Weekend briefing: Financial market records, economic highs, but ...

Yellen warns on new US debt ceiling crisis; strong PMIs in West; weather extremes raise coal demand; container prices spike higher; UST 10yr 1.29%, oil up and gold slips; NZ$1 = 69.8 USc; TWI-5 = 72.9

24th Jul 21, 8:31am by David Chaston

Te Whakaraupō / Lyttleton Harbour. Photograph by Greg O'Beirne - Licenced under GFDL / CC by 2.5.

Here's our summary of key economic events overnight that affect New Zealand with news Wall Street equity markets closed at all-time records today.

But remember, the US is in its summer holiday season from now to Labor Day (September 4, 2021) where economic activity is relatively lighter, investor activity shallower, and small changes tend to get a magnified effect. Silly Season, if you like.

Firstly, Janet Yellen as US Treasury Secretary has warned Congress that unless it acts by August 2 to raise its debt ceiling, the Administration will have to take "extraordinary measures" to prevent a US debt default. (Congress suspended the debt limits under a bipartisan deal with Trump but that lapsed with the replacing Administration.)

There were a couple of early PMIs released overnight for some major economies we follow and they are all quite positive. In the US their factory sector expanded at a series high (best in at least 14 years) with strong new order levels. But costs and prices are rising faster, and labour shortages show no signs of easing for manufacturers. It wasn't quite as bullish in the giant American services sector but the expansion is still strong (just less so). This loss of momentum is being attributed to labour shortages and difficulties acquiring stock.

In Europe, they are seeing their fastest expansion in more than 20 years. New factory order levels are very high as are the pace of cost increases. But the rate of price increases being pushed through is easing. Their services sector is expanding at a 15 year high. Germany is pushing higher but France's recent burst may be topping out even if it remains strongly expanding. The UK recovery is stuttering however.

Taiwan reported strong industrial production in June, up +27% from the pre-pandemic June 2019 levels. But they also reported very weak retail sales, down -14% from June 2019 in a very sharp drop after pandemic restrictions were suddenly imposed. The restaurant trade was particularly hard hit, making the fall the largest since they began this retail trade data series in 1999.

The growth streak for the Australian private sector ended in July according to flash PMI data which showed business activity now in contraction. Survey respondents signaled that renewed pandemic restrictions affected demand and output countrywide.

In China, they are bracing for two new large typhoons after digging out of the Henan disaster. One of them may also affect Japan and the Olympics.

The weather extremes in parts of the world are raising demand for electricity, and quite sharply. And the fastest way to respond is to burn more thermal coal, much of which is low grade. The price of thermal coal is soaring. China's political disputes with Australia isn't helping and volumes from the US are now driving this trade.

At the same time, iron ore prices are now dropping sharply as China’s intensified drive to lower steel output prompts mills to start cutting production to avoid sanctions. The prices Chinese mills are paying dropped -10% this week although they remain +28% higher than at the start of 2021.

The Baltic Dry Index remains high (up +70% since the start of 2021) but has flat-lined over the past week. It too is down -10% from the start of the month. But for containerised cargoes, there is no letup with prices now up another +7% in just two weeks averaging NZ$12,800 per 40ft container.

The Trans-Tasman travel bubble is now suspended until late September. There were 136 new community cases in NSW yesterday, and another 14 in the community in Victoria where their lockdown is in extension with the border closed to NSW. South Australia is also in lockdown. Queensland has closed it border with NSW, which is a last-resort action for them. There were new cases in New Zealand, all caught at the border (mostly among ship crews), none in the community.

Wall Street is rose today with the S&P500 up a full +1.0% in final trade. That is a +2.6% gain for the week and is a new all-time high. Overnight, European markets rose about +1.1% in all markets except London which was up +0.8%. Yesterday, Tokyo was on holiday. Hong Kong fell a sharp -1.5% to be down -1.7% for the week. And Shanghai was fell -0.7% in its Friday session for a weekly rise of +0.6%. The ASX200 ended yesterday up a minor +0.1% for a modest weekly gain of +0.6% and the NZX50 Capital Index ended up only a minor +0.1% for a minor +0.5% weekly gain.

The UST 10yr yield starts today at just on 1.29% and a +3 bps turn back up to be exactly where it was a week ago. The US 2-10 rate curve is steeper by 3 bps to now be at +109 bps and very similar to week-ago levels. Their 1-5 curve is now little-changed at +65 bps, while their 3m-10 year curve is now at +124 bps and 2 bps steeper. The Australian Govt ten year benchmark rate starts today at 1.21% and little-changed. The China Govt ten year bond is at 2.94% also little-changed. The New Zealand Govt ten year is now at 1.52% and down -1 bp from this time yesterday. A week ago it was 1.65% so it has fallen -13 bps since then.

The price of gold is now just on US$1802/oz which is down -US$4/oz from this time yesterday and down -US$9 from this time last week.

Oil prices have risen by another +50 USc so in the US they are now just under US$72/bbl, while the international Brent price is now just on US$73.50/bbl. For the week they are also up just +50 USc.

The Kiwi dollar opens today just under 69.8 USc and very slightly firmer since this time yesterday. Against the Australian dollar we are also slightly firmer at 94.7 AUc. Against the euro we are unchanged at 59.3 euro cents. That means our TWI-5 starts today up slightly at 72.9 - which is about where it was a week ago.

The bitcoin price is now at US$32,220 and virtually unchanged since this time on yesterday and just marginally higher (+0.6%) than this time last week. Volatility in the past 24 hours has been low at just under +/- 1.4%.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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37 Comments

by taimaiakka0 | 24th Jul 21, 8:42am 1627072967

Russian opting for short term pain for long term gain :

https://www.cnbc.com/2021/07/23/russia-raises-key-rate-to-6point5percen…

by Palmtree08 | 24th Jul 21, 10:28am 1627079292

"High inflation eats into living standards and has been a key concern among households ahead of September parliamentary elections in which the ruling party United Russia is widely expected to retain its dominance." The reporter has a sense of humour I see.

by taimaiakka0 | 24th Jul 21, 9:05am 1627074349

US may survive with the size of it's economy and US$ but not sure if small countries like NZ who are copying US.

Each country has to follow it's own path. Watch how Orr find reason for not increasing OCR - enough excuses to choose from.

by AJ123 | 24th Jul 21, 11:40am 1627083654

These people have two tongues. One in their mouth, and one in their shoe. Ignore what they say, and watch what they do.

by ham n eggs | 24th Jul 21, 9:20am 1627075248

39 now... makes you wonder if this is a Pfizer benefit concert or a vaccine

https://www.cnbc.com/2021/07/23/delta-variant-pfizer-covid-vaccine-39pe…

by False economies | 24th Jul 21, 9:44am 1627076694

From the article "The two-dose vaccine still works very well in preventing people from getting seriously sick, demonstrating 88% effectiveness against hospitalization and 91% effectiveness against severe illness, according to the Israeli data."
Still seems worth it to me.

by ham n eggs | 24th Jul 21, 10:16am 1627078581

Yes, but I wonder what the results for water are

by northman46 | 24th Jul 21, 10:29am 1627079364

Are you suggesting the Pfizer vaccine would be no more effective than a placebo?

by tim52 | 24th Jul 21, 10:51am 1627080715

It's not that simple though. With 39% effectiveness, heard immunity is not achievable. Vaccinating the entire population at best slowing it down.
The most import consideration for here though is what the government new plan will be. Will it decide that the over 60s are sufficiently vaccinated and everyone else has had an opportunity so lets open the border and deal with half the population catching the disease or will the borders remain close?

If the borders remain closed the risk of serous outcome covid along with catching it would be, lets say, 1 in 1 to >10 million per year for the average NZer depending on location and I would think this is much lower than from the vaccine for most. I think I would wait for a better vaccine to become available. Meanwhile the government and opposition still pretend herd immunity is possible.

by keithwoodford | 24th Jul 21, 11:14am 1627082065

tim52,
This is not necessarily correct. Vaccinated people are not protected by a physical shield. Rather, their immune system is primed to react very quickly when the invader arrives. Some of these people will still produce a positive result but never be symptomatic because the immune system knocks out the infection while bug numbers are still very low. The PCR tests are now so good that the invading organisms can still be detected at very low levels. These people can still be 'infectious' but the chances of passing it on are much lower than for an unvaccinated person who will be shedding millions of the COVID organisms. We saw a great example of that in Wellington a few weeks back where the Sydney visitor, who by my recollection had only one vaccination, was sufficiently infectious to infect his partner but no-one else was infected despite him travelling widely during his so-called infectious period. As long as infected vaccinated people on average only infect less than one other person then herd immunity can still work. A challenge for NZ is going to be to get approval for vaccination of people 16 years of age.
KeithW

by tim52 | 24th Jul 21, 12:16pm 1627085815

If you look overseas highly vaccinated counties it has not stopped the spread and they have been forced to lock down for delta and still are having difficulty stopping the wave. Sure it's not definitive and maybe if Israel get's another 20-30% vaccinated you get the reproduction rate low enough to stop the outbreak but I think that's starting to look like wishful thinking and I don't think the Israel's government believe this to be the case. I can't see any significant negative correlation between countries vaccination rates and case numbers or reproduction rates. Israel does have a vaccine passport system in place so this may be lowering the apparent vaccine effectiveness so maybe its not that bad.

We have had many lucky cases where no one outside the family was infected. I think you just have to consider that anecdotal.

by keithwoodford | 24th Jul 21, 12:28pm 1627086524

The Israeli situation is complex. There are clear demographic groups there. The Orthodox and Arab Israelis have lower vaccination than other demographics. These two demographics are also the groups who travel less and the Delta variant has not really got into those populations yet. The Orthodox population also has higher immunity because the original variant, once it got established, ripped through that group. Overall, the current level of new cases in Israel is still very small compared to where it was a few months ago. The evidence that boosters will be required is growing, and Phizer has been saying this for quite some time. I expect that we will be into boosters in NZ early next year and I will be lining up if that is the case.
KeithW

by Rosenstein | 24th Jul 21, 12:55pm 1627088121

Pfizer. Phizer. Phizzer. Fizzer. The 4 stages of the vaccine against rapidly evolving mRNA virus. I see you're at stage 2.

by keithwoodford | 24th Jul 21, 1:08pm 1627088908

One of the nice things about mRNA is that it is possible to rapidly produce a booster with enhanced action against the Delta variant, or any other nasty variant that turns up. For those who have the specialist expertise (and it is indeed new and exciting technology which has been developed independently in recent years by BioNtech and Moderna) the new mRNA can be created in a matter of days.
mRNA will in time be the technology that deals with many diseases. It is truly one of the great scientific break throughs that will in future be applied both to diseases and a range of genetically determined health conditions.
KeithW

by Hamish | 24th Jul 21, 6:30pm 1627108200

I wish there was a vaccine for bad drivers.

by rastus1 | 24th Jul 21, 9:56pm 1627120581

Informative comments thanks Keith

by tim52 | 24th Jul 21, 2:40pm 1627094438

Israel is locking down and restricting international travel to try stop the spread and its not working. The vaccine will not enable someone to skip MIQ quarantine. Its about improving outcomes from the disease.
Do you think the Phizer vaccine will deliver on the promises the goverment is making? There's a radio ad where we it is promised that there will be no more lockdowns so everyone is guaranteed to be able to attend can attend a tangi if they get the first jabs. Do you think they will have any political capital left to coerce people to get >90% percent compliance on getting a booster.

You are far better able to calculate you own risk of catching covid and having a bad outcome without the vaccine than me but do believe there is demographic (that I am no longer apart of) that has a higher risk of myocarditis or allergic reaction than catching covid (under the current government policy) let alone having a serious case by the time the vaccine wears off.

by JimboJones | 24th Jul 21, 6:40pm 1627108838

Just have a look here instead: Covid was leaking out of MIQ almost every week, then they vaccinated the workers, haven’t had a case since.

by donny11 | 24th Jul 21, 12:37pm 1627087065

Respect your posts Keith, but think you might be clutching at straws. Our heard immunity though vaccination strategy is not going to work & should be abondened, the virus is clearly breaking though the pfizer vaccine. Best we can do is to offer everyone who wants a vaccine a vaccine then open back up. Vaccinating children will accomplish nothing.

by keithwoodford | 24th Jul 21, 1:10pm 1627089036

Eventually we will open up. But now is not the time. Right now, the priority has to be to get everyone vaccinated who is willing to be vaccinated. At a personal level, I regard it as not only a self-protective measure but also a community responsibility. In saying that, I am not arguing for compulsion. However, for those in the higher risk settings such as health professionals and associated people, and for those with links to the border, then it goes with the territory.
KeithW

by donny11 | 24th Jul 21, 1:23pm 1627089814

Agreed now is not the time. However by year end everyone who wants a vaccine will have had an opportunity to have one. That will be the time. Our strategy goes from rational & intelligent to quixotic beyond that point.

by Albert2020 | 24th Jul 21, 9:49am 1627076979

Is a vaccine ever highly effective at preventing you from getting a respiratory disease? Millions get the influenza jab every year but doesn’t stop them getting it, only dramatically reduces your chances of dying from it much like this vaccine seems to do. Also have to take into account that influenza vaccines are altered every year to keep up with altering strains which we haven’t seen with the Pfizer (or any other) vaccine thus far.

by ham n eggs | 24th Jul 21, 10:17am 1627078647

Ah.. a Pfizer gravy train.. got ya

by False economies | 24th Jul 21, 11:19am 1627082377

I'm no great fan of big pharma, but if you're suggesting that they're deliberately making vaccines that aren't very effective I think you might have fallen down an internet conspiracy rabbit hole...

by Rosenstein | 24th Jul 21, 12:59pm 1627088361

No it's better than that. At any given moment there are numerous strains of influenza floating around. What Pharma does is effectively what I do at the TAB. Bet on a winner. They stick it in a vaccine, hope its the one that circulates most widely in any given geographical region. The difference between Pharma and TAB is that even if they don't pick a winner, they still get paid.

by donny11 | 24th Jul 21, 1:26pm 1627089972

Costs 100x more to have someone in hospital for a week than it does for the flu jab. I think flu jabs for the immunocomprised is a good thing. Even if they are only 50% effective

by philip east | 26th Jul 21, 2:00pm 1627264816

Phizer have some fine upstanding products that have worked well .

by Audaxes | 24th Jul 21, 10:05am 1627077934

The price of thermal coal is soaring. China's political disputes with Australia isn't helping and volumes from the US are now driving this trade.

However, the most recent statistics show that the US has been taking the lion's share of the market in China left by the exit of some Australian products, in particular wines, beef, timber, and seafood. Moreover, the US had not been an exporter of coal to China, but the most recent year has witnessed a sharp surge from almost zero American coal bound for China in October 2020 to 720,000 tons in May this year. American beef exports to China have now overtaken Australian products, harvesting on the huge Chinese market with an increasing middle class population of 400 million strong. Link

by Burni | 24th Jul 21, 12:29pm 1627086581

I guess this will increase to cost of what we are importing to burn at Huntly hence power costs will increase.

Looks like the best vehicle might be one powered by hydrogen in some way.

by Rosenstein | 24th Jul 21, 1:06pm 1627088806

I love the smell of hypocritical thermal coal in the morning.

by Squishy | 24th Jul 21, 10:43am 1627080210

The UK economy may be stuttering but cases may be slowing which is likely to give it new legs:
https://youtu.be/W-LQbGCTGhI

As for burning coal for energy, we can hardly point fingers at others.

by Burni | 24th Jul 21, 12:30pm 1627086651

Certainly not while we're advocating for more EVs.

by fortunr | 25th Jul 21, 2:50pm 1627181410

This is a revealing article that clearly highlighted what I have been saying all along: that the ultra-loose monetary policy enforced by Orr has been a complete disaster (https://www.stuff.co.nz/business/opinion-analysis/300363065/the-reserve…).
As a result of this, the near future will see the RBNZ forced to raise rates at a level and at a speed that will surprise many. Mortgage rates at over 5% will hit NZ much sooner than many expect or fear.
Had Orr been more competent and less shortsighted, and less aggressive in its loosening of the monetary policy, we would not have had to deal with sustained inflation, rampant debt, an unbalanced economy and an housing Ponzi that will be painful to redress.
It is high time to sack him, he had done enough damage already and we need somebody who has the willingness to take the painful but necessary action to sort out this mess, starting with an immediate raise of the OCR to at least 1%.

by Nzdan | 25th Jul 21, 6:49pm 1627195781

From the article:

The headlines screamed that CPI rose to 3.3 per cent. It is worse than that. Prices rose 1.3 per cent in the last 90 days. The past three quarters had been 0.8, 0.5 and 0.7, which is how we get 3.3 per cent. If the rate of 1.3 per cent reflects a new plateau we are looking at annual inflation of 5.2 per cent.

by Averageman | 25th Jul 21, 6:43pm 1627195439

Perhaps Biden will miss extending the never never on US debt while hes MIA. That would trigger a global shock.

by TuaWai Smith | 27th Jul 21, 12:56am 1627304197

No one has cared about the US national debt since Clinton. The nature of US politics is to throw money at constituents that get the politicians voted in for their continued gravy train in office. The republican's are absolutely the worst hypocrites when it comes to this. They are meant to be fiscally more conservative, but look at trumpty dumbties reneging on his campaign promise to reduce the debt and drain the swamp...he and the enabling repubs added 4 trillion dollars to the debt even before covid hit..not to mention they created the biggest swamp of bad character in politicians in USA history. It seems countries have just given up and just print money these days. Inflation???? They are headed for a reckoning.

by TuaWai Smith | 27th Jul 21, 1:00am 1627304442

double post