Investors look for the exits in China. Japan stays with low rates & easy money. US data generally positive. EU living with high inflation without fossil fuels.
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 financial markets have decided there are no [economic] adults in the room in China's ruling group and are moving to decrease their exposure to the Middle Kingdom.
First, almost 20% of the members of the American Chamber of Commerce in Shanghai said they were decreasing their exposure to China. And this survey was carried out before the CCP Congress changes were known.
On Friday, Hong Kong equity investors took it on the chin with an ugly -3.7% drop to cap a loss of -6.5% for the week. Shanghai was tough too, falling -2.3% on Friday and -3.9% for the week.
And over the weekend reports emerged that the giant Foxconn facility that makes iPhones in Henan Province, one that employs and houses 200,000 workers, has a serious pandemic outbreak forcing a lockdown on the facility and causing great distress. Workers are escaping, some redirected into isolation facilities, but not all. Apple is likely to accelerate its decoupling.
Further, some key commodity prices sank rather sharply over the weekend. That included iron ore, zinc, and steel. Copper remains in the doldrums. The immediate drivers of these retreats are the lower prospects in China.
The Bank of Japan kept ultra-low interest rates and maintained its dovish guidance as recession fears dampen prospects for a solid recovery in Japan, cementing its status as an outlier among global central banks who are mostly tightening monetary policy.
Meanwhile, Japan unveiled an economic package worth about US$200 bln to cushion their "high inflation" as households and some businesses struggle under the impact of a weak yen.
In the US, and following the first positive estimate of US Q3 GDP growth, the follow up PCE inflation rate has been released and it is unchanged at 6.2%. The same data shows consumer spending remained 'robust', growing at a +7.2% rate and above the related inflation level. Personal incomes rose at an annual rate of +5% and higher than was expected. Perhaps more important than the monthly September numbers are that none of these metrics seems to be falling away. Wall Street liked what it saw, more or less validating Janet Yellen's recent comments.
The next Fed meeting is coming up this week on Thursday, November 3 (NZT). Markets have priced in a +75 bps hike then taking its policy rate to 3.75% and expect it to rise to 5% from there through to mid-2023. After that, the October non-farm payrolls report will be released at the end of the week, and markets now expect a modest +220,000 gain in payrolls and little change in the low jobless rate. Full employment there seems unchallenged at this time.
But not all Americans appreciate the current focus on tackling inflation. Pending home sales were down a massive -10% in September from August, and down more than -30% from a year ago.
And another sentiment survey, this one from the University of Michigan, remains very low even if it did inch up in October and confirming the earlier 'flash' result.
Perhaps online sales are peaking out; Amazon is warning that this upcoming holiday season sales may be lackluster.
Across the Atlantic, EU business and consumer sentiment remains very low too - for completely understandable reasons.
And markets believe the ECB is about to turn dovish to support a flagging region and downgrade the inflation fight.
German inflation is getting worse however. The latest 'harmonised' reading has it at an eye-popping +11.6% pa in October, driven by energy costs up +43% and food costs up +20% in a year. But the costs of the Russian invasion seem to have made Germans more hostile to Russia. Their President, who comes from a wing of Germany's Social Democrats that long argued for closer economic ties to Moscow, said Russia's invasion had brought "a change in era".
Germany is living with the stresses, and even managing to grow their economy in real terms despite the extreme pressure.
The EU struck a deal on a law to effectively ban the sale of new petrol and diesel cars from 2035, aiming to speed up the switch to electric vehicles and combat climate change.
We are in for a heavy data week ahead. In the US we will get the Fed's interest rate decision, their non-farm payrolls report, and a raft of earnings reports. Also, investors will be closely watching central bank meetings in England, Australia, Norway and Malaysia. There will be GDP and inflation rate figures from the Euro area. Finally, China will be releasing its manufacturing and services PMI’s for October.
Then there are the tensions in Ukraine, the US mid-term elections, and the Brazilian election results, all of which financial markets will be watching too.
The UST 10yr yield starts today unchanged at 4.01% but down -21 bps in a week.
The price of gold will open today at US$1646/oz. This is up +US$4 from this time Saturday.
And oil prices start today +US$1 firmer than this time Saturday at just on US$88/bbl in the US while the international Brent price is just over US$94/bbl.
The IEA has released its October update pointing out that demand for fossil fuels has peaked for all for types (coal, oil, gas) and will fall rapidly from here, and the demand for renewables, especially hydrogen is taking off. To meet European demand alone, the IEA estimates the total capital investment in hydrogen is as much as US$1 tln. And that is just the start, they say.
The Kiwi dollar will open today at 58.1 USc and little-changed from Saturday. Against the Australian dollar we are firm at 90.7 AUc. Against the euro we are unchanged at 58.3 euro cents. That all means our TWI-5 starts today at 68.4 and also little-changed.
The bitcoin price is now at US$20,625 and down a mere -0.4% from this time Saturday. But it is up +7.5% from this time last week. Volatility over the past 24 hours has been low at just on +/- 0.9%.
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.