Here's our summary of key economic events overnight that affect New Zealand with news the risks of a major economic stumble in China are now very high.
But first today, the technical updates out of the Q1 GDP result relating to American household incomes and expenditure were released overnight and they were better than analysts were expecting. Personal spending rose +1.1% in March from February, way above market expectations for a 0.7% increase. It was driven by strong demand for services and higher prices of petrol and food. Personal income went up +0.5%, also above forecasts. Meanwhile, inflation as gauged by the Fed's preferred core PCE measure rose 5.2% from a year earlier, less than the consensus of 5.3%.
And all that keeps the Fed on track for a big +½% interest rate hike next week.
A strong result like that would also normally be market-moving. But it does show why the globally-dominant US economy is still the engine of the world economy. The US economy is currently running at a US$24.4 tln rate, with the world probably running at a US$102 tln rate at present. (New Zealand contributes about US$0.230 tln to that, or 0.22%. China is running at about a US$16 tln rate, Australia at about a US$1.4 tln rate.)
The latest University of Michigan sentiment survey, one that is widely watched, confirmed the strong consumption data and suggests the optimism is carrying on into April and May. It bounced back sharply from the weak prior month survey.
But the latest Chicago PMI report, covering the manufacturing heartland of American, wasn't so upbeat. It is still expanding fast, just not as fast as previously or as expected. It is a pull-back worth watching as a trend is developing.
In China, the big news is the rapid devaluation in their currency vis a vis the USD. Over the past week it has devalued by -2.4%, since the beginning of April by -4.2%. There is zero mention of this devaluation in the Chinese media. It is a monthly move that took US$55 bln off their FX reserves, and is equivalent to a negative -0.4% hit of annual GDP. It certainly isn't trivial as a world-scale economic shift.
Locally, the big Chinese news is the extending of neighbourhood quarantines in Beijing. There is now widespread pessimism that both the Shanghai and Beijing lockdowns will stunt overall economic activity in a material way, country-wide. The Shanghai effect is already massive. Direct cash handouts to households are under consideration, but that is unlikely to ease lockdown strains. The 'brave face' continues to be the line. Xi is now very engaged; the risks are clearly high. But that engagement juiced up their Friday share markets.
But the imminent May Day holiday retail bonanza isn't going to happen this year with official warnings out for travel and celebrating. China's GDP will notice this too.
Russia cut its official policy rate by -3% to 14%. It also reviewed economic conditions in the country in a clear-eyed way, reporting things are deteriorating, but not as bad as they could be under the circumstances. The review isn't positive about the future however. Their central bank also dismissed the idea of pegging the ruble to gold after the Kremlin said it was a proposal under consideration.
And Russia has made a last-minute payment of its debt obligations in US dollars, after trying to press creditors to accept rubles.
The EU reported its annual inflation at 7.5%, although there is a suggestion in this data that the impetus has gone out of this rise in recent months. Recall, we reported German inflation at +7.4%, and today France said its CPI inflation was at +4.8%.
Germany also reported Q1-2022 growth at +3.7% which was better than expected. And France reported +5.3% growth on the same basis, although the recent Q-on-Q data wasn't flash.
Both countries are now reporting tough producer price pressure. (Here and here.)
Rising producer prices are also an issue in Australia, but not to the same extreme extent.
In Canberra, they are making a diplomatic mess of their relations with Pacific Islands countries as the Solomon Islands-China relationship becomes a political-survival issue for their Prime Minister in the election campaign. They are making enemies when they should be making friends. It is a screw-up that will affect New Zealand by reinforcing ugly paternalistic attitudes in Canberra.
The Reserve Bank of Australia will be reviewing its policy rate on Tuesday afternoon. The pace of rate increases will become clear then, regardless of whether it increases the 0.1% cash rate in May or June. Markets have priced in a +20 bps hike for Tuesday, +55 bps for June. Analysts are split over when the rate hiking will start.
Meanwhile, the inflation pressure is on. Surging wholesale electricity prices due to higher gas and coal prices have sparked furious lobbying by retailers for an increase in benchmark retail prices. Retail prices are controlled by the Government. The risk is that if prices are not raised, companies will shed household customers to limit their losses, an even worse outcome than higher prices. It's another mess of their own making because the Government took this price-setting power back to 'help households' rather than leave it to market forces.
The UST 10yr yield starts today up another +7 bps at 2.93% as markets lock in their Fed bets for next Thursday's announcement. The UST 2-10 rate curve is a little flatter at +20 bps. But their 1-5 curve is unchanged at +87 bps. Their 30 day-10yr curve is a little flatter at +251 bps. The Australian ten year bond is now at 3.23% and up another +7 bps. The China Govt ten year bond is down -1 bp at 2.86%. And the New Zealand Govt ten year is up +5 bps at 3.66% largely in sympathy with the Aussie rise. A week ago it was at 3.60%.
A string of high-profile disappointing earnings reports has knocked Wall Street today, despite the strong US personal consumption data. Amazon's loss has rattled investors. Apple has issues too. The S&P500 is down -3.6% in Friday afternoon trade, heading for a weekly loss of -2.9%. Overnight, European markets were all up more than +0.5%, led by Frankfurt. Yesterday Tokyo was closed for another public holiday. Hong Kong ended the day up +4.0% with a strong afternoon session. Shanghai ended up +2.4% also with a strong finish. These both enable them to post weekly gains. The ASX200 ended its Friday session up -1.1% but that still left it down -2.1% for the week. The NZX50 ended Friday up +0.4%, but -0.6% short for the week.
The price of gold starts today back up +US$21 since this time yesterday at US$1911/oz. A week ago it was at US$1933/oz.
And oil prices are little-changed at just over US$104/bbl in the US while the international Brent price is now just over US$107/bbl. A week ago the international price was US$105.50/bbl.
The Kiwi dollar will open today softer again at 64.8 USc and almost a two-year low. That has been a -2.4% devaluation in a week, and a massive -7% devaluation since the start of April. Against the Australian dollar we are soft too at 91.2 AUc. And against the euro we are more than -½c lower at 61.2 euro cents. That all means our TWI-5 starts today at 71.9 and its lowest since the end of February. On a TWI-5 basis the April devaluation is -3.8%.
The bitcoin price is down -3.7% from this time yesterday at US$38,628. A week ago it was at US$39,415. Volatility over the past 24 hours has been moderate at just over +/- 2.4%.
And please note that I will be on holiday next week. These daily briefings continue in a different form, and I will return on Monday, May 9, 2022.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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55 Comments
But first today, the technical updates out of the Q1 GDP result relating to American household incomes and expenditure were released overnight and they were better than analysts were expecting...And all that keeps the Fed on track for a big +½% interest rate hike next week.
According to today’s advance estimate for first quarter 2022 US real GDP, the third highest (inflation-adjusted) inventory build on record subtracted nearly a point off the quarter-over-quarter annual rate. Yes, you read that right; deducted from growth, as in lowered it. This might seem counterintuitive since by GDP accounting inventory adds to output.
It only does so, however, via its own rate of change; the second derivative for specifically the difference. Because Q1’s third highest inventory accumulation follows Q4’s record high accumulation, the fact it was less if still huge when compared to the prior three months counts as a reduction to overall GDP.
Even so, headline GDP would’ve still been less than zero because the US economy, contrary to most price illusion perceptions, has been heading toward trouble for some time.
David,
Aha! The challenge of data sources that do not align!
But in the case of NZ, where I think I can see a little clearer though the noise, I think we will be very lucky if we can avoid a recession.
It is challenging to see where genuine economic growth is going to come from in NZ.
We are in an export led county where it is imports that are doing the leading.
Keith
The China economy is probably the key one to be watching here in NZ right now. The combination of both the yuan depreciating and the foreign reserves declining says that something significant is occurring and it will be a third factor that affects both. In all likelihood, it is being driven by an external current account deficit with imports rising relative to exports. China imports a lot of commodities (energy, minerals and feed for its animals in particular) and the prices of all of these items are currently high.
Clearly, this year is going to be very challenging for China in ways that China has not had to face in the last 50 years. There will be implications for NZs export returns but it is impossible to quantify what these might be. And they may well vary considerably by product.
KeithW
Some of the key issues such as commodity prices were beyond China's control. However, failure to engage with either Pfizer-BioNTech or Moderna for manufacture of their mRNA vaccines, or the direct purchase thereof if manufacture was not feasible, was a strategic error and the chickens are now coming home to roost.
The Omicron issue will probably have blown through China by the end of this year but it looks non-manageable in the short term.
KeithW
I am also thinking Keith of China’s abysmal handling of the early stages of Covid, it’s ongoing abysmal human rights record, it’s response to the Ukraine invasion etc
And it’s general arrogance and over belief in its ability and power.
not to mention its self harm in blowing up a property bubble of epic proportions.
The China economy is probably the key one for to be watching NZ right now. The combination of both the yuan depreciating and the foreign reserves declining says that something significant is occurring and it will be a third factor that affects both.
For all the bluster otherwise over the years, the plain truth is that China, as everyone else (including, ahem, Russia), needs US dollar funding. They don’t get it from the US, however, (also, ahem, Russia), rather the offshore eurodollar funding apparatus which is a complicated beast of sometimes competing interests contained within a web of oftentimes confusing transaction varieties.
The world needs these “dollars” because that is, as of right now and the far foreseeable future, the only way to conduct necessary, lifegiving business around the world. A Chinese firm needing raw material from Australia? That import company might be able to find some Aussie dollars to pay for it, but transacting that way in the one’s local currency would be expensive, likely unprofitable.
Instead, when the whole world is using the same currency mediating practically everything in between, that currency is readily available on both sides of the trade. The Chinese firm can cheaply transact with a Chinese bank to secure US dollars to transfer to the Australian supplier’s Australian bank (which can then reuse by supplying an Australian importer seeking to buy goods from somewhere else on the planet besides China).
Everyone is happy.
Unless, of course, the Chinese bank which supplied the US dollars to the import firm suddenly itself can’t secure US dollars to use. This becomes a huge problem for that bank, for China’s import economy, as well as Australia, too. Text Link, Video Link
Question...if the eurodollars are not reliant on US trade (or are they?...it seems to me they must be) then why the shortage? They may not be available to a particular economy due to perceived risk but they must still be in the market somewhere....or have they flown into the US markets for safety?
They may not be available to a particular economy due to perceived risk but they must still be in the market somewhere....or have they flown into the US markets for safety?
Short term (3mths) eurodollar bank ledger credit/liability balances - you owe me/I owe you are continually created and extinguished outside central bank oversight in the US domestic market - you cannot fly digital balance sheet entries elsewhere, there is no physical money. Rollover risk is the main liability for borrowers.- lenders lose confidence to create credit.
Banks don't take deposits and they never lend money. They are in the business of purchasing securities. When one gets a bank loan, the loan contract is a promissory note. The bank purchases that contract from the borrower. Now the bank owes the borrower money and it creates a record of the money it owes, which we call deposits - source.
I owe you + you owe me + magic banking laws = Money out of thin air.
This isn't a great advert for how well AML is going here. Is it easier for the small players to find the cracks?
"The money Joanne sent went into a Kiwibank account. On Friday, a Kiwibank spokesperson said they were unable to answer questions about individual customers or accounts due to “confidentiality obligations”."
https://www.stuff.co.nz/national/crime/128475643/overseas-organised-cri…
Wotcha doing with your week off , David ... stay at home , or venturing out ?
... I'm in isolation for a week ; 3 in the household have Covid19 ... Gummy dodged it ... so far ... a chance to catch up on the painting , gardening , & annoying the good folk here ! .... joy ...
Comment: This year has seen some unusual twists and turns in the world of cryptocurrency, even for a technology with a track record of turbulence. Crypto has taken an unlikely supporting role in the war in Ukraine, starting with Ukrainian leaders explicitly seeking cryptocurrency donations to help finance new military equipment. Over $100 million of crypto donations have subsequently rolled in, and President Zelenskyy has since signed a bill to legalise cryptocurrency as an asset class in Ukraine.
Illia Polosukhin, the organiser of Unchain, a charity distributing humanitarian aid in Ukraine, points out that “a bitcoin transaction takes 10, 20, 30 minutes versus a wire transfer that might take two or three days, and you can’t be sure of that - by then [the Russians] might have bombed a national bank”. Polosukhin also notes that crypto, being digital, means that Ukrainian refugees can access funds without needing to carry cash.
https://www.newsroom.co.nz/cryptos-quest-for-legitimacy?utm_source=Frie…
Yep.
I am happy with my decision to sell my shares in October.
I have exchanged some of cash to yen, otherwise will wait a bit. Probably look to do term deposit in a couple of months, and also keep plenty of cash in hand to buy more shares once all the bad winds have blown through.
Have just checked, my share portfolio is up ~1.7% in the last six months so there's definitely been some opportunities out there. Mostly from gold, oil and other commodity producers and a good performance from a local unlisted company. Dragged back by some NZX companies.
Will see how long the positive lasts once this latest wobble flows onto the NZX on Monday.
Exxon Triples Buyback To $30 Billion As Energy Giant Prints Billions In Free Cash Flow
Offering shareholders an escape route?
The U.S. Wants to Tackle Inflation. Here’s Why That Should Worry the Rest of the World. https://nyti.ms/3xVpzdj
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