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.

Today we lead with news the expected reactions are bedding in now with equity prices sliding as bond yields rise sharply again.

But first, American inflation expectations are rising, in the short term at least. Median one-year-ahead inflation expectations increased to a new series high of 6.6% in March from 6.0% in February, while three-year ahead inflation expectations actually slipped to 3.7% from 3.8%. The increase in short-term expectations is broad-based across age, education, and income groups. Tomorrow we get the official March CPI data and 6.6% is what is expected for core inflation. But including food and energy, analysts are expecting total CPI inflation to be up at 8.4%, and well above the 7.9% recorded in February.

The US Treasury auctioned US$46 bln of 3 year Notes earlier today. They got bids worth US$114 bln, but for the accepted bids they had to pay 2.68% - a three year high - which is up sharply from the 1.70% they paid just a month ago in an equally popular auction.

Canada is girding itself for a +50 bps rate rise by their central bank this week.

China is apparently getting a bit more inflation now. Their official data says overall prices were up +1.5% in the year to March, but because there was no change from February what we are seeing are base effects moving the annual number up. Food prices are rising as part of that (+2.0% year-on-year), but prices for beef (0.0%) and lamb (-4.6%) are not part of that. Milk prices are rising slightly (+0.4%). The easing of high producer price inflation did happen in March, but not be as much as was expected. It is now running at +8.3% year-on-year.

And despite their economic slowdown, Chinese banks are lending at a fast rate, with new loans up more than +10% in March. Bank debt is rising at more than twice the economic growth rate, an extended distortion.

The Shanghai government announced yesterday that it will lift pandemic lockdown restrictions in just over 40% of its neighbourhoods, though the city as a whole has continued to log record daily infections. Spreading distress for locked-down residents is behind the move. And that distress has been noticed in Guangzhou (the metropolis near Hong Kong) where there has been a severe run on supermarkets and household supplies in case authorities there impose a similar tough lockdown.

The French first round election result has gone as we noted yesterday, so the Incumbent president and his far-right rival are now expected to be in a tight race in two weeks for the second round and deciding vote. What will swing this result is how the third-place 'left' voters react. Will they turn out for Macron? If so he will win comfortably. If not it will be very close. (For the record, the traditional French conservatives polled only 5% in the first round.)

Zinc prices have skyrocketed to above US$4,400/tonne in April, just shy of its record peak hit in November 2006. Demand remains strong, but Russia is a key supplier and supply disruptions are spreading. High energy prices aren't helping. As a consequences inventories are very low with them virtually zero in Europe and falling in the US. Zinc isn't the only metal under pressure, but it is emblematic.

There has been another heady rise in benchmark bond yields overnight with the UST 10yr yield rising +8 bps to 2.78% taking it back to a level we last saw in November 2018. 

The price of gold starts today at US$1947/oz and essentially unchanged from this time yesterday.

And oil prices are down -US$3.50 at just under US$94/bbl in the US while the international Brent price is down -US$4 and now just on US$98/bbl.

The Kiwi dollar will open today lower by -20 bps at 68.3 USc. Against the Australian dollar we are marginally firmer at 92 AUc. Against the euro we are at 62.7 euro cents an slightly softer. That all means our TWI-5 starts today still just under 74.2 and little-changed from this time yesterday.

The bitcoin price is down a sharp -6.4% from this time yesterday at US$40,327. Volatility over the past 24 hours has been high at +/- 3.9%.

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.