Dairy prices up. Markets have a taper tantrum. Japan sees inflation. German economic sentiment rises. China frontloads new stimulus.
Kia ora,
Welcome to Wednesday’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 markets are reacting today to the rising expectation that the Fed will move against the inflation threats earlier than they had priced in.
But first, today's dairy auction was a good one - even if perhaps not quite as good as the futures market was expecting. Overall prices were up +4.6% in USD terms and +5.2% in NZD terms. Starring was the butter price, rising to a record high and breaching the US$6000/tonne mark for the first time ever. The global recovery in the foodservice market is one driver of these strong prices. The other is a falloff in global dairy production, and that includes New Zealand. But it is a good result when local production will be down -1.6% but prices are up +4.6%. Clearly this will be positive for the farm gate milk payout. On a formula payout calculation basis, this would support a NZ$9.10/kgMS price if these prices lasted for the rest of the season - and it is likely that many analysts will be raising their forecast after this latest auction.
Lower milk production is only a part of it. Agricultural production is slipping worldwide and that is keeping prices very high, and they will probably go much higher yet - making life very hard for emerging economies.
But the big overnight international financial market news is the emergence of a taper tantrum on Wall Street as markets reprice for the end of QE, earlier Fed rate hikes to push back against inflation, and sharply rising benchmark bond yields. In the situation going forward, asset valuations won't be supported by cyclically low yields.
And the booming US economy may come off the boil somewhat. Certainly the NY Fed's Empire State factory survey suggests that things levelled off abruptly in response to the Omicron surge, but that expectations remain buoyant in this key manufacturing region. Prices remain elevated and investment intentions remain very strong.
Canadian housing starts eased back in December, although they were revised higher for November.
Japan's industrial production data for November was up a strong +5.1% year-on-year, and up a stronger +7.0% from October. This augers well for Japan, and also suggests international demand for their high-tech exports is rising.
The Bank of Japan raised its inflation forecasts but said it was in no rush to change its ultra-loose monetary policy, as rising prices fan speculation it may soon signal a shift in its decade-old stimulus experiment.
Also improving is Germany economic sentiment which rose strongly and unexpectedly, even if their current conditions haven't improved. Germans seem to like what they see when they look ahead in 2022.
In the US, there is an emerging high-stakes struggle between high-tech telecom companies and the airline industry. It seems that older and especially wide-body passenger jets, of which there are thousands still in service, are at safety risk from the rollout of the US's new 5G services interfering with airplane electronics. Much aircargo is carried on older widebody aircraft. Some international airlines are grounding flights to the US. All this of course adds a further impediment to global supply chains.
In China, more details are emerging of their efforts to get their struggling economy going again. China’s top state planner said that it will "appropriately" front-load infrastructure investment. Plus, financial markets are expecting some big official reserve ratio cuts over the next few months. Not long ago, a Chinese economic slowdown would have assumed to have had global implication. But it isn't working out like that it seems. The world is generally immune to their woes, although there will be some emerging markets badly affected no doubt.
The UST 10yr yield opens today at 1.86% and up +7 bps from where we closed last Friday.
The price of gold starts today at US$1815/oz and down -US$5.
And oil prices start today slightly firmer at just over US$84/bbl in the US, while the international Brent price is now just under US$86.50/bbl. These prices are seven year highs. Not helping are terror attacks on oil installations in the Middle East.
The Kiwi dollar will open today lower at 67.7 USc. Against the Australian dollar we are softish at 94.2 AUc. Against the euro we are holding at 59.7 euro cents. That means our TWI-5 starts the today at 72.1 and a slip since this time yesterday.
The bitcoin price has moved down by another -1.3% to US$41,614 Volatility over the past 24 hours has been modest at +/- 1.4%.
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.