The fight for Ukraine widens. Penalties against Russia grow. China distances itself. US data impressive. Australian inflation jumps.
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 all eyes are on Ukraine.
Although it might be the first day of Carnival in Brazil, it is the fourth day of war in Ukraine, a pall that hangs over the world. Obviously events move fast in war, but the following are of note. Russian forces seem bogged down in the north but are having an easier time pushing in from the south even if progress isn't that fast there either. Ukrainian resistance is holding for now. What is especially impressive is how much resistance is coming from Russian-speaking populations near the Russian border, especially around Kharkiv which is just 25 kms from the border. Russian forces entered the city, but officials there now say they have been driven out.
Russia has released its cyber hackers to go after "Russia's enemies'.
The EU has banned some key Russian financial institutions from the Swift payments network. It has also placed an airspace ban on all Russian aircraft.
After that, Russia put its nuclear forces on 'special alert'. It is not clear what motivated that - Swift or their forces getting bogged down - but it isn't a good sign.
The Russian Central Bank is struggling to keep up with a sudden rush in cash-note withdrawals from banks. Already high, just in the past few days Russians have noticed further sharp price rises. The odds are high that a big rate hike is coming soon to support the ruble that fell to 90:USD, although it is off that low now.
The Russian Central Bank has also come to the rescue of the oligarch-controlled major banks that face sanctions.
S&P has downgraded Russia credit rating from BBB- (the lowest investment grade) to BB+ and now a 'junk' rating. Moody's have issued a 'warning' they are about to do the same. S&P also cut Ukraine from B to B-. Meanwhile Fitch warned Ukraine could default given its parlous situation.
China has re-emphasised its key policy position that "sovereignty is sacrosanct" and has distanced itself from Russia. (A China that brings Russia to heel could make it a serious winner in this crisis, especially in Europe - but only if Ukraine comes out of this independent and with its original borders. China's inability to restrain Russia will make it look weaker than it claims to be.) China did not support Russia at a UN Security Council vote.
Away from Europe, new orders for US manufactured durable goods rose +1.6% month-over-month in January from December, following a revised +1.2% gain in December from November. The January result beat market expectations. January orders were +16.5% higher than for the same month a year ago. Capital goods orders also rose strongly, and are now up +32% from January 2021 and was led by non-defence capex investment (+42%). It is an impressive performance by the American factory sector. Despite Russia, markets noticed.
Perhaps driving this upbeat mood is American personal spending. Yesterday's upward revision of real GDP for Q4-2021 seems to be flowing in to 2022, and there was a surprisingly strong +2.1% rise in January personal spending. It was expected to be good, with a +1.5% monthly gain, but the actual result is far above that. Markets noticed this too.
Still American inflation remains high through all this increased economic activity. And war will make it worse, even if the war is far away. After last week's set of Fed officials talking up rate rises soon, two more were doing that over the weekend (Waller, Bowman), in fact touting a +50 bps hike.
In Japan and the rest of East Asia, polling shows that most people expect China to do something similar to Russia's adventure in Taiwan. Japan has now joined the EU and the US on the Swift payments block.
Meanwhile, Singaporean industrial production took a rather outsized fall in January. It's the type of drop they haven't had except in the grips of the pandemic.
In Australia, the head of Harvey Norman has warned: “You name it, no matter what product you come in to buy today, it’s dearer than yesterday, and it will be dearer again tomorrow. Prices are going up by +5, +10, +30%.” The head of a major supermarket chain has made a similar warning recently.
This sort of cost pressure is expected to see the RBA change its policy outlook on inflation with a sharp pivot even for 2022.
It is not all bad for Australia on the inflation front. Wheat prices could rise +50% from here and they are already at a nine year high.
The UST 10yr yield opens today at 1.97% and down -2 bps from this time Saturday.
The price of gold starts today at US$1889/oz and up +US$5/oz from where we left it on Saturday. This time last week it was US$1897/oz.
And oil prices are higher today, up +US$1.50 now just under US$91.50/bbl. The international price is just under US$94.50/bbl. This time last week the US price was US$90/bbl and the international price was US$91.50/bbl.
The Kiwi dollar will open today at 67.4 USc. For the week the rise is less than +½c. Against the Australian dollar we are at 93.4 AUc. Against the euro we at 59.9 euro cents. That means our TWI-5 starts today at just on 72.1 and a weekly rise of +60 bps.
The bitcoin price has held and is now an insignificant -0.3% lower that this time on Saturday. Volatility over the past 24 hours has been moderate at +/- 2.1%.
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.