Kia ora,

Welcome to Tuesday’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 we may be having a bear market rally in financial markets, always a very risky time even if the data doesn't shout risk warnings. (In the past, such events have ended with a panic selling period.) But of course every new event isn't the same as prior ones and this time we have strong labour markets and resilient households which were never present in similar prior periods.

But first, today is a holiday in the US, their Memorial Day. That will be a key reason financial markets will remain quiet today.

The Biden-McCarthy debt limit deal is heading for votes in Congress. The Senate is likely to approve. But the House vote will be more contentious, and that will likely take place on Thursday NZT. After that, attention will turn to financial markets as the US Treasury races to sell bonds to replenish their reserves. That amount will be huge but needs to be completed by June 5 (Saturday NZT) to avoid default. This rush will likely be destabilising in bond markets, although the Fed may have to step in with its balance sheet support to ease the strains on financial stability.

Yellen has told McCarthy that "We will make more than US$130 bln of scheduled payments in the first two days of June, including payments to veterans and Social Security and Medicare recipients. These payments will leave Treasury with an extremely low level of resources. During the week of June 5, Treasury is scheduled to make an estimated US$92 bln of payments and transfers, including a regularly scheduled quarterly adjustment that would result in an investment in the Social Security and Medicare trust funds of roughly US$36 bln. Therefore, our projected resources would be inadequate to satisfy all of these obligations." Essentially default is imminent. It is up to McCarthy to get his deal through the House. No wonder markets are nervous.

Across the Pacific, a gauge of Chinese shares traded in Hong Kong inched closer to a bear market as a wobbling economic recovery, intensifying geopolitical tensions and a weaker yuan kept investors away. The Hang Seng China Enterprises Index slumped -1.3% on Monday, taking its losses from a January 27 peak to a whisker away from reaching -20%. The Chinese carmakers' industry association said car demand remained weak and shares of many of these companies slid.

Also falling sharply have been Hong Kong exports in April, down -13% from year-ago levels but that too was less than was feared.

Singapore's producer prices are now more than -11% lower than year ago levels and at a three year low. This reflects the tough times that have fallen on their economy recently, but at least the pace of the fall eased considerably in April

In Australia, the turmoil at PwC is getting ugly. There are about 900 partners and many of them will be very angry at what a few of their tax partner colleagues have wrought for the firm. And partners are jointly and severally liable for the huge costs which are inevitably coming. Many good people are about to be hurt significantly. The firm has stood down the nine partners at the center of their troubles and the Chairman has been jettisoned. But none of this is going to save them. Now the Australian Prime Minister wants those partners at the center of all this named. And the MNCs who took the PwC tax advice will be sweating their situation.

Meanwhile in Western Australia, their very popular Premier, Mark McGowan has unexpectedly quit politics. He led the Labor Party there to an extraordinarily dominant win in the 2021 election. He is certainly going out on top.

The UST 10yr yield will start today at 3.77% and down -3 bps in off-Wall Street trading. 

The price of gold will start today at US$1943/oz and down -US$3 from yesterday.

And oil prices are unchanged from yesterday at just on US$73/bbl in the US. The international Brent price is still just on US$77/bbl.

The Kiwi dollar starts today marginally firmer at 60.6 USc. Against the Aussie we are marginally softer 92.6 AUc. Against the euro we are at 56.5 euro cents and little-changed. That means the TWI-5 is still at 69.4.

The bitcoin price is a higher again today, now at US$27,729 and up another +1.4% from this time yesterday. Volatility over the past 24 hours has been moderate at just on +/- 2.0%.

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.