Bond investors nursing heavy losses. China profits fall. Money rushes out of China. US looks a billionaires tax. Hart eyes sell-down.
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.
Today we lead with news there is a global bond selloff underway which we will be watching in the run-up to the end of the month. Bond investors are nursing huge losses as the bond market enters a bear phase, the scale of which we haven't seen in nearly 40 years.
But first up, China reported that in the first two months of 2022, profits at private businesses fell almost -2% compared to the same period last year. Profits of foreign companies fell more than -7%. But their state-owned enterprises reported a more than +16% rise, most of which came from "mining" (read coal). The net result over all this is a +5% rise.
Bigger sales and higher prices are producing a bonanza for coal miners there. The coal price has more than doubled in 2022 so far, and they more than tripled in 2021. China is planning more coal output and more coal-fired power stations, at least through 2025. Beijing seems to be the green-washing capital of the world when it claims it is tackling climate change.
Future industrial profits outside the coal industry might be a challenge in the face of the growing spread pandemic. Shanghai has now ordered a lockdown and mass testing in a key industrial powerhouse part of the vast city. This will have global shipping and supply-chain consequences
Since the invasion of Ukraine by Russia, China has been experiencing huge flows of money out of the country. They are leaking funding from both stocks and bonds, according to monitoring a high-frequency data. And it is China-specific, not a general emerging-market trend. The volume has been enough to shift the yuan down by almost -0.5%. It is as though both American and European wealth managers are rethinking their structural commitment to China. There will be loud echoes if such a shift is underway.
Separately, it looks like the Chinese are pulling the plug on some large oil-sector investments with Russia.
And the Americans have agreed to supply the EU with significant gas supplies in an attempt to reduce Europe's reliance on Russian energy. Canada has chipped in too, now. Russia currently supplies about 40% of the EU's gas needs and this deal will cut that to 30%. Internal reductions will get priority to minimise much of that. Germany says it is making real progress on that.
In the US, the Administration is proposing a 'billionaire minimum income tax' of 20%. Most billionaires pay little or no tax now. It would require that American households with a net worth of more than US$100 mln pay a rate of at least 20% on their income, as well as on unrealised gains in the value of their liquid assets, such as stocks and bonds, which can accumulate value for years but are currently taxed only when they are sold.
Data from the Canadian economy continues to impress. They had an unexpectedly good manufacturing sales level in February, and it seemed broad-based.
Mexico raised its policy rate by +50 bps at the end of last week, now up at 6.50%.
In Germany, business sentiment has taken a dive, but in the circumstances not a huge surprise. The fall is from a moderate level but as a one-month event it was bigger than at the start of the pandemic. Interestingly, 'current conditions' assessments didn't actually fall much, but companies in Germany are expecting tougher times ahead. However that is in the perspective of an earlier +3.7% growth expectation; now it could be as low as +2.2% - so still an expansion.
More broadly, the global bond market repricing got more momentum at the end of last week in anticipation of a looming policy tightening cycle with major central banks seeking to tame inflation running at multi-year highs. The yield on US 10-year note hit 2.5%, the highest since May 2019, Germany's 10-year Bund yield, a benchmark for Europe, rose to as high as 0.56%, the highest since May 2018, while the French 10-year yield held above 1%.
Among commodities, the rise and rise of the lithium price is now so extreme that it is expected to weigh on demand for electric vehicles. Analysts now say that just to stay still cost-wise, EV car makers will have to raise prices by at least +15%, maybe as much as +25%.
For wheat supply, Russia is saying that contracted flows of supplies are running ok, but that new orders have virtually dried up on money transfer difficulties. The wheat price is staying very high, but not rising further.
Finally we should note that local billionaire Graeme Hart is apparently looking at a public listing of his Carters and related wood products holdings. The talk is that he will realise about $1 bln in the transaction. But we should also note that Hart has dabbled with sell-downs in the past of parts of his empire on a number of occasions and nothing really came of them.
The UST 10yr yield opens today at 2.49% and unchanged over the weekend.
The price of gold starts today at US$1958/oz and up +US$2/oz from this time Saturday. A week ago gold was at US$1929/oz, so almost a +US$30 gain since then.
And oil prices are little-changed US$112/bbl in the US. And the international Brent price is still about US$116.50/bbl. These prices are about +US$10/bbl higher than a week ago.
The Kiwi dollar will open today essentially unchanged at 69.6 USc. Against the Australian dollar we are firmish at 92.7 AUc. Against the euro we are little-changed at 63.4 euro cents. That all means our TWI-5 starts today at just at 74.9 where it has been since Thursday.
The bitcoin price is up +0.9% from this time yesterday at US$44,939. Volatility over the past 24 hours has been modest at +/- 1.6%.
You can find links to the articles mentioned today in our show notes.
And get more news affecting the economy in New Zealand from interest.co.nz.
Kia ora. I'm David Chaston and we’ll do this again tomorrow.