adept at sidestepping any meaningful reforms.

British inflation is still very high and starting to rise again. In April it rose at an annualised rate from March that exceeded 14%. From a year ago it was running at 8.7% which is a fall from the same year-on-year level from March, but their core inflation rate rose on the same basis. It is the recent pickup that will concern them. Accelerating food costs are their biggest challenge. It is very noticeable how much higher British inflation is over that in the EU. The removal of competition from EU firms has allowed local firms room to raise prices sharply in their home market, perhaps to subsidise tougher competitive positions outside the country.

The UST 10yr yield starts today at 3.73% and up +3 bps from yesterday. 

Yesterday's RBNZ Monetary Policy decisions saw local swap rate fall back sharply, but interestingly only to where they were a week ago, or a month ago. The corrections were no more than that.

The price of gold will start today at US$1962/oz and down -US$14 from yesterday.

But oil prices are another +50 USc firmer from yesterday to be just over US$73.50/bbl in the US. The international Brent price is now just over US$77.50/bbl.

The Kiwi dollar is a lot softer against the USD from yesterday, down -1½c and now just on 61 USc. Against the Aussie we are down more than -1c at just on 93.3 AUc. Against the euro we are down more than -1c also to 56.7 euro cents. That means the TWI-5 is has fallen -130 bps to 69.9, evaporating all of the May gains and putting us back to where we were in the first week of May.

The bitcoin price is -3.3% weaker today, now at US$26,287. 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.

New Zealand's record current account deficit is significant in both a NZ and global context, and there are interesting comparisons to draw between 2023 and 2011 when S&P Global Ratings last downgraded NZ's sovereign credit rating, S&P's Martin Foo says.

The current account deficit, reflecting we're spending more than we're earning overseas, swelled to its highest dollar value of $33.8 billion last year.  As a percentage of Gross Domestic Product (GDP), showing its significance in the context of NZ's overall economy, it weighed in at 8.9%, the highest it has been since the 1970s.

Foo, director and analyst at credit ratings agency S&P Global Ratings, spoke to interest.co.nz in the latest episode of the Of Interest podcast about this and more.

Foo talks about why NZ's current account deficit is so big, why it could get worse before it gets better, what a country can do to try and reduce a current account deficit, explains S&P's existing NZ sovereign credit ratings, why NZ scores lowly in S&P's external assessment, NZ's international investment position, how S&P would signal a potential downgrade, whether an upgrade's possible, and S&P's assessment of last week's budget.

*PLEASE INSERT AUDIO HERE*

 "We [S&P] are raising our collective eyebrows and raising some serious questions. The current account deficit is an indicator of underlying economic conditions, or underlying fiscal conditions, and we have to think about what's causing these record imports," Foo says.

"New Zealand's external metrics do look quite weak compared to other comparable countries right now. As a simple example, last month the International Monetary Fund released its world economic outlook and the current account deficit at 8.9% of GDP was actually the largest of any advanced economy with the possible exception of Greece. Perhaps what's more interesting is the IMF is projecting that the deficit will stay quite elevated at about 8.6% of GDP in 2023, which would make New Zealand the worst performer on this particular metric."

S&P upgraded NZ's sovereign credit ratings in February 2021. They're now an AA+ foreign currency rating and a AAA local currency rating, both with stable outlooks. They're the highest and second highest credit ratings S&P issues. (In the podcast Foo explains what foreign and local currency ratings are).

S&P last downgraded NZ in September 2011, lowering the foreign currency rating one notch to AA, and the local currency rating a notch to AA+. Foo says there are some interesting comparisons between then and now.

That was a long time ago and the world was a very different place but there are some striking similarities to what's happening today. 

"New Zealand was facing a rising current account deficit and that was occurring in conjunction with earthquake related spending pressures, as well as fiscal stimulus to support growth. And if you look at today's situation, if you substitute the word 'earthquake' with the word 'cyclone,' then you have a situation that's airily familiar."

Nonetheless Foo says S&P still sees NZ as having "very, very strong credit metrics."

"We currently have New Zealand on a stable outlook. If we were to move we would typically signal that with a change of outlook, perhaps to negative. Right now we're still comfortable with the stable outlook," Foo says.

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 there is still no US debt deal, and that is starting to raise financial market nerves.

Also, American retail sales are still in the doldrums, rising minorly above last year level in last week's same-store assessment, but still well below the expansion that inflation requires to just stay even.

And the latest look at the American factory PMI (for May) shows them slipping from a steady state into a minor contraction. However, that was cancelled out and more by an improving services landscape where the expansion gathered pace in May and is now at more than a one year high

But that services improvement is not reflected in the mid-Atlantic states, where the Richmond Fed reports weakness in both their services and factory sectors.

American new home sales activity picked up minorly in April from March, and is now running +12% higher than year-ago levels. However the year-ago base was unusually low.

In Canada, their producer prices are dropping - signaling deflation may be coming there. Those producer prices were -0.2% lower in April than March and recall March also recorded a fall from February. And year-on-year they are now -3.5% lower, also a faster decline than in March. But at least it wasn't as fast a fall-away than the -5.6% drop analysts were expecting. Driving this sharpish decline is energy costs, which they probably appreciate (unless you are an oil producer).

In Japan, their flash May PMIs have come in strong, in fact the strongest rise in private sector activity in almost ten years. Their services sector expanded faster at 56.8, and their factory sector shifted from a contraction in April to a modest expansion in May.

In South Korea, their central bank's Composite Consumer Sentiment Index came in at 98 points in May of 2023, up from 95.1 points in the previous month. It marked the highest figure since May a year ago as easing inflation expectations led to a rise in "living conditions".

Singapore's inflation rate is rising again, now up to +5.7% in April from March's +5.2%, but down from the peak in August of +7.5%. For them it is food, housing and fuel that is keeping this pace up, and it is surprising they haven't benefited from the lower oil prices.

Retail sales in Taiwan rise +7.5% in April from a year ago, much faster than their 2.4% inflation rate. But their industrial production is really suffering, now more than -20% lower than year-ago levels.

In Europe, their early look at May PMIs shows their services sector still expanding at a good pace, but their factory sector still in a small contraction.

While not strong in the first place, the latest PMIs for Australia indicate a further softening of activity. Their services PMI fell to 51.8 (now only just expanding) in May. Their manufacturing PMI didn't change from its contraction, holding at its weakest level since May 2020.

We should note that the price of copper, a bellwether for the Chinese economy and the global economy more generally, is slipping and is back at levels we last saw last year, and down -15% from its early 2023 peak.

The UST 10yr yield starts today at 3.70% and down -1 bp from yesterday.

The price of gold will start today at US$1976/oz and little-changed from yesterday.

And oil prices are +US$1 firmer from where we left them yesterday to be just over US$73/bbl in the US. The international Brent price is now just over US$77/bbl.

The Kiwi dollar is slightly softer against the USD from yesterday and now just on 62.5 USc. Against the Aussie we are little-changed at just on 94.5 AUc although that is its highest of the year. Against the euro we are still at just over 58 euro cents. That means the TWI-5 is has slipped slightly to 71.2 and just off its five month high.

The bitcoin price is up +1.2% today, now at US$27,195. Volatility over the past 24 hours has been modest at just on +/- 1.2%.

Join is at 2 pm today for full coverage of the RBNZ Monetary Policy Statement and its decision of the Official Cash rate change. Analysts expect a +25 bps rise to 5.50% although financial markets have priced in an equal chance of a +25 bps or +50 bps rise.

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 debt woes continue to bedevil the world's two largest economies.

In the US the debt-limit talks drag on, casting a pall over markets. Public statements are all positive about "progress", but there is no deal and markets are growing weary (and wary) about all the unnecessary theatrics. Trading volumes on equity markets have suddenly gone quiet.

US households are also feeling uneasy at their own financial situation. An updated Fed survey of household economic attitudes shows the effects of inflation on Americans' economic confidence. About 73% said they were doing "at least okay financially" in 2022 which is down a sharpish -5 percentage points, the most since the survey was launched a decade ago. It had stood at a record high the year before but now it is at its lowest since 2017.

China has reviewed its key policy rates and left them unchanged in its May reviews The People's Bank of China (PBoC) maintained its key lending rates steady for the ninth straight month at May fixing, as widely expected. The one-year loan prime rate, which the medium-term lending facility uses for corporate and household loans, was left unchanged at 3.65%; while the five-year rate, a reference for mortgages, was kept at 4.3%. The move came after the central bank held its medium-term policy rate at 2.75% last week.

But in the background, China's hidden local government debt, which could be as high at US$10 tln, is restraining the country. The non-hidden debt seems to be US$23 tln. Policy makers are struggling to know what to do, in part because there is no agreement about about the nature and size of the overall problem. The two combined is as much as the total American federal debt. And that is just for their local government.

Japan's core machinery orders, which exclude those for ships and electric power companies, fell -3.9% in March from February, improving slightly from the -4.5% drop in February. But analysts were expecting a small rise by +0.7% on this basis. Although this data is always quite volatile, it is considered as a leading indicator of capital spending in the coming six to nine months.

But investors think Japan has turned an important corner, economically. The value of Japanese stocks has leaped by +US$400 bn so far this year, the biggest increase in any Asian market and roughly double the gains of Chinese equities. Investors are taking a fresh look at Japan as an alternative to China.

Taiwan's equity market gains are outpacing China as well (even China+Hong Kong), despite the handicaps its claimant is placing on it. But orders for Taiwanese exports are still tracking a lot lower, down more than -18% year-on-year in April. Analysts had expected only a -14% decline and they came in just above the February level which was their lowest since the pandemic.

EU consumer sentiment improved slightly in April but it still remains deeply negative, just less so.

We should also note that the Greek election result surprised most observers. While there is another final round of voting to go at weeks-end, the incumbent conservative government has been surprisingly endorsed at the ballot-box. This has been a free and fair election. The same weekend Turkey is also holding a run-off vote. But to win that, its incumbent president has had to control the country's media and run hard on culture-war issues.

In Australia, there is now talk that Sydney house prices may surge more than 10% this year. Rental demand, immigration and FOMO are all driving prices up across the city. The irony is that this will likely push the RBA to raise interest rates further, causing wider household budget stress and bring more properties on to the market, but maybe not enough to quell the froth. Social pressures will rise.

The UST 10yr yield starts today at 3.71% and little-changed from yesterday. 

The price of gold will start today at US$1975/oz and down -US$3 from yesterday.

And oil prices are marginally firmer from where we left them yesterday to be just over US$72/bbl in the US. The international Brent price is now just over US$76/bbl.

The Kiwi dollar is little-changed against but firm the USD from yesterday and now just on 62.8 USc. Against the Aussie we are little-changed at just on 94.5 AUc although that is its highest of the year. Against the euro we are still at 58.1 euro cents. That means the TWI-5 is has crept up slightly to 71.4 and nearly a five month high.

The bitcoin price is virtually unchanged again today, now at US$26,867. Volatility over the past 24 hours has been modest at just on +/- 1.0%.

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

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

Kia ora. I'm David Chaston. And we will do this again tomorrow.

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 the timing of the next policy rate moves are top of mind in both the US, and New Zealand.

But first in the week ahead, the spotlight in the US will be on the debt ceiling negotiations, FMOC meeting minutes, and several Fed speeches. Additionally, investors will be closely monitoring data on personal income and spending, PCE prices, the second estimate of GDP growth, corporate profits, durable goods orders, services and manufacturing PMIs, as well as new and pending home sales.

More generally, fresh May PMIs are anticipated for the UK, Australia, the EU, Japan, France, and Germany. Finally, inflation rates for the UK and South Africa will be released, and monetary policy decisions are awaited for China, South Korea, Indonesia, Turkey, South Africa, and of course from the RBNZ on Wednesday.

There are now just 20 weeks until the October 14 election. There is an RBNZ MPS on Wednesday, and another on August 16 just 60 days ahead of the election. There are interim rate reviews on July 12 and October 4. Almost certainly the RBNZ would not move rates on October 4 because of the risk of being seen to influence the election. They might feel uncomfortable on August 16 for the same reason. Assuming those two dates are off the table and there is no big immediately pressing issue, the only opportunities to adjust rates until the post-election MPS on November 29, are on Wednesday and July 12. If their judgement is that Budget 2023 adds to inflationary pressures, the Wednesday MPS reassessment is the most likely time they will pull the trigger. A bit more than +35 bps is priced in, so the markets are unsure whether we are facing +25 bps or +50 bps on Wednesday. More here.

In China, their currency continues its devaluation, falling well past 7 to the US dollar, and now up to 4.43 to the NZD. From the start of April, the Chinese yuan has devalued -2.3%. Against the NZD the devaluation is -3.0%. It may have been more if it hadn't raced to put in place direct deals with many developing countries, oil exporters, and Russia. These effectively hide demand and supply transactions from the open market. That opacity is holding the yuan from falling further. At some point the non-Chinese traders will tire of having a discount imposed on them.

And it isn't helping that foreign buyers seem to be shunning the important Canton Trade Fair this year.

And as a marker for healthy economic activity, we should note that China's income tax take is declining in 2023.

Japanese inflation came in at 3.5% in April, well above the expected +2.5% and above March's 3.2%. Japanese inflation is settling in above the Bank of Japan's 2% target rate. That's twelve consecutive months higher than that target.

In the US, the debt level negotiations push on towards a critical point; the first or second week of June is when the taps run dry and a shutdown is most likely. After a theatrical pause, negotiations are underway again, and Biden and McCarthy will meet tomorrow.

Fed Chair Powell said that because of stress in the banking sector, it might be unnecessary to raise rates to curb inflation. Other Fed speakers chimed in with a pause view as well.

In Canada, data for March retail sales was weak coming in only +2.4% higher in value terms than year ago levels but falling from February levels. 

In Europe, they are assessing what lessons can be learned from the Credit Suisse meltdown and the recent American regional banking wobbles. The issue seems to be that large uninsured deposits flee at first signs of trouble, and the size of these shifts accentuates the problem. Having a limit on insured deposits 'causes' this problem. It's not protection of depositors that is now the issue, it is protection of overall financial stability.

German producer price inflation rose +4.1% in April from a year ago, the smallest increase since April 2021. The annualised rate between March and April was even lower.

Over the weekend there were elections in Greece, which is coming out of a twelve year crisis during which most Greeks endured substantial hardship. 

In Australia, they are feeling left out of inbound travellers from China. There were 26,810 short-term visitors from China in March compared to 124,370 in March 2019. This semi-official snub has a flow-on impact on New Zealand where only 7119 short-term visitors from China arrived here compared to 41,063 in March 2019. China may be punishing Australia, but we get blowback too.

And Australia has decided how it will regulate Buy Now Pay Later schemes. They will be regulated under credit laws and companies in the sector will have to determine that products are suitable for their users under their responsible lending obligations. Those firms will be required to hold an Australian credit licence. These moves are likely to by shadowed in New Zealand at some point.

The UST 10yr yield starts today at 3.69%, the same as where we were Saturday but up +25 bps for the week. 

The price of gold will start today at US$1978/oz and up +US$2 from Saturday, but down -US$33 for the week.

And oil prices are marginally firmer from where we left them Saturday to be just under US$72/bbl in the US. The international Brent price is still just over US$75.50/bbl. These levels are +$1.50/bbl higher than this time last week.

The Kiwi dollar is little-changed against the USD from Saturday and now just on 62.7 USc. But that is up +¾c in a week. Against the Aussie we are little-changed at just over 94.4 AUc. Against the euro we are unchanged at 58.1 euro cents. That means the TWI-5 is up to 71.3 and no change from Saturday.

The bitcoin price is unchanged today, now at US$26,885 and little changed from both Saturday and one week ago. Volatility over the past 24 hours has been 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.