Economy Watch

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.

And today we lead with news there are some significant jitters being felt in a widening range of banks globally as debt maturities for commercial property spook everyone.

But first in the US, the number of peopleclaiming for jobless benefits rose for a second consecutive week to the highest level in eleven weeks. There are now almost 2.2 mln people on these benefits and that is the highest in more than a year. Still these overall levels are low in historical context, and compared to the size of their workforce. We will get an update on that tomorrow when the non-farm payrolls data is released. Analysts are expecting a gain of +180,000.

However, there was a sizable rise in the number of job cuts reported in January. They typically spike in January so it is hard to assess whether this is out of the ordinary. But this year the spike was more than usual, in fact the highest January since 2009. Job cuts in the financial and tech sectors were prominent in this latest data.

But the factory sector might be turning a corner, up. The widely watched ISM factory PMI improved to in January to its 'best' level since October in a sharp and unexpected change. The sector is still contracting although at a much softer pace, as demand moderately improved and output remained stable. The improved bit was that new order levels expanded sharply.

The internationally-benchmarked S&P/Markit PMI version delivered a very similar story for Fanuary, but was more positive, suggesting the overall sector is actually now expanding.

In India, their central bank has ordered Paytm to immediately cease trading. The ubiquitous payments app and its related bank have ignored regulator warnings about the risks it has been taking. Paytm is backed by both Japan's Softbank, and China's Ant Group.

As expected, the EU euro-area inflation report for January came in at 2.8%, holding the lower levels it has reported for the past four months. Again it is lower energy costs that is keeping a lid on rising food prices (+5.7%) but they will be encouraged by the 2.0% rate for other goods.

The Bank of England also acknowledged that inflation risks are "more balanced" there when they held their 5.25% policy rate unchanged today in another split decision.

Internationally, there were a wide range of factory PMIs released by S&P/Markit for January and they showed an overall improving trend - in fact this sector is no longer contracting globally, the best it has been since mid 2022. And that supports the recent improvements to future global growth prospects that the IMF released recently and we reported yesterday.

It is also supported by global passenger air travel data for December which was up strong from a year ago. However, compared to pre-pandemic levels it is not quite there yet. Domestic air travel is higher but international travel is not. In large part that is because the Chinese travellers are staying home still.

But the global commercial property market looks like it is just starting a serious downward spiral. Lower valuations are squeezing leveraged owners, many of whom have large maturities imminent. And that is rocking banks. In the past few days banks from Europe (Deutsche), the US (New York Community Bancorp) and Japan (Aozora) have signaled serious consequences from these revaluations. Although it has been long-foreshadowed we may be entering a very rough patch for banks exposed to the sector. About NZ$1 tln is immediately involved.

The peaking of container shipping freight rates may be underway because these rates fell -4% last week, the first fall late November. And this is despite no resolution to either the Red Sea crisis or the Panama drought. Rates from China to Europe mostly fell. And freight rates for bulk cargoes remain modest even from a long 50+ year perspective.

The UST 10yr yield starts today at 3.87% and down -9 bps from this time yesterday as bond markets price in more anticipated Fed rate cuts. 

The price of gold will start today up another +US$13/oz from yesterday at just on US$2063/oz.

But oil prices are little-changed at just over US$76.50/bbl in the US while the international Brent price is now just under US$81.50/bbl.

The Kiwi dollar starts today at just on 61.3 USc and -10 bps softer than yesterday. Against the Aussie we are up +30 bps at 93.4 AUc. Against the euro we are a touch softer at 56.5 euro cents. That all means our TWI-5 starts today at 70.3 and unchanged from yesterday.

The bitcoin price starts today softer. It is now at US$42,627 down -2.0%% from this time yesterday. Volatility over the past 24 hours has been moderate at just on +/- 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 on Monday.

Kia ora,

Welcome to Thursday’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 financial markets are now more convinced rate cuts will be coming in 2024 as inflation transitions away.

First up today we should note that the US Fed will announce the results of its latest FOMC meeting soon, at 8am NZT. No-one is expecting them to change any rates today, leaving their policy rate at 5.5%. But markets have increasing expectations that some sort of signals will emerge about how and when they will start cutting that rate in 2024. Of course that is almost all to do with how they see inflation tracking in the US and where they think it may settle. Benchmark bond yields have sunk in anticipation of those meeting details. There seems little pressure on the employment mandate they have, and little indication that their jobs market is about to change, so that is now only a background factor.

After rising strongly for the prior three weeks, last week these was a correction in the number of mortgage applications in the US, dropping -7.2% from the prior week. This was despite no change in benchmark mortgage interest rates.

The ADP employment report showed private businesses in the US added +107,000 jobs this month, below forecasts of +145,000. It also showed that the pay premium for those switching jobs has now evaporated. This is the report that comes just before the US non-farm payrolls report for January that is out this weekend. That is expected to show a gain of +180,000 jobs in the month, although analysts have consistently underrated the strength of the US labour markets recently.

China's official PMIs for January were out yesterday. The factory PMI was unchanged at 49.2 maintaining the December contraction. It was their fourth consecutive month of decline and the ninth in the past ten months. Their services PMI expanded slightly more than in December at 50.9 and up from 50.4. Their services sector has never slipped into contraction in these official surveys. So overall these surveys record a slight expansion in January.

Yesterday, China moved to merge more than 2,100 rural banks with about NZ$11 tln in loans (assets) in a move to contain growing financial risks. These banks have been hit by by bad loans, shrinking margin, and slowing growth.

And staying in China, it has been reported that investors sold out of ¥14.5 bln (NZ$3.3 bln) worth of mainland equities (net), a sixth month international investors have pulled back. This is the longest and strongest retreat from Chinese equities in a decade. 

Meeting notes from the last Bank of Japan review shows that more members are coming to the view that they need to shift their unusually low rate up soon. This will be a very big deal when it happens.

Singapore is in the sights of Chinese regulators cracking down on illicit money flows. Oddly, the crackdown is on money flowing in to China, not out.

Inflation in Germany fell below 3% in January, its lowest since June 2021. Lower costs of energy enabled the drop to 2.9%. Without food & energy, their rate was 3.4% and also its lowest since mid-2022.

In Australia, the Federal Court has declared that Westpac engaged in unconscionable conduct in October 2016 when executing a AU$12 bln interest rate swap transaction, the largest of its kind in Australian financial market history. It did pre-hedging ahead of an interest rate swap transaction with some large customers. Westpac will pay a fine of AU$1.8 mln as a penalty and reimburse ASIC $8 mln for its investigation and litigation costs. No one will go to jail though, and the costs of the behaviour are a rounding error compared to Westpac's profits. Lessons are probably not learned here.

Australia's inflation rate came in lower than expected at the end of 2023. The quarterly CPI was 4.1% from a year ago (a two year low) and well below the 5.4% in Q3-2023. Markets expected 4.3%. And their Monthly Inflation Indicator for December alone came in at 3.4%, a big drop from 4.3% in November and well below the expected 3.7% analysts were expecting. Both are substantial shift lower and paint a picture of fast-easing price pressures.

These results sparked a rise in the local equities market, and a sharpish fall in bond yields as markets start to price in a 0.25% cut in official interest rates by August. (For reference, markets have priced in almost two -0.25% cuts by then here in New Zealand.)

Global air cargo volumes rose +10.8% in December from a year ago, meaning 2023 volumes fell only -1.9% over the whole year. But the year ended with December volumes +2.3% higher than December 2019 volumes, pre-pandemic.

The UST 10yr yield starts today at 3.96% and down -12 bps from this time yesterday as bond markets start pricing in anticipated Fed rate cuts. 

The price of gold will start today up another +US$15/oz from yesterday at just on US$2050/oz.

Oil prices are down -US$1.50 at just over US$76.50/bbl in the US while the international Brent price is now just over US$81/bbl.

The Kiwi dollar starts today at just on 61.4 USc and +20 bps firmer than yesterday. Against the Aussie we are also up +20 bps at 93.1 AUc. Against the euro we are a touch firmer at 56.6 euro cents. That all means our TWI-5 starts today at 70.3 and up +10 bps from yesterday.

The bitcoin price starts today firmer yet again. It is now at US$43,492 which is up +0.7% from this time yesterday. Volatility over the past 24 hours has been modest at just on +/- 1.7%.

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.

Kia ora,

Welcome to Wednesday’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 IMF now expects a global soft landing in 2024 and 2025 after authorities seem to have successfully quelled inflation.

But first, an update on dairy prices. We mistakenly signaled a full GDT dairy auction overnight in our report yesterday. But we got that wrong; it is next Wednesday, February 6, 2025. But there was a GDP Pulse even overnight instead and that delivered higher prices. WMP prices were +1.1% higher that the last equivalent event a week ago. SMP prices were +0.3% higher. These gains were less than anticipated in the dairy futures markets, but both continue the recent trend of rising prices.

Meanwhile, the US Redbook retail index of bricks & mortar stores came in +5.0% higher last week than a year ago, maintaining the recent gains. And don't forget these are off heady rises a year ago, so there isn't any indication yet American consumers are flagging under household budget pressures in these results.

And the widely-watched Conference Board survey of consumer confidence rose in its January edition, largely as expected. Consumers are feeling the most upbeat in two years.

And there has been a trifecta of good American data out overnight with the US JOLTS report surprising with a rise in job openings in December. They surged by +101,000 from the previous month to over 9 mln, the highest in three months and above the market consensus which expected to hear of a retreat.

The only American data out overnight that was negative was the Dallas Fed's survey on the service sector in the oil patch. Like the factory survey, it retreated.

In China, market optimism for an economic rescue package is fading. China’s stock and bond markets are giving a clear signal to policymakers that they need to take more steps to revive investor confidence. Stocks fell for a third day on Tuesday, pulling back from last week’s rebound. Their benchmark 10-year bond yield dropped to the lowest level in more than twenty years, as traders now expect the central bank will release additional monetary stimulus to boost growth. But direct solutions for the troubled sectors still seem unaddressed. The IMF may agree with Beijing that current approaches will be enough, but financial markets remain sceptical.

In Europe, sentiment was broadly stable in December.

And the EU released it's Q4-2023 GDP result overnight - and it looks like they have avoided a recession, even if the result was weak. The stalled in the last three months of 2023, following a -0.1% contraction in the previous quarter. Analysts had expected Q4 to decline too. But these are preliminary estimates. They avoided a recession because of better-than-expected growth in Spain and Italy while the French economy stalled and Germany, which is the largest one, contracted. They will be relieved at the overall result, but in fact it doesn't really paid an encouraging picture.

Australia said that December retail sales were weaker than expected, falling -2.7% from November to be just +0.8% higher than year ago levels. That was the steepest drop since August 2020. This follows a revised rise of +1.6 in November and a fall of -0.2% in October 2023. Meanwhile inflation ran at about 4.3% over the same time, so retail volumes in 2023 shrank about -3.5%.

Overnight, the IMF chimed in with an updated 2024 growth forecast, one they raised (which was a bit of a surprise). They now expect 2024 global economic activity to expand +3.1%, and improvement from 2.9% seen in October while keeping the forecast for 2025 unchanged at 3.2%. The key improver came from greater-than-expected resilience in the US and several large emerging market and developing economies, as well as anticipated fiscal support in China. 2024 growth forecasts were revised higher for the US (2.1% vs 1.5%), China (4.6% vs 4.2%) and India (6.5% vs 6.3%) but the institution expects lower growth for the Euro Area (0.9% vs 1.2%) and Japan (0.9% vs 1%). They foresaw small improvements in Australia over the next two years but at modest levels, but forecasts for New Zealand were not included.

The UST 10yr yield starts today at 4.08% and down -2 bps from this time yesterday. 

The price of gold will start today up another +US$8/oz from yesterday at just on US$2035/oz.

Oil prices are up +US$1 at just over US$78/bbl in the US while the international Brent price is now just over US$82.50/bbl.

The Kiwi dollar starts today at just on 61.2 USc and marginally firmer than yesterday. Against the Aussie we are up +20 bps at 92.9 AUc. Against the euro we are unchanged at 56.5 euro cents. That all means our TWI-5 starts today at 70.2 and up +10 bps from yesterday.

The bitcoin price starts today firmer yet again. It is now at US$43,177 which is up +2.1% from this time yesterday. Volatility over the past 24 hours has been moderate at just on +/- 2.0%.

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.

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 world's largest property developer is to be dismembered and liquidated.

First up today, while you may already know the headline, we must note that Evergrande has been forced into liquidation by a Hong Kong court. While this may not strictly qualify as a 'surprise' it is still a very big deal, for a number of reasons. First it is a spectacular crash-to-earth by a very well connected company - one that rapidly lost favour. Second, it heightens the risk of all other Chinese large property developers, some of whom (like Country Garden) may have assumed there would be bailouts underpinning their industry. And third, it shows Hong Kong courts are now under the direct control of Beijing, handing down verdicts in big sensitive cases in the way Beijing wishes to signal. President Xi is not happy with his billionaire 'friends'. One reason he will be livid is that Evergrande has liabilities to others of over US$300 bln. Unless there is some sort of rescue package, it is hard to see how there won't be a cascading impact. After all, US$300 bln is 1.7% of China's 2023 GDP.

Sadly for China, this won't be a quick crash from which everyone can pick themselves up and carry on. It will be a slow lingering process from here. Evergrande claims assets of US$240 bln, but that valuation must be very suspect. If China dumps on international creditors in this case, it will accentuate the de-risking pullback underway.

And we should also perhaps note that the share price of EV maker BYD took a tumble yesterday (-4%) missing profit forecasts despite massive sales gains, and a big jump in profit from a year ago. Shareholders have been highly sceptical about the investment prospects of the company recently, making down its share price by -36% over the past year. Also weaker than expected were international sales of its vehicles; it has strength in the Chinese domestic markets however.

Meanwhile in the US, the Dallas Fed factory survey contracted rather sharply in January, falling to its lowest level in eight months, basically on weak order levels. This is a sentiment isurvey in the heart of America's oil patch.

Across the Pacific, Taiwan's consumer sentiment rose and has now reached its highest level since March 2022. For them the pleasing thing about this survey was that improvement came across the board. The resolution of their Presidential election clearly helped.

Singapore's producer prices ended up -1.1% lower in December than in the same month a year earlier capping a full 12 months of declines. Singapore does go through these producer deflation periods on a regular basis, but the last one (apart from the pandemic) was back in 2015-2016. The current one might only have lasted half that time however.

In contrast to China, India claimed that it will grow at a 7%+ rate for the next few years. It says "the strength of the financial sector and other recent and future structural reforms" ensure growth at a fast clip. But independent observers are more sceptical that the official confidence.

In Finland, they have just had a presidential election, a serious and civilised affair. A 'conservative' (for Finland) ex-prime minister won of the first round, beating out an independent Green candidate. The key issues weren't economic however, rather focused on its new role as a NATO front-line border state, spooked by the Ukraine invasion. But neither candidate won outright so there will be a runoff election in two weeks.

The UST 10yr yield starts today at 4.10% and down -4 bps from this time yesterday. 

The price of gold will start today up another +US$8/oz from yesterday at just on US$2027/oz.

Oil prices are down -US$1 at just over US$77/bbl in the US while the international Brent price is now just over US$82/bbl.

The Kiwi dollar starts today at just on 61.1 USc and up +20 bps from yesterday. Against the Aussie we are unchanged at 92.7 AUc. Against the euro we are up nearly +½c at 56.5 euro cents. That all means our TWI-5 starts today at 70.1 and up +20 bps from yesterday.

The bitcoin price starts today firmer yet again. It is now at US$43,177 which is up +2.1% from this time yesterday. Volatility over the past 24 hours has been moderate at just on +/- 2.0%.

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.

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.

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.

And today we lead with news the giant US economy grew by +US$1.4 tln in 2023, shrugging off all recession predictions.

US initial jobless claims rose last week, and by more than expected, but were still at near the bottom of their ranges. There are now 2.06 mln people on these benefits, lower than last week but there were 1.86 mln on these same benefits a year ago. The seasonal retreat isn't as strong as last year, so the overall level is creeping up.

US durable goods orders came in in December less than expected and continuing their recent yoyo pattern. They were virtually unchanged in December 2023, after a +5.5% rise in November and missing market expectations of a +1.1% rise. Excluding aircraft, new orders increased +0.6%. Capital goods orders however were up a very strong +9.8% in December from a year ago, and holding November' very good level.

The big news however is that the US economy expanded at a +3.3% rate in Q4-2023, much better than forecasts of a +2% rise, and following a stellar +4.9% rate in Q3. Consumer spending on goods slowed while consumption of services rose faster. Also helping were a rise in exports. For all of 2023, the giant American economy rose +2.5% in real terms and generated US$27.9 tln in economic activity in the year, up an additional +US$1.4 tln or +5.8% more nominally, +2.5% in real terms. That is a larger expansion in volume terms than China's in the same period and is like adding two thirds of Australia over the past twelve months.

The current manufacturing sector isn't delivering its share of this expansion however. The Chicago Fed's National Activity Index fell slightly in December, after being downwardly revised slightly in November, indicating activity contracted during the last month of the year. All four broad categories of indicators decreased from November, and three of them made actually contracted.

And the Kansas City Fed manufacturing survey retreated rather sharply in January too.

US new home sales came in +4.4% higher in December than a year ago, and residential building consents were up +1.8% in the same month

China is going through a crisis of confidence, one triggered by tightening State control and lackluster economic performance. Their 'security' push to suppress news that isn't positive for the Party is corroding confidence inside and outside the country. It is particularly obvious in a transformed and chilled Hong Kong.

South Korea reported a GDP expansion of +2.2% in Q4-2023 over the same quarter a year ago. This was better than expected and the +1.4% rate in Q3-2023.

As expected, the ECB kept its hawkish hold position in the face of continuing inflation pressures, and it kept its quantitative tightening program. It claims credit for reducing inflation however due to its set of 2023 rate hikes.

Today is a public holiday in Australia, "Australian Day". (Monday is a public holiday in Auckland.)

Globally, container freight rates rose by another +5% last week as the latest supply chain pressures in the Red Sea (and the Panama drought) continue to bite. A feature of the latest changes is that trans-Pacific shipping rates are making a sharp catchup even though they are not directly involved. But still, there is no equivalent rise in rates for bulk cargoes.

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

The price of gold will start today up +US$2/oz from yesterday at just on US$2014/oz.

Oil prices are up another +US$1 at just over US$76.50/bbl in the US while the international Brent price is now just over US$81/bbl.

The Kiwi dollar starts today at 61.1 USc and unchanged from this time yesterday. Against the Aussie we are little-changed at 92.9 AUc. Against the euro we are marginally firmer at 56.4 euro cents. That all means our TWI-5 starts today just on 70.1 and essentially unchanged in a day.

The bitcoin price starts today a little lower. It is now at US$39,703 and down -1.1% from this time yesterday. Volatility over the past 24 hours has been low to modest at just on +/- 1.0%.

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 on Monday.

Although the war on inflation is being won, there are still battles to come and it's too soon to expect Reserve Bank interest rate cuts, says Kiwibank Chief Economist Jarrod Kerr.

Speaking to interest.co.nz for the first 2024 episode of our Of Interest podcast, Kerr says the cost of living crisis is improving for households and businesses.

"We are winning the war on inflation but there are a few battles ahead and a few wins that we need over this year. We think inflation will fall to 3% quite quickly, but the move from 3% to 2% might be a bit awkward later this year and into next year," says Kerr.

On Wednesday Statistics New Zealand's latest Consumers Price Index (CPI) showed annual inflation down to 4.7% in the December quarter from 5.6% in the September quarter. Hot on the heels of the latest inflation data, Reserve Bank Chief Economist and Monetary Policy Committee member Paul Conway is due to give a speech next Tuesday. This will include comments on NZ data released since the central bank's last Monetary Policy Statement in November.

These will be the first public comments from a senior Reserve Bank figure this year. 

"I think we have to have an acknowledgement [from Conway] that the overly hawkish commentary from November is no longer. When you look at what they told us in November, they basically told us they've got no tolerance for upside surprises. We've had nothing but downside surprises since that statement... The GDP report came out much weaker than what the central bank [expected]," Kerr says.

"They gave us a clear indication that if everything goes wrong to the upside that they will hike [the Official Cash Rate] again, and they gave us a 60% probability that they would hike again. I think that was wrong at the time and it has been proven wrong now. And I think Paul may hint that suggestions of another hike in this cycle have evaporated. But equally talk of rate cuts, I think they'll be coming out and say that's premature, that's a conversation for later in the year."

A key area of concern remaining for the Reserve Bank will be non-tradeable inflation, relating to inflation from domestic goods and services. This came in at an annual rate of 5.9% in the December quarter versus the Reserve Bank's 5.7% forecast. Kerr notes much of this is coming from housing related costs such as rents, helped higher by record net migration levels, insurance, and construction costs. In reality the Reserve Bank doesn't have a great deal of influence in the areas of insurance, rates and rents, Kerr says.

In the podcast he also talks about the next OCR review on February 28, whether the Reserve Bank's Monetary Policy Remit to; "achieve and maintain future annual inflation between 1% and 3% over the medium-term, with a focus on keeping future inflation near the 2% mid-point," may need to change in an era of climate change and other challenges, when he expects the Reserve Bank to cut the OCR, the US interest rate outlook, the outlook for the NZ dollar, the inflationary threat from Middle East conflict, and concerns about China.

*You can find all episodes of the Of Interest podcast here.

Kia ora,

Welcome to Thursday’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 has rolled out what might be the first in a set of ¥1 tln stimulus/recovery moves.

But first, American mortgage applications rose for a third consecutive week last week, up +3.7% even though there was little movement on benchmark interest rates. Perhaps this market is emerging from its slumbers.

The 'flash' January PMI data for the US is also quite strong. Service sector activity expanded the most in seven months, while manufacturing firms continued to experience a moderate drop in output. New business expanded for the third consecutive month and at the sharpest pace since June, despite the second consecutive monthly decline in new export orders. This is not a description of a struggling economy - maybe not firing on all cylinders yet but certainly on the up.

The Bank of Canada held its policy rate at 5% for the fourth consecutive time overnight. This was as widely expected, leaving benchmark borrowing costs at a 22-year high. Like its southern neighbour, it is still selling down its bond holdings via its quantitative tightening program.

Japanese exports are firing impressively. They were up +9.8% in December from the same month a year ago, more than expected. And with the sharp drop in oil prices, the cost of their imports fell equally impressively, down -6.8% on the same basis. That enabled them to log an unexpected trade surplus in December. (They can probably thank the missteps from Xi and Putin for this result.)

And Japan's January PMI's were all stronger, which is no surprise.

In China, their central bank announced they will reduce the reserve requirement ratio (RRR) for all banks by 50 basis points to just 10% starting from February 5, releasing up to ¥1 tln to the market to try and get an economic recovery going. (They seem to have a penchant for 1 tln policy moves at present - and they are adding up.) This would be the lowest RRR level since March 2007. The PBOC had previously cut its RRR by 25 bps in both March and September last year. Additionally, starting today, they have lowered re-lending and re-discount interest rates by -25 bps, targeting the rural sector and small businesses. These announcements certainly boosted equity markets.

They need a boost. German companies operating in China are less than positive even if they remain committed to staying. 83% of the 566 respondents in a survey released overnight said China “is facing a downward trajectory” economically. Nearly two-thirds said they expected a recovery to take one to three years.

Although China's GDP grew by +5.2% in 2023, achieving Beijing's target of "around 5%", its nominal GDP in US dollar terms fell for the first time in 29 years as its share of the global economy shrank for the second straight year.

In Europe, business activity fell at the slowest rate for six months in January, according to 'flash' PMI survey data. But downturns are persisting in both the manufacturing and service sectors as they get further falls in new orders. The overall contraction of new orders was however the smallest recorded since last June, helping stabilise employment levels and lift business optimism about the year ahead to an eight-month high.

Meanwhile, the ECD has reportedly asked some banks to closely monitor activity on social media to detect a worsening in sentiment which could lead to a deposit run. While early detection might not stop a bank run like SVB or Credit Suisse, regulators and banks are eager not to be caught off guard, according to the people familiar with the regulators' thinking.

In Australia, their 'flash' January PMIs were similarly underwhelming. Activity continued to decline but the pace of reduction eased alongside a slower fall in new orders. However there were improvements in business sentiment while employment levels also continued to rise. Inflation pressure fell.

The UST 10yr yield starts today at 4.16% and little-changed from this time yesterday. 

The price of gold will start today down +US$12/oz from yesterday at just on US$2012/oz.

Oil prices are up +US$1at just over US$75.50/bbl in the US while the international Brent price is still just over US$80/bbl.

The Kiwi dollar starts today at 60.2 USc and -½c lower from this time yesterday (and a new two month low). Against the Aussie we are firmer at 92.8 AUc. Against the euro we are also firmer at 56.2 euro cents. That all means our TWI-5 starts today just under 70.1 and up +30 bps in a day.

The bitcoin price starts today a little higher. It is now at US$40,126 and up +2.5% from this time yesterday. Volatility over the past 24 hours has been modest to moderate at just under +/- 2.0%.

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.

Kia ora,

Welcome to Wednesday’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 reports of an impending large Chinese share market rescue that were enough to stop falls there yesterday.

But first, it is an important day here in New Zealand because we get the Q4-2023 inflation data at 10:45am. That will set the tone for our OCR direction for the first half of the year and the related monetary policy decision-making. Financial markets expect a headline rate of 4.7%, down from the Q3-2023 level of 5.6%. Anything about these levels is still far too high, and with the RBNZ back to having a single inflation-control mandate, they have less room for patience. But as always, the detail (core, or tradable/nontradable) will be what markets are watching.

In the US, their weekly monitoring of bricks & mortar retail trade by the Redbook index shows stronger gains, up +5.2% last week from the same week a year ago, notably more than accounted for by inflation. That caps the best four week run since late 2022.

But another Fed district has delivered a dour factory survey, this one from the Richmond Fed. But the sluggish manufacturing situation there contrasts with a more upbeat services survey in the same region, although little-changed to be fair.

In Japan, their central bank kept its key short-term interest rate unchanged at -0.1% and that of 10-year bond yields at around 0% during its January meeting. This was as expected. Meanwhile, in a quarterly outlook, they trimmed their 2024 CPI estimate to 2.4% from October's projections of 2.8%, reflecting a recent decline in oil prices. For 2025, they expect core inflation to hit 1.8%, slightly higher than its earlier estimates of 1.7%. Policymakers also cut their 2023 GDP growth forecast to 1.8% from 2.0%.

Data released in Taiwan yesterday for December wasn't good. Retail sales rose only +1.1% in December from a year ago, a weak result. And industrial production actually fell -4.0% on the same basis. But this is consistent with the weak new order data we reported yesterday.

In an effort to stabilise local equity markets as they head into the Chinese Luna New Year holiday (which starts on February 9), Bloomberg is reporting that Beijing is trying to mobilise ¥2.3 tln (NZ$525 bln) for a home team buying spree. Just the rumour brought a turnaround in Hong Kong, Shanghai and Shenzhen yesterday, but the big question is will it be sustained and change attitudes of investors, or will they just take the opportunity to lock in prices they wouldn't otherwise be offered. China has a history of these types of emergency responses, but few of them work. During the 2015 rout, the home team spent about ¥1.7 tln in a summer support drive but stock prices fell anyway after the state buying wound down. It was never clear how the losses were absorbed.

And in their property market, newly released data for 2023 shows that foreclosures in the residential market jumped a lot from 2022, up more than +35%. There were 796,000 foreclosure auctions monitored nationwide in 2023 and 389,000 were for residential units. Non-auction foreclosures will be on top of that. 

The expected small improvement in EU consumer sentiment has not eventuated in January. But to be fair, it is only a minor hesitation in the broader perspective.

In Australia, the NAB business confidence index climbed to -1 in December from a downwardly revised -8 in the prior month. It was the third straight month of negative readings but the softest figure in the sequence, supported by a pick-up in the mining and retail sectors.

And staying in Australia, it looks like the "stage three" Morrison tax cuts for high earners are to be revised so that they shift to help those on middle and low incomes, including people earning less than AU$45,000 pa, a level ignored in the prior version. High earners who were counting on the tax break are not happy. The 37% tax bracket for workers earning more than AU$135,000 pa is likely to be retained. (Meanwhile, Scott Morrison is quitting the Australian parliament to go work for some ex-Trump Administration officials.)

The UST 10yr yield starts today at 4.15% and up +5 bps from this time yesterday. 

The price of gold will start today little-changed, up a mere +US$1/oz from yesterday at just on US$2024/oz.

Oil prices are down -50 USc at just over US$74.50/bbl in the US while the international Brent price is still just over US$79.50/bbl. Not much net change but it has been volatile in between.

The Kiwi dollar starts today at 60.7 USc and -¼c lower from this time yesterday (and a two month low). Against the Aussie we are softish at 92.5 AUc. Against the euro we are holding at 56 euro cents. That all means our TWI-5 starts today just under 69.8 and down -15 bps in a day.

The bitcoin price starts today lower, again. It is now at US$39,145 and down another -3.4% from this time yesterday. Volatility over the past 24 hours has been moderate at +/- 2.9%.

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.

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 investors are marking down Chinese equities in a brutal retrenchment Beijing doesn't seem to be able to arrest. Funds are fleeing to Tokyo and the US both of which reached modern record highs.

But first in the US, a closely-watched leading indicator metric slipped marginally in December even though more components rose than fell. However the improving metrics were more than offset by weak conditions in manufacturing, relatively high interest-rates, and lowish consumer sentiment. But the magnitude of monthly declines has lessened, and the LEI’s six-month and twelve-month growth rates have turned upward even if they remain negative. The 'recession; signal from this data is weakening.

China's Loan Prime Rates were unchanged yesterday, not a surprise given last week's unchanged Medium-Term Lending Facility rate. The unchanged LPR rates are because their central bank is in a very tough position, having already prioritised keeping up the value of the yuan to try and hold back the equity market retreat. Lower interest rates would make it almost impossible to hold the yuan's value - and they are prepared to take the risk on economic expansion.

The declining prospects for the Chinese economy can't now be avoided, even in China itself, it seems. Rare stories are surfacing about a 'deflationary nosedive'.

In Taiwan, export orders fell a sharp -16% in December from the same month a year ago to under US$44 bln, far worse than market forecasts of a -0.3% fall and reversing a +1% gain in the previous month. This was the largest annual decline since June, as demand decreased for all product groups. It is a big change, but one magnified by high orders a year ago, so a base effect is in play here. A significant share of these export orders are for production in China by Taiwanese companies, so the decline won't all be felt in Taiwan.

The almost halving of the nickel price over the past year is causing a messy shakeout among miners in Western Australia (and globally in fact). Mines are closing and those running are loosing big money. High inventories and very weak demand from China are behind the retrenchments. Nickel is mainly used in making alloys such as stainless steel. Among other technical industrial applications, it is used in batteries as a "critical mineral", including rechargeable nickel-cadmium batteries and nickel-metal hydride batteries used in EV and hybrid vehicles. The lithium price has fallen even further and its miners are taking a cold bath too.

The UST 10yr yield starts today at 4.10% and down -3 bps from this time yesterday. 

Wall Street has opened its week modestly higher, with the S&P500 up +0.2% but that is a new record high. Overnight European markets were up a bit more, up +0.6% on average. Yesterday Tokyo surged again ending up +1.6% apparently driven by offshore demand. Hong Kong fell -2.3% and Shanghai a very large (for them) -2.7%. Singapore was little-changed. The ASX200 ended its Monday session up +0.8% which the NZX50 ended up a more modest +0.2%.

The price of gold will start today down -US$6/oz from yesterday at just on US$2023/oz.

Oil prices are up +US$1.50 at just under US$75/bbl in the US and the international Brent price is up +US$1 just over US$79.50/bbl.

The Kiwi dollar starts today at just under 61 USc and marginally lower from this time yesterday. Against the Aussie we are softish at 92.6 AUc. Against the euro we are also soft at 56 euro cents. That all means our TWI-5 starts today just under 69.9 and down -10 bps in a day.

The bitcoin price starts today lower. It is now at US$40,511 and down -2.6% from this time yesterday. Volatility over the past 24 hours however has been modest at +/- 1.8%.

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.