Information breakfast; Stagflation threatens the global economy

Here is our summary of the key overnight economic events affecting New Zealand with news that stagflation is stalking the global economy.

But first, the latest US consumer sentiment survey, this one from conference board, fell slightly in May, but nothing like that of the University of Michigan. The decline in this was less than expected. Respondents seem satisfied with the “current situation” but concerned about their “expectations”. This survey seems more in line with the economic data we have seen recently.

And the latest Chicago PMI confirms it. This reports better expansion in this industrial hub – actually quite rapid expansion in May. Production and new orders surged from April, but cost pressures are not easing yet. Inventories are very high as companies “invest” to build resilience in the face of ongoing supply chain challenges.

And the Dallas Fed survey of Texas manufacturing paints a similar story. Their May report reveals extensions at all levels. But they also signal heightened concerns about the future more generally – although the companies did not yet have evidence to back up those concerns. This seems more “political” than a reading of their real situation.

Canada reported a more modest GDP growth rate for Q1-2022 of +3.1% real. That would be considered pretty good except in light of the recovery-growth seen in 2021.

Japan reported good retail sales growth in April, better than expected, but inflation may have played a role in these figures. Still, it was their biggest jump in nearly a year. But they are preparing for further retail price increases which come into force today. Higher retail sales due to inflation, yes, but that doesn’t come with an increase in revenue. Expect Japanese consumer sentiment – already weak – to continue to fall.

And Japanese industrial production really struggled in April. Production has dropped and inventories have increased, which is a bit of a toxic mix. Supply chain issues related to sourcing components from a Shanghai lockdown have hurt more than expected, and we know they haven’t improved in May, and the outlook for June isn’t good no more. Their factories are still going to be under the pump for a while. Good order levels mean nothing if you can’t deliver.

Chinese officials note that their May PMI bounced back from April. But they are still contracting after the April disaster. And this is true for both their factory and service sectors. It has been three consecutive months of decline. It will take them a magical turnaround to register 5.5% GDP growth in 2022, as they had predicted. That seems very unlikely at this point. Factory export orders are contracting as they have every month for a year.

The first data May home sales in China are not encouraging, although that may pick up slightly in June as cities like Shanghai and Beijing ease their lockdown restrictions.

To boost consumer confidence and spur economic activity, Beijing has halved taxes on small, low-emission passenger cars. They expect this could result in the sale of an additional 2 million such vehicles.

India too reported their quarterly economic performance from January to March, and it underperformed in a trend we expected. The fault is both the spread of the pandemic and the high prices of raw materials.

EU reported its headline inflation rate for May and it was 8.1%, Germany at the highest at 8.7% on a harmonized basis and France at the lowest at 5.4%. Most of the nations arrived at the German level rather than the French level.

It doesn’t just look like a sharp downturn in New Zealand’s residential construction industry, Australia has seen a drop in building permits as well – looked worse because a rise was expected, and that now means 23 of the last 25 months have booked retreats compared to the previous month, and year over year the April level is a whopping -36% inferior.

And May was not so good for the Sydney property market. Prices fell -1% in April, the biggest monthly decline since January 2019. Some analysts say it is now on track for a -10% decline in 2022. None of this will help the way banks view the risks associated with lending to the Australian construction industry in the current environment.

The 10-year UST yield will start today sharply higher by +11bps to 2.85% after adjusting after Wall Street returned from the holidays. The UST 2-10 yield curve is steeper at +30 bps and their 1-5 curve is steeper at +76 bps. Their 30-day-10-year curve is also steeper at +214 basis points. The Australian 10-year bond is now at 3.37% and up another +9 bps. The ten-year Chinese government bond is up +4 basis points to 2.81%. And the 10-year New Zealand government will start today up +7 basis points to 3.60%.

Wall Street is open again, but little changed, up just +0.1% in Tuesday night trading. European overnight markets all fell around -1.4%, with the exception of London which strengthened by a slight +0.1%. Yesterday, Tokyo ended on a late fall, down -0.3%. Hong Kong is up +1.4%. Shanghai grew by +1.4%. The ASX200 ended Tuesday’s session down -1.1% while the NZX50 was up +1.5% in its session.

The price of gold is down -9 USD today at 1,845 USD/oz.

And oil prices are back down from the same time yesterday, down -US$2 to just over US$114/bbl in the US, while the international price of Brent is now slightly below 116. US$.50/bbl.

The Kiwi Dollar will open today down -¼c at 65.2 USc. Against the Australian dollar, we are down to 90.7 AUc. Against the euro, we are little changed at 60.7 euro cents. That means our TWI-5 today starts at 71.9 and milder.

The bitcoin price is up +4.2% since this time yesterday and is now at US$31,988. Volatility over the past 24 hours has been moderate at +/- 2.9%. And look at this.

The easiest place to stay on top of the risks associated with today’s events is to follow our Economic calendar here ».

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