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.

And today we lead with good economic news that just keeps coming even as fears don't abate.

First, for those returning to work, welcome back. For those still on holiday, lucky you.

This coming week we will get some grunty American data along with the meat of their earnings reports for December results. (Tesla's will be particularly interesting.) They will report their first estimate for Q4-2023 GDP, December PCE, and personal income & spending data, as well as durable goods order data. Outside the US, Japan has a rate decision, as does the ECB, Canada, Norway, Turkey and Malaysia. We will get PMIs from Australia and their NAB Business Sentiment update for December.

Over the weekend, data from China showed investors are still withdrawing funds from the country on a net basis. Foreign direct investment into the Middle Kingdom fell by -8% in 2023. But although the transparency on this data is limited, there is a suggestion that there was a small improvement in the month of December from a year ago.

But that may be a data mirage. Bloomberg is reporting that things are getting grimmer in Chinese equity markets. Tokyo has overtaken Shanghai as Asia’s biggest equity market, while India’s valuation premium over China has hit a record. The meltdown in Chinese share values is wreaking havoc on the nation’s asset management industry, pushing mutual fund closures to a five-year high. But you won't find any of this in Hong Kong or other Chinese analysis.

Japan's December CPI inflation rate came in at 2.6%, down from 2.8% in November. And their core rate was at 2.3%, down from 2.5% in November. That is the 21st consecutive month it has been above the Bank of Japan's 2% target. But with this slippage, the central bank will likely remain very cautious that Japanese inflation is really back. 2.3% is a 17 month low even if over all of 2023 inflation was at a 41 year high in Japan. To help ensure that inflation stays embedded, Japan's government is urging businesses to raise wages ahead of annual spring negotiations between employers and labour unions. The largest union is demanding a 5% rise.

In the US, consumer sentiment as measured by the widely-watched University of Michigan survey surged in January, and inflationary expectations retreated. This was a combo that was not expected, or at least, not as decisively. Sentiment is now suddenly its highest in 2½ years. Year-ahead inflation expectations softened to 2.9% after plunging in December. That current reading is the lowest since December 2020. Few analysts saw such a sharp improvement in both measures coming although it is reflective of the steady progress in the American economy in other data, especially labour market data.

But American existing home sales activity dropped by -1.0% in the December month from a month earlier to an annualised rate of under 3.8 million, reaching the lowest level since August 2010 and falling below the market's anticipated 3.82 million units. For all of 2023, they sold 4.1 mln, the lowest level in nearly 30 years.

North of the border, Canadian retail sales jumped in December (but after a drop in November), the sharpest increase in 11 months.

Across the Atlantic, German producer deflation got "worse" in December with producer prices falling a whopping -8.6% from the same month a year ago. On an annual average basis, industrial producer prices were -2.4 % lower in 2023 than in 2022. But the December result is not all bad because a lot is due to extreme base effects. And energy prices in December were down more than -23% from the same month in 2022. Basically it is a gift from Russia. Germany is surviving a cold winter with plenty of gas and low prices.

Closer to home, in Australia the IMF released the results of its annual staff review. The IMF wants to see meaningful tax reform there, and doesn't like that the markets pricing interest rate cuts in 2024. They [rightly] point out that inflation and inflation expectations are still far too high. The IMF's call for tax reform in Australia is a long-standing position - but one Canberra ignores.

The UST 10yr yield starts today at 4.13% and down -3 bps from this time Saturday. 

In a global market that has been rising since the start of 2023, investment grade corporates have just issued a record $150 bln in debt in January - so far. It's a head-turning pace. Corporate treasurers are voting with their deals, trying to stay away from the upcoming Trump uncertainties, and betting rates will rise sharply in the future. There is also pent-up rollover demand.

The price of gold will start today up +US$4/oz from Saturday at just on US$2029/oz.

Oil prices are little-changed at just on US$73.50/bbl in the US and the international Brent price is still just over US$78.50/bbl.

The Kiwi dollar starts the week at 61.1 USc and little-changed from this time Saturday. But that caps an almost -2½c retreat since the start of the year, or a -3.8% devaluation. That is large and there could be inflation implications. Against the Aussie we are holding at 92.8 AUc. Against the euro we are also holding at 56.1 euro cents. That all means our TWI-5 starts today just under 70 and a -1.6% devaluation for 2024 so far on that basis.

The bitcoin price starts this week a bit higher but still in its recent lower range. It is now at US$41,585 and up +2.6% from Saturday. Volatility over the past 24 hours however has been very low, +-/ 0.4%.

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.