Flood of US data due this week. Powell hawkish but not for the next review. US deficit consequence warning. China profits lag; China jobs weak.
Kia ora,
Welcome to Monday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.
I'm David Chaston and this is the international edition from Interest.co.nz.
And today we lead with news the next 15 weeks will set the tone for 2023. So far in 2023 the benchmark equity market is up +15% (S&P500), benchmark bond yields are up +70 bps (UST10yr +20%), and the USD is unchanged.
First we are now in the last week before the America's Labor Day holiday, signaling the end of the "sell in May (Memorial Day) and stay away (until Labor Day)" hiatus. Financial markets will then come back to full capacity. If investors did sell in May, they have missed a +5% stock market rally. The benchmark UST 10yr rate rose +50 bps hurting bond prices. And US CPI inflation fell -1% over that time. But what awaits them? How they react will lock in 2023's reputation.
This upcoming week will be a busy one for big data releases. It will be a very busy week in the United States with investors closely following their labour market report (the non-farm payrolls report) which for August drops on Saturday, September 2 (NZT). Markets currently expect only a gain of +170,000 this time. Before then we will get the US PCE price index, personal income and spending data, JOLTS job openings, ISM Manufacturing PMI, and the second estimate of American Q2 GDP growth.
Elsewhere, the focus will be on inflation rate figures for the EU, Germany, France, Italy, Spain, and Switzerland. Additionally, flash manufacturing PMI readings will be released for China, South Korea, India, Russia, Spain, Italy, and Canada. Finally, Turkey, India, Brazil, and Canada are set to report their Q2 GDP growth figures.
The last big northern 'holiday season' event is the central banker conference at Jackson Hole.
With his eyes firmly on expected American inflation pressures, Federal Reserve Chair Jerome Powell, speaking at the symposium, emphasised the potential necessity for additional interest rate hikes in order to effectively manage the pressures they still see ahead. Despite currently waning inflation, they still have "robust" consumer spending, and an expanding economy he said, and a healthy labour market. However, he did suggest they could hold rates steady at its next meeting in September.
Market reactions to this closely-watched speech have been modest, although Wall Street equities rose and they have ended with a winning week. And the USD rose modestly.
At the same conference a respected Stanford professor warned that liquidity risks in the gigantic US Treasury bond market may get worse if another crisis like the March 2020 pandemic shock occurs again. (Also, see this.) And that is because dealer balance sheets are growing much more slowly than the holdings of US Treasuries (because so much more is being issued). Attempts to sell those down in a financial crisis will get stymied by what dealers can handle without themselves coming under stress. And that could cause a meltdown. He did have some suggestions for policymakers.
Meanwhile the one piece of American data that was released over the weekend, the University of Michigan consumer sentiment survey, didn't have much market impact. After rising sharply for the past several months, this consumer sentiment indicator moved sideways in August. Still, it was at its second highest reading in 21 months and is now about 39% above the all-time historic low reached in June of 2022.
In China, they said they will scrap a rule that disqualifies people who’ve already had a mortgage from being considered a first-time homebuyer in major cities; the official Xinhua news agency reported this. It is couched in slightly different terms, but that will be the effect. It does look like an odd approach to take to spark an uptick in their residential property markets.
Meanwhile, Country Garden isn't getting much support for delaying payments on its bond. Bond holders are digging in.
And not helping China's labour markets, the giant tech assemblers (like Foxconn) just aren't hiring like they used to, and this is the high season for manufacturing for shipment to the US for the end of year holiday season. Brands like Apple are de-risking away from China. Those new manufacturing centers are getting the bulk of the orders (like India and Vietnam) while any softness from weaker end-market demand is being felt primarily at the Chinese centers in an accentuated way. This lack of hiring is actually quite a big deal.
And it will be no surprise that the persistent weakness in Chinese industrial profits is extending, even if not quite as weak in July as June. These profits last month fell -6.7% from a year earlier, compared with a drop of -8.3% in June. For the first seven months of 2023, profits declined -15.5%, although that eased from a -16.8% decrease a year earlier.
In Europe, and after peaking in April, it has been downhill for German business sentiment, and it fell again in August in the latest Ifo survey and is back to October 2022 levels.
The UST 10yr yield will start today at 4.23%, down -1 bp from this time Saturday to where it was a week ago.
The price of gold will start today at US$1915/oz and up +US$2 from Saturday. A week ago it was at US$1889/oz, so up +1.3% over that period.
And oil prices are marginally softer at just under US$80/bbl in the US. The international Brent price is now just on US$84.50/bbl, both levels very similar to a week ago.
The Kiwi dollar starts today -20 bps lower than Saturday at just on 59 USc. Against the Aussie we are firmish at 92.3 AUc. Against the euro we are unchanged at 54.7 euro cents. That all means the TWI-5 is still at 68.4, and actually little-changed from a week ago.
The bitcoin price is little-changed today and now at US$26,018 and up +0.4% from Saturday. It is down by -1% from a week ago. Volatility over the past 24 hours has been very low at just under +/- 0.4%.
You can find links to the articles mentioned today in our show notes.
You can get more news affecting the economy in New Zealand from interest.co.nz.
Kia ora. I'm David Chaston. And we will do this again tomorrow.