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 supply-chain stress in threatening the global economy in a fundamental way now. And weaker American consumer sentiment isn't helping.

The rise in American inventories is starting to become concerning, although much of it is just caused by price rises. Still even if retail inventories were only up +1.7% in May from April, they are up a sharp +17% from May 2021. Wholesale inventories are where the real problems are, up +25% year-on-year. Congestion in shipping, rail and warehouse supply lines haven't really eased. The prospect of an inventory-correction has to be rising. There could be US$250 bln in excess stock in their supply chains, US$150 bln in wholesale channels, US$100 bln in retail channels. That represents about 1% of US economic activity, so any pullback would be noticeable even if not huge. World-wide it is a very much larger problem and that is where the real risk lies.

The US merchandise trade deficit for May came in less than for April although not by much. But at least it was their lowest in five months with exports rising +22% year-on-year. As we have noted before, the overall trade deficit amounts to only about -4% of US GDP, again very manageable in the intermediate term at least.

The weekly Redbook indicator as an early view on American retail sales shows them tracking little-changed with no real sign of any slowdown on this front.

But the Richmond Fed factory survey does, confirming what the Dallas Fed survey indicated yesterday - that the top is off new order levels and future prospects don't look as bright in June.

And the widely-watch Conference Board survey of consumer sentiment in June has turned negative too, near a ten year low. You would expect this negativity to show up in retail sales activity soon. If not, the mood turn is entirely political, not economic.

Will the US Fed change its tightening course? Michael Burry thinks a retail bullwhip is coming and they will. But overnight senior central bank speakers in both the US and the ECB doubled-down on their inflation-fighting purpose.

In China, senior officials are exhorting farmers to bring in a good grain harvest, an unusual move that probabaly indicates some concerns about food security in light of Russia's invasion of Ukraine.

In Germany, GfK Consumer Climate Indicator declined to a fresh record low even if it wasn't quite as bad as expected. It been really negative for the past four months.

In Europe generally, we should note that Turkey has now consented to both Finland and Sweden joining NATO.

In Australia, their Federal Government has racked up AU$892 bln in bond debt - and growing. (For reference, the NZ Government has AU$168 bln gross outstanding.) At the rate they need to issue new debt, it will exceed AU$1 tln in the next few years. They now have a very serious interest rate risk. Plus, just given the quantum they have at risk, the market appetite for more may be constrained - meaning buyers may get hard to find. The head of their debt management office has been out explaining his expected predicament.

The UST 10yr yield starts today unchanged from this time yesterday at 3.20%. 

The price of gold is at US$1821/oz in New York and down -US$2 from this time yesterday.

And oil prices are +US$1.50/bbl higher at US$110.50/bbl in the US, while the international Brent price is now just over US$113.50/bbl.

The Kiwi dollar will open today -½c lower at 62.5 USc. Against the Australian dollar we are down -¾c at 90.3 AUc. Against the euro we are little-changed at 59.4 euro cents. That means our TWI-5 starts today at just on 70.5 and down a further -30 bps.

The bitcoin price has moved little from this time yesterday and is now at US$20,581 and down -0.6%. Volatility over the past 24 hours has been modest at +/- 1.6%.

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.