Globally, eyes on weather disruptions. China data soft, yuan weak. Japan data strong, yen weak. US data positive, eyes on payrolls.
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.
And today we lead with news climate changes are making the reading of recent economic signals harder because the whole context is changing.
In the week ahead, the non-farm payrolls report and FOMC Minutes will be taking the headlines in the United States. This will be followed by the release of ISM Manufacturing and Services PMI, factory orders, and foreign trade data.
And there will be PMI survey results released for India, South Korea, and Canada among others. We will get inflation rates for Indonesia, Switzerland, South Korea, the Philippines, Turkey, and Mexico. And on Tuesday the RBA interest rate decision.
We should note that the iconic American holiday, July 4, is on a Tuesday local time, Wednesday NZT. Financial markets will be open Monday local time. But it is unlikely that volumes will be high because many people will make it an extended long weekend. In fact, through the end of August and until Labor Day in the US, summer holiday-taking is pervasive. But remember, Americans usually don't have more than two or three weeks annual vacation from their job.
But it isn't much fun this year in many places, especially in the West, as a heat wave grips these regions.
Globally, weather events are going to be driving economic events as extremes become more common. That makes thinking about the past as an indicator of the future less a valuable benchmark. New situations that require adaption can create opportunities as well as unknowable risks. And the big one is the demographic risks. The pressures for livable conditions then creates political risks. Yes, it will likely be that New Zealand is in a relatively favourable position but that won't make it 'better than the past' - just less-worse. We have suffered unbearable wet conditions in many parts of the country. We could be in for a sharp and an uncomfortable dry period over the rest of 2023. Adaption is going to require fast planning and preparation.
In northern China, the rolling heat wave is extending and will be around until at least Tuesday with temperatures near or above 40oC. The south of the country is getting heavy rains. Both are raising risks for harvests.
China released its official PMIs for June on Friday and they make concerning reading. Factory activity stayed in a mild contraction but it is now three months in a row it has contracted. Services is expanding but at their slowest pace in six months. Still, neither is severe, only lackluster. The Caixin versions will come on Monday. The private Caixin versions have recently tended to reflect slightly better results over the past few months.
The Chinese yuan is now at its weakest since the end of 2022 and if it beaches that, it will be its weakest since 2007. The PBoC seems likely to intervene soon.
Japanese industrial production which has been soft-to-flat for the prior six months, took a sharp turn higher in May, confirming other signals that Japan seems to have turned a corner. Some of that might have been inventory build, but most components seem to be going in the right way. None of this is helping their currency however and central bank intervention seems likely there too as the yen devaluation gathers steam as well.
The US released its May PCE inflation result over the weekend and it was another small dip, up +3.8% from a year ago and lower than the April +4.3% rise. If there is a hesitation it is that the pace was above that in the April-to-May period. But markets cheered the result and equities surged. But bond markets aren't signaling they think the Fed will relax just yet, especially as it signaled two more rate hikes at least in 2023. Markets have a July 26 +25 bps fully priced in now.
We should also note that while American personal incomes keep growing at an inflation-equalling pace and better than expected, consumer spending did dip in May according to this update and that was less than expected.
Meanwhile heartland manufacturing in the Midwest Chicago region is suffering with their PMI retreating faster than expected. It isn't a positive signal. It did come in in June less-worse than the May but the recovery was timid and much less than anticipated.
However, the final June University of Michigan survey of consumer sentiment is rising and by more than expected, capping four straight months of gains. But to be fair it is still well below its long term average of positivity. It looks good because the base of a year ago was so weak.
The first estimates of the US non-farm payrolls are coming through and the expectation is that they will rise another +223,000 to keep the labour force-led expansion going. But remember these forecasts greatly underestimated the gains in May which came in at +339,000.
A Canadian business outlook survey run by their central bank found businesses reporting that their indicators of domestic demand have moved up compared with a year ago as uncertainty about the path of future interest rates and their concerns of a recession fade.
Inflation in the EU came in at 5.5% in June, down from 6.1% in May, so they are on the right track even if more progress needs to be seen by the ECB before they ease back on their policy interest rate hikes. Food prices are the main pressure point now. Energy prices are the key restraining factor.
But German retail sales can't hold on to inflation, with a shrinkage on a volume/real basis. But at least their labour market is still hanging in there (just).
In Australia, as we signaled recently, the latest Commonwealth government accounts are revealing surging surpluses. They reported a monster +AU$24 bln surplus in May alone. Their financial year ends in June. Now they expect the full year surplus to be far bigger than the +AU$4.2 billion forecast contained in the budget seven weeks ago. Probably an all-time record. And big surpluses are now projected for the 2023/24 year as well. It is raining revenue for the Australian government as both company and personal taxes rose to new highs.
But it may not last. China’s leading steel makers warned on Friday that their industry faces a challenging second half as demand disappoints, profitability lags and pressure to cut costs mounts in the world’s top producer. Most of their steel is made from Australian and Brazilian iron ore.
And we should note that 22 key countries are supporting the proposal at the IMO for a climate-change levy on ships that use fossil fuels. But overnight China started a campaign to encourage developing countries to boycott the effort.
The UST 10yr yield will start today at 3.84% and unchanged from Saturday. Their key 2-10 yield curve inversion is holding at -105 bps. Their 1-5 curve is little-changed at -127 bps. But their 3 mth-10yr curve is less inverted, now by -135 bps. The Australian 10 year bond yield is now at 4.01% and up +1 bp. The China 10 year bond rate is unchanged at 2.69%. And the NZ Government 10 year bond rate is down -1 bp at 4.67% but still near its highest since early March 2023. Recall a week ago it was at 4.60%.
The price of gold will start today at US$1920/oz and unchanged from Saturday, and a week ago.
And oil prices are unchanged too and still at just over US$70.50/bbl in the US. The international Brent price is a tad softer at just on US$75/bbl.
The Kiwi dollar starts today at 61.4 USc and unchanged from Saturday. Against the Aussie we are still at 92.2 AUc. Against the euro we are similarly little-changed at 56.3 euro cents. That means the TWI-5 is still at 69.8 and exactly where we were a week ago.
The bitcoin price has risen slightly from this time Saturday and now is at US$30,495 which is a +0.5% rise although it did manage to finish June above NZ$50,000 for the first time since April 2022. Volatility over the past 24 hours has been low at just under +/- 0.8%.
You can find links to the articles mentioned today in our show notes.
You can get more news affecting the economy in New Zealand from interest.co.nz.
Kia ora. I'm David Chaston. And we will do this again tomorrow.