China-related sentiment downturn deepens

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 that will all be overshadowed tomorrow by two key pieces of US data, their CPI and the Fed monetary policy decisions.

Today, the American Redbook retail indicator came in +5.5% higher than year-ago levels, continuing its track well above inflation and showing a positive retail impulse in the world's largest economy.

And the NFIB Small Business Optimism Index rose in May to its highest in five months. So again, no real stress signs there.

Canadian building consent levels came in much better than anyone expected in April. The total value of building permits increased by 20% month-on-month, the most since May 2020, after a -12% decline in March. Residential permits were up by 21%. That means they are +30% higher than year-ago levels, a surprisingly strong surge.

And staying in Canada, their government is proposing an effective hike in their capital gains tax (by raising the 'inclusion rate' from 50% to 66%), a move that business interests say would hurt investment. But the IMF is now saying that is probably just scaremongering. The IMF wants Canada to go further, also raising its 9% GST rate while raising a related tax credit to shield the poor.

In Japan, their machine tool orders were up +4.2 in May from a year ago. While this isn't spectacular, it looks like there is a trend reversal underway from the previous twenty-one months of declines.

In Hong Kong the dollar cost of China's security embrace of the once-great financial center is starting to become clear. They are coming up to five years of falling commercial real estate values as the shift out gathers pace. Bloomberg is reporting that those real-estate value losses now exceed -US$270 bln (-NZ$440 bln). Of course, no-one knows where it will settle, but the funk is deepening faster at present, not slowing down.

Values are being market down over the past few days on their major stock exchanges too. Over the past month the Shanghai stock exchange has fallen -4%, the Hong Kong exchange is down -5%. Sentiment is certainly leaking away in China's investment community. And China-linked commodity prices are easing lower too, especially mineral prices. Copper, iron ore, and rebar steel are all lower, as are soybeans, for example. The imminent visit from the Chinese Premier (not President Xi) has the aura of representing a fading force in the international trading world.

Meanwhile, India, despite a projected slowdown this year, will continue to be the world's fastest-growing large economy, according to the World Bank's latest Global Economic Prospects report.

Australian business sentiment isn't improving either. In fact, business confidence there fell back into negative territory in May as conditions continued to gradually soften, suggesting the subdued economic activity seen in the Q1 GDP data has continued into Q2. Business conditions slipped just below average with trading conditions and profitability easing.

The overnight dairy Pulse auction had prices retreating somewhat from last week's good full GDT event. But the lower levels probably aren't significant at this stage.

The UST 10yr yield is now at 4.40% and down -7 bps from yesterday. 

The price of gold will start today back unchanged from yesterday at US$2313/oz.

Oil prices are still at yesterday's level of US$77.50/bbl in the US while the international Brent price is just over US$81.50/bbl. But they have been volatile in between.

The Kiwi dollar starts today at just on 61.4 USc and up about +20 bps from this time yesterday. Against the Aussie we are up more than +¼c at 93 AUc. Against the euro we are also another +¼c firmer at 57.2 euro cents. That all means our TWI-5 starts today at 71, and up +20 bps from yesterday.

The bitcoin price starts today at US$66,780 and down a rather large -4.7% from this time yesterday. Volatility over the past 24 hours has still been high at just on +/- 3.0%

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.