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.

Today we lead with news inflation may be transitioning lower, but investors seem uncertain what that will do to the level of economic activity

But first up today, there was another dairy auction this morning, and not especially notable. Prices dipped -0.1% in USD terms. Only cheddar cheese showed any life, up +4.0%. The rest of the components moved very little. For example the core WMP price was up a mere +0.1% and SMP was down -0.3%. However even though these prices were little-changed they were undermined by a rising NZD. In local currency, prices fell -2.9% from the prior event. That takes them, in local currency terms, down to the lowest they have been since February 2021. Not helpful.

The New York state factory index turned in a shocker of a result, falling hard. In fact (apart from the pandemic halt), it was their weakest result since the depths of the GFC. Apart from lower inflationary pressures, there are no positive indications here.

In Canada, inflation is easing too. Their December CPI slipped to 6.3%, the least since February and below market expectations of 6.4%, compared to the 6.8% in November and further declining from the 1983-high of 8.1% reached in June. Lower petrol prices drove this latest result. Will it be enough for the Bank of Canada to ease off its rate hikes? We will know when they next meet on Thursday next week.

Meanwhile, Canadian housing starts fell away quite sharply in December and by more than expected. It wasn't a huge miss, but it is their lowest level since January 2022.

Canada is also taking "aggressive measures" to free up its borders and build its immigration levels in the face of serious skill shortages.

China said its economy expanded +2.9% in Q4-2022 from the same quarter a year ago. This was nearly double what was expected. For the full year, it claims +3.0% real. At the same time it said industrial production rose just +1.3% in Q4. Retail sales fell, down -1.8% (an -8% fall was expected. And electricity production was up +3.0% they said. All this key data is far more positive than almost any analysts was expecting. One reason was that their rural sector brought in record harvests.

China also said its population shrank -850,000 to 1.41 bln people by the end of 2022. It's an historic switch lower and is the start of an "irreversible" decline, demographers say. They recorded 9.4 mln births and 10.6 mln deaths in 2022. Now 20% of their population is over 60 years. 

In Japan, investors are bracing for a potential big policy shift by the Bank of Japan as soaring inflation may force the end of its ultra-low rates pledge. The Bank of Japan is meeting now and we will know the outcome of its policy deliberations later today. Certainly speculation is high and investors are on edge.

Singaporean exports fell sharply in December, down more than -20% from the same month in 2021. That is much tougher than the -14.7% pace they reported for November.

For the first time in almost a year (that is, since the Russian invasion of Ukraine), German investor sentiment turned positive, and in a quite spectacular way. It is now net-positive. Driving that has been the expectation that inflation is being brought back under control. And in turn driving that has been the unexpected success the EU has had insulating itself from Russian energy blackmail. And they now think they will avoid recession in 2023. All good reasons for Germans to be optimistic to start the year.

The UST 10yr yield starts today at 3.54%, and up +4 bps from yesterday. 

The price of gold will open today at US$1912/oz and down -US$9.

And oil prices start today up +US$1.50 at just under US$80.50/bbl in the US while the international Brent price is just under US$86/bbl. Moving the dial today are improved demand indicators.

The Kiwi dollar has firmed overnight, now at 64.3 USc and its highest in a month. Against the Australian dollar we are firm too at 92 AUc. Against the euro we are up +½c at 59.5 euro cents. That all means our TWI-5 starts today at 71.2, and up +30 bps since this time yesterday.

The bitcoin price is marginally higher, now at US$21,201 and up +0.9% from this time yesterday. Volatility over the past 24 hours has also been modest at just +/- 1.6%.

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 will do this tomorrow.