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 that bond markets are showing the pressure today with heavy selling and rising yields, in a sign that markets accept that central banks are serious in their inflation fight commitments. Yesterday's Bank of Japan moves aren't helping either.

But first up today we have the final dairy auction for the year and it is also ending on a low note, down -3.8% from the prior event and down -18% from the same event a year ago. In between it peaked +20% in March, and bottomed -18% at this latest event, so finishing in the dumps. WMP fell -4.0% from two weeks ago, and SMP fell -4.8%. The exchange rate has moved little over the past two weeks, so the -3.5% result in NZD is little different to the USD result.

With the milk flow easing off, the combined effect of lower prices on lower volumes will not help our export trade, nor our current account balance. But with borders open and international tourism and education slowly building back, at least there are forces mitigating the hurt this would otherwise cause.

US retail sales bounced back last week, up on a same store basis from the same week a year ago and by a bit more than inflation.

American housing starts were little-changed in November from October and maintaining the expected level. But building consents for residential construction fell away rather sharply, to a rate not seen since June 2020. A small fall back was expected, but they got a rather large fall-back in November. That takes them to pre-pandemic levels as higher interest rates start to bite this sector.

Maybe one reason is that new research shows that American rents are falling fast now, after a fast run-up earlier would have encourages multi-unit housing construction. The usual CPI-version of rents lags new-transaction data because if includes the vast cohort that is stable in their rent situation. This new data focuses on rents for the latest transactions. (see page 20.)

Canadian retail sales recovered in October from the September retreat, and by the level expected. But it is expected to soften again in November.

Bond yields jumped and the yen surged after the Bank of Japan surprised investors by raising the cap on benchmark 10-year government bond yields. They held its key short-term interest rate at -0.1% and that for 10-year bond yields at around 0% during its December meeting by a unanimous vote, but tweaked its yield curve control tolerance range from the current +/- 0.25 percentage points to +/- 0.5 percentage points. This is all aimed at their yield curve management.

But it wasn't expected. It is a doubling down by the central bank, rather than the expected easing off now that inflation is re-emerging in Japan. But clearly they think the recent inflation is only transitory.

Meanwhile, the share of Japanese government bonds held by the Japanese central bank has now topped 50% on a market value basis for the first time, new data showed.

In China, their central bank left its loan prime rates unchanged.

Meanwhile, Taiwanese export orders slumped badly in November, diving -23% from the same month a year ago as the nation feels the effect of the cold shoulder from China.

The Europe, the latest survey of EU consumer sentiment is little-changed, but it remains deeply negative, less so in the euro area.

German producer prices fell more than expected in November, slipping -3.9% from October which was a similar shift the month before. These prices are now 'only' +28% higher than a year ago, a sharp retreat from +34% in October. Recall they maxed out at +46% up in August, so the retreat is turning out to be as fast as the original build up.

The UST 10yr yield started today at 3.70%, and up another +12 bps from this time yesterday. 

The price of gold will open today at US$1820/oz and up +US$31 and aided by the Japanese move.

And oil prices start today down -US$1.50 from this time yesterday at just over US$74.50/bbl in the US while the international Brent price is just under US$79/bbl.

The Kiwi dollar opened today at 63.2 USc and down -½c. Commodity currencies are out of favour today. Against the Australian dollar we are unchanged at 94.9 AUc. Against the euro we are more than -½c lower at 59.4 euro cents. We should also note that we are a massive -4.8% lower in a day against the Japanese yen That all means our TWI-5 starts today at 71.6 and down another -80 bps.

The bitcoin price is now at US$16,839 and up +1.2% from this time yesterday. Volatility over the past 24 hours has again been moderate at +/- 2.3%.

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 again tomorrow.