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 that stresses are building in China and so far they aren't doing much to effectively turn them around.

But first, aided by sharply retreating energy costs, annual inflation ran at 4.9% in April in the US, lower than the 5.0% in March and the 5.0% rate expected. And very much lower than the 8.3% rate a year ago. That is the first time in two years it has been below 5%. Progress in taming inflation might seem slow, but actually they are making steady progress. However, the March to April annualised rate is 6.1% unadjusted for seasonal effects, or 4.8% adjusted for seasonal effects. So they might find it tricky to make progress from here. The next stage will require inflation expectations to recede. There are signs of that, but these signs are not solid yet.

Because the data is broadly in line with what analysts had expected, there has been only muted market reaction - it has been priced in. But that assumes the Fed is less likely to go hard on its rate increase track. The 5.25% policy rate is now not expected to rise from here. Maybe a brave market expectation, but that is what is priced in.

American mortgage applications jumped 6.3% in the first week of May, the biggest rise in nearly two months and rebounding from a -1.2% fall in the prior week. But that is now three of the last six weeks recording notable rises, seven of the last twelve weeks. Helping is a slow retreat in benchmark mortgage rates. The declines are tiny, but sentiment is helped when they don't go up.

US monthly Budget Statement revealed a smaller surplus in April that the prior year. April is just one of the two months in the year when receipts traditionally exceed payments. But this year their deficit is rising compared to the prior year, up to -$1.9 tln over the past twelve months. But this is not because spending is rising. In fact Federal expenditures are -16.8% lower in April that the same month a year ago. It is the severe clamp on tax receipts that is swelling this deficit. They were -26.0% lower than a year ago. Republican intransigence is killing any current chance of sorting this out. These are huge inhibitions; that -26% April reduction in tax receipts is a -US$225 bln shortfall, in just one month. Even the US can't sustain that.

In China, they are trying to stop the relentless decline in domestic food production. Their way is to bring new land back into production, and force farmers to grow strategic crops, rather than economically sustainable ones on that land. It is an aggressive national priority, driven by Beijing directives. It has all the hallmarks of being successful i=only in the short-term and disastrous long-term as soils exhaust themselves.

Meanwhile, China's monetary policies are reaching their limits and they show signs of turning conservative. Debt is still rising from what are already extreme levels, and when matched with their current tepid consumption, they have some serious pressures and concerns ahead.

In Turkey, we are watching their presidential election campaign and the vote this weekend. It could be close if it remains a fair contest.

Germany also released inflation data overnight coming in at 7.2%. But this is really just a confirmation of their earlier 'flash' result for April, not fresh data.

At the lates G7 Finance Ministers meeting, they called for tightening oversight of cryptocurrency transactions between individuals, in a bid to close loopholes for money laundering and sanctions evasion. These rules are controlled by the international Financial Action Task Force and the G7 wants regulatory standards to curb money laundering and terrorist financing using cryptocurrencies which they claim is rife.

The UST 10yr yield starts today at 3.45%, and down -7 bps from yesterday. 

The price of gold will start today at US$2031/oz and down -US$4 from this time yesterday.

And oil prices have fallen -US$1 from yesterday to be just over US$72.50/bbl in the US. The international Brent price is just under US$76/bbl. These are their lowest levels since December 2021.

The Kiwi dollar is firmer against the USD and now at 63.5 USc. That is a +3.5% appreciation in just two weeks. Against the Aussie we are up over 94 AUc. Against the euro we are marginally firmer at 57.9 euro cents. That means the TWI-5 is now at 71.2 and a one month high. We should also note that the Chinese yuan is weakening, now at a three month low against the USD which is also a bit weaker. Against the NZD the yuan is at a six month low.

The bitcoin price is lower today, now at US$27,330 and down -1.1% from this time yesterday. At one point however it was down -3.0%. Volatility over the past 24 hours has been moderate at just over +/- 2.7%.

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.