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 bond investors are pricing their yields for a sharp slowdown coming soon with some key yields getting more inverted. Attention is shifting to what the US Fed will announce on Thursday.

But first up, Japan reported June CPI inflation at the end of last week with their headline rate now at 2.4%, down fractionally from 2.5% in May, but still above the Bank of Japan's target of 2%. It's been above that target for three consecutive months now. And it's been seven years since they have had inflation like this although that was because of a GST hike. Excluding that, it's been 32 years.

In China, the central bank said there were NZ$1.6 tln of bonds issued in June, taking their total issuance to NZ$33.7 tln. That is about 125% of annual Chinese economic activity, just for this official debt. Much of this new issuance will be just to keep the lights on, rather than investing for future gains.

In Russia, they slashed their official interest rate by -150 bps. Earlier in the year it was raised fast to weigh against a spike in inflation. Now it is being cut hard to try an invigorate a war-damaged economy with sinking demand.

Globally, the 'flash' business activity surveys were out over the weekend for most major economies and they paint a somber picture.

The American one reported a contraction in July, all due to services activity. The factory sector is still expanding at the same rate as in June, but the services sector took an unexpectedly retreat. The decline was the sharpest since the initial stages of the pandemic in May 2020. Separately, new export orders fell for a second successive month but new local orders are still expanding making the combined new order inflow the weakest in the past two years.

With little other major economic data around, the unexpected contraction in the giant US services sector had an immediate impact on equity and bond markets on Wall Street on their Friday.

Weaker growth in new orders was also a feature of the Japanese flash PMI for July. But at least both their factory and service sectors are still expanding there.

In Europe, their factory PMI slipped into a minor contraction while their services sector is still expanding in July - but only just. But none of this will be much of a surprise given the invasion from the east. Perhaps you could say it is quite resilient in the circumstances, that they are not yet in a major contraction.

A lot of the EU result is due to the pressure Germany is under with both their factory and services sectors contracting now. The French services sector is a bright spot.

Data for Canadian retail sales in May was strong, and a bright spot in the weekend releases. Year-on-year increases are impressive and far more than inflation can account for. But of course this data is quite dated now.

In Australia, the big general insurer there, IAG, has reported that natural perils and rising costs will push up premiums by up to +9% for house and car cover. This comes as their shareholder funds shrink as provisions and reserves need to be raised, and it missed profit guidance to investors. Since mid April which was before the latest flooding on the Australian eastern seaboard, its share price has fallen -20% and investors worry about what the climate will do to its business.

And we should note that over the past week, the iron ore price has fallen -8%, copper is flat, but it had already fallen -27% since early June. Nickel fell almost -30% from early June. Wheat is down more than -30% since mid June. Soybeans are down -15%. Only coal is holding its new high price. Aluminium is down -15% from early June. And crude oil is down -18% from that early June peak.

The UST 10yr yield starts today at 2.75% and unchanged from Saturday but back to mid-April levels. A week ago this was at 2.93%. Market attention is squarely on Thursday's US Fed announcements where a +75 bps rate hike is universally expected. The UST 2-10 rate curve is marginally flatter today, now at -22 bps and their 1-5 curve is slightly more inverted at -17 bps. Their 30 day-10yr curve is now at +61 bps and little-changed from Saturday. 

The price of gold will open today at US$1727/oz in New York which is up +US$3 from this time Saturday. It is also up +US$16 from this time last week.

And oil prices are little-changed at just under US$95/bbl in the US, while the international Brent price is now at just over US$99.50/bbl. These prices are almost exactly the same as this time last week.

The Kiwi dollar will open today marginally firmer than this time Saturday at 62.5 USc. Against the Australian dollar we are also a little firmer at 90.3 AUc. Against the euro we are unchanged at just over 61.2 euro cents. That means our TWI-5 starts today at 71.1 and this is -60 bps lower than this time last week.

The bitcoin price is little-changed from this time Saturday, down by just -0.9% to US$22,788. Volatility over the past 24 hours has been moderate at just on +/-2.1%.

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.