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 rise in both American personal income and personal spending topped forecasts in June, but bond markets have ignored this strength.

But first in China, they said they had an inflow of foreign investment in June of +US24.5 bln in the month. That was their best monthly result in more than a year.

But this comes after Beijing meetings on their economic slowdown and how they are responding. Missing are any mentions of the 5½% 2022 growth target. Replaced are calls for measures to "expand demand", work on "preventing decline" and "stabilising the current situation".

And over the weekend, their official PMIs were released for July. After having popped up to a rare expansion in June, the July manufacturing PMI contracted again, as it had done in each of the March to May months. So that is four of the past five months contracting. Both new orders and especially new export orders, fell. It wasn't a contraction analysts were expecting. Their services PMI was still expanding at a good pace July, but less so than in June, and their claim seems an odd result when only three of the ten sub-indexes actually expanded. New orders contracted in the 12 of the past 13 months.

However, the easing Chinese lockdowns, as tentative and uncertain as they have been, supercharged Japanese industrial production. After taking a heavy hit in May, this June rebound more than made up for the earlier shortfall and was way better than expected. It was the first rise in industrial output since March and the steepest pace on record. But Japanese retail sales growth slowed in June.

In the US the widely watched PCE inflation gauge rose +1.0% in June from May, more than expected and up +6.8% in a year. But these inflation levels are far lower than the US CPI measure of inflation (+9.1%).

For a fourth consecutive week, American petrol prices have fallen. So some heat is coming out of this source of inflation. 

Perhaps more importantly, the PCE data set shows both incomes and spending growing faster than expected. Personal incomes are up +7.2% in a year, a rate that has been stable for many months. Personal spending growth was up more, but this is a more volatile series and is up at the rate of +7.6%. These shifts show on average most households are not quite keeping up with inflation. The slippage however is being assumed as more than it really is, which is why sentiment surveys are quite negative.

All of these indicators keep pressure on the Fed.

The widely watched University of Michigan sentiment survey bounced off its lows in July, but remains deeply pessimistic. In fact it is still basically at its all-time low in a record that does back 44 years, six recessions and some of those were long and deep. Yet, the US has record low unemployment and is not in recession presently, and yet these types of sentiment surveys record lowest-ever mood depths. But company earnings remain very strong. It is not easy to reconcile. They may be talking themselves into a recession.

Expanding at a moderate pace, even if less so, is the heartland Chicago PMI. But of note in this survey is the sharpish shrinkage of new orders. Inventories are rising.

On the heels of the advance US Q2 GDP release on Friday, there were a slew of countries releasing Q2 economic activity reports over the weekend. Canada's was flat from May but up +1.1% in the year. Taiwan's was up +3.1% for the year. Mexico says it was up +2.1% for them. And the overall EU rate was +4.0% and a better than expected result. It was lower than the +5.4% in Q1, but well above the expected +3.4%. These come after a set of national releases that included France who said it grew +4.2% over the past year. Germany reported a +1.1% expansion rate. New Zealand won't report its Q2 GDP result until September 15.

In Australia, producer prices rose +5.6% over the past year to June, slightly faster than in the year to March, but lower than their CPI rise of 6.1%. The equivalent New Zealand data for the June quarter isn't due out until August 17, 2022.

Staying in Australia, the latest APRA data shows moderating growth in mortgage loans to owner-occupiers as rate hikes and the rising cost of living taps the brakes for household borrowing, but loans to investors are picking up sharply - in anticipation of more migration. Overall, private sector lending was up more than +9% year-on-year.

The UST 10yr yield starts today at 2.66% where it ended in New York last week. 

The price of gold opens today at US$1767/oz in New York which is up +US$2 from this time Saturday.

And oil prices start the week marginally softer at just on US$97.50/bbl in the US, while the international Brent price is now at US$103.50/bbl. The number of North American oil rigs operating is now back to pre-pandemic levels.

The Kiwi dollar opened today marginally firmer from this time Saturday at 62.9 USc. Against the Australian dollar we are also marginally firmer at 90 AUc. Against the euro we are a tad softer at 61.5 euro cents. That all means our TWI-5 starts today at 71.2 and little-changed in a week.

The bitcoin price has moved sideways from this time Saturday, down a mere -0.8% to US$23,735. Volatility over the past 24 hours has been moderate at just over +/-2.2%.

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.