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.

And today we lead with news inflation seems to be in retreat in all major economies.

The closely-watched American CPI inflation result for May got the benefit of falling petrol prices. The headline level came in +4.0% ahead of year-ago levels, which was marginally better than the expected 4.1% and much lower than the +4.7% level in April. From April it is only up +0.1%.

But excluding food and energy costs, American inflation was up +5.3%, so inflation clearly isn't beaten yet. Food prices rose. Still, even at this level it is their lowest since November 2021.

Faster-falling inflation levels, no matter which index you choose to watch, does support the idea that the Fed may choose to pause its current cycle of monetary tightening. That is what most analysts are picking. But +5.3% is still way above their policy target and still quite sticky, and an early signal that they have done enough might unleash a new burst of animal spirits that reignites inflation's embers. They certainly don't want that. It is no certainty they will pause on Thursday (NZT). Bond market signals aren't buying the 'pause' view.

Having said that, there certainly is no energy left in American retail sales growth. Revenge spending has ended. Apart from the pandemic period, same-store year-on-year growth last week is now at its lowest since the 2009 GFC period. And given inflation, in real terms it is shrinking rather fast. So perhaps a few more animal spirits are what is needed.

Lackluster conditions are not only in the US. China’s central bank unexpectedly cut its short-term policy interest rate, easing its monetary stance to help aid their economy’s faltering recovery. Overnight, China cut its reverse repo rate to 1.7% from 2.0% in another turn of the stimulus tap, and this was the first reduction in the rate since August 2022. The yuan fell. Benchmark bond yields fell. This sudden action comes just days after the central bank pleaded for patience. And their May new yuan loan levels bounced back weaker in May than expected after the dire April levels. Data out later this week is expected to point out growing economic weakness.

Going against the retreating trends, Japan is now reporting an upturn in business sentiment. It's not major, but it does break a cycle of retreats. Their stock market enthusiasm is leading the change in attitudes.

German economic sentiment also stopped falling in the latest ZEW survey.

German CPI inflation fell from +7.2% in April from a year ago to +6.1% in May on the same basis, and was down -0.1% between the two 2023 months, so they are also making headway in their inflation fight. Their core inflation rate is down to +5.4%

In Australia, consumer sentiment unexpectedly improved, according to the Westpac-Melbourne Institute Consumer Sentiment index. It was only a small improvement, but no change was expected.

Meanwhile NAB said their business sentiment survey was unexpectedly weaker in May. Business conditions continued to ease, they said, with notable declines across the trading, profitability, and employment. The fall in conditions now appears to be accelerating and it hasn't been positive since January.

Separately, it has been reported that residential dwelling vales rose by AU$140 bln to AU$9.9 tln in the March 2023 quarter. There are now just over 11 mln dwellings in Australia, now worth on average AU$896,000. That is a gain of +1% for the quarter.

And we should also note that ASIC has put accountants and lawyers on notice about the looming challenge of providing advice to companies about how to comply with complex disclosure rules on sustainable finance and climate risk. Getting that wrong will bring legal and reputation risks for their clients, and then for them.

The UST 10yr yield will start today at 3.85%, up +10 bps from yesterday. 

The price of gold will start today down -US$14 at US$1942/oz.

And oil prices have recovered +US$2 from yesterday to now be just over US$69.50/bbl in the US. The international Brent price is now just under US$74.50/bbl.

The Kiwi dollar starts today up +¼c at 61.5 USc. Against the Aussie we are +¼c firmer too from yesterday at 90.8 AUc. Against the euro we are little-changed at 57 euro cents. That means the TWI-5 is now up +20 bps at 69.5 which is actually a two week high.

The bitcoin price is virtually unchanged since this time yesterday at US$25,821. Volatility over the past 24 hours has remained modest at just on +/- 1.3%.

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.