Carbon down; commodity prices up. food prices hit record; US data good; China property crisis rolls on; Russia wreck; Australia to join nuclear club
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 it is all about the spreading inflationary consequences of war.
But first up, local carbon prices have been retreating recently. They ended last week down at NZ$78.50, a -10% drop in a week. In China, their fledgling carbon market now barely functions. The EU carbon price has fallen even more sharply, down -30% in a week to €66/tonne (NZ$105/tonne). The whole thing seems weird, given the record demand and prices for fossil fuels, and it calls into question whether these carbon market prices are giving useful climate signals. Given the dive in the EU price, holders of the NZUs may be facing steep losses here in coming weeks. Carbon market prices are responding to 'normal' financial market signals, and not climate or IPCC data.
We have been highlighting sharp rises in many commodity prices recently, and coal hit another record high at the end of last week, as did aluminium. This seems to be a daily achievement recently and we are inured to these rises, even if we know that they are building to cause serious long-term global inflation. Worse, for many commodities, inventories are low.
One to keep a special eye on is nickel, essential for stainless steel production, and EV batteries. But the world's largest producer is MMC Norilsk Nickel, a huge Russian producer accounting for 14% of global supply. They control 40% of the world's palladium supply, and 10% of platinum supply. They haven't been sanctioned yet, nor their oligarch owner.
But missing from the list has been Dr Copper. Copper demand has, for the past few years, depended on Chinese infrastructure activity, and China's economy is off the boil so copper hasn't participated in the current commodity price frenzy - which has been good, because it is already expensive and used widely. But on Friday that all changed. Copper prices zoomed higher overnight to hit a new record high of US$10,820/tonne. Supply concerns rather than demand pressures are behind this jump. And China signaled much more stimulus is on the way as its economy stutters.
Meanwhile, global food prices rose sharply in February, up almost +4% in one month, up +24% in a year. This represents a new all-time high, exceeding the previous top in February 2011, by 3.1 points. The February rise was led by large increases in vegetable oils (+37%) and dairy prices (+25%). Cereals (+15%) and meat prices (+15%) were also up. And of course, the global stresses in March means this is just the start of extreme food price stress. Rising post-pandemic demand in the recovering first world, stable supply everywhere, plus new growing security and supply-chain uncertainties are all conspiring to drive up food prices and food stress. In turn, these tensions will bring new 'security' arguments between nations.
Black Sea shipments of wheat have reduced to a trickle on the fighting and over the weekend wheat prices have exploded.
For the World Bank, the Ukraine invasion is a global economic catastrophe. And it is now no longer possible to get insurance for cargoes to or from Russia, especially those using the Black Sea.
The American economy added +678,000 jobs in February (seasonally adjusted), the most in seven months and way above market forecasts of +400,000. Job growth was widespread. (The actual rise was almost +1.5 mln from the prior month, but January is always seasonally low.) Their jobless rate fell to 3.8%, lower than expected. Their participation rate rose again, marginally. Average weekly earnings rose at +5.4%, and the fastest pace since March 2021. But markets glossed over this news in the face of the security issues in Europe. Still, this labour data will likely keep the Fed on track for a rate hike in two weeks.
US vehicle sales came in at just over 14 mln in February (annualised rate) and down sharply from the 15 mln rate in January. But supply issues are holding this back.
Brazil's economic growth was +1.6% in Q4-2021 and while expectations were low for this data, it is far lower than the +4.0% rise in Q3-2021.
There have been major policy meetings in China, but they are all overshadowed by the Russian invasion. At home they set a low growth target of "around +5.5%", but you have to say their conviction levels are low because they also noted "rising challenges". This is recognition that their economy is floundering. They need it to improve because they have tens of millions of young people joining their jobs market all with high income hopes that will be difficult to accommodate. New aggressive stimulus is probably not far away. Certainly interest rate cuts are close now. The iron ore price is on the move higher again in anticipation.
But not helping is that their property meltdown isn't resolved and is at a dangerous stage again. Zhenhro and Evergrande lead a rapid rise in offshore defaults. Altogether some US$100 bln in debts needs to be repaid this year alone. Bond discounts are very deep (-85%) indicating deep pessimism of likely progress, despite Beijing taking control of some of the larger developers. Auditors are resigning (a la Trump). Bank accounts are being frozen. Workers are walking off the jobs. For Beijing 'housing' is a core policy 'mountain'. The unprecedented demographic turn means future demand for houses will shrink very sharply. At present supply, there are more than a decade's worth already in the market. That means there is no need for the Evergrande's of China anymore. Building more as part of new stimulus will make the problems worse. Now Beijing's housing problem is that those who bought face steep valuation crashes. It's not the way Beijing thought their housing policy would turn out. They are about to face some very angry buyers.
In Hong Kong, retail sales are languishing. December trade was revised lower, and the January year-on-year gain was weak, and on a weak base. January 2022 sales were a massive -30% lower than in January 2019.
Meanwhile EU retail sales didn't bounce back as strongly in January as was expected, a worrying under-performance given what has come after this.
Russia's currency is at a new record low, weakening again very sharply at the end of last week. Until now, key Western policy makers have exempted oil from their sanctions. But the Allies are moving to include Russian oil in the blockade. That won't help the ruble.
S&P cut Russia's rating to "CCC-" from "BB+", as default risk rose sharply again. Both Moody's and Fitch cut their ratings further. Explanation of ratings grade is here.
In most of the world, Russia is losing the information war over Ukraine. In China, though, it’s winning big. Beijing has thrown its hat in the ring on the Russian side - but with some reservations on the commercial side. They are a dubious friend for the Russians. But Russia's mistake is a golden opportunity for Beijing to make it a subservient client.
It is not economic news, but we should note that Australia is ramping up its defense spending, and will buy and host nuclear submarines. One of Brisbane, Newcastle or Port Kembla will host a new AU$10 bln naval base for a new fleet of these submarines. Their existing Indian Ocean base will be upgraded. Fear of what China is about to do with Taiwan is driving their sharp turn to become nuclear-armed.
The UST 10yr yield opens today at 1.74% and up +2 bps from this time Saturday. A week ago it was at 1.99% but risk aversion has taken hold since. (But recall, at the start of 2022 it was at just 1.52%.) We should also note that while New Zealand benchmark Government bond yields are flat or soft, wholesale swap rates are still rising, and key ones are back up to 2016 levels now.
The price of gold starts today at US$1973 and up another +US$11/oz from this time Saturday. That is a weekly rise of +US$89/oz or +4.4%. At the start of 2022 this price was US$1814/oz, so it is up +8.8
And oil prices are down a bit today and by -US$2/bbl level. In the US they are now just under US$113.50/bbl. The international price is just on US$117/bbl. A week ago the international price was US$93.50/bbl and that seemed high. At the start of the year is was under US$80/bbl. The climb since has been more than +40%.
The Kiwi dollar will open today still higher at 68.6 USc and a +¾c rise from Friday. Against the Australian dollar we are at 93 AUc and firm. Against the euro we at 62.8 euro cents and almost a +1½c rise from Friday. That means our TWI-5 starts today at just on 73.6 and its highest since late November. If sustained, this will mitigate some of the imported tradables inflationary pressure. Not a lot, but some. And all this is despite the US dollar rising to near a 20 year high.
The bitcoin price is lower today, down another -4.2% from this time Saturday to US$39,137. For the week it is up +3.8%; Year to date it is down -17%. Volatility over the past 24 hours has been moderate at +/- 2.0%.
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, Omicron permitting.