Kia ora,

Welcome to Thursday’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 markets are choppy after the Fed decision.

As widely expected, the US Fed did hold its policy rates unchanged at today's meeting. But it added the phrase "in determining the extent of additional policy firming that may be appropriate ..." signaling the more hikes are probable. They reinforced the importance of getting to their 2% inflation target. Their own median forecasts suggest two more rate hikes this year, adding another +50 bps in 2023. So it's more of a 'skip' than a 'pause'. This caused the US dollar to slip, equity markets to retreat, and bond yield to rise.

American May producer prices rose only +1.1% from year-ago levels, up +2.8% without food and energy. They fell -0.3% in May from April, following a +0.2% rise in April. Markets had expected only a -0.1% month-on-month drop. Goods prices went down -1.6%, the largest decrease since July 2022, mainly due to a -14% drop in petrol prices and a -1.3% fall in food prices. Prices for services rose +0.2% in May. All this paints a picture of rapidly receding inflation.

American mortgage applications rose rather sharply last week, up +7.2% from week-ago levels but are still substantially below year-ago levels. However, it was their first rise in five weeks. Mortgage rates declined for the second straight week, with the 30-year fixed rate decreasing to 6.77% plus points but that is more than +100 bps higher than a year ago. Industry sources are noticing more first home buyers in their housing market.

In Beijing, officials are worried about their faltering economy. A wide range of emergency support measures are now being considered by their State Council and decisions could come late this week or early next. On the agenda are more and deeper rate cuts, direct support for their struggling real estate sector, and tax incentives and credit support for the car market, especially electric vehicles. Tax breaks are also under consideration for high-end manufacturing companies. But it seems not under consideration is a redux of the large-scale infrastructure spending. That was considered wasteful and inefficient the last few times it was used, and put added pressure on local governments who are now a key part of the current weakness.

'Hidden debt' - that is debt owned by Local Government Financing Vehicles - and ultimately the liability of China's local government has now swelled to more than NZ$13 tln. (At the end of 2022 it was ¥59 tln or 33 times New Zealand's economic activity.)

The situation is certainly unnerving wealthy Chinese. China’s millionaires keep leaving, but now outflows may be ‘more damaging than usual’, a new report says. China isn't the only country where the rich are escaping. Russia, the UK, and India also feature. Where are they going to? Australia, UEA and Switzerland are the top three. New Zealand makes it into the top ten list.

In South Korea, their jobless rate fell to 2.5% in May, falling for the third consecutive month to a record low, indicating that the country’s labour market remains resilient despite weakish manufacturing activity, tighter financial conditions and slowing economic growth. Regionally, Japan has an unemployment rate of 2.6%, in China it is 5.2%, in Taiwan it is % and in Singapore it is 1.8%. New Zealand is 3.4%. It is hard to have a recession when just about everyone is employed.

Australia will release its labour market data later today and a minor +15,000 additional jobs are expected with their jobless rate staying at 3.7%.

In the EU, they did get their expected bounce-back in industrial production in April from March, but it wasn't quite as strong as they hoped and doesn't change the lackluster track.

The UST 10yr yield will start today at 3.81% and down -4 bps after yesterday's large +10 bps jump. Rates are on the move following the Fed 'hold' decision. 

The price of gold will start today little-changed, up just +US$2 at US$1944/oz.

But oil prices have slipped back today to now be just under US$69/bbl in the US. The international Brent price is now jdown -US$1 to just under US$73.50/bbl.

The Kiwi dollar starts today much firmer, up +¾c at 62.3 USc and a three week high. Against the Aussie we are +½c firmer at 91.3 AUc. Against the euro we are up as well at 57.4 euro cents and almost a +½c gain. That means the TWI-5 is now up +50 bps at over 70 which is now a three week high.

The bitcoin price is little-changed since this time yesterday at US$25,989 and up only +0.6% from yesterday at this time. Volatility over the past 24 hours has been low at just on +/- 0.5%.

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.