US has a high inflation problem, China has a low income problem

Kia ora,

Welcome to Friday’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 ECB has turned hawkish and is now focused on fighting inflation rather than propping up some of their large slow growing economies.

But first, new American jobless claims rose to +185,000 last week, a very minor rise. There are now 1.255 mln people on these benefits, still an all-time record low even if little-changed from the prior week.

Tomorrow, all eyes will be on the American CPI inflation rate. It is expected to come in at +8.3%, for May, the same as for April. But there will be special interest on the food component which could well come in higher than overall prices. Other countries are about to release monthly CPI data too. But New Zealand only releases this data quarterly and we will have to wait until July 18 to get our June data. Our weekly grocery price monitor suggests our prices are now starting to rise very fast, up +13% in a year.

There was a US Treasury 30yr bond auction a few hours ago, well supported, but the median yield rose to 3.11%, up from 2.91% at the prior equivalent event a month ago. That a +20 bps rise and above today's secondary market level, an unusual outcome.

In China, exports were expected to recover somewhat in May after a tepid change in April. But in fact they jumped by much more than expected, up almost +17% to US$308 bln. That is their highest increase in shipment in four months and easily beat market forecasts.

Chinese imports were little-changed, so their trade surplus jumped to almost +US$80 bln, well above the expected US$58 bln, and far above the April US$43 bln. Their concentration on shifting high-value exports as a priority after the lockdowns in Shanghai, and using alternative ports, appears to have been a positive initiative.

This may be positive for their exporters, but their general population is feeling very glum. China’s consumer confidence index slumped to 86.7 in April from 113.2 in March, hitting the weakest level since the data was first available in 1991. Their core problem isn't inflation, it is income reductions. This is yet another indication as to why Premier Li appears so worried about their economic situation.

Japanese machine tool orders rose strongly again in May, up almost +24% above the same month a year ago and essentially maintaining their fast paced rise.

The ECB said during its June meeting that it will end net asset purchases under its Asset Purchase Program in July and it intends to raise the key ECB interest rates by 25 basis points next month. It will be the first increase in borrowing costs in more than ten years, as inflation in the Euro Area shows no signs of easing. It said it is likely to raise them the same amount in September.

European bond yields rose and equity prices fell on the ECB announcement that the easy money of their QE is ending. But they are not emptying the reservoir, only not adding to it from here on.

But there are doubts the ECB can remain hawkish if economic expansion turns to contraction there.

Container shipping rates eased a tiny amount again last week, but nothing meaningful. Bulk cargo rates eased as well.

The UST 10yr yield will start today up +2 bps at 3.04%. 

The price of gold is down -US$5 today from this time yesterday, now at US$1849/oz.

And oil prices are down -US$1/bbl from this time yesterday, now just under US$120/bbl in the US, while the international Brent price is now just under US$122.50/bbl.

The Kiwi dollar will open today sharply lower at just under 64 USc. The daily retreat is the most since the pandemic shock on March 19, 2020. Against the Australian dollar we are marginally firmer at 89.9 AUc. Against the euro we are just under 60.2 euro cents. That all means our TWI-5 starts today at just over 71.2 and down -100 bps in a week mostly due to the rising greenback.

The bitcoin price has slipped by a tiny -0.2% from this time yesterday and is now at US$30,293. Volatility over the past 24 hours has been modest at +/- 1.3%. 

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 on Monday.