Russian invades Ukraine in limited manner. US PMIs healthy. UST yields rise. China to mine more coal, cut taxes. Commodities rise.
Kia ora,
Welcome to Wednesday’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 the economic implications of sanctions after the Russian invasion of Ukraine are starting.
But first, remember today the RBNZ will review the OCR which currently sits at 0.75%. There will almost certainly be another increase, but will it be +0.25%? (the most likely), or +0.50% (to deal seriously with the 6%+ inflation currently hitting the economy?) There is a lot riding on this decision. All eyes will be on RBNZ at 2pm today (NZT).
In Russia "Defense of the Fatherland Day", commemorating the first mass draft into the Red Army in 1918. In Ukraine, it is "Defenders of Ukraine Day". Testosterone levels are high in Eastern Europe at present.
Russia's invasion of some renegade Ukraine provinces has triggered sanctions, which are likely to upend some key economic activity in Europe and have global implications for energy prices. The situation is likely to get worse as Russia is promoting some far-fetched historical land claims (actually not too dissimilar to China's "nine dashed line" claims). It now claims the whole Donbas region, most of which separatists don't control. Fortunately for Russia, they hold the presidency of the UN Security Council, so easily able to bat away any formal condemnation.
In the US, the February PMIs are expanding faster as their economy continues its good recovery despite inflation pressures. Activity in factories rose as did activity in their services sector, essentially putting the Omicron bump behind it. These rises were more than expected. The February expansion levels are settling in at levels better than pre-pandemic.
But factories in the Richmond Fed's mid-Atlantic state district don't seem to be as positive. However, service sector businesses are doing better there. Both are still expanding at good levels however.
Also holding at good levels in the Conference Board measure of national consumer sentiment, although this measure isn't back to pre-pandemic levels yet.
There was a US Treasury tender for their 2 year bond this morning. It was well supported although not quite to the level of last time a month ago. But what was very noticeable was the rise in yield, up to 1.51% median, from 0.95% at the prior event. That is a significant movement.
In China, Beijing has approved the development of three large-sized coal mines with a total annual production capacity of 19 million tonnes. China is also planning more 'larger' tax cuts to support a flagging economy.
In Germany, the closely-watch IFO business sentiment survey came in with an improved result - which you have to say is a surprise given the growing threats to the EU economy from the Ukraine-Russia situation. Germany has been unequivocal in applying sanctions on Russia over the invasion, dispelling thoughts that they might break ranks in Russia's favour.
Although we are becoming a bit of a broken record with this data, it continues to 'impress' and not necessarily in a good way. The lithium price has extended its rapid rise, up +36% in 30 days, and up by almost 6x in a year, now exceeding US$70,400/tonne (NZ$104,500/tonne). A mad 'gold-rush' is on to find supply. And this is despite some obvious downsides to lithium batteries - they can explode.
The UST 10yr yield opens today at 1.93% as Wall Street returns to work, unchanged.
The price of gold starts today at US$1903/oz and up +US$7 from this time yesterday.
And oil prices are up another +US$1 at just under US$92/bbl in the US, while the international Brent price is just under US$94.50/bbl.
The Kiwi dollar will open today up another +¼c at 67.5 USc. Against the Australian dollar we are up slightly at 93.4 AUc. Against the euro we are marginally firmer at 59.5 euro cents. That means our TWI-5 starts today at just on 71.9 with another daily gain.
The bitcoin price has fallen -2.9% since this time yesterday and now at US$37,823. From the start of 2022 that is now a -20% fall, so it is in a bear market phase now. Volatility over the past 24 hours has high at +/- 3.4%.
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.