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.

And today we lead with news China's debt problems are just growing and more investors are worried.

But first, in the week ahead we will get some key data. In the US, they have a Fed rate review on Thursday and markets will be eyeing signals about when rates might move. Some think a March cut is coming. Then on Saturday, the January non-farm payrolls report on their labour market is out. And PMIs, consumer sentiment data, and factory order data will round out their big economic signals. Their earnings season is in its third week and there are some very large companies reporting, including most of the FAANGs (or now more accurately, MAMAAs). EU GDP will come this week too along with CPI updates from them, South Korea and Australia (on Wednesday). Locally it will be building consent data and the large end of month stats dump from the RBNZ that will interest us.

Over the weekend we got data on Chinese industrial profits which rose +16.8% in December above the same month last year. And that was the fifth straight month they have risen. But the bar is low. The year ended with overall profits -2.3% lower over the whole twelve months, and in calendar 2022 they had fallen -4.0%.

2024 is going to be a tough year for Chinese corporates. They are facing a record obligation to pay bond debt maturities, which will total ¥6.8 tln, (or NZ$1.55 tln). Their problem is that creditors are either increasingly unwilling to roll it over, or will demand significantly higher interest rates to do so. Both scenarios will hurt, and the pain will grow as the year progresses. Debt obligations have been growing much faster than GDP, making creditors skittish. And in the three years to 2026 the redemption obligation rises to ¥20 tln, so the problems won't fade with time.

In the recent past, investors have continued buying Local Government financing bonds (LGFVs) which are part of the overall corporate debt, assuming that they are guaranteed by the government. And none have failed outright yet. But these LGFV bonds linked to "infrastructure" (read, their property development sector) are based on unprofitable enterprises, and maturities are jumping 40% in 2024, accentuating the pressures. Recently, institutions have been dealing with this pressure with very high interest rates (8+%) and much shorter maturities (less than 3 years). It doesn't take a rocket scientists to see what is about to happen. This will only work out if Beijing underwrites everyone, which does seem increasingly unlikely. Xi won't be happy in the trap and will probably want to 'teach' the financial markets a lesson.

The scale of the problem is highlighted in an updated report on the country's macro leverage ratio. It rose +13.5 percentage points in a year to 288% in 2023 as a measure of non-financial debt to GDP.

To put off the reckoning, last week China rolled out some very large and unexpected stimulus, much of it targeted. Their central bank now seems to have an outsized role in these efforts and the signals are more is to come, with the central bank providing cheap funds via its "Pledged Supplemental Lending" programs. These recent moves cost about ¥3 tln in total.

But investors from well-known global institutions and local icon firms at a Hong Kong Government promotion event last week cast doubts on how effective the policies would be. The event was supposed to talk things up, but in fact it just allowed participants to confirm that others share their gloom. So far, key concerns such as China's property crisis and low confidence appear unaddressed.

Singapore was expecting to report a bounce-back in industrial production in December after the November fall. But it didn't happen. They reported another, albeit smaller, retreat. Analysts there aren't anticipating any significant improvement in the first half of 2024.

American inflation seems to be cooling, and in a way that the US Fed will like. While overall PCE inflation was unchanged at 2.6%, their core PCE rate came in lower than expected at 2.9%, down from 3.2% in November. Remember this was running at almost 5% a year ago.

And all this happened while personal spending rose in the December quarter, and by more than anticipated. Higher activity and lower inflation is a goldilocks outcome. 'Real' personal consumption is +3.2% higher than a year ago - that's after inflation!

And to add to the vibe, personal income has come in +4.2% higher that year-ago levels on the same 'real' basis, showing households are more than keeping up with inflation.

Markets are back thinking this might give the Fed an opportunity to reduce policy rates by mid-2024; some think as early as March. One thing on their mind with falling inflation and a policy rate at 5.5% is that real interest rates are effectively rising now.

December American pending home sales also rose rather strongly in December, up +8.3% from November to finally to best year ago levels by +1.3%. They haven't had a gain like this outside the pandemic period since early 2017. A surge in California helped although most regions showed gains. And recall, we noted last week a similar strong rise in new home sales nationwide.

The UST 10yr yield starts today at 4.14% and down -2 bps from this time Saturday. 

The price of gold will start today up another +US$3/oz from Saturday at just on US$2019/oz.

Oil prices are up another +US$1 at just over US$78/bbl in the US while the international Brent price is now just over US$83/bbl.

The Kiwi dollar starts today at just under 60.9 USc and marginally lower from this time Saturday. Against the Aussie we are unchanged at 92.7 AUc. Against the euro we are also unchanged at 56.1 euro cents. That all means our TWI-5 starts today at 69.9 and unchanged since Saturday and little-changed in a week.

The bitcoin price starts the week firmer again. It is now at US$42,307 which is up +0.9% from this time Saturday. Volatility over the past 24 hours has been modest at just on +/- 1.3%.

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.