Chinese car industry in parlous state, but Chinese service sector expands faster; US jobs growth stays strong; commercial property faces huge risks
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 a coming car crash may be a literal one.
First up today in China, their March car sales were strong. But they may have been at the expense of future sales because car makers are offering deep discounts to buyers. The fierce price cutting is endemic, and profits will be few. Some key suppliers are now reporting that orders have just suddenly dried up. The industry body is calling for an end to discounts, but with planned production expansion, that seems unlikely. It is a manufacturing sector that might wobble soon. After all, sales are now running -15% lower than their 2017 peak.
But we now have the private Caixin services PMI for China and that has confirmed the earlier reported strong rise in the official services PMI - showing a robust expansion there. It's the fastest pace of expansion in activity since November 2020, and comes with strong new services order intakes following the end of their pandemic restrictions. New orders rose at the fastest pace in 28 months, with new export business expanding at the quickest rate since the series began in September 2014. The contrast with the US is worth noting, but to be fair the US expansion has been going on for very much longer and without the volatility.
In the US, there were no surprises from the March non-farm payrolls report on the giant US labour market. The headline seasonally adjusted rise was +236,000 and very similar to the +240,000 expected. But in fact, the actual (not seasonally adjusted) payrolls rose +520,000 to an employed labour force of 154.7 mln and a remarkable +4.1 more people employed that in March 2022. This data is from employer payroll records. And it we look at the household survey, one that includes self employment, +605,000 more people were in work in March than February and the total employed workforce grew to 166.8 mln (again actual, not seasonally adjusted). None of this suggests the US labour force is wobbling yet.
That is not to suggest there aren't stresses; there are, especially in the tech sector. US-based employers announced 270,000 job cuts in the March quarter, the highest first quarter total since 2020. 90,000 of these were in March alone.
US initial jobless claims are hard to read this week. The number of Americans filing for unemployment benefits fell to 207,000 in the week ending April 1st from the prior week. However the previous week's data was revised up in their seasonally adjusted series and that got all the headlines. There are now 1.845 mln people on these benefits, a small decline, but not as low as the 1.7 mln expected.
Maybe because employment is strong, one area that is doing much better is car sales. New vehicle sales volume is expected to have a +5.7% year-over-year rise for Q1 2023. March is expected to see an +8.6% year-over-year sales volume rise. This performance has put 2023 on track to hit a 15 mln annual rate, a steep uptick from last year’s 14.1 million. Units sold in March hit 1.366 million. But at these levels the US vehicle market is a lot smaller than the Chinese market. And Americans don't seem to be taking out car loans any faster, despite the uptick in sales locally.
The next big piece if US data is due on Thursday this week (NZT) and that is their March CPI. It is widely expected to come in at under a 4% annualised rate in March from February, a slower pace the the prior month's 5% rate. But it is still well above the target the US Fed wants, so the actual result will be keenly watched.
American consumer debt levels rose an insignificant +US$15.3 bln in February and this was less than the +US$20 bln expected, but slightly more than the seasonally low January rise. Still, on a per capita basis, Americans have US$14,000 of non-housing debt, which is high when you compare that to New Zealand's NZ$2,560 per capita. The tables are turned on housing debt of course.
The US financial stress index has returned to its low pre-SVB levels. Meanwhile, an index measuring global supply chain pressure has not only eased suddenly, it has retreated to its lowest level since 2009.
But all bets are off in the giant American commercial property market. Bloomberg has calculated that a wall of US$1.5 tln of commercial property debt is due to roll over in the next 20 months, just when banks have lost their appetite for funding such debt. And you can understand why; Morgan Stanley reckon office and retail property valuations could fall as much as 40% from peak to trough, increasing the risk of defaults. And it is the smaller regional banks that hold much of this debt. They are unlikely to want to keep those exposures, and the big banks are likely to eschew them too.
From the US to Japan, real estate investment trusts that focus on office property have taken a hit from fears that financing will be harder to come by. The S&P 1500 Office REITs Sub-Industry Index, which tracks major office property REITs in the US, fell to 53 at one point in late March. It was down more than 20% from the end of 2022 and plumbed its lowest point since 2009. As of Thursday, the index still languished under 60. This is an international trend that is yet to arrive in New Zealand.
North of the border, Canada has delivered a better-than-expected March jobs report, essentially driven by much better full-time employment data.
Also much better than expected is the closely-watched Ivey factory PMI for Canada, reporting an improvement that we didn't see in the earlier Markit version. The Ivey version rise was based on expanding employment and inventory levels.
In India, their central bank kept its policy rate unchanged at 6.5% which was a surprise because a +25 bps rise was expected. India's consumer inflation likely eased in March to 5.8% thanks to softer food price rises, dipping below the RBI's upper tolerance limit, and this may have encouraged them to hold off.
In Germany industrial production surged +2% month-on-month in February and beating market forecasts of a meagre +0.1% gain. Production in vehicle manufacturing, which is the largest one in Germany, increased sharply. Industrial output went also up for both capital goods and consumer goods.
Australia posted another very large trade surplus in February for both goods and services. The surplus swelled by +AU$2.6 bln to AU$13.9 bln, the third largest surplus on record. A key reason was that imports retreated in the month, a shift which was expected, but the size of the fall was much larger than anticipated. The outsized February surplus takes their annual surplus to more than AU$145 bln, equivalent to +5.9% of their GDP.
And their central bank has released its Financial Stability Review. In it they say about 15% of borrowers are forecast to have "negative spare cash flow". About 9% are expected to run out of savings buffers by the middle of the year, even if they slash spending, unless rates fall. Specifically they say (p41) "... there is a group of borrowers who, even if they cut back sharply on non-essential spending, will be at risk of exhausting their savings buffers within six months unless they can make other adjustments to their income or essential spending. ... those on lower incomes and recent first home buyers are over-represented in this group."
Global food prices are still falling. The FAO March index posted the twelfth consecutive monthly decline since reaching its peak one year ago and down more than -20%. The decline in March was led by drops in cereal, vegetable oil and dairy price prices, while those of sugar and meat rose.
The global economy is set to grow at roughly 3% over the next five years which would be the slowest pace since 1990, the head of the IMF has said. Her heads-up comes as they prepare to release an update to their World Economic Outlook later today.
The UST 10yr yield starts today at 3.41%, and up +12 bps from Thursday.
The price of gold is at US$2008 and unchanged from Saturday's level. It won't start trading again until Asian markets reopen later today.
And oil prices are little-changed at just under US$80.50/bbl in the US. The international Brent price is still just over US$84.50/bbl.
The Kiwi dollar is unchanged against the USD and now at 62.5 USc. Against the Aussie we are still at 93.7 AUc. Against the euro we are still at 57.3 euro cents. That means the TWI-5 is at 70.4 and unchanged from Saturday.
The bitcoin price is little-changed again today, now at US$27,935 and virtually unchanged from Saturday. Volatility over the past 24 hours has been virtually non-existant at less than +/-0.1%.
And we should note that the American subsidiary of Binance, the firm being challenged by US Federal regulators is struggling to find a bank to handle its customers' cash after the failure of Signature Bank last month, the Wall Street Journal reported. Previously, the deposits were sent to either Signature Bank or Silvergate Capital, both seen as crypto-friendly banks. However, after both failed, Binance is struggling to find a bank willing to engage with them
Please note that New Zealand is on holiday today for the long Easter weekend.
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’ll do this again tomorrow.