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.

Today we lead with news that the coming week will be dominated by interest rates decisions by the major central banks including US Federal Reserve, Bank of Japan and the Bank of England. Also in focus will be August inflation rates reported for both Japan and Canada.

All this will come following the global recession warning from the World Bank that is focusing minds.

Most equity market indexes ended last week sharply lower as investor fears grew. And the S&P500 futures suggest that Wall Street will open tomorrow down another -0.8%. From its peak in January this year, the S&P500 has now retrenched by -19.3%. The cacophony of news when it hits -20% and a bear market just might drive it to a new low. Certainly p/e ratios need correcting in this new environment of much higher benchmark interest rates.

But consumers seem to have had enough of the 'fear' mood - they already did that. Now they seem to be feeling better about life.

In the US the University of Michigan consumer sentiment survey rose to a five-month high, driven by a sharp, recent fall in petrol price inflation. Will it last? Who knows? Will the investor fear mood last? That seems equally uncertain but they are having to swallow increasing losses. Along with their bond investor brothers, equity market losses are piling up and portfolios are shrinking in value now. The negative mood might become a self-fulfilling trend in the back half of 2022.

More positively we should note that the "interim settlement" of the US rail dispute is a significant risk removed from the immediate future. Given where the parties were, it is quite an achievement, under pressure. Ratification seems likely.

China reported some key data late on Friday, and some of it was unexpectedly positive. Retail sales were up +5.4% in August from a year ago, an expansion at twice the July rate. Industrial production was up +4.2% on the same basis, also beating expectations. In fact, electricity production surged in August, up almost +10% from year-ago levels. But this is still a bit of a puzzle because these 'power' rises recently are far more than can be explained by industrial activity, or consumer behaviour.

The Chinese central bank fixed the value of the yuan (CNY) at 6.93 to the US dollar on Friday. But in freely-traded offshore markets, the CNH is trading over 7. If you can get CNYs out of China, there is a good arbitrage trade available now with an "easy" 1% gain on each transaction.

Chinese citizens are as heavily 'invested' in residential real estate as Kiwis, maybe even more so. But data out on Friday shows that in 50 or their 70 largest cities the prices of new housing fell in August from July. That is the most in more than seven years. More broadly, for housing resales, 56 of these 70 cities posted price retreats. The 'wealth effect' impact on vast numbers of Chinese households will be negative, and for many, disturbingly so. There may be building social disquiet.

Meanwhile in Germany, they have seized control of some Russian-owned energy assets in the country to shore up its energy security concerns. Russia has turned off its gas and oil taps and Germany needs the local infrastructure to operate on alternate supplies, which are starting to flow in volume, including from the US. The price of oil and gas is not rising, nor is futures pricing.

Elsewhere in Europe, Hungary is becoming the cheerleader for Russia at a time inflation is soaring. It has placed caps on mortgage rates, food prices and fuel costs. It is also cracking down of dissent, and the EU is worried for democracy in Hungary and is withholding US$7.5 bln in aid while those anti-democratic measures are in place. Hungary has inflation at 15.6% pa and a benchmark interest rate of 11.75%.

The UST 10yr yield starts today at 3.46% and unchanged from this time Saturday. We should also note the sharp rises in wholesale swap rates in New Zealand on Friday, pushing up again. Our one year swap rate is now it’s highest since 2008. 

Bond investors may be taking losses, equity investors joining them, but data out on Saturday (for July) shows an international rush to shift money to the US. In the month, they reported the sum total of all net foreign acquisitions of long-term securities, short-term US securities, and banking flows was an inflow of US$153.5 bln. While these flows are quite variable, there has been an upward trend in them since 2019.

The price of gold will open today at US$1676/oz. This is -US$41 or -2.4% below where it was this time last week.

And oil prices start today little-changed from Saturday at just on US$85/bbl in the US while the international Brent price is still just on US$90.50/bbl.

The Kiwi dollar will open today at just on 59.9 USc and marginally firmer than this time Saturday. For the week it has been a -1.2% devaluation. Since the start of the month a -2½% devaluation. And since the start of 2022 the devaluation has been -12½%. Against the Australian dollar we are unchanged at 89.2 AUc. Against the euro we are still just under 59.9 euro cents. That all means our TWI-5 starts today at 69.6, marginally firmer but still very close to a two year low.

The bitcoin price is now at US$19,674 and virtually unchanged from this time Saturday. Volatility over the past 24 hours has been modest at just over +/- 1.3%.

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’ll do this again tomorrow.