Remember, it is a public holiday in New Zealand today, Labour Day. Here's our summary of key economic events over the holiday weekend that affect New Zealand, with news that China is preparing for a confrontational future. Bit players like New Zealand could face some very tough choices in the decade ahead from the positions being staked out in Beijing this past week.
While we were holidaying, Chinese President Xi Jinping sealed his bid for a precedent-breaking third term while his deputy and several other top officials got the boot and 'retired'. Claims they were above the official age for retirement ring hollow because the don't apply to Xi's mates. Former President Hu Jintao, Premier Li Keqiang, as well as senior official Wang Yang were all ushered out. 'In' was Shanghai party chief Li Qiang, a long time Xi acolyte and the man who ran Shanghai's very tough lockdown, replacing Li, followed by anti-corruption chief Zhao Leji, ideology tsar Wang Huning, Beijing party head Cai Qi, top Xi adviser Ding Xuexiang and Guangdong provincial boss Li Xi. All have previously worked with the 69-year-old Xi over the years as he shot up the ranks of the party. It's a hardline group. There are no women again this this core group (again), and for the first time in 25 years no women in the wider Politburo. Also conspicuously missing are leaders with economic experience. Along with Li Keqiang, the central bank chief was another key economic official demoted.
It is likely that the same forces that moved Western companies out of Russia (and Russian companies out of the West) will play out again with China. We are already seeing moves like that, with early triggers relating to protecting supply chains.
The exhortations of the Party in Beijing this week are exposing a serious generation gap. The "last generation" movement among China's under 35s is becoming quite embedded with a suspicious and cynical generation emerging. The political theater in Beijing means little to increasing numbers of younger Chinese expected to carry the weight of Xi's "modernisation" dreams despite increasingly dire career prospects in their sputtering economy. At Xi's coronation, the signs of rot should not be dismissed. In the end demographics are destiny, and Chinese demographics tell a story of decline that is already underway. Xi is also expecting a country with deeply embedded values of hard work resulting in financial security to set them aside 'for the greater good'. It is likely to just build frustrations.
Buyers are shunning residential real estate 'investment' in most Chinese cities now. Local authorities are raising emergency funding to complete stalled projects, but buyers remain suspicious of what they will get. Some cities are trying to entice them back with sub 4% mortgage interest rates. In fact one city is now offering 3.7% mortgages. There is not a lot of evidence it is working yet.
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Prices for iron ore and copper are falling, mostly based on weaker prospects in the Chinese economy. And despite war disruptions from Russian supply, neither are aluminium nor nickel prices going anywhere either. Sanctions should have raised prices for these key commodities, but it isn't happening. The reason is weak demand, especially from China.
Global credit risks are rising as the triple threat of rate rises, Europe’s energy crisis and China’s stuttering property market all show no sign of easing. Good corporate profits can't mask any of these threats to credit markets.
Also, we should watch out for global commercial property valuations and sales activity. Rising yields and p/e ratios make this sector increasingly vulnerable to a slump.
We are less than ten days away from the next US Fed rate review. Markets are pricing in a full +75 bps (and a bit more) for that meeting, plus another +125 bps and taking their official rate to 5.0% by March 2023 and it is assumed it will level out at that point for the rest of the year. That is a rapid-fire set of increases expected and already priced in. The big question now is, when to slow down? (Markets have priced in a New Zealand OCR at 5.5% by August 2023.)
The US Federal Government booked a -US$1.78 tln deficit in their full fiscal year to September, a huge improvement on the -US$2.78 tln in the prior 2021 year. Still, this deficit is still -5.4% of US GDP. That is back to the average levels of the past 35 years, and a steep and fast recovery from the disastrous Trump years.
We should also note that the US Fed's balance sheet has retreated to US$8.7 tln (34% of GDP) and back to levels first reached in December 2021. That is a reduction of -US$220 bln from the peak in mid April 2022. Quantitative tightening (QT) is underway.
American used car loans are a new risk for the American banking system. Borrowers who took out loans when used car prices were high a few months ago could be under-water as those prices fall back as sharply and interest rates rise. Bank provisioning for this risk is rising sharply.
Canadian retail sales didn't slip away as much as expected; in fact they rose in August after a slip in the prior month.
As widely expected, Japan's government and central bank intervened in the currency market over the weekend to support a falling yen, The yen soared the most against the US dollar since March 2020 on the intervention, rising +2.7% in just a few hours. It was an intervention timed for the final few hours of trading in the US, so it should hold things until Tuesday NZ time, at least.
Japanese inflation came in at 3.0% in September, unchanged from August and holding near an 8 year high. Food prices were up +4.2%. Electricity costs were up 21% and generating a surge in home battery storage demand. Without food and energy costs, 'core' inflation there was only 1.8% however.
On Wednesday, Australia releases its September CPI data. It is expected to rise to 6.9% from 6.1% in August. But analysts like at CBA reckon it will be over 7%. At that level, the RBA may not be as sanguine about how they have handled monetary policy so far.
In freight news, the backup of container ships off Southern California’s coast that was at the heart of American supply chain congestion during the pandemic has effectively disappeared. The queue of ships waiting to unload at the ports of Los Angeles and Long Beach fell from a peak of 109 ships in January to just four vessels this past week. This doesn't mean all American logistics pressure is over, but it is an early sign that it is fading, and fading fast. And after peaking in early January this year, the share price of global shipping giant Maersk has fallen -35%. Super profits from logistics stress are no longer there.
The UST 10yr yield starts today at 4.22% and unchanged from this time Friday but it did briefly get up to 4.33% at one point in between. But it is up +20 bps from this time last week. The UST 2-10 rate curve is little-changed at -26 bps. Their 1-5 curve is marginally more inverted at -25 bps. And their 30 day-10yr curve is unchanged at +75 bps. The Australian ten year bond is down -1 bp at 4.21%. The China Govt ten year bond is unchanged at 2.74%. And the New Zealand Govt ten year will start today also unchanged at 4.69% but up +17 bps from this time last week.
The price of gold will open today at US$1658/oz. This is up +US$4 from this time Saturday.
And oil prices start today up +50 USc from this time Saturday at just on US$85/bbl in the US while the international Brent price is just on US$92/bbl. These are little-changed from week-ago levels.
The Kiwi dollar will open today at 57.6 USc and unchanged from Saturday. But it is almost +2c higher than this time last week. Against the Australian dollar we are little-changed at 90.3 AUc. Against the euro we are also unchanged at 58.4 euro cents. That all means our TWI-5 starts today at 68.1, and +160 bps higher than a week ago.
The bitcoin price is now at US$19,473 and +1.3% higher than this time Saturday. Volatility over the past 24 hours has however been modest at just +/- 1.1%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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