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.

Today we lead with news that the economic pace is shifting lower in the US  and higher in China.

Although American mortgage applications rebounded strongly last week from the New Year break, they remain well below year-ago levels. But mortgage rates are now falling and are their lowest since September. Despite that, the recovery in transactions in their real estate market are very modest at best.

There is a similar weak rebound in their retail markets for the new year. Sales are up on a same-store basis last week, but not up enough to account for inflation.

And their respected Advance Retail Sales data shows overall December sales fell -1.1% from November, and a rather startling retreat. Year-on-year they are up just +5.3% and nowhere near enough to account for inflation. The Fed's dampeners are working.

On the industrial front, we are starting to see concrete signs of deflation starting to emerge. Even though producer prices are +6.2% higher than year-ago levels, they fell at a -6% rate in December from November, which was more than anticipated.

Business inventories are swelling much faster now, as the slowdown makes this much harder to manage. They were a massive +15% higher than a year ago in November. To be fair however, they are only just back to the range they were in prior to the pandemic on an inventory-to-sales ratio basis.

As you might expect, American industrial production is waning now, and contracted in December from November at an annualised rate of -8% which is pretty sharp. Year on year it is up only +1.6% on a 'real' basis and that is the slowest expansion since before the pandemic.

It is not only industrial production that is turning lower. Overnight Microsoft announced that it is laying off 10,000 employees. The worm is turning even among the tech giants.

With all this weak news, both equity and bond markets are retreating in the US.

Canada also released its producer price data for December. And that also revealed a shift to deflation, and rather a sharp turn. Year-on-year those costs are still +7.6% higher, but that is down from +9.4% in November, so a sharp turn recently. But like the Americans, the main driver for the retreat is falling energy costs, so that isn't necessarily bad.

Chinese foreign direct investment data was reported late yesterday for December and that was weak from the prior month, and similar to the very modest rise in November. Both levels re rising less than the equivalent rises in 2021. In most years there is a surge in December, but that was notably absent this year.

In Japan, their central bank kept its ultra-easy monetary policy unchanged, despite the bond market fallout from a surprise policy shift last month. After the two-day meeting, the BOJ's nine-member board maintained its yield curve control policy, keeping its target band for 10-year Japanese government bonds at between plus and minus 0.5%.

Japan also released data for their industrial production, but that was nor November. However, their results were the opposite of the US. They reported lower year-on-year results, but a sharp improvement in November from October (+2.4% real annualised rate) indicating recent improvement. We also saw that in their December machine tool orders data we noted yesterday.

In Australia, the number of houses (dwellings) under construction reached a record high in December, but that is just as the number of consents and starts for new dwellings fell very sharply.

If they implement the BEPS reforms, the OECD says governments could get a bigger windfall than previously estimated, maybe as much as NZ$400 bln. Holding that up however, is the US Congress and its new Republican-controlled House of Representatives many of whom are in the pocket of wealthy supporters.

Meanwhile the IEA says global oil demand is set to rise by +1.9 mb/d in 2023, to a record 101.7 mb/d, with nearly half the gain from China following the lifting of its pandemic restrictions. Jet fuel remains the largest source of growth.

And at Davos, the IMF is suggesting it is likely to upgrade global growth forecasts because the prospects for improvement after China's reopening may be better than first assumed.

The UST 10yr yield starts today at 3.39%, and down -15 bps from yesterday. 

The price of gold will open today at US$1906/oz and down another -US$6.

And oil prices start today up +50 USc at just over US$81/bbl in the US while the international Brent price is just over US$86.50/bbl.

The Kiwi dollar has firmed slightly overnight, now at 64.5 USc but that is now a two-month high. Against the Australian dollar we are firm too at 92.4 AUc. Against the euro we are up at 59.7 euro cents. That all means our TWI-5 starts today at 71.5, and up another +30 bps since this time yesterday.

The bitcoin price is marginally lower, now at US$20,959 and down -1.1% from this time yesterday. Volatility over the past 24 hours has been moderate at +/- 2.9%.

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 tomorrow.