German elections, Huawei deal, Evergrande bonds, US debt ceiling all driven by politics; Japan's inflation low; Taiwan exports high; IMF warns Australia; UST 10yr 1.45%, oil and gold firm ; NZ$1 = 70.1 USc; TWI-5 = 73.6

Here's our summary of key economic events over the weekend that affect New Zealand with news politics is to the fore to start the week.

First in Germany at their elections to replace Angela Merkel, seven parties have reached the 5% threshold with the largest garnering only 25% of the vote. The Greens got 14% and the far-right AfD 11%. The far-left party scraped in with 5%. The king-makers will be the centerist FDP, the usual party in this position, but the Greens may make negotiating tough to achieve a government with stability. Merkel's party the CDU looks like it will be the largest party of the opposition now.

German politics are key in Europe with their economy the largest in the EU, +20% larger than France, and now almost +30% larger than a faltering UK.

Meanwhile, global investors who own Evergrande's USD bonds did not receive their US$83 mln coupon payment by the deadline last week. There is a 30 day grace period before a default event is triggered however. At stake are bonds with a face value of only US$2 bln, but it is an event sending reverberations through the US$400 bln Asian debt markets. Evergrande paper is now trading at just 28c in the dollar. Total Evergrande liabilities, which includes much more than its traded bonds, exceed US$300 bln. Given that China's GDP is US$14.5 tln, that is 2%, so the Chinese economy could feel an Evergrande collapse.

Perhaps that isn't so much when you know that China's overall debt is 270% of GDP - it is an economy built on debt. But most of it is local debt; only 16% of it is owed to offshore lenders. (For the US total debt is 125% of GDP.)

And China is arresting the senior management of another failed conglomerate, HNA.

But freed is the daughter of the Huawei boss, held on money laundering charges in Canada - along with two retaliatory Canadian hostages China took as bargaining chips. China's kidnapping strategy has paid off for them, and we should expect to see this playbook used again in similar circumstances when members of the Chinese elite are arrested overseas - for anything.

In Japan, consumer prices slipped by -0.4% in August 2021 from a year ago, after a -0.3% drop a month earlier. This was the eleventh straight month of decrease in consumer prices, amid weakening consumption due to the ongoing pandemic. Core consumer prices were flat, in line with forecasts and ending a decrease for the first time in 13 months. (In the linked report ▲ means negative.)

The latest Japanese factory PMI for September shows the sector expanding at a modest level still. New orders slipped but managers are obviously confident about the future because hiring remained strong. Price pressure wasn't noted in this survey. Meanwhile, the Japanese services PMI for September records a small contraction, but far less than for August.

In Taiwan, their export order data grew less than forecast in August on unexpectedly weaker demand for new smartphones. But they were +17% higher than a year ago and +34% higher than for August 2019. More importantly perhaps, the ratio of their firms' exports that are produced offshore is falling.

Singapore industrial production rose +11% in August, better than expected, and +29% above the pre-pandemic levels two years ago.

But despite an 84% full vaccination rate, Singapore is seeing a renewed surge in Covid cases, stressing their hospitals, and they are instituting new social restrictions including work-from-home.

In the US, there are now reports that the Whitehouse is about to order its Federal agencies to prepare for a shutdown as its debt limit is now exceeded. And the Fed could be used to keep the bond market from getting too raucous, but it's a bitter solution for Fed officials. However, the Americans have been here before and partisan politics and cheap points-scoring seems to trump good policymaking at present.

Meanwhile, American new home sales data for August was minorly positive, adding to the good July, but really only taking them back to pre-pandemic levels. Still this latest data is a four-month high.

The IMF has been reviewing Australia's economic situation and released its staff report late last week. It noted that Australia needs to address the rising financial stability risks posed by rocketing house prices, which are expected to increase by up to +20% this year. (I wonder what they would say about NZ's higher rises?) The IMF also warned Australia there would be a “reckoning” for so-called zombie companies once pandemic supports were withdrawn, which could result in a spike in corporate insolvencies, particularly in SMEs.

Staying in Australia, there were another 961 new community cases in NSW reported yesterday with another 789 not assigned to known clusters, and these numbers are a material improvement - or perhaps they just relate to weekend testing. They now have 11,634 active locally acquired cases. Victoria reported another 779 new cases yesterday. Queensland is still reporting zero new cases. The ACT has 25 new cases again. Overall in Australia, more than 51% of eligible Aussies are fully vaccinated, plus 24% have now had one shot so far. Vaccination hesitancy is dissolving fast in Australia, so a 90% target there now looks feasible by the end of the year.

The UST 10yr yield opens today at just over 1.45% and down -2 bps from this time Saturday. That is up from 1.37% a week ago. The US 2-10 rate curve is holding at +118 bps. Their 1-5 curve is still at +87 bps, while their 3m-10 year curve is still at +139 bps. The Australian Govt ten year benchmark rate starts today at 1.40%. The China Govt ten year bond is at 2.89%. And the New Zealand Govt ten year is now at 1.94% and up +5 bps from this time Saturday and in a rising trend.

The price of gold will start today marginally firmer, up +US$3 at US$1750/oz and almost exactly where it was a week ago.

And oil prices have moved higher to just under US$74/bbl in the US, while the international Brent price is even higher at just over US$77/bbl. 

The Kiwi dollar opens today at just on 70.1 USc. Against the Australian dollar we are at just on 96.6 AUc. Against the euro we at 59.8 euro cents. That means our TWI-5 starts the week at 73.6 and below the top of the 72-74 range of the past eleven months, and little-changed in a week.

The bitcoin price has risen today, and is up at US$43,213 and a +2.6% gain from this time Saturday. Volatility in the past 24 hours has been high at just over +/- 3.6%.

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