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 holiday edition from Interest.co.nz.

Today we lead with news the US Fed seems to want ‘more evidence’ of easing inflation and it backs fresh rate hikes in 2023, unlike what markets have assumed.

But first we should note than American companies, from tech majors to consumer firms, are bracing for a potential economic downturn by shrinking their employee base to get ready for what they see coming. An updated list compiled by Reuters gives an indication of the scale involved; not massive, but significant.

On a same-store basis, American retail sales held up well last week, rising far more than inflation from year-ago levels (+10%).

US retailers used the holiday sales period to try to reduce inventories. That meant that warehouse pressures remained elevated but that transportation pressures eased sharply. We are unlikely to see a replenishment inventory build in Q1-2023.

The widely-watched local PMI showed their manufacturing sector contracted in December. It was a result broadly in line with the internationally-benchmarked factory PMI we noted yesterday. There is a broad pull-back underway in America's factories.

The data for November shows that job openings and new hires stayed at good levels, but probably things have moved on from there now.

US mortgage applications fell sharply over the Christmas period as you might expect. But they remain more than -40% lower than year-ago levels so still in the doldrums. Meanwhile American mortgage rates are back rising again and that won't help going forward either.

The US Fed released the minutes of its mid-December meeting, and those revealed they thought financial markets were misreading their signals. They are concerned because monetary policy only works when markets interpret their policy directions properly, and a misreading undermines their targets. Markets had been assuming the Fed will ease off in early 2023 and then start to reverse its rate hikes. But that doesn't seem to be what the Fed intends. It still isn't convinced it is on top of the inflation threat. Still, there was no immediate reaction in financial market pricing.

In China, the World Health Organisation says data there shows no new coronavirus variant has been found - it's just omicron - but the Chinese data under-represents how many people have died in the fast spreading outbreak. Essentially, China is being caught out by low vaccination rates. The costs may be high and they may be late, but they are getting the message.

New Zealand stands out by not requiring special testing requirements from China.

Meanwhile, Hong Hong retail sales are in real trouble it seems. They were down -4.2% on a value basis and down -5.3% on a volume basis in November.

In Australia, there are signs that their trade relationship with China may be about to thaw. There are rising expectations that some export bans may be lifted. But a major beneficiary will likely be the Aussie coal industry and a major boost for investors who ignore the climate and ESG trends that have been gaining traction elsewhere. It will make it hard for investors committed to those trends to compete.

And staying in Australia, the level of unsold properties is rising fast now, up +15% over 2022 and the fastest rise in a decade. Older suburban homes are especially harder to sell in the present market environment. They are calling this a 'stale stock' problem.

The UST 10yr yield started today at 3.72%, and down another -7 bps from yesterday. 

The price of gold will open today at US$1856/oz and up another +US$18 from yesterday. But that is a six month high.

And oil prices start today down -US$4 from yesterday's levels at just under US$74/bbl in the US while the international Brent price is just over US$78.50/bbl. These levels take it back close to its yearly lows.

The Kiwi dollar has recovered +½c to 63.1 USc after yesterday's drop. Against the Australian dollar however we fell another -¾c to 92.1 AUc. Against the euro we are firm at 59.5 euro cents and almost a +½c gain. That all means our TWI-5 starts today at 71, up a net +40 bps from yesterday.

In the US, regulators have issued a joint warning to banks over the risks in the cryptocurrency market. They told banks to be wary of potential fraud, legal uncertainty and misleading disclosures by digital asset firms. They also said there is "contagion risk" from the sector. The bitcoin price is now at US$16,887 and +1.6% higher than this time yesterday. Volatility over the past 24 hours has been low at just +/- 0.9%.

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.