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 China's woes are affecting us, devaluing our currency to a nine month low. And the AUD is suffering similarly.

But first today, we can report that American inflation expectations continue to retreat, falling to their lowest since April 2021 and are now at 3.5% in July for the year ahead (and that is down from 3.8% in June). This mirrors the sort of levels we had noted in recent consumer sentiment surveys. Although this is not back to what the Fed says it needs, it is clearly on track, and consumers themselves seem to believe the Fed's actions won't bring a renewal of price pressure.

The same survey showed households’ perceptions about their current financial situations and expectations for the future improved. The share of respondents expecting to be better off a year from now is the highest since September 2021.

India however does not have control of inflation. Retail prices consumers face jumped to 7.4% in July, the highest since April 2022. A rise was expected, but nothing like that. It is a jump from 4.9% in June caused mainly by sharply rising food prices that were up +11.5%, their highest since January 2020, and in turn led by the cost of vegetables which were up an eye-watering 37% for the year.

As high as that may be, it is nothing like what the Argentines are facing. They just reported CPI inflation running at the rate of 116% and yesterday the Argentine peso was devalued sharply to 350 to the USD. This was all triggered when a wild-card hard-right populist took the top spot in a poll ahead of their upcoming presidential elections. They are in a sad spiral and that poll was probably the last straw; they are out of options and out of money.

Yesterday we noted the rapid devaluation in the Russian ruble. Well, today their central bank announced it will be holding an emergency meeting which will likely raise its policy rate sharply. It is currently at 8.5% and will probably go to at least 10% then. The ruble has devalued -27% so far this year amid a slowing economy, unbalanced currency flows, and capital flight.

In Australia, iron ore prices are falling, solely because of negative sentiment about the Chinese economy. We are seeing other commodity prices retreat too, including food commodities with declines for soybeans and wheat. Tomorrow morning, we have another dairy auction and everyone should hold their breath over that. As you know prices have been very weak recently, resulting in Fonterra cutting their pay-out forecast to well below break-even levels for most dairy farmers. The question that tomorrow will answer is how deep the current pressures will reveal. There is almost zero chance prices will hold or rise. Last week's WMP Pulse auction brought a -7% price drop and that probably foreshadows what is ahead tomorrow. Yes, the dairy sector is hurting, but the sheep and beef sector is finding it tough going too. Farmers will have shelved spending plans and the ripple effect on our whole economy will be significant.

The UST 10yr yield will start today at 4.19% and up +3 bps from yesterday and still near its October 2022 highs. 

The price of gold will start today at US$1910/oz and down -US$3 from yesterday.

And oil prices are a touch lower at just over US$82/bbl in the US. The international Brent price is unchanged at just on US$86/bbl.

The Kiwi dollar starts today essentially unchanged at just on 59.8 USc and near its lowest since November 2022. Against the Aussie we are a little softer at 92.1 AUc. Against the euro we are marginally firmer at 54.8 euro cents. That all means the TWI-5 is now at 68.5 and down -20 bps firmer than this time yesterday.

The bitcoin price is also virtually unchanged today from this time Saturday and still at US$29,374 which is up +US$52 or +0.1%. Volatility over the past 24 hours has been very low at just on +/- 0.2%.

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.