Good morning, wherever you are. Here's our summary of key economic events overnight that affect New Zealand, with news everyone is struggling to understand how the China virus impacts will play out.
Wall Street is sharply lower today as investors come to grips with both the economic fallout from the China virus, but also their realisation that they have been too optimistic on the prospects of the US economy. The recent momentum shift lower isn't passing and the China situation will only add to the speed of the decline.
The S&P500 down a sharp -1.4% so far and heading for a -2% loss on the week.
While US personal spending is holding, personal income growth is slipping. For the full year disposable personal incomes were up +4.4%, but only up +3.2% in Q4-2020 as taxes rose +5.2% pa. The US "tax cut" program is biting now for most, as the benefits all went to the wealthy. Meanwhile consumers are spending as before, ignoring the rising tax take. Personal saving, which had been strong earlier, turned negative in Q4, and unusual American situation.
This blindness to the turning incomes and saving is reflected in another consumer sentiment survey which has it still near its cyclical peak.
Things are a bit more realistic in the latest Chicago Purchasing Manager's survey, where sentiment in this factory heartland fell sharply. It is now at its lowest level in more than four years and that benchmark four years ago was a brief outlier. The current depressing trend has been building for all of 2019 however. Worse, it is being led by sharp drops in new orders.
North of the border, Canada reported its Q4 GDP growth at +1.5% in November, a small rise from October.
China's isolation by increasing numbers of countries is gathering momentum. And that isolation is in all sorts of ways: India has banned exports of masks and protective clothing.
China's official survey of its factory sector (a 3000 firm sample) reported its January factory PMI turning lower to be neither expanding nor contracting. It's larger 4000 sample survey of its services sector shows business expanding faster at 54.1 and above the 2019 average. But both survey were carried out in early weeks of January before the Wuhan emergency started to grip.
China's financial markets may re-open on Monday (but that is still uncertain). But their industry probable won't as firms stay shuttered after the week-long Spring Festival that has been upended by the virus emergency. And that will have a huge knock-on impact, to not only China's economy, but just about everywhere else.
The impact on the New Zealand economy is getting some attention from economic analysts, and generally they see a mild -0.1% or -0.2% dent to our economic growth. All use 2003 SARSs as a benchmark, and all cover their estimates with caveats. But given China's central place in the world economy, much will hinge on what happens this coming week and whether some semblance of normality returns there after China's holiday. At this stage, the biggest local industry to be impacted earliest, will be tourism.
Britain's exit from the EU has now happened - sort of. The implications will become clearer now. One thing is certain - whatever happens, it will have virtually no impact on the New Zealand economy.
Overnight European equity markets fell -1.2%. In Asia, Tokyo was up +1.0% yesterday taking its weekly loss to -2.6%, while Hong Kong slipped -0.5% yesterday to end the week down -5.9%. Who knows what the Shanghai market will do when it opens next week. Across the Tasman, the ASX ended unchanged on the day to end down -1.0% for the week, while the NZX50 rose +0.4% yesterday but was down -1.4% for the week..
The UST 10yr yield is lower today at just under 1.53% and that means over the past week it has declined -17 bps and that is on top or the prior week's -16 bps drop. It has fallen -39 bps over all of January. Their 2-10 curve is little-changed at +19 bps. But their 1-5 curve is now negative -11 bps, a sharp switch from positive +7 bps last week. And their 3m-10yr curve has also turned negative, now -3 bps in a sharp turn because it was a positive +20 bps this time last week. The Aussie Govt 10yr was up +2 bps bps overnight to 0.97%, but a -19 bps fall in a week. The China Govt 10yr is holding at 3.03% and markets are due to open again on Monday. And the NZ Govt 10 yr is unchanged overnight at 1.31% and that is a -15 bps weekly drop.
Gold is higher today, up +US$2 from yesterday, now at US$1,583/oz but little-changed from this time last week. Data from the World Gold Council shows that for a second quarter in a row, supply far exceeded demand as both India and China turn away from the yellow metal. Speculation is now gold's game.
The Fear & Greed index we follow has moved to the 'fear' side of neutral after a long stint hard over on the 'extreme greed' side. Volatility has jumped, with the VIX now at just under 19 with a rise for the week. The average for the past year has been 15. Both represent a risk-aversion change for the week.
US oil prices are still falling, down -US$1 on the day and now at US$51/bbl and that is a -US$3.50 drop in a week. Sinking global economic demand is behind the sharp drop. Since the start of 2020, that is more than a -US$10.bbl dive, or -17% and very close to a bear market in crude oil. The Brent benchmark is down too at just under US$58/bbl. The US rig count fell again this week, and to levels near a three year low. There is little reason for them to rise at these prices.
The Kiwi dollar has fallen -2.3% this week and ended at 64.6 64.3 USc as China-exposed currencies take a knock. On the cross rates we are holding at 96.6 AUc. Against the euro we are also much lower for the week at 58.3 euro cents. The net of these shifts reduces our TWI-5 to 69.9 and that is the first time below 70 this year.
Bitcoin is unchanged from where we left it yesterday at US$9,237 but that is a very strong weekly gain of +9.4%. The bitcoin rate is charted in the exchange rate set below.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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