Dairy prices rise to record highs. Ukraine war get more brutal. US PMI data improves. China warns on 'challenges'. RBA sits pat.
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 war in Ukraine is adding to the global supply chain stress. And there has been a major bond market rally as risk-off sentiment spreads. And further, there are signs of a collateral squeeze in some financial markets.
But first, it has been a notable dairy auction this morning. Overall record prices were reached, after the fourth consecutive solid rise, this one +5.1% from the prior even and the largest of the set. Since the first auction of the year overall prices are up +19%. But the rising Kiwi dollar has limited today's gain in local currency to +3.1%. New all-time record high prices were achieved for butter (after another +5.9% rise this time) and Cheddar cheese (up +10.9% this time). In USD it wasn't a record high for either SMP (+4.7%) or WMP (+5.7%), but in NZD, the WMP did touch a new record high.
Analysts were expecting higher prices along these lines. It will be interesting to hear their new farmgate payout forecasts which are all sure to rise. They have been all holding back to see this result after Fonterra raised its estimate for this season to above each of their prior calculations.
In eastern Europe, Ukraine holds - just - but faces a new more brutal version of the invasion as Russian anger grows that it wasn't welcomed by an easy victory, anger doubled because it is the Russian-speaking population fighting as hard against them as anyone. The Russians are now targeting civilians in reprisal, with indiscriminate bombing of cities.
Overnight, China gave a half-hearted indication it will try to play a role in resolving the crisis.
Sadly, this war has suddenly opened the gates to sharply rising spending on military defense capabilities. And that is a global phenomenon, including in east and south-east Asia. It has also renewed the desire to join security alliances. Russia has set back the gains of demilitarisation by decades, maybe more.
It is also a time investors are assessing the risks in their portfolios. It won't be good for less developed countries. The economic implications of that will be enormous and last a generation.
And re-routing cargoes away from Russia is creating a new front in the supply-chain stress situation. It is likely to have freight-rate cost implications at some point, probably soon.
Despite the grim European security situation, the February factory PMIs in the US were all very positive. The widely-watched ISM one rose marginally and holding its very healthy level. The internationally-benchmarked Markit one also rose notably. New orders were up strongly while the pace of cost increases stabilised.
US retail activity as monitored by the Redbook survey is maintaining its strong expansion.
The US logistics managers index was up as well, "with no obvious signs of slowdown".
In Canada, they released the Q4-2021 economic activity data and that came out better than expected with a +6.7% rise, up from the +5.5% rise in Q3-2021.
And the high-profile trucker protest at the Windsor bridge had zero impact on their factory PMI which rolled on at a healthy expansion.
Both the official and unofficial factory PMIs were out for China late yesterday, and both recorded minor gains, but sufficient to take them from a stall to a marginal expansion. Their services PMI is little changed too, and still in a tepid expansion.
Yesterday however a senior Chinese official warned that they are facing big challenges stabilising consumption this year amid huge pressure on foreign trade. The result is downward pressure across the whole country, their Minister of Commerce said.
The overall EU factory PMIs stayed expansionary in February, with good output growth supported by stronger demand and fewer delivery delays in the month.
German reported its inflation rate ticking up to +5.1% in February. On an EU harmonised basis it ticked up to +5.5%.
There was a PMI report out for Russia for February too. That reported a renewed decline in their manufacturing sector performance amid weak customer demand. They were contracting, and are it is not likely to improve in March.
In Australia, the RBA sat pat with its official cash rate still at 0.1%, and give no signal that this was about to change. They say the war in Ukraine is a major source of uncertainty for the global economy, local wages growth isn't strong, and inflation is benign in their view.
In Australia, mortgage lending to investors rose to a record high in January. And at 33% of all new housing lending (except refis) that proportion is back at a four hear high. (The record high was in 2015 when it hit 46%.) Currently New Zealand lending to investors accounts for just 17%. The NZ proportion peaked at 35% in mid 2016.
The UST 10yr yield opens today at 1.71% and down another sharp -16 bps from this time yesterday as the international risk-off mood builds on markets.
The price of gold starts today at US$1934/oz and up +US$39/oz from this time yesterday. We are in full "extreme fear" mode now.
And oil prices are sharply higher again today and have pushed on up well over the US$100/bbl level. In the US they are up +US$10 to just over US$104/bbl. The international price is just over US$106/bbl. The last time crude oil prices were this high was in 2014 so these latest prices are eight year highs. (In between they fell to just US$18/bbl in 2020. It was only a brief stop that low however.) The price of coal hit a record high yesterday.
The Kiwi dollar will open today at 67.6 USc and a marginal slip. Against the Australian dollar we are at 93.2 AUc and also a marginal slip. Against the euro we at 60.9 euro cents and a rise of more than +½c. That means our TWI-5 starts today at just on 72.4 and unchanged from yesterday even if it is still a five week high.
The bitcoin price has risen again today, up +5.3% from this time yesterday to US$43,278. Volatility over the past 24 hours has been extreme at +/- 5.1%.
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.