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.

And today we lead with news of rising interest rates as economic activity wanes.

But first up today, there was another dairy auction earlier this morning and it was another positive one. Prices were up +2.5% in USD terms, up 2.4% in NZD terms. That is the second rise in a row totaling +5.9% after a string of four retreats that totaled -9.2% so we have recovered a bit more than half the falls since February. There were rises across the board led by the +5.0% rise in WMP.

But this has been a rare bright spot in today's lineup.

Not helping today are equity market pressures on more American regional bank stocks. This is coming ahead of tomorrow's Federal Reserve meeting, which is shaping up as a critical even for market confidence. A +25 bps rate rise is on the cards there taking their policy rate to 5.25% (and matching the RBNZ).

And the US retail impulse remains very weak. On a same-store basis, last week retail sales were up a mere +1.3% from year-ago levels and far less than accounts for price inflation. Excluding the pandemic they are back to 2017 levels when inflation was much lower, so the situation is quite weak.

In March, the number of job openings in the United States decreased by 384,000 to 9.6 mln the lowest level in almost two years and below the market's expectation of just under 9.8 mln, indicating that their labour market is cooling off faster now. We will know by how much when we get the non-farm payrolls data for April on Saturday, NZT. Analysts are expecting a modest rise in employment of +179,000 for the month which would be a two year low.

American factory order levels disappointed as well. New orders for manufactured goods increased by just +0.9% compared to the previous month, rebounding from two consecutive months of decline. However, the growth fell short of market expectations of +1.1% and followed a revised -1.1% drop in February. Year-on-year these orders are up just +1.3% which is pretty weak.

There was a sharpish fall in the Logistics Managers Index as well. It fell for a third consecutive month to hit another record low of 50.9, compared to 51.1 in March. The decline was mainly driven by a dip in inventory levels suggesting that firms continue to get closer to properly balancing their supply of goods. So this fall isn't all negative and indicates sensible inventory management.

China may be on holiday this week, but the economic recovery is setting them back on the air quality front. A clear blue sky, once a rare sight, is again becoming a luxury this spring as factories gear up production in a bid to recover from three years of pandemic disruptions. In March, 14 days of heavy pollution were recorded in Beijing, and the number of days with good air quality decreased by a quarter from the previous year, according to official Air Quality Index data.

After suffering at least two full years of ugly retreats, Hong Kong managed some sort of bounce-back in Q1-2023 with a +5.3% rise in GDP from the prior quarter. That puts the year to March +2.7% ahead or the equivalent prior period. But they are nowhere near back to 2018 and prior levels yet. Still, it is better than even more retreats.

EU inflation isn't abating. Their CPI rose marginally to 7.0% in April from March's 13-month low of 6.9%. The pressure remains on the ECB.

Meanwhile, German retail sales were particularly weak in March and dropping at a somewhat alarming rate, although some of this was due to price declines for energy.

The Reserve Bank of Australia unexpectedly raised their cash rate by +25 bps to 3.85% yesterday after maintaining it at 3.6% in April. This marks the 11th time the bank has raised rates in the past year, defying market predictions for a pause and pushing borrowing costs to their highest level since April 2012. The move was motivated by the bank's concern that the current inflation rate in Australia, which is at 7%, is still too high. Markets really struggle to understand the RBA's communication and forward guidance, frustrating many analysts. And the RBA is itself frustrated with Australia's poor productivity which is says is hampering economic recovery without inflation.

Today - this morning in fact - the RBNZ will release its Financial Stability review, and important part of their market guidance. Their view of credit conditions in a retreating housing market will be of interest, especially as we haven't seen this level of value decline in housing (and commercial property?) in many generations.

And the RBNZ FSR will come out at about the same time as the local March labour market data, so it will be a very busy morning of important local indicators. We are expecting employment levels to have risen, although the jobless rate might tick up to 3.5%.

The UST 10yr yield starts today at 3.43%, and back down a very sharp -15 bps from this time yesterday.

The price of gold will start today at US$2012/oz and up +US$30 from this time yesterday.

And oil prices have fallen -US$4 from yesterday to be just over US$71.50/bbl in the US. The international Brent price is just under US$75.50/bbl.

The Kiwi dollar is almost +½c firmer against the USD and now at 62.1 USc. Against the Aussie we are a tad firmer at 93.1 AUc. Against the euro we are up marginally at 56.4 euro cents. That means the TWI-5 is now at 70.1 and up +30 bps since this time yesterday.

The bitcoin price is firmer today, up to US$28,601 and +1.1% higher than this time yesterday. Volatility over the past 24 hours has been modest at +/- 1.9%.

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.