Weekend briefing: A new stress in world trade

Economy / news

US factories struggle but services expand; China data mixed; India export levels stay tame; Red Sea troubles have ships avoiding it; UST 10yr 3.93%; gold and oil down; NZ$1 = 62.2 USc; TWI-5 = 70.4

16th Dec 23, 8:33am by David Chaston

Image sourced from Shutterstock.com

Here's our summary of key economic events overnight that affect New Zealand, with news world trade is about to take another knock with two giant shipping companies halting the use of the Red Sea on security concerns.

But first, the early look at the American PMIs shows services rising while factory activity is contracting. The sharpest increase in new orders since July is pushing their dominant service sector to a quicker expansion, but the reverse is the case for manufacturing where new order levels are retreating.

The NY Fed Empire factory survey sank sharply in December from its unusual rise in November. But the longer term trend is still in place for a gradual move up from its deep negatives at the start of the year.

Meanwhile, overall American industrial production made a minor gain on November from October but is still slightly lower than year ago levels. Manufacturing output (led by business equipment), which accounts for 78% of total production, rose by +0.3% from October, marginally missing market expectations of +0.4%.

After peaking in April 2022 at almost US$9 til, the Fed has managed to shrink its balance sheet to just over US$7.7 tln since then and that is even accounting for the temporary surge required for the SVB Bank/regional bank crisis in March this year. The 'normalisation' has been -US$1.2 tln over 20 months or averaging -US$60 bln/month (although it has been running at twice that rate since March). The Fed balance sheet is now back to levels first arrived at in April 2021. However there is a very long way to get back to the pre-pandemic levels of US$4.2 tln - that would require another three years at the current rate. (On a per-GDP basis that return to pre-pandemic normal will come quicker however.)

Canadian housing starts took an unseemly dive in October as they dropped to just an 213,000 annual pace and far below the expected 257,000 pace, or the 272,000 pace in October. For them, this is a huge and unusual miss probably reflecting the impact higher interest rates have on multi-family housing units.

China released a wide set of national data late yesterday. In the official data none of their 70 largest cities reported any house price growth based on housing resales. Overall their housing index was said to fall -0.2%, but sales of new units are low and now quite problematic. Sales of used units are showing much larger declines than the index they released, both month-on-month and year-on-year. In fact they are now heading for a multi-year retreat, the first they have had.

Going the other way, China reported that electricity production was up +8.4% in November from the same month in 2022. That supports the better than expected industrial production data they also reported, up +6.6%.

And also gaining were retail sales. Although very little changed from October, the jump from a year ago is an eye-catching +10.1% - at least until you realise the base was very stunted and they were just contemplating easing Covid restrictions. Correcting for that, the year-on-year gain seems to be about +4%.

China is getting ultra-sensitive about talk of economic problems - and their Ministry of State Security is on the case warning officials and commentators about not holding the Party line about the country's "bright future".

Meanwhile, foreign patent holders are finding that Chinese courts side with local companies and will chop royalties agreed in existing deals that they subsequently don't like.

And in Australia, the extent of bribery and corruption in China's environmental regulatory system is laid bare in the collapse of a public company there.

In India, export levels are neither growing nor retreating significantly. They were up in November marginally from October but down -2.9% from year-ago levels

In the eurozone, the early PMI surveys show activity is falling at an increasing rate in December and that is true for both their factory and services sectors.

As expected, Russia raised its policy rate by +100 bps to 16%. The decision added to 850 bps in hikes since the start of the bank’s tightening cycle in July. Inflation expectations continue to rise for consumers and businesses and although "official" inflation is only 7.5% central bank officials clearly think actual inflation is much higher than that.

Two of the world's largest container shipping groups have halted using the Red Sea and the Suez Canal. Germany's Hapag-Lloyd and Denmark's Maersk both said the dangers are too great at the moment and have instituted temporary halts. This will put a giant spoke in global trade as more than 10% of world trade depends on the Suez canal

The UST 10yr yield has fallen slightly today as things settle down in the new levels, now at 3.93% and inchanged from yesterday. And the last time we were at this level was in July. A week ago this rate was 4.23% so that is a -32 bps retreat since. The key 2-10 yield curve is more inverted, now by -50 bps which is little-changed from a week ago. But their 1-5 curve inversion is unchanged by -103 bps. And their 3 mth-10yr curve inversion is now -147 bps, little-changed. The Australian 10 year bond yield is now at 4.09% and up +1 bp from yesterday. The China 10 year bond rate is down -2 at 2.65% and a three month low. And the NZ Government 10 year bond rate unchanged from yesterday at 4.67% but down -31 bps from a week ago.

Wall Street has opened its Friday trade with the S&P500 down -0.3% from Thursday, but heading for a strong +2.5% weekly gain. Overnight, European markets were widely varied. London was down -1.0%. Frankfurt was unchanged again. And Paris was up +0.3%. Yesterday Tokyo ended its Friday session up +0.9% which is also its weekly gain. Hong Kong was up +2.4% yesterday to be +4.0% higher for the week. Shanghai ended down -0.6% yesterday to be -0.5% lower for the week. The ASX200 rose +0.9% in Friday trade to be +3.4% higher for the week, and the NZX50 ended unchanged on the day for a modest +0.5% rise for the week..

The Fear & Greed index we follow has stayed well on the 'greed' side as risk appetites remain elevated.

The price of gold will start today just on US$2033/oz and down -US$4/oz from this time yesterday. But that is up +US$36/oz from a week ago.

Oil prices are down nearly -US$1/bbl from yesterday at just under US$72/bbl in the US. The international Brent price is now under US$77/bbl. A week ago these prices were US$70.50 and US$75.50/bbl respectively so +US$1.50 rises since then.

The Kiwi dollar starts today at 62.2 USc and unchanged from yesterday. but it is up more than +1c from a week ago. Against the Aussie we are little-changed at 92.6 AUc. Against the euro we are up almost +½c at 57 euro cents. Along with gains against the Yen and Pound, that all means our TWI-5 starts today just on 70.4, just +10 bps firmer than yesterday at this time, and +20 bps higher than a week ago.

The bitcoin price starts today at US$41,891 and down -1.7% from this time yesterday. A week ago it was at US$43,699 so a -4.1% drop since then. Volatility over the past 24 hours has remained moderate at +/- 2.1%.

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18 Comments

by Audaxes | 16th Dec 23, 9:11am 1702671118

As expected, Russia raised its policy rate by +100 bps to 16%. The decision added to 850 bps in hikes since the start of the bank’s tightening cycle in July.

Vladimir Putin is running Russia’s economy dangerously hot

Extravagant war spending is fuelling inflation

by Audaxes | 16th Dec 23, 9:15am 1702671345

This is what Milton Friedman called the interest rate fallacy, and it indeed refuses to die. We can tell what monetary conditions are in the real economy, as opposed to financial liquidity, though the two can be linked, by the general level of interest rates. When money is plentiful, interest rates will be high not low; and when money is restricted, interest rates will be low not high. The reason is as Wicksell described more than a century ago:

[The natural rate] is never high or low in itself, but only in relation to the profit which people can make with the money in their hands, and this, of course, varies. In good times, when trade is brisk, the rate of profit is high, and, what is of great consequence, is generally expected to remain high; in periods of depression it is low, and expected to remain low.

When nominal profits are expected to be robust, holders of money must be compensated for lending it out by higher interest rates. Thus, the same holds for inflationary circumstances, where nominal profits follow the rate of consumer prices. During the Great Inflation, interest rates weren’t low at all, they were through the roof well into double digits and higher by 1980. At the opposite end in the Great Depression, interest rates were low and stayed there because, as Wicksell wrote, the rate of profit was low and was expected to be low well into the future. High quality borrowers were given as much money as they could want while the rest of the economy was deprived of funds; liquidity and safety being the only preferences in what sounds entirely familiar. Link

by GetFeeling | 16th Dec 23, 1:48pm 1702687727

re ... "[The natural rate] is never high or low in itself..."

A concept so poorly understood by the commentariat that we end up with constant references to 'average rates' based upon the last 20,30, 50, 100 years ... NZ Inc's productivity would increase dramatically if economics was compulsory at high schools (and government actually worked in NZ Inc's collective interest and reformed our broken tax system.)

by J.C. | 16th Dec 23, 6:57pm 1702706236

A concept so poorly understood by the commentariat that we end up with constant references to 'average rates' based upon the last 20,30, 50, 100 years

It's fair to say that the price of money has been manipulated down since the early 90s. Hell, even Greenspan admitted to this. Regardless, after the GFC and despite Greenspan moving on, the Anglosphere has doubled down.

You'd be a fool to dismiss the possibility of any consequences.

by powerdownkiwi | 16th Dec 23, 8:55pm 1702713300

getfeeling - no; it's been the teaching of 'economics' that has been humanity's biggest mistake.

They measure neither resource stocks, not energy flows. Including entroy.

What the h-ll use is economics?

by Rob Reid | 16th Dec 23, 11:21am 1702678919

Old rich people buying services, propping up the sector in NZ and US. Could go on for years given the decades of equity gifted to them. Softening the blow of a world flirting with recession.

by Palmtree08 | 16th Dec 23, 12:45pm 1702683933

Better party up now then, before government has had time to reduce the value of retirement savings to zero. Could the whinning generations be grateful about the wealth transfer? Nah. Whinning has become an addictive way of life for some.

by Pa1nter | 16th Dec 23, 3:10pm 1702692659

While this might be the case, there's also a potential issue funding development and investment. As boomers age, they become more risk adverse, and withdraw their funding from higher risk, future focused investment. The sort of thing that gave us much of the technology and services we enjoy today. With them holding onto their wealth, and the kids having relatively less, funding for this sort of activity may drop off.

by Rob Reid | 16th Dec 23, 3:58pm 1702695483

Yup, a liquidity crisis for projects with risk as we drift along in a world financially dominated by old conservatives. Peter Zeihan has been talking about that too. Banks unwilling to conjure much money for want of safe bets.

by powerdownkiwi | 16th Dec 23, 8:57pm 1702713443

Business cases which gain bank approval get scarce as the Limits to Growth peak gets traversed.

And almost non-existent down the backside of the graph.

Should come as no surprise...

by J.C. | 16th Dec 23, 6:59pm 1702706350

Old rich people buying services, propping up the sector in NZ and US. Could go on for years given the decades of equity gifted to them.

You reckon? Through some kind of reverse mortgage mechanism? Banks making out like bandits yet again.

by Rob Reid | 16th Dec 23, 10:28pm 1702718920

Yes, reverse mortgage, and just selling up, starting with spare property.

I know a bunch of people with millions in equity now that they could happily spend for 20 years until they expire. Still recon the unwinding of decades of cheap money concentrated in a certain chunk of the pop has years to play out.

by GetFeeling | 16th Dec 23, 1:39pm 1702687177

"Manufacturing down, Services up" seems to a bit of a global trend at the moment in many western countries. This was a prediction of what would likely happen when boomers retired.

I've been filing numerous papers on this subject in my "/to read/boomers" folder that was last emptied 15 years ago (before splashing out on 'retirement' stocks and then letting stop-losses do their work). Ho hum. That'll be Christmas reading taken care of then.

by J.C. | 16th Dec 23, 7:00pm 1702706454

Look on the bright side. Hopefully the 60/40 portfolio scam narrative has been thrown on the scrap heap.

by GetFeeling | 16th Dec 23, 5:33pm 1702701193

re ... "with two giant shipping companies halting the use of the Red Sea on security concerns.with two giant shipping companies halting the use of the Red Sea on security concerns."

Somewhat counterintuitively, this will heap pressure on Israel to pull back from its slaughter of innocents.

by powerdownkiwi | 16th Dec 23, 9:00pm 1702713615

The last time it was closed

Was to their advantage...

Parted, that time.

by Rob Reid | 16th Dec 23, 10:34pm 1702719266

Good point, yes should add some pressure. But it wont stop them. The IDF will finish Hamas well within a year, at any cost, including to civilians. It's what happens when the smoke clears that is more uncertain.

by GetFeeling | 17th Dec 23, 7:24am 1702751092

When the smoke clears there will be another Hamas.

One day, after Israel has slaughtered 000's more and the the world has become disgusted at Israel's belief that a jewish life is worth a 100+ Palestinian lives, they may finally realise that oppressing and disadvantaging and imprisoning an entire people just isn't ever going to work.

At this stage, what will Israel do? Seek a peaceful coexistence? Or wreak another holocaust using the logic that its been done to them so that gives them the right to do it to another? (And if people doubt that last option is real then I suggest people need to read just how extreme Israeli politics has become.)