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.

Today we lead with news retailers worldwide are now on eggshells waiting to see how hard consumers pull back in the face of the supply-chain-induced inflation surge.

But first, it is Memorial Day in the US and they are still on holiday. They are using the break to ponder their ridiculous obsession with guns. Away from there, financial markets seem upbeat. Asian equity markets ended yesterday booking stellar gains mostly. Overnight European equity markets were mostly quite positive. And that was despite peaky consumer inflation data.

Perhaps the better business mood relates to signs that Shanghai is moving toward re-opening its city and region after a two-month lockdown.

A pickup in global demand and tighter supply is seeing the oil price rise sharply.

But supply-chain pressures don't seem to be easing, and may in fact get worse with a China re-opening. Japanese consumers are waiting months for appliances they once took for granted. And that is all to do with supply-chain snafus around computer chips.

China not only has a Covid crisis, and a related supply-chain crisis, it also has a banking confidence crisis in one province. It is bad enough that people took to the streets demanding access to their money.

In Europe, German inflation is surging, principally from energy costs, but food is up sharply too. They are on the economic front line of the war in Ukraine. CPI inflation is up 7.9% in May, rising from 7.4% in April. This is their highest since the 1973 oil shock and well above what was expected. Food inflation is set to surge to more than 11% (vs 8.6% in April), while services are expected to rise 2.9% and this is down from 3.2% in the prior month.

Spanish inflation jumped too, up to 8.7% in May.

These surges, undoubtedly felt across the whole EU, is denting consumer sentiment in a significant way. But interestingly, businesses are looking past the immediate impacts and haven't joined consumers in their depressive fog. Business sentiment remains above long term averages. Confidence in employment prospects remains surprisingly elevated.

It's not good in all of Europe. Sweden revealed its economy shrank in Q1-2022. It is not the only one of course, just the latest one.

Back in the US, Fed officials are out softening up the financial markets for a set of more +50 bps rate hikes.

High inflation is a scourge for retail demand. Around the world, retailers are bracing for consumer resistance to higher prices, and the impact could get very depressive in the next month or two. Costs are forcing prices up right now. Higher prices are keeping consumers wary. The risk of sharp falls in retail volumes is very real, very soon. The fight against inflation seems urgent.

And those consumer attitudes will have a great bearing on how housing market sales activity performs from here.

In Australia, election watchers are now confident the winning Labor Party will govern with a majority in their new parliament. And the leaders of both parties in the prior coalition have been dumped.

The UST 10yr yield will start today unchanged at 2.74% while the US remains on holiday. 

The price of gold is unchanged today at US$1854/oz.

And oil prices are very much higher from this time yesterday, up +US$2 to just under US$116/bbl in the US, while the international Brent price is now just over US$117.50/bbl.

The Kiwi dollar will open today at firm 65.6 USc. Against the Australian dollar we are at 91.1 AUc. Against the euro we are at 60.8 euro cents. That all means our TWI-5 starts today at 72.1 and firming.

The bitcoin price has risen +5.2% since this time yesterday and is now at US$30,694. Volatility over the past 24 hours has been high at +/- 3.2%.

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.