The messy business of dealing with US mistakes

Kia ora,

Welcome to Tuesday’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 the US downgrade is seeing the trend of higher interest rates extend.

And in the US, we have more negative signals. The Conference Board's Leading Economic Index (LEI) "plunged" by -1.0% in April, after declining sharply by -0.8% in March. The LEI has declined by -2.0% in the six-month period ending April and is now just shy of signaling 'recession' they say. But it is actually back lower than in the last Trump presidency when there was recession.

At an investor day in New York, the boss of the US's largest bank, JPMorgan Chase, said investors are underestimating geopolitical and inflation risks. “Credit today is a bad risk,” he said earlier today. “The people who haven’t been through a major downturn are missing the point about what can happen in credit.”

In Canada, their largest province has announced a Budget that prioritises higher spending and larger deficits in the coming year in a direct effort to "protect Ontario". The next federal Canadian budget isn't due until at least September.

In China, retail sales rose by +5.1% in April from the same month a year ago, moderating from March's over 1-year high of +5.9% and missing market estimates of +5.5%. But is was one of the still-good data releases from China, one that is in a rising trend and even better because they have virtually no inflation.

Another positive data release from China came from their industrial production which grew by a claimed +6.1% in April from a year ago and better than the expected +5.5% gain. However, the latest figure eased from the +7.7% growth recorded in March. Meanwhile, electricity production rose only +0.9% in April, hardly supporting the much stronger industrial production data.

China, which regulates the wholesale price of petrol and diesel, announced cuts overnight, to take effect immediately.

Meanwhile their national real estate development investment fell sharply yet again, and the residential sector was down -9.6% from April last year. And prices for new, and previously-owned housing are still down sharply on a year-on-year basis even if there are small pockets of regional improvements.

Meanwhile, Chinese residents trading foreign stocks or holding offshore accounts are being put on notice as authorities take fuller advantage of cross-border data to trace unreported earnings.

In the EU, their economy is projected to grow by +1.1% in 2025 and +1.5% in 2026, and both are downgrades from the levels forecasted last autumn. This is according to the European Commission’s Spring outlook. The downgrade is primarily attributed to the impact of rising tariffs and increased uncertainty stemming from recent abrupt shifts in US trade policy. On the inflation front, disinflation is now expected to proceed more rapidly than previously anticipated. Inflation in the Eurozone is projected to ease to 2.1% by mid-2025, reaching the ECB’s target earlier than previously expected, and to decline further to 1.7% in 2026. 

And staying in Europe, we should probably note that BNPL giant Klarna, which also operates in New Zealand, is seeing its losses grow. In Q1-2025 they doubled to -US$100 mln as "consumer credit losses" rose sharply, even as revenue grew.

Later today (at 4:30pm NZT), the Australian central bank will review its cash rate target, currently at 4.10%. It is widely expected to be cut by -25 bps to 3.85%. That would put it still above the New Zealand OCR at 3.50% and our official rate is also expected to be cut by -25% mid next week to 3.25%, restoring the differential. But although both cuts are expected and priced in, more attention will focus on the next likely shift. Some see the RBA 'done' at one cut with the next move a rise. Background inflation risks are still elevated there, their labour market isn't suffering, and growth prospects are still there even in the current turbulent world.

The UST 10yr yield is at 4.47%, up a mere +3 bps from this time yesterday, but curves are steeper.

The price of gold will start today at US$3227/oz, and up +US$25 from yesterday.

Oil prices are holding again today at just over US$62.50/bbl in the US but the international Brent price is -50 USc lower at US$65/bbl.

The Kiwi dollar is now at 58.9 USc, up +10 bps from yesterday at this time. Against the Aussie we are unchanged at 91.8 AUc. Against the euro we are also unchanged at 52.7 euro cents. That all means our TWI-5 starts today still just over 67.5 and up +10 bps from yesterday.

The bitcoin price starts today at US$105,393 and essentially unchanged from yesterday. Volatility over the past 24 hours has been moderate however at just under +/-2.2%.

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.