China races to get Evergrande behind it. China PMIs slip. US PCE inflation up. Rate hike expectations grow. Eyes on RBA.
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 the struggle against inflation is now a worldwide one, but there is more posturing than action so far.
But we should note up front that Auckland and the top half of the North Island of New Zealand is on holiday today - Anniversary Weekend. The rest of the country is working, open for business (although there may be a few in Wellington government departments taking it quite easy today).
In China, the clean-up of the Evergrande mess has taken a somewhat surprising turn. The defacto Beijing liquidators have turned over control of a sprawling building project near Shanghai to an American distressed debt manager, Oaktree. It was one of Evergrande's most prized assets.
Meanwhile, a growing number of Chinese construction and decoration companies are writing off assets or issuing profit warnings as debt woes at Evergrande and other property developers debilitate their suppliers. Caterpillar have downgraded their China prospects even as they reported stronger global prospects.
The minor December improvement in their official factory PMI reversed in January, taking it back to a stall, neither expanding nor contracting. Similarly, the official services PMI slipped back too, but at least it is still expanding. But folks in Beijing will be quite worried about this services PMI - it is their lowest ever after the first pandemic retreat, and that one very low August reading in 2021. Of course the locals are now all on holiday with the start of Chinese New Year. (新年快乐)
Singapore's producer price index came in at +22% higher in December that the same month a year ago, but as high as that may seem, it is less than their September level of +26%. But even if you take out oil, and their PPI was still up +13%.
Hong Kong reported its advance Q4 GDP result which was up +4.8% for the year which is less than the Q3 result. Most of that was from earlier in the year, helped by a weak base, and the final quarter ended on a weakish note.
In the US, December data confirmed personal consumption expenditure rose +5.8% and a 40 year high and core PCE was up +4.9%. Those inflation measures will weigh on the Fed. But for the month of December, disposable personal income increased almost +US$40 bln while personal consumption expenditures fell -$95 bln. Consumers are changing their spending habits to prepare for inflation. For the year, personal disposable incomes rose +7.3% but over that same year personal consumption expenditures rose more than +12%. The need to tame inflation is now urgent but that weaker December consumer spending does add a dilemma for the Fed.
So it is no surprise that consumer sentiment is retreating.
And this is despite American employers paying much more to employ their workforces, up their most in 20 years.
From all these inflation pressures economists at Bank of America have shifted to a decidedly hawkish expectation, saying seven rate rises from the central bank are likely in 2022. Seven! That would take their 0.25% policy rate to 2.00% by the end of 2022, a very fast change. And a voting Fed member says a +50 bps jump is on the table for March.
Germany also reported its Q4 GDP result and it wasn't flash. Their economy retreated in the quarter, but although a retreat was expected the actual result was worse. For the full year, it was only up a tepid +1.4%.
So it won't be a surprise to learn that the EU confidence measures are sinking in January for both industry and consumers.
In Australia, inflation's march is stronger in their business sector. They posted a December producer price rise of +3.7%, up considerably from the September +2.9% and a 13 year high.
And there is something of a rush in Australia for home owners to fix their mortgages. This has long been a market where the traditional variable mortgage ruled. But with rate hikes on the horizon, homeowners are getting more 'kiwi' with their loans and are going with fixed rate contracts. The shift is large enough for some analysts to suggest the RBA might be worried that their rate-hike firepower will be undermined by the shift, taking much of the impact out of the market.
All eyes now turn to the RBA and their policy announcements late tomorrow afternoon.
The UST 10yr yield opens today at 1.78%.
The price of gold starts today at US$1792/oz and up +US$7 from this time Saturday.
And oil prices start today little-changed from Saturday at just under US$87/bbl in the US, while the international Brent price is now just under US$89/bbl. The number of US oil rigs in production is going up quicker now.
The Kiwi dollar will open today lower at 65.4 USc on the recent greenback surge. Against the Australian dollar we are little-changed at 93.7 AUc. Against the euro we are unchanged at 58.7 euro cents. That means our TWI-5 starts today down at 70.6 and a new 14 month low.
The bitcoin price is up +2.5% since this time yesterday and now at US$37,868. Volatility over the past 24 hours has been modest at +/- 1.6%.
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.