Economic prospects hesitate, suggest a shift lower

Kia ora,

Welcome to Monday’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 July starts on shaky ground everywhere although the ground is firmer in the US than China.

As this is the first week of July, it will be heavy with PMI survey results everywhere (except New Zealand). But the most important release this week will be the American labour market report (their non-farms payrolls) for June on Saturday. Analysts currently expect another +180,000 gain. And before that we get their JOLTs report.

In Europe, election results in France and England will shape the week. But so will CPI inflation rates. Not only do we get them for the EU and the other big EU economies, they also come for South Korea, Turkey, Indonesia, and the Philippines too.

Over the weekend, Japanese industrial production data was released showing it rose +2.8% in May from April, beating market forecasts. It also recorded an unusual year-on-year gain too. This was the second increase so far this year, mainly due to strong motor vehicles output. They think June will slip back but July will be another gainer.

But it was all backwards in China.

The official factory PMI was steady for the second straight month as expected. The latest result marked the fourth contraction in factory activity so far this year, as Beijing was struggles to spur an economic revival amid weak demand, deflation risks, and a protracted property weakness. New orders, foreign sales, and buying levels all declined for the second month in a row

And their official services PMI slipped as well, now barely expanding. While it was the 18th consecutive month of expansion in June, the latest result was the softest since last December, as new orders and new export orders continues to contract.

On Wednesday we may get the Caixin versions of these two PMIs. Recently they have delivered better results, although not significantly different.

In the US, the inflation measure the Fed prefers, the personal consumption expenditure price index (PCE) was unchanged in May from April following a +0.3% rise in April. This was what markets were expecting. That means the annual PCE rate slipped to 2.6%, its lowest since March 2021. (The May CPI was 3.3% and we get the June CPI on June 13 (NZT).

Personal spending was up +2.4% from May a year ago, personal income a bit less.

US durable goods orders were unchanged in May from April but were -1.2% lower than the same month a year ago. Of more concern however will be that capital goods orders fell -10% on the same basis.

Eventually that may weigh on employment, but so far it hasn't. Last week initial claims for jobless benefits fell from the prior week. Compared to the same week a year ago the number of people on these benefits was higher, but in relation to their workforce, that gain was insignificant.

US pending home sales for May fell when a bounce-back was expected, reinforcing the funk the American housing market is in. In fact local sawmills have been closing on low new home demand and even that hasn't stopped wood prices from falling to post-pandemic lows. Their residential construction and home-improvement markets are buckling.

The widely-watched University of Michigan consumer sentiment survey was little-changed in June, but it is up more than +6% from a year ago.

The ECB said that its survey of consumer inflation expectations over the year ahead are now back to 2.8%, the same level they were at when they started this survey in early 2020. They peaked at 5.8% in October 2022. Those survey said they felt inflation ran at 5.8% over the prior 12 months. (It actually ran at 2.7% in the year to May but averaged 3.9% over the past twelve months. The June results comes later this week and is expected to be 2.5%.)

In France, exit polls show that far-right candidates probably made gains in their weekend first-round elections, garnering about a third of the votes. Turnout was a 'high' 60%. But the final outcome is still uncertain. The second round will take place on July 7, 2024.

The rise and rise of container freight rates continued last week, up +4% from the prior week to now be a massive 256% higher than the same week a year ago. Again the main culprit was outbound rates from China to Europe, hostage to the Yemeni Houthis and their piracy. Bulk cargo rates were up +2% for the week and are again in an uptrend. They are up +72% for the year.

The UST 10yr yield is now at 4.39% and unchanged from Saturday. 

The price of gold will start today up +US$6 from Saturday at US$2326/oz.

Oil prices are little-changed from Saturday at just on US$81/bbl in the US while the international Brent price is still under US$85/bbl.

The Kiwi dollar starts today slightly softer from Saturday at just on 60.9 USc. Against the Aussie we are little-changed at 91.3 AUc. Against the euro we are also unchanged at 56.9 euro cents. That all means our TWI-5 starts today still lower at 70.5.

The bitcoin price starts today at US$61,628 back up +1.6% from this time Saturday. Volatility over the past 24 hours has been low at just on +/- 0.9%.

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.