Kia ora,

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

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

Today we lead with news the move towards bear market conditions seems relentless, even if Wall Street pulled back slightly on Friday.

But first, the Australian election seems to have not only delivered a change of governing party - the traditional switch between the Coalition LNP and the Australian Labor Party - but voters behaved in an unusual way, cutting their support for both. The LNP suffered a huge loss of support, but the ALP also suffered a loss, even if quite small.

The gainers were the blue/green independents (the 'teals'), and to a much lesser extent the red/green Greens (the 'purples'). Teal independents have won seven more seats so far, as many extra as the ALP. The Greens won two more. Some seats are still to be decided. The swing to the ALP was less than +4%, the swing away from the LNP was almost -6%. Almost all the difference was the 'teal' independents. They were motivated by climate-change and anti-corruption policies.

In hindsight, it seems clear that the LNP was perceived as driving fringe agendas and culture-war policies out of step with a modern mainstream society, and it was tainted with indications it was untrustworthy. Poor pandemic policies and denials didn't seem to help. Those attributes were punished by voters.

The changes to their Senate are still quite unclear, and the results there are delivered by a very opaque system that can see minor forces (like the Greens) elevated.

The implications for New Zealand are still murky, but they are probably better than if the LNP had retained power.

In other news, the Chinese central bank held steady its key rates for corporate and household loans at its May fixing, but cut the mortgage reference rate for the second time this year, amid a slowdown in the Chinese economy due to the resurgent pandemic outbreak, a property crisis, and weak loan demand. The one-year LPR was kept unchanged at 3.70% after cuts of 5 and 10 bps in December and January, while the five-year LPR was trimmed by -15 bps, the most since a revamp of the rate in 2019, to 4.45%.

The sharply rising risk of default by many Chinese companies has forced their authorities to offer 'default insurance' to investors to induce them to supply funding. Bond investors have become increasingly wary of buying corporate debt amid slowing economic growth, disruption caused by Covid-19 lockdowns, and those rising default risks. Even in China, they privatise the benefits, and socialise the risks.

Taiwanese export orders have taken a very sudden and unexpected dive. After being hugely positive for more than two years, these export orders slumped by -5.5% from a year earlier to just US$52 bln in April. That follows a +17% jump in March and smashes market forecasts of an +8.3% rise. Particularly hard hit were ICT product orders. 

Japan is in the news again with another rare data item - they got inflation in April of +2.5%. It wasn't unexpected and the actual level came in at about the forecasted level. They haven't had price inflation at this level in more than seven years. In the prior seven months they have also recorded CPI inflation, but usually at tiny year-on-year levels. Now is its significant from a policy perspective. Food prices rose +4.0%. It could be worth watching how the Bank of Japan reacts now.

In their Friday session, Wall Street started with sharp losses, pushing towards the start of a bear market. But in late trading those losses were pared back and they ended the day virtually unchanged. But the fear of bear market conditions hasn't really receded.

The early report of the May sentiment readings for EU consumers shows they remain very weak, but little-changed from April.

German factories are being hit very hard with cost increases as a consequence of Russia's invasion of Ukraine. Producer prices are up more than +33% in the year to April, most of it energy related. But non-energy prices are up more than +16% so the downstream impacts are huge for them.

The UST 10yr yield will start today unchanged at 2.79%. 

The price of gold is a little firmer today, up +US$4 since this time Saturday at US$1847/oz. A week ago it was at US$1810/oz.

And oil prices are little-changed today and now just on US$110/bbl in the US, while the international Brent price is still just under US$111/bbl. The convergence of the two benchmarks is quite unusual.

The Kiwi dollar will open today back up more than +¼c against the US dollar, now at 64.1 USc. Against the Australian dollar we are firmish at 91 AUc. Against the euro we are also firmsih at 60.7 euro cents. That all means our TWI-5 starts today  at 71.3 which is up +30 bps from this time Saturday.

The bitcoin price has risen 3.7% from this time Saturday and is now at US$29,907. Volatility over the past 24 hours has been modest at +/- 1.8%.

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

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

Kia ora. I'm David Chaston and we’ll do this again tomorrow.