US service sector contracts. Markets fear Xi's new team. Chinese data inconsistent. Japan defends the yen. EU PMIs soft. Eyes on Aussie CPI.
Kia ora,
Welcome to Tuesday’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 that is generally going south.
Global credit risks are rising as the triple threat of rate rises, Europe’s energy crisis and China’s stuttering property market and political changes all show no sign of easing. Good corporate profits can't mask any of these threats to credit markets.
Also, we should watch out for global commercial property valuations and sales activity. Rising yields and p/e ratios make this sector increasingly vulnerable to a slump.
We are less than ten days away from the next US Fed rate review. Markets are pricing in a full +75 bps (and a bit more) for that meeting, plus another +125 bps and taking their official rate to 5.0% by March 2023 and it is assumed it will level out at that point for the rest of the year. That is a rapid-fire set of increases expected and already priced in. The big question now is, when to slow down? (Markets have priced in a New Zealand OCR at 5.5% by August 2023.)
The early 'flash' PMI result for the US paints a "challenging" picture for business conditions there. New order intakes were weak and their factory sector slipped unexpectedly into a minor contraction. But it is their giant services sector that is their main problem, shifting sharply lower into a real contraction. Still, it is not as low as this survey recorded in August. Getting the blame for this contraction are company moves to rein in their fast rising inventory levels, something analysts have been signaling as likely for six months.
Canadian retail sales didn't slip away as much as expected; in fact they rose in August after a slip in the prior month.
While we were holidaying, Chinese President Xi Jinping sealed his bid for a precedent-breaking third term while his deputy and several other top officials got the boot and 'retired'. 'In' is a hardline group. There are no women again this this core group (again), and for the first time in 25 years no women in the wider Politburo. Also conspicuously missing are leaders with economic experience. Along with Premier Li, the central bank chief was another key economic official demoted.
These are changes that have spooked investors. There is a rush by foreign investors to quit exposures to China now; the Hong Kong equity market was in full panic mode yesterday and ended down more than -6%. The Shanghai markets tumbled -2%.
Burnishing Xi's coronation, their official stats reported the Chinese economy rose +3.9% in Q3-2022, exceeding the market consensus of +3.4% and picking up from a meagre 0.4% growth in Q2. But it improved even though retail sales rose at just a +2.5% rate, the least in 4 months, and export growth was at a 5-month low. Further, their jobless rate hit its highest since June at an official 5.5%.
One reason the GDP data came in stronger than expected is that industrial production beat estimates, up 6.3% in September alone, in an unexpected spurt. If true, that is surprisingly strong given all the other weak data in this category. Electricity production fell -0.4% in September.
We'll leave you to draw your own conclusions about how credible the reported rising economic growth is among all these falling data points.
Further, real estate investment fell hard (down -8.0%). And house prices also fell at a faster pace with 50 of their 70 largest cities positing declines.
Buyers are shunning residential real estate 'investment' in most Chinese cities now. Local authorities are raising emergency funding to complete stalled projects, but buyers remain suspicious of what they will get. Some cities are trying to entice them back with sub 4% mortgage interest rates. In fact one city is now offering 3.7% mortgages. There is not a lot of evidence it is working yet.
Prices for iron ore and copper are falling, mostly based on weaker prospects in the Chinese economy. And despite war disruptions from Russian supply, neither are aluminium nor nickel prices going anywhere either. Sanctions should have raised prices for these key commodities, but it isn't happening. The reason is weak demand, especially from China.
Taiwan retail sales rose +7.5% in September from a year ago, good for them but it was less than the strong August rise.
Taiwanese industrial production however retreated in an unusual move lower, down -4.8% from year-ago levels.
As widely expected, Japan's government and central bank intervened in the currency market over the weekend to support a falling yen, The yen soared the most against the US dollar since March 2020 on the intervention, rising +2.7% in just a few hours. It was an intervention timed for the final few hours of trading in the US on Friday, so it should hold things until today, at least. It is estimated to have cost US$37 bln in those few hours.
Japanese inflation came in at 3.0% in September, unchanged from August and holding near an 8 year high. Food prices were up +4.2%. Electricity costs were up 21% and generating a surge in home battery storage demand. Without food and energy costs, 'core' inflation there was only 1.8% however.
Japan's giant economy is still expanding on rising output and new order growth although some of this improvement isn't as fast as it was. Inflation is still an issue for them, but being a high-tech economy is providing extensive resilience.
In Europe, their PMI's are retreating however, although the contraction is minor at this point. The UK contraction is similar.
Tomorrow, Australia releases its September CPI data. It is expected to rise to 6.9% from 6.1% in August. But analysts like at CBA reckon it will be over 7%. At that level, the RBA may not be as sanguine about how they have handled monetary policy so far.
Australia's factory sector is still expanding, just a little slower, but their services sector has slipped into a contraction in October.
The UST 10yr yield starts today little-changed at 4.23% but it is quite volatile.
The price of gold will open today at US$1650/oz. This is down -US$8 from this time yesterday.
And oil prices start today down -50 USc from this time yesterday at just on US$84.50/bbl in the US while the international Brent price is just on US$91.50/bbl.
The Kiwi dollar will open today at 56.8 USc and down -¾c from this time yesterday. Against the Australian dollar we are little-changed at 90.2 AUc. Against the euro we are also down -¾c at 57.6 euro cents. That all means our TWI-5 starts today at 67.5, and -60 bps lower than yesterday.
The bitcoin price is now at US$19,292 and -0.9% softer than this time yesterday. Volatility over the past 24 hours has also been low at just +/- 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.