Fast spreading inflation gives regulators a tough choice. China struggles despite credit flood. US CPI at 40 yr high. Australia faces another power crisis.
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, regulators and households worldwide are battling the lurking thief that is inflation. And regulators face a stark choice: inflation or recession?
The last time Stats NZ looked at our consumer inflation level it was as at March and it was running at 6.9% then. It is surely higher now. Our June rate won't be known until July 19. No analysts have yet forecast that level recently. The RBNZ's last MPS picked a 7% June rate (and lower after that) and that will clearly be way out. Our own Grocery Price Monitor, a weekly series, suggests June 2022 quarter prices will be +12% higher than the equivalent level a year ago. However there is more to CPI inflation than just grocery prices.
There are plenty of things to blame, and partisan commentators are choosing them all. But the cost of energy is behind almost all the food, transportation and product price rises, so the most credible culprit, given when this scourge took off, is the 'Putin tax', out-weighing the pandemic effects, or even QE. Everything contributes in its own way but the war shock is the trigger.
How to fix the problem, one that steals from wallets and household budgets? If we can't stop the war on Ukraine, we have to quell demand significantly, so that price hikes don't stick. The problem is that this remedy hurts.
But we see it in action in China.
Chinese consumer prices were up just +2.1% in May from a year ago, but of concern will be that prices actually fell from April, a whiff of deflation there. Food prices fell, and as a part of that, prices for sheep meats actually fell rather a lot, down -1.4% in a month and taking the year-on-year retreat to more than -6%. Pork and vegetable prices fell much faster however, and it is clear that their livestock farmers will be in no position to pay sky-high animal feed prices on the international market.
Chinese producer prices were virtually unchanged in May from April, and that dragged the annual PPI increase down to +6.4% and its lowest in more than a year (February 2021). Raw material price rises are still very high there, but prices for consumer durables at the factory gate actually fell in May from a year ago. It's a squeeze that will hurt.
China may be struggling in the real economy with sinking demand, but they still know how to flood new loans on to companies. New yuan loans rose sharply in May, up by +11%, partly because they are switching out of foreign currency loans. Their banking system now has NZ$49 tln in lending on their books (¥210 tln). That is 183% of Chinese GDP. For perspective, New Zealand's total lending is 154% of our economic activity, and for the US, it is just 70% on the same basis.
Russia cut its policy rate by -1.5% to 9.5% over the weekend. They can see demand retreating fast and, fearful of an over-reaction, are easing up. They last recorded CPI inflation up +17%, but a collapse in economic activity will have it fall as fast as it rose. Also falling and fast is the Russian population. Deaths exceeded births by 311,200 people in the first four months of this year, according to data published by their Federal Statistics Service.
In the US, the 'feared' surprise in American inflation has been recorded for May. Overall the headline rate came in at 8.6%, a new 40 year high. But worse, food price inflation came in at 10.1%, and also a 40 year high. Markets were expecting a headline rate of +8.3% and food prices up about 9%, so the actual results have shocked financial markets into some sizeable reactions. Equity prices fell, bond yields jumped, and the US Dollar gained sharply.
One likely reaction is that the Fed will raise its policy rate by +75 bps on Thursday, June 16 (NZT). Until now, the best estimate has been +50 bps.
With that as backdrop it is hardly surprising that consumer sentiment has dived. There was a survey out on Saturday (NZT) and it recorded its lowest level on record. Sticker shock is pervasive, especially for petrol prices. And this survey suggests that the public is more sceptical the Fed's policy actions are likely to get inflation back down.
However, not all data released overnight was negative. The remarkable repair of the US Federal Government finances continues with a greatly improved May deficit. Analysts had expected a deficit of -US$120 bln for the month. But the actual result was just -US$66 bln. Over the past year, this deficit has shrunk more than half to just over -US$1.1 tln from -US$2.8 tln in the prior fiscal year. That is probably the fastest budget repair ever accomplished, all while their economy expands.
Canada released its May employment data and that was generally positive, coming in better than expected. There was a big shift toward full-time employment in May, and a smaller shift away from part-time work. Their jobless rate fell to 5.1%. Canada's consumer price inflation was running at 6.8% in April.
Separately, India reported that its industrial production rose faster in April than was expected. It was up a creditable +7.1% from a year earlier when a +5.1% rise was expected. India's consumer price inflation was running at 7.8% however.
In Argentina, there seems to be some sort of bank run underway. Savers fear the country will default and are pulling money out of inflation-linked savings accounts to protect themselves from the prospect these balances are growing so fast the Government can't possibly pay. On Thursday alone, almost -NZ$400 mln was withdrawn. They risk making it self-fulfilling. Argentina has an inflation rate of 58% and rising fast (+6% per month). It's as toxic there as in Turkey (who have a CPI running at 73% pa).
In Australia, their CPI rate for March was 5.1% and their June rate won't be known until July 27, 2022. It's going to be very much higher, also for energy reasons.
A key coal-fired power plant is out of action due to a technical failure, and it won't be restarted until late September. This will test an already-brittle eastern-seaboard power system. Certainly it will bump up power prices.
And in Queensland, the national energy market operator has capped electricity wholesale prices in the state for what is thought to be the first time ever after a sustained period of extreme prices.
Meanwhile, the great Australian fintech export, Buy-Now, Pay-Later, seems to be imploding worldwide. Rising bad debts and losses can't seem to be stemmed and investors have lost faith that the idea can be profitable. That idea is cemented with rising interest rates on the debt they must carry to back up their interest-free balances.
The UST 10yr yield will start today up +1 bp from this time Saturday at 3.17%, and that is a +20 bps rise for the week.
Last week on Wall Street, the S&P500 fell -5.1%. Over the weekend, the S&P500 futures indicated than when they reopen tomorrow, they will start down another -2.8%. Monday trade may open with a rough tone everywhere, starting in New Zealand of course. And markets are now also battling a social phenomenon, where it is suddenly fashionable to be a market bear.
The price of gold was up +US$23 at the close of trade in New York, now at US$1872/oz. A week ago it was at US$1849/oz.
And oil prices are little-changed from this time Saturday, now just under US$118.50/bbl in the US, while the international Brent price is now just over US$120.50/bbl. Both levels represent about a +US$1 gain for the week.
The Kiwi dollar will open today little-changed at just over 63.5 USc. For the week that is a -2.2% devaluation. Against the Australian dollar we are at 90.2 AUc. Against the euro we are at 60.5 euro cents. That all means our TWI-5 starts today at just under 71.3, and down -60 bps for the week as the greenback strengthens, now at a 20 year high.
The bitcoin price has fallen by -3.0% from this time Saturday and is now at US$28,115. It's been volatile and at one point in between it got as low as US$26,878. Volatility over the past 24 hours has been high at +/- 3.5%.
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.