Kia ora,

Welcome to Wednesday’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 there are some early signs global households may be starting to feel they are owing too much debt. Any pullback from that will induce a 'balance sheet recession', that during stagflation, might be very hard to control.

But first up today, the latest dairy auction has come in with something of a disappointment. Overall prices rose as expected, but the +1.5% gain in USD terms wasn't as strong as the derivatives market had priced in. Chinese buyers were noticed by their relative absence. On the positive side, it did end a run of five consecutive declines. In NZD terms however, that small rise evaporated. Volumes were low so the direct impact was not great, but the flow-through to wider contract pricing based on these auctions will be noticed. Maybe the impact on farmgate payout prices won't be strong either given where we are in the season, but analysts will be underwhelmed by this result.

In the US, logistics stress as measured by the LMI index seems to be easing. The rise in freight costs seems to be tailing off, but warehouse capacity is getting tighter and so warehousing costs are rising faster. It's a mixed bag. Higher inventory levels in response to the extended supply-chain uncertainties appear to be embedded now.

However, at least one very large American retailer has announced plans to shrink their embedded high inventories. If that spreads, suppliers may face a drought of orders.

American retail activity still appears to be strong, according to last week's nationwide survey.

American exports of both goods and services rose in April and their trade deficit reduced. Even if these shifts were small, they were unexpected and noticed. In fact, their deficit with China decreased by -US$8.5 bln to just under US$35 bln, the most in seven years. Falling imports from pandemic-restricted Chinese ports drove the April changes.

American consumer credit expanded more than expected in April, but that was down from the very high March expansion. Still, it continues a longish run of high demand, some of which will be inflation's effect, but it does support the ongoing strength of overall American consumption.

In China, they are expanding its safety net for the financial sector with a new rescue fund that could run into the tens of billions of dollars, as a cooling domestic economy and tightening monetary policy abroad pose growing risks. The new financial stability security fund is expected to provide a backstop for big institutions, such as banks, insurers and leasing companies, in cases of imminent collapse or widening investment losses sparked by overseas market turmoil that risk undermining the financial system as a whole.

They are worried about a 'balance sheet recession' because households have loaded up on debt, and will cut their spending plans for a long time to work their way through that new load.

German factory orders really disappointed observers. They fell in March and quite hard. A small recovery was expected, but in fact they fell again in April and for a third consecutive month. And foreign orders sank -4% which was faster than for local orders.

The Reserve Bank of Australia hiked its cash rate more than was expected to 0.85% with a full +50 bps rise, the most in more than 20 years. It is a real blindside curve-ball thrown to markets from a famously conservative governor, who apparently wants to know more about "least regrets". He has had an epiphany over the threat inflation poses for Australia.

But the pain it will cause their housing sector is a key concern for companies there.

Meanwhile, the World Bank has substantially cut its global growth forecast for 2022 to +2.9% in June from the +4.1% it forecast in January, citing the war in Ukraine, surging energy and food prices, and rising interest rates. They said that for many countries, a stagflation recession will be hard to avoid. Interestingly, the adjustment down to their forecasts for advanced economies was greater than for China. They still see China expanding +4.3% this year while the US's expansion will be reduced to +2.5%.

The UST 10yr yield will start today down -7 bps at 2.96%. 

The price of gold is up +US$10 today from this time yesterday, now at US$1852/oz.

And oil prices are little-changed from this time yesterday, now just under US$117.50/bbl in the US, while the international Brent price is now just under US$119.50/bbl.

The Kiwi dollar will open today lower at just under 64.8 USc. Against the Australian dollar we are -½c weaker at 89.7 AUc. in fact, that is our lowest against the Aussie dollar in nearly four years. Against the euro we are also lower at 60.5 euro cents. That all means our TWI-5 starts today at just under 71.7 and surprisingly little-changed in a week.

The bitcoin price has fallen by -4.5% and is now at US$29,898. Volatility over the past 24 hours has been very high at +/- 4.0%. 

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.