Economy Watch

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 that tomorrow's Australian Budget may bring some important positive surprises.

But first up today, global food prices are rising again, up in April for the first time in more than a year. But the driver was a sharp rise in the sugar price due to global supply issues. Meat prices rose marginally, but dairy prices fell in this UN-FAO tracking.

Meanwhile, China's foreign exchange reserves have crept up, now just above US$3.2 tln. But theiy remain well below their 2021 levels.

The Caixin services PMI came in at the same level as the official services PMI, both measures recording a healthy expansion.

And after nine years of fitful trials, the PBoC is finally getting its digital yuan off the ground. Some provincial governments allow trade in the e-yuan. And now public employees are being paid in e-yuan, direct to their phone wallets. 

Singapore's retail activity rose +2.2% in March and a sharp deceleration of the February rate. They will be concerned about that fall away. Given they have inflation running at +5.5% and the retail data is nominal, that suggests real retail activity is down -3.3%.

In the US, their economy unexpectedly added +253,000 jobs in April, beating forecasts of +180,000 and following a downwardly revised +165,000 in March. But these are the headline, seasonally-adjusted numbers. On an actual basis, the month-on-month rise was +892,000. There are now 161 mln people employed in their workforce, a new record high and up +3.1 mln from year-ago levels. 155.3 mln are on employer payrolls and 5.7 mln self-employed in unincorporated businesses. The 'self-employed' level is near a record low over the past decade if you exclude the March-July 2020 pandemic emergency period.

Average weekly earnings rose at a +5.8% annualised rate in April from March. It was an unexpected improvement and is a faster rise than in any month in the past year. The jobless rate dipped to 3.4% and their participation rate is unchanged at 62.6% so there remains plenty of capacity for more improvement.

By any measure this is a strong labour market, confounding the doomsters yet again.

This strong labour market is supporting non-housing consumer credit growth which came in higher in March than expected. Total consumer debt rose +US$26.5 bln from the prior month after an upwardly revised +US$15 bln increase in the previous month and the March levels were well above market expectations of a +US$16.5 bln rise. This data is also not supporting bear scenarios.

None of this data will be welcomed by the Fed. It does not indicate that inflationary pressures will be easing soon from a slowing economy. But a more immediate problem is looming - the inability to get their debt limit fiasco sorted.

Across the border, Canada's labour market delivered a stronger-than-expected result too, adding +41,400 jobs when +20,000 additional were expected. But there was a downside - all those additional jobs were part-time roles. Their jobless rate is hovering near a record low for them.

Like Singapore, the EU is suffering declines in retail activity too, down -1.2% in March from February, down -3.8% from year ago levels. This data is inflation adjusted.

In Germany there has been a very sharp drop in factory orders, led by orders for large engineering products. This has been the biggest drop in industrial orders since the height of the pandemic in April 2020.

In Australia, the RBA's Monetary Policy Review doesn't see inflation returning to its policy range until ... mid-2025. They acknowledge the current 7% inflation is too high but they are in no rush to rock the boat to fix that problem. They seem more worried about weak housing markets than inflation stealing savings. Perhaps they are trying to inflate their household debt away? They seem to have little tolerance for meaningful action on inflation.

Lending for owner-occupied homes in Australia rose +5.5% to A$16 bln in March from February, logging a positive month-on-month gain for the first time in ten months and defying expectations for a -1% decline. Still, March’s figure was -25% lower than for March a year ago.

This past weekend, auction clearance rates were high - above 75% - and listings available for sale low, as their housing markets turn higher. A fast-recovering housing market seriously complicates the RBA's efforts to tackle inflation, but signs of an imminent recession there are not on the horizon.

All eyes in Australia are now on the May 9 (Tuesday) Federal Budget. An earlier return to surplus seems likely as taxes rise sharply from their strong jobs and wages growth. Expectations are high for new initiatives aimed at helping households deal with inflation - while themselves not causing more inflation. Income-targeted subsidies for basic household expenses seem to be how they will do that.

The UST 10yr yield starts today at 3.44%, and unchanged from Saturday and a week ago. 

The price of gold will start today at US$2018/oz and up +US$4 from this time Saturday. A week ago it was at US$1991/oz.

And oil prices have slipped slightly from Saturday to be just over US$71/bbl in the US. The international Brent price is just over US$75/bbl. These are -US$5 lower than week-ago levels.

The Kiwi dollar is holding little-changed against the USD and now at 62.9 USc. Against the Aussie we are marginally softer at 93.3 AUc. Against the euro we are marginally firmer at 57.2 euro cents. That means the TWI-5 is now at 70.6 and unchanged from Saturday but up +70 bps in a week.

The bitcoin price is lower today, now at US$28,949 and down -2.1% from Saturday. Volatility over the past 24 hours has been very low at +/- 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.

The cost of the Reserve Bank's buy-up of government bonds during its 2020-2021 quantitative easing (QE) programme has come into focus as interest rates have risen.

Notably the balances of exchange settlement accounts held by banks and others with the Reserve Bank soared as the central bank bought government and local government bonds off banks in the secondary market, peaking at $56.4 billion last December after averaging about $7.5 billion in the decade up to 2020.

Holders of the settlement accounts receive interest on their deposits at the Official Cash Rate (OCR), which has risen to 5.25% since the 0.25% Covid low.

Treasury says its best estimate of the expected direct fiscal loss from the Reserve Bank's QE, its so-called Large Scale Asset Purchase (LSAP) programme, is about $10.5 billion. It notes this has been partially offset by the fiscal benefits of the LSAP through stabilising the NZ government bond market and providing economic stimulus at a time of heightened uncertainty in 2020.

From a whole-of-government perspective Treasury says the LSAP withdrew fixed-rate government bonds from the market and replaced them with floating-rate settlement cash balances. This means the Crown has more floating rate liabilities, becoming more exposed than it would have been to rising interest costs.

In the latest episode of interest.co.nz's Of Interest podcast Paul Tucker, former deputy governor of the Bank of England and now a research fellow at the Harvard Kennedy School, speaks about the impact of QE on the public finances. Tucker's also the author of a recent paper called Quantitative easing, monetary policy implementation and the public finances.

"This has turned out to be a bad thing in many countries specifically because of how low world interest rates were during 2020 and 2021. Although it was essential for governments to protect families and protect small firms from the ravages of Covid and economic lockdown during 2020 and 2021, they would actually have done better to finance that by borrowing in the markets because long-term interest rates were remarkably low for states with a good credit rating, which includes my own and includes yours," says Tucker.

"Instead they exposed themselves to the path of short-term central banking interest rates."

Speaking to interest.co.nz on Thursday, BNZ Chief Financial Officer (CFO) Peter MacGillivray said BNZ currently has about $10 billion in its settlement account. And on Friday ANZ NZ CFO Amanda Owen said her bank's settlement account balance would be bigger than BNZ's.

Asked whether receiving interest at the OCR would now be lucrative for settlement account holders Tucker says; "Broadly yes. It depends on whether they pass it on to their customers. The banks are sitting on this large pile of cash with the central banks and suddenly that's paying a healthier rate of interest."

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

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 mainland Chinese buyers are again very active in Sydney's new housing markets.

But first, there were just under 220,000 US jobless claims last week which was not as big a fall as was expected. (The seasonally adjusted number was higher.) There are now just under 1.7 mln people of these assistance programs.

All eyes are now on non-farm payrolls, and it is expect these will have risen only a modest +180,000 in April when the data is released tomorrow morning. The number of layoffs in April came in at their lowest level of the year.

And the American trade deficit came in at its lowest in four months, and it’s second lowest since November 2020. Exports rose +2.1%, imports fell marginally.

Canada's widely-watched Ivey PMI slipped slightly by is still expanding at a very solid rate.

The Caixin China General Manufacturing PMI fell to a small contraction in April which mirrored the official PMI contraction. But analysts had expected the Caixin PMI to be a bit better than that. It was not to be. The latest result was the first contraction in factory activity since January, amid an ongoing property downturn and fears of a global slowdown. New orders shrank after rising in March, while employment declined the most in 3 months.

Hong Kong reported its March retail sales overnight and they were strong, even after accepting they were off an unusually low base. The strong recovery of inbound tourism helped.

The ECB raised its benchmark policy rate by another +25 bps overnight to 3.75%. This was as expected. The previous three rises had been +50 bps each, and is up from zero in July 2022. They also signaled they won't be reinvesting all its QE holdings as each tranche matures, letting it run off at the rate of -€15 bln per month. Essentially they are signalling their recovery is now on track on a solid enough footing to ease off the loose money policies put in place for the pandemic.

European producer prices continued their retreat in March and are now 'only' +5.9% higher than year ago levels. Recall they were up by more than +40% in August last year at the peak of the pressures.

Australia's trade surplus rose to +AU$15.3 bln in March from an upwardly revised result in the previous month, handily beating market forecasts of +US$12.7 bln and their second largest on record (in June 2022). It was founded on strong mineral exports. Total exports to China, the country's largest trade partner, surged by more than +28% and now account for 17% of all goods exports.

Staying in Australia, the latest NAB Residential Property Survey found the overall share of foreign buyers in new property markets rose to almost 8% in the March quarter, up from 5.2% in Q4-2022. Buyers from China are driving this. The sharp rise was underpinned by +16% rise in NSW, up from 6.7% in the previous quarter. Foreign buyer market share in NSW is now at its highest level in eight years. Even before lockdowns were lifted, Foreign Investment Review Board figures show approved mainland Chinese investment in residential real estate totalled AU$1 bln in Q3-2022. It reached only AU$2.4 bln for the entire prior financial year.

Global container freight rates slipped again last week but only marginally as they have reached -34% below their 10 year average (even if this does include the pandemic spike). Bulk cargo rates were little changed too.

Global air passenger traffic in March rose strongly from depressed year-ago levels but it is still -12% lower than pre-pandemic levels. It is domestic travel that has made the best recovery. The weakest sector is international travel in the Asia/Pacific region.

The UST 10yr yield starts today at 3.37%, and down another -3 bps from this time yesterday. 

Wall Street is down -0.8% on the S&P500 in its Thursday trade. More woes from regional bank stocks are depressing this market. 

The price of gold will start today at US$2046/oz and up another +US$23 from this time yesterday. (Remember its all-time high was US$2070 on August 6, 2020.)

And oil prices have stabilised from yesterday to be just under US$69/bbl in the US. The international Brent price is just under US$73/bbl.

The Kiwi dollar is +½c firmer against the USD and now at 63 USc. Against the Aussie we are also +½c firmer at 93.9 AUc. Against the euro we are up +½c at 57.1 euro cents. That means the TWI-5 is now at 70.7 and up +40 bps since this time yesterday.

The bitcoin price is firmer today, now at US$28,829 and up +1.3% this time yesterday. Volatility over the past 24 hours has been moderate at +/- 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.

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 the chances of a global recession are receding in 2023.

First up today, the US Federal Reserve announced the expected +25 bps rate hike, taking its upper bound rate to 5.25% and a 16 year high. Their short Statement reinforced their focus on getting inflation back down to its target 2% range. Their decision was unanimous. But compared to previous pledges, this Statement no longer refers to the potential need to raise rates from here. The Fed doesn't see a recession coming for the US.

The data today confirms their assessment that the American "economic activity expanded at a modest pace in the first quarter" and is continuing like that. The widely-watched ISM services PMI for April rose to a slightly faster and modest expansion with new orders strong. The internationally-benchmarked Markit one reported a similar expansion in their services sector.

The US ADP employment report signaled a much faster expansion in their April labour market than expected, also confirming the Fed's view of a strong labour market there. The ADP report was expected to show of +148,000 in April, but it came in twice as strong at +296,000. On Saturday NZT we will get their official non-farm payrolls report and analysts still expect their employed labour force to grow by +180,000 in April. There has to be upside to that now.

We should probably also note that American car sales are rising again, now running at a 15.9 mln annual rate in April, a sharp improvement from the 14.8 mln rate in March.

The American housing markets are still not sharing in this expansion however. Mortgage applications fell -1.2% last week, following a +3.7% rise in the previous week. They are -32% lower than year-ago levels. The benchmark 30 year mortgage interest rate held at 6.50% plus points.

India's services sector is firing on all cylinders, with a sharp improvement in April to a fast expansion built on strong new order flows. Among developing countries, the contrast with China will be annoying Beijing.

The European labour markets are tighter for them too. The bloc's jobless rate fell slightly to 6.5% in March, and this is now the lowest rate on record and coming in just below market expectations of 6.6%. A year ago, this rate was 6.8% so the improvement since has been slow.

International trade by air cargo is still easing back but the decline moderated in March. The levels were -8% lower than a year ago (and about -8% lower than pre-pandemic levels too). However Asia Pacific volumes were down a bit more. The only region posting increases over pre-pandemic activity is North America.

The UST 10yr yield starts today at 3.40%, and back down another -3 bps from this time yesterday. 

The price of gold will start today at US$2023/oz and up another +US$11 from this time yesterday.

And oil prices have fallen sharply again, down another -US$3 from yesterday to be just under US$68.50/bbl in the US. The international Brent price is just on US$72/bbl.

The Kiwi dollar is marginally firmer against the USD and now at 62.4 USc. Against the Aussie we are also marginally firmer at 93.4 AUc. Against the euro we are up marginally at 56.5 euro cents. That means the TWI-5 is now at 70.3 and up +20 bps since this time yesterday.

The bitcoin price is virtually unchanged today, now at US$28,456 and a mere -0.4% lower than this time yesterday. Volatility over the past 24 hours has been modest at +/- 1.3%.

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

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 of rising interest rates as economic activity wanes.

But first up today, there was another dairy auction earlier this morning and it was another positive one. Prices were up +2.5% in USD terms, up 2.4% in NZD terms. That is the second rise in a row totaling +5.9% after a string of four retreats that totaled -9.2% so we have recovered a bit more than half the falls since February. There were rises across the board led by the +5.0% rise in WMP.

But this has been a rare bright spot in today's lineup.

Not helping today are equity market pressures on more American regional bank stocks. This is coming ahead of tomorrow's Federal Reserve meeting, which is shaping up as a critical even for market confidence. A +25 bps rate rise is on the cards there taking their policy rate to 5.25% (and matching the RBNZ).

And the US retail impulse remains very weak. On a same-store basis, last week retail sales were up a mere +1.3% from year-ago levels and far less than accounts for price inflation. Excluding the pandemic they are back to 2017 levels when inflation was much lower, so the situation is quite weak.

In March, the number of job openings in the United States decreased by 384,000 to 9.6 mln the lowest level in almost two years and below the market's expectation of just under 9.8 mln, indicating that their labour market is cooling off faster now. We will know by how much when we get the non-farm payrolls data for April on Saturday, NZT. Analysts are expecting a modest rise in employment of +179,000 for the month which would be a two year low.

American factory order levels disappointed as well. New orders for manufactured goods increased by just +0.9% compared to the previous month, rebounding from two consecutive months of decline. However, the growth fell short of market expectations of +1.1% and followed a revised -1.1% drop in February. Year-on-year these orders are up just +1.3% which is pretty weak.

There was a sharpish fall in the Logistics Managers Index as well. It fell for a third consecutive month to hit another record low of 50.9, compared to 51.1 in March. The decline was mainly driven by a dip in inventory levels suggesting that firms continue to get closer to properly balancing their supply of goods. So this fall isn't all negative and indicates sensible inventory management.

China may be on holiday this week, but the economic recovery is setting them back on the air quality front. A clear blue sky, once a rare sight, is again becoming a luxury this spring as factories gear up production in a bid to recover from three years of pandemic disruptions. In March, 14 days of heavy pollution were recorded in Beijing, and the number of days with good air quality decreased by a quarter from the previous year, according to official Air Quality Index data.

After suffering at least two full years of ugly retreats, Hong Kong managed some sort of bounce-back in Q1-2023 with a +5.3% rise in GDP from the prior quarter. That puts the year to March +2.7% ahead or the equivalent prior period. But they are nowhere near back to 2018 and prior levels yet. Still, it is better than even more retreats.

EU inflation isn't abating. Their CPI rose marginally to 7.0% in April from March's 13-month low of 6.9%. The pressure remains on the ECB.

Meanwhile, German retail sales were particularly weak in March and dropping at a somewhat alarming rate, although some of this was due to price declines for energy.

The Reserve Bank of Australia unexpectedly raised their cash rate by +25 bps to 3.85% yesterday after maintaining it at 3.6% in April. This marks the 11th time the bank has raised rates in the past year, defying market predictions for a pause and pushing borrowing costs to their highest level since April 2012. The move was motivated by the bank's concern that the current inflation rate in Australia, which is at 7%, is still too high. Markets really struggle to understand the RBA's communication and forward guidance, frustrating many analysts. And the RBA is itself frustrated with Australia's poor productivity which is says is hampering economic recovery without inflation.

Today - this morning in fact - the RBNZ will release its Financial Stability review, and important part of their market guidance. Their view of credit conditions in a retreating housing market will be of interest, especially as we haven't seen this level of value decline in housing (and commercial property?) in many generations.

And the RBNZ FSR will come out at about the same time as the local March labour market data, so it will be a very busy morning of important local indicators. We are expecting employment levels to have risen, although the jobless rate might tick up to 3.5%.

The UST 10yr yield starts today at 3.43%, and back down a very sharp -15 bps from this time yesterday.

The price of gold will start today at US$2012/oz and up +US$30 from this time yesterday.

And oil prices have fallen -US$4 from yesterday to be just over US$71.50/bbl in the US. The international Brent price is just under US$75.50/bbl.

The Kiwi dollar is almost +½c firmer against the USD and now at 62.1 USc. Against the Aussie we are a tad firmer at 93.1 AUc. Against the euro we are up marginally at 56.4 euro cents. That means the TWI-5 is now at 70.1 and up +30 bps since this time yesterday.

The bitcoin price is firmer today, up to US$28,601 and +1.1% higher than this time yesterday. Volatility over the past 24 hours has been modest at +/- 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 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 deposit insurance and financial stability are getting involved in an unhealthy mix

But first up, in the US there were the two competing PMIs for April released overnight. The closely-watched local one recorded a contraction, although less than expected and less than in March. The internationally benchmarked one recorded a small expansion after a minor contraction in March. Both suggested price pressures are not yet easing.

And we should note that JPMorgan Chase was the 'winner' in the FDIC auction to take over the failed First Federal Bank. They beat out two other bidders (PNC and Citizens Bank). Meanwhile, regulators are reviewing their deposit insurance scheme, one that was found wanting during the recent turmoil. Rather than protecting deposits to a limit, they face having to expand it to some sort of unlimited version. Interestingly, financial markets have shrugged of worries about bank health.

The RBNZ is due to institute a deposit guarantee scheme here, so they will no doubt be assessing what lessons they can draw from all this. The world is shifting to a policy trap where no-one can get hurt from risks that go bad.

The Canadian PMI was out overnight too and recorded a tiny expansion with price pressures not easing.

In Japan, their PMI is neither expanding for contracting which is an improvement from March. New order levels are firmish. But price pressures are being passed on.

South Korea, their export engine is stuttering, extending a long decline to seven straight months. The pullback was led by a persistent slump in the semiconductor sector in the face of a global economic slowdown.

China is still on on its Golden Week holiday. Some financial businesses will start returning on Thursday. Travel volumes on the first day of this holiday were reportedly strong. But in commodities markets, prices for most raw materials are still retreating as confidence China will build back better evaporates.

In India, their factory PMI rose to a good expansion with increases in new orders and output.

In Australia, their factory PMI has declined further and is now contracting, capping almost three years of retreat. New order levels are declining faster.

Australian job ad levels fell again, now well off their peak. But the April slip was less than earlier months.

And staying in Australia, all eyes will be on their central bank and their monthly rate review, due at 4:30pm NZT today. No change is expected from the current 3.6% level, even though their inflation remains high and sticky at well over 6%. The RBA has been under severe political attack in Canberra, with substantial reforms planned for it. But so far their Governor is holding his course through these storms. The political pressure is to lower the policy rate levels to give highly-leveraged households debt-payment relief despite the unusually high level of inflation. And arguably the relatively low current policy interest rate is helping fuel a renewal of higher house prices. They are in a kind of no-man's land, policy-wise.

We should also probably note that Australia will essentially ban vaping, limiting it to prescriptions for legitimate therapeutic use, and calling it a menace to children and public health.

The UST 10yr yield starts today at 3.58%, and up a very sharp +15 bps from this time yesterday. 

The price of gold will start today at US$1982/oz and down -US$9 from day-ago levels.

And oil prices have fallen -US$1 from yesterday to be just under US$75.50/bbl in the US. The international Brent price is just under US$79/bbl. Yesterday's weak Chinese PMI data is undermining this price.

The Kiwi dollar is little-changed against the USD and now at 61.7 USc. Against the Aussie we are -½c softer at 93 AUc. Against the euro we are up marginally at 56.2 euro cents. That means the TWI-5 is now at 69.8 and actually little-changed since this time yesterday.

The bitcoin price is lower today, down to US$28,297 and -4.5% lower than this time yesterday. Volatility over the past 24 hours has been moderate at +/- 2.9%.

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 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 today is a holiday in many countries, including China and India, and a number of European countries.

This week is set to be busy on the global economic front, with a number of key events scheduled. Locally, all eyes will be on Wednesday's labour market report for March. Analysts are expecting little-change with the jobless rate staying at 3.5%. The same day there is a dairy auction. And the same day the RBNZ releases its Financial Stability Review. Later in the week, investors will closely follow the US labour report, and before that both the US Fed and the ECB will update their monetary policy settings. The central banks in Australia, Brazil, Malaysia, and Norway will decide on interest rates, while inflation rates will be released for the Euro Area, Italy, the Philippines, Switzerland, South Korea, Indonesia, and the Netherlands. Finally, PMIs are due from the US, India, Canada, Italy, South Korea, and Russia this week.

But first in the US, their central bank faulted itself over the weekend for failing to “take forceful enough action” to address growing risks at Silicon Valley Bank ahead of the lenders collapse, one which raised turmoil across the global banking industry. It is a brutal self-review, reflecting very poorly on supervision by the San Francisco Fed. But behind it all was a 2018 roll-back of post GFC rules, handicapping regulators. Another US agency also released their review as well. The Fed said it will revisit the range of rules that apply to banks with more than US$100 bln in assets, including stress testing and liquidity requirements.

Confidence in American financial institutions by American is currently falling, although it isn't yet down to the 2011 or 2008/09 levels.

But a lack of confidence has killed another US bank, the regional (California) First Republic Bank. The FDIC has taken it over, firing all the senior management and wiping out all its equity investors. JPMorgan Chase and PNC are among the likely bidders to take over its carcass, a valuable regional market position.

Staying in the US, their PCE inflation came in with its smallest increase since July 2022 with this inflation measure up +4.2% from a year ago, and running at a rate of under +2% in March from February. This data will be influential at the Fed.

Perhaps the sense of control returning to inflation is helping the mood, despite angst about banks. The widely-watched University of Michigan consumer sentiment survey improved in April with the biggest recovery in the 'current situation'.

Also improving, but more sharply, the Chicago PMI jumped in April from its weak 2023 first quarter. It is still contracting, but only barely now. It wasn't an improvement that anyone expected.

In China, it is Golden Week, a week-long public holiday where a lot rests on healthy retail shopping. Chinese economic data releases will be few this week.

And staying in China, their steel exports are surging, up +50% from year-ago levels. But this is not a good sign. Rather it is a sign that the Chinese post-pandemic recovery is in trouble. Prices for industrial materials are plunging, with steel near a five-year low. The Chinese economy is slowing quite quickly now resulting in supply gluts. Prices had been on the rise since the end of last year in anticipation of an economic recovery after China abandoned its zero-COVID policy, but the expected growth isn't coming. Chinese producers with excess supply are ramping up exports, depressing prices globally.

Confirming the post-recovery wobbles, their official factory PMI contracted in April following three months of expansion. It was an unexpected retreat. Their official services PMI is still expanding however at a healthy clip. What won't help their manufacturing sector is their tough new rules about "national security' which are being expanded to include anything Beijing doesn't like. It will be hard for foreign investors to risk getting caught up in that. Some already have and it can get ugly quickly (not unlike being invested in Russia).

Late Friday the Bank of Japan issued its Monetary Policy Review and made few changes. But in a light-handed way, new Governor Ueda did signal that change is coming, now that inflation is embedding above 2%. Their very loose monetary policies are now under review even if the regulator still isn't fully convinced that a virtuous cycle of wage growth and price hikes is working.

Meanwhile, Japanese retail sales came in +7.2% higher in March that year ago levels, better than the +5.8% expected and almost matching the February burst. Industrial production wasn't as strong however.

In the past we have noted the Chinese concerns about food security. Well Japan is waking up to them as well, especially after seeing what is happening in Ukraine and it is increasingly concerned about Chinese expansionist activities in its own neighborhood. If New Zealand get punished by China for not toeing the Beijing line, it appears that Japan may become a more stable alternative. Apparently, Japan sources only 38% of its own food from domestic supplies, the lowest level among G7 nations.

While our house prices are generally falling and becoming more affordable, in Australia they are going the other way. House prices there rose at a +10% annual rate in March and a +8.5% annualised rate in April. In Sydney, the rises were even faster. Lack of supply, the interest rate pause and booming immigration is fueling this market. They also are suffering through a very severe rental crisis as well.

The UST 10yr yield starts today at 3.43%, and down -11 bps from this time Friday but most of that fall happened Saturday NZT. 

The price of gold will start the week at US$1991/oz and very little-changed from week-ago levels.

But oil prices have recovered their Friday drop to be just over US$76.50/bbl in the US. The international Brent price is just on US$80/bbl.

The Kiwi dollar is marginally firmer against the USD and now at 61.8 USc. Against the Aussie we are firmer too at 93.5 AUc. Against the euro we are up marginally at 56.1 euro cents. That means the TWI-5 is now at 69.9 and actually little-changed since Saturday.

The bitcoin price is still meandering today, although back up to US$29,620 and up +1.3% from this time yesterday. Volatility over the past 24 hours has stayed modest at +/- 1.4%.

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 $33.8 billion record current account deficit was a shock to overseas investors in NZ government bonds, but is ultimately probably not something people will lose a lot of sleep over, says Sydney-based interest rate strategist Martin Whetton.

Statistics NZ last month reported the annual current account deficit reached $33.8 billion last year, equivalent to 8.9% of gross domestic product, the worst ratio since measurement began in 1988. 

In response credit rating agency S&P Global Ratings told Bloomberg the deficit was; "catching our attention, the persistently weak and worsening current account position of the New Zealand sovereign, particularly given that it has been quite weak the last year or two and our forecasts are for it to narrow.” This led to fears of a potential downgrade to NZ's S&P sovereign credit rating.

In terms of overseas investors who buy NZ's government bonds, Whetton says the current account deficit is something they'll look at.

"And obviously when that number came out recently there was a bit of a shock to the market because there was the immediate response from S&P that suggested that the rating could be under threat as a result," Whetton said in the latest episode of interest.co.nz's Of Interest podcast.

"A decision on that can take some time, And I think if we just cool down for a moment and say 'New Zealand is in a very solid position, it has got a strong economy, and it does have very low debt-to-GDP at the government level,' then it's not something that people will lose a lot of sleep over."

"There are investors who simply have hard mandates around credit rating, but when you're starting at the top of the tree in ratings, very few people would not be able to buy New Zealand [government debt] so that's not an issue if there was a downgrade," said Whetton.

S&P has an 'AAA' sovereign domestic currency rating with a stable outlook on NZ. This rating assesses the country's capacity to meet obligations denominated in the NZ dollar, which almost all government debt is issued and repaid in. (See more on NZ sovereign credit ratings here, and credit ratings explained here).

In the podcast Whetton also talks about the attraction to overseas investors of NZ government bonds, the NZ yield premium over other similarly rated bonds, the big issues in sovereign bond markets at the moment, why he thinks NZ government debt is at a sustainable level, and finally how countries get into trouble with their sovereign debt.

"Typically it's borrow in a foreign currency. The benefit of countries like Australia, New Zealand, the UK, Japan, Italy, [is we] borrow in our own currency. So we pay it back in our own currency and you can always print more of that currency. Now the purists would recoil at that comment and I understand why because it can be inflationary. But if you need to solve it that way you can," Whetton said.

"You also, as we in Australia and New Zealand have found in the last couple of years, can get your central bank to buy [government] debt. I would not say that is the way you do things. Having a fiscal programme that is credible over the medium to long-term is probably your best starting point."

*This episode follows a recent one with Kim Martin, Director of New Zealand Debt Management which is the Treasury unit responsible for managing the Government's debt. And you can find all episodes of the Of Interest podcast here.

To boost New Zealand's ability to fight inflation Auckland University's Tim Hazledine suggests broadening the Commerce Commission's powers, looking at extending the Pharmac concept, and cutting Goods & Services Tax (GST) to 10%.

Hazledine, Emeritus Professor of Economics at the University of Auckland, discusses this and more in the latest episode of interest.co.nz's Of Interest podcast.

Following Thursday's Consumers Price Index (CPI) release from Statistics NZ, Hazledine's assessment is the inflation tide is going out.

"It's receding, which is good. The question is whether it would've gone out anyway or whether King Canute in the Reserve Bank had anything to do with it," says Hazledine.

His key evidence for improvement is the 1.2% March quarter CPI figure, down from 1.8% in the March quarter last year.

"That's the indicator that you really should be interested in and that's encouraging."

Nonetheless Hazledine says there are signs a recession is going to happen, and suggests we ought to be looking at policy instruments to support the Reserve Bank, which has "a monopoly on inflation fighting almost by statute."

This includes expanding the Commerce Commission's mandate so it becomes a price watch commission, potentially even with a mandate to roll back price increases if they think they're not justified.

"They really have to be finding out about prices everywhere and investigating costs, investigating pricing practices," says Hazledine.

He also promotes the concept of tripartite pay talks, seen in parts of Europe, between the Government, unions and employer groups, exploring an extension of the Pharmac model to source other products and services at lower prices from international suppliers, and reducing GST to 10% from 15%.

"That [a GST cut] would immediately cut consumer prices...The biggest single beneficiary from inflation in New Zealand is the Government."

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

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 of a lot of second-tier data and some of it isn't very good.

But first, US jobless claims were in fact little-changed from the prior week, although seasonal adjustment generated a higher number. There are now just under 1.8 mln people on these benefits but that is up from 1.5 mln a year ago. Despite the headline seasonally-adjusted rise, the actual data isn't really showing any increase in new claims.

But they may be on their way. The Philly Fed factory survey dived to its lowest level since the pandemic and its eighth consecutive negative reading. This survey covers the Pennsylvania manufacturing rust-belt heartland and is quite a negative signal.

US existing home sales in March dipped from February to an annual rate of 4.44 mln when a 4.5 mln rate was expected.

Chinese foreign direct investment is falling and quite quickly now. It hardly changed from February to March and is now only +4.9% ahead in nominal terms from a year ago. In February it was +6.1% ahead. In the 30 years of this data, we have never seen such a month where there was virtually none. This is very unusual and no doubt is ringing alarm bells in Beijing.

Meanwhile, China's central bank kept lending rates unchanged yesterday, adding to signs that it has put monetary stimulus on hold while it watches the progress of what they hope will be a consumer-driven economic recovery. The PBoC's one-year loan prime rate, a reference for lending to companies, stayed at 3.65%. The five-year rate, a benchmark for mortgage interest rates, remained 4.3%. Both have been unchanged for eight months.

From a very low base, Chinese mortgage lending rose +50% in the March quarter from the same period a year ago as homebuyers took advantage of lower interest rates. It is a signal that policies to bolster the property market are kicking in.

Taiwan export orders rose in March from February but were still -25% lower than year-ago levels, a consequence of the vice China has on the island nation.

Consumer confidence in the EU edged up in April, according to the latest 'flash' survey. It was a faster improvement than was anticipated.

German producer prices rose in March to be +7.5% higher than year ago levels. But in February they were more than +15% higher, so we are witnessing a very fast correction there recently. In fact, from February to March prices fell at a much faster than expected rate, a very sharp -2.5% in just one month.

Last week freight rates for containerised shipping actually rose. It was a tiny move up, but was the first we have seen in a very long time. It was primarily driven by the Shanghai to Los Angeles route which rose +11% in a week. The Shanghai to New York route rose +12%. But apart from these two major trades, most other rates are still falling. Bulk cargo freight rates were little-changed last week, still running at their long term average levels, levels we first saw in 1988!

The UST 10yr yield starts today at 3.55%, and down -5 bps from this time yesterday.

The price of gold is at US$2005/oz and back up +US$11 from this time yesterday.

And oil prices are down another -US$2.50 and just over US$77/bbl in the US. The international Brent price is just under US$81/bbl.

The Kiwi dollar is softer against the USD and now at 61.9 USc. Against the Aussie we are much weaker at 91.6 AUc and more than -¾c lower. Against the euro we are down -¼c at 56.4 euro cents. That means the TWI-5 is at 69.5, down -40 bps.

The bitcoin price is lower today, now back down to US$28,475 with another -2.7% fall from this time yesterday. Volatility over the past 24 hours has stayed modest at +/- 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.

This podcast will be taking a week off, so we will see you again on Monday week.