A material downturn is underway

<p>Kia ora,</p><p>Welcome to Tuesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.</p><p>I'm David Chaston and this is the International edition from Interest.co.nz.</p><p>Today we lead with news that is still dominated by American [high] inflation and Chinese [low] demand. Everything now depends on American employment levels. As long as they stay high (for them), then the world may get a softer landing than otherwise. But the Chinese situation isn't helping. Trouble in both the #1 and #2 economies in the world has ripple impacts globally. Together they account for more than 42% of the world's economic activity.</p><p>Today's financial markets are acting like a herd stampede, one that is changing direction. No-one seems to want to believe the 2022 direction so far is the right way.</p><p>Equity prices are diving. Bond yields are jumping (bond prices are sinking). And the US dollar is rising fast. Commodity currencies are being devalued. It is another sharp re-rating lower, the fifth such event in 2022 alone. Only once (in the second half of March) has there been a recovery from one of these shifts lower. They are becoming much more frequent, and that tells you something important. In 2021 there was only one of these selloffs. In 2020, there was only the sharp pandemic selloff. In both 2020 and 2021 there was a full recovery pushing equity prices to the record highs that ended at the end of December 2021. The track has been down from there, in these increasing selloff events.</p><p>Since the market high right at the start of 2022, the S&P500 has fallen more than -20%, so it is now a bear market for equities.</p><p>And many now expect the main rate curves to invert soon.</p><p>Further, commodity prices are almost all falling today.</p><p>Last week markets were confident the US Fed will raise its policy rate by +50 bps at their next meeting on Thursday. Yesterday, that expectations went up to +75 bps. Today, markets seem to be expecting a reasonable chance a +100 bp