China faces key bond market test. China tax revenues recover strongly. Global factory PMIs expanding. New US houses sell fast.
Kia ora,
Welcome to Monday's ANZAC holiday edition Economy Watch where we follow the economic events and trends that affect New Zealand.
I'm David Chaston and this is the International edition from Interest.co.nz.
Today we lead with news there is extra stress in "the bubble that never pops".
All is not well in China's NZ$1 tln bond market, and a key source of uncertainty is in their State-owned financial firms, especially those set up as 'bad banks' by Beijing to manage the banking system bad debts from a 1999 financial crisis. There were four such SOEs and one is in dire strife, so much so that Beijing executed its chairman for corruption in January. The other three are in bad financial shape too. This one, China Huarong Asset Management, is majority owned by China’s Ministry of Finance and is deeply intertwined with the nation’s NZ$75 tln financial industry. The pointy issue is that it looks like Beijing is sick of the endless bailouts that SOE firms get (not just these four) and may let this one fail. That could have a ripple effect that spreads widely. And it will end investors' presumed safety net that has been priced into Chinese bond values. The resulting repricing lower could trigger a tsunami of other company failures.
And short bets in the main Chinese share markets have hit a new record high. That is because demand for hedging against the risks of policy tightening, and further fallout from the antitrust crackdown on their big tech firms, are rising sharply.
Away from the stock markets, foreign investors boosted their holdings of Chinese bonds in the first quarter by +US$63 bln, or up +11% from Q4-2020. But the developing Huarong issue may interrupt those inflows.
More generally, tax revenues are rising sharply in the Middle Kingdom, with GST up +24% in Q1-21 from Q1-20, and personal income tax up +19%. Across all types of taxes, central government tax revenues are up +27% and local government taxes up +21%. They had a +¥120 bln surplus in the period (+NZ$25 bln), so no deficit spending here.
Prices for iron ore and coking coal ended last week with strong rises. Prices for key agricultural commodities rose during the week too. The Baltic Dry Index has raced to a new ten year high. But it is still a very long way below the extreme levels it reached pre-GFC.
In Japan, their factory PMI rose to a healthy expansion in April, and better than the good March result. New orders, and new export orders both drove this improvement. Unfortunately, their dominant services sector is still contracting.
In Hong Kong, business confidence pulled back from a deeply negative situation in January to one where optimists equal pessimists in April.
In Taiwan, industrial production rose sharply again in March, aided by the worldwide shortage of computer chips. But all that is at risk as the drought in the country deepens. The immediate prospects are not great. However, Taiwanese retail sales improved much more vigorously as well as the industrial situation.
The US PMIs were also very strong, for both the factory and services sectors. In fact, both components are recording their strongest expansion since these internationally-benchmarked PMIs started in 2007. This result has encouraged the Wall Street equity markets to new record highs.
Sales of new homes exceeded 97,000 in March, and far above the expected level, juiced because the existing home resale market is in low supply. This is a new high-water mark for their home-building sector, one that is actually struggling with timber supplies and other supply-chain issues, but still getting the job done. The March sales take their annual sales rate above 1 mln, also a new record high.
US rents have stopped declining. Overall, they turned up in March, the first rise in eight months. The rises are fastest in second tier cities; the major cities are still getting declines and some are double-digit year-on-year.
In the EU, they recorded a standout improvement in their factory PMI in April, its most expansionary since this series started in 1997. It was their tenth straight month of gains, and is being led by Germany. Their services sector isn't expanding, but it is now not contracting, so there is a stabilisation there which counts as an improvement.
The UST 10yr yield starts today at 1.56%.
The price of gold starts today at US$1777/oz and that is down -US$4 since this time Friday.
Oil prices will start the week at just over US$62/bbl in the US, while the international price is just under US$65.50/bbl.
The Kiwi dollar opens today at just under 72 USc and firmer. Against the Australian dollar we are marginally firmer at 92.9 AUc. Against the euro we are unchanged at 59.5 euro cents. That means our TWI-5 is little-changed at 73.7.
The bitcoin price will start the week lower than this time Saturday at US$49,764 and down another -2.8%. That is now a fall of -23% in 12 days. Volatility in the past 24 hours has been a moderate +/- 1.9%.
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.