90 seconds at 9 am: US, Euro-zone and Chinese economy in concerted slowdown; Rush for safe havens; Spanish situation critical; Central bank intervention eyed; RBA may cut 50 bps

US, Euro-zone and Chinese economy in concerted slowdown; Rush for safe havens; Spanish situation critical; Central bank intervention eyed; RBA may cut 50 bps

Here's my summary of the key news over the long weekend in 90 seconds at 9 am, including news the global economy is now headed for a concerted slowdown after data emerged over the weekend showing much weaker-than-expected American jobs creation , a slide in China's factory expansion and signs of  a worsening crisis at the heart of the Euro-zone.

US stocks fell more than 2.5% on Friday night after just 69,000 jobs were created in May, less than almost all forecasts. See more here at BusinessInsider US stocks fell a further 0.4% in late trade before a late rally saw them close broadly flat. The early fall followed data showing US factory orders fell unexpectedly in April for a second month, Bloomberg reported. US stocks have now fallen 10% from their peaks in April.

Chinese stocks fell 2.7% overnight after more data was published showing its economy is slowing too. Economists are worried China may not be able to restimulate its economy in the same way it did after the Lehman crisis of 2008, given uncertainty over a political leadership transition, high inflation and falling house prices. See more here at Bloomberg.

Meanwhile, the Euro-zone continued to lurch from crisis to crisis. Spain's Prime Minister called for a Europe-wide banking union to ensure stabilty of the banking system. Spain's banking system needs at least 50 billion euros of fresh capital to make up for massive losses from loans to its imploded property sector. The Spanish government is thought unable to bail out its own banks and Germany is pushing for Spain's government to accept a bailout similar to that imposed on Portugal, Greece and Ireland. See more here at Bloomberg.

However, Spain is reluctant to embrace German-style austerity, which many now see as a discredited strategy to reduce debt and restart economies.

The impasse over the Euro-zone appeared to deepen over the weekend as German Chancellor Angela Merkel refused to accept calls for a common Euro-zone government bond, which would effectively mean Germany guarantees the government debts of Southern Europe's heavily indebted economies.  See more here at Bloomberg.

Renowned hedge fund investor George Soros also said over the weekend there was just 3 months left to save the euro. See more here at the Telegraph.

Also in Europe, Cyprus is expected to ask shortly for a bailout for its banking system, which has built itself up over the years to be worth 9 times Cypriot GDP. It is now dubbed the 'Iceland' of Southern Europe. See more here at Yahoo.

Fear about the global economic slowdown and the potential break-up of the Eurozone has seen many investors rush to safe haven investments such as government bonds. The US 10 year bond yield fell below 1.5% for the first time on Friday night and New Zealand bond yields also fell sharply. The German 2 year bond yield went negative, meaning investors are effectively paying the German government to look after their money.

Increasingly, markets are expected some form of concerted central bank intervention to calm down markets. Investors are looking for signs the US Federal Reserve will engage in a third round of Quantitative Easing or money printing to buy US government bonds, and that the European Central Bank will also buy more Southern European bonds. See more here at Bloomberg.

Closer to home, the Reserve Bank of Australia is expected to cut its official rate by at least 25 basis points and possibly 50 basis points from its current 3.75% as its economy slows in line with China's. See more here at Sydney Morning Herald.

What does it mean for us?

A concerted slowdown in the global economy and the inability of China to restart its strong economic growth would bear down on both economic growth and inflation in New Zealand. That would mean lower interest rates for longer and slower economic growth for longer, along with higher unemployment, particularly if the Australian economy slows further and is unable to soak up surplus labour from New Zealand.

Financial markets are pricing in a chance the Reserve Bank of New Zealand will cut its Official Cash Rate by around 44 basis points over the next year, although bank economists still forecast the next move in rates will be higher around the March quarter.

Any move lower in the Official Cash Rate would make floating mortgage rates more attractive than fixed rates, although it would also indicate a slower economy, the potential for higher unemployment and a risk that house prices may flatten or fall.

The New Zealand dollar tends to drop in line with expectations for commodity prices when the global economy slows. It also falls when appetites for risk globally dry up and investors rush back to safe havens in America and Japan. However, there is a chance that heavy money printing in America and Japan could weaken those currencies vs the New Zealand dollar.

The New Zealand dollar was steady around 75.7 USc, having dipped under 75 USc late on Friday night before hopes for central bank intervention held up appetites for riskier assets.