Inflationary pressures grip the world, both from demand and supply origins. Central banks huddle. China cooling fast.
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 – forget about house prices, we are all about to be obsessed with angst about inflation.
First we should note that over the course of this coming week the central bank news will be relentless. Final 2021 review meetings are being held at the US Fed, The Bank of Japan, the ECB, and in Switzerland, England, Norway and Mexico. All are facing inflation issues, and all need to set new defenses against that, a threat many in their countries have forgotten how corrosive it can me. But all also face huge public debt for which 'financial repression' is the standard playbook solution. Their judgements will be watched with interest.
Clearly, both supply and demand issues are occurring at the same time, and that means these policy makers face a unique set of policy circumstances their forebears didn't. If earlier times it was one or the bother; now its both. One thing seems certain; faster tapering by the US Fed.
American consumer price inflation came in at the expected 6.8% year-on-year in November, and up from 6.2% in October. Their core inflation level also didn't surprise with a 4.9% rate compared to 4.6% in October. The main driver was energy costs, and the impact of these may fall away soon as crude oil's gains seem to have settled down. But other elements are rising faster too with food prices up a concerning 6.1%, clothing and apparel up 5.0%, rent up 3.8% and new car costs up 11%. Oddly, medical care costs have only changed minorly over the past year.
And we should note that the widespread tornado damage through the US Midwest will, temporarily at least, disrupt domestic supply chains, causing enhanced supply-side inflation over the next few months.
Americans haven't experienced inflation like this two generations (since 1982) so there is bound to be unease, and probably much of it partisan. Overlooked will be that average weekly earnings rose +5.6% in the year to November, more than the core CPI rise and less than the headline rate. 'Real earnings' will have declined, but there is more than enough room for consumers to make small adjustments to ride out these changes. And of course, most will.
But inflation 'shock' will be real, especially more those who didn't see this coming and others at the margins. However, so far there is no real evidence there is widespread angst, with the widely-watched University of Michigan consumer sentiment survey coming in more optimistic that analysts had expected and broadly stable over the past four months. So far, Americans seem to be handling higher inflation in a mature way.
Meanwhile, the US budget deficit is now shrinking, even if the progress is small. It came in under -US$2.7 tln in the year to November, or -12.5% of GDP. Rising tax revenues from higher activity is helping. For the first two months of their new fiscal year (October and November) federal tax receipts were +23% higher than the same period in 2020. If that keeps up (and it may be unlikely), they will eat into their deficits quickly. US federal tax levels are very low by international standards; in 2020 they were 16.5% of US GDP, 25.5% for all taxes (not just Federal) whereas the average for OECD countries was 33.5%. In New Zealand it was 32.2% and Australia 27.7%.
In China, the top brass in Beijing are increasingly concerned about stability as their economic activity slows down. In a statement after their closed-door three-day Central Economic Work Conference they declared: “Ensuring stability is the top priority for the economy next year.”
China's housing market is cooling fast. Unsold new home inventories have climbed to the highest level since August 2016. In some regions a sense of panic is growing as their home owners face steep losses. You can see why 'stability' is now the catchword.
And there are increasing concerns, even internally, that China's economic data is being manipulated again - to be relentlessly positive.
In Japan, producer prices rose more than expected in November, adding to background global costs. At an annual rise of 9.0%, and a monthly rise of +1.4%, that puts them at a 40 year high, and a very uncomfortable position for their manufacturers.
Germany also reported very high consumer price inflation for November, up 5.2% and it highest since 1992 (and up +6.0% on a harmonised basis to compare with how other countries report it). Energy costs are the main culprit there, but food prices rose 4.5%.
Brazil also reported CPI inflation over the weekend - and theirs was at 10.7%. (All these high CPI rates puts New Zealand's 4.9% into perspective and makes Australia's 3.0% seem very modest. Inflation will surely persist as long as the supply-chain pressures persist, irrespective of the oil price.)
We should also note that coffee prices are now at a ten year high and have risen very sharply since April.
India's industrial production disappointed for October, up +3.1% and much less than was anticipated. The RBI's maintenance of loose monetary policies to try and get some momentum building in the Indian economy makes sense with this data.
Locally, supply-chain pressures, especially in the house building industry, are causing extreme cost inflation. It isn't an issue only affecting New Zealand - Australia has equally severe pressure. The houses we thought we were getting via the very high consent approvals, either may not actually arrive, or if they do, they will be substantially more expense that budgeted.
The UST 10yr yield opens today at 1.48% and down -1 bp from this time Saturday.
The price of gold will start today at US$1783/oz and down -US$3 from this time on Saturday.
And oil prices start the week a little firmer at just under US$72/bbl in the US, while the international Brent price is still just over US$75/bbl.
The Kiwi dollar opens today marginally softer at 67.9 USc. Against the Australian dollar however we are marginally firmer at 94.8 AUc. Against the euro we are unchanged at 60.1 euro cents. That means our TWI-5 starts the week at 72.6.
The bitcoin price is virtually unchanged at US$47,845 and up a mere +0.7% from this time Saturday. Volatility over the past 24 hours has stayed modest at just over +/- 1.6%.
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.