Kia ora,
Welcome to Monday's Economy Watch where we follow the economic events and trends that affect New Zealand.
I'm David Chaston and this is the International edition from Interest.co.nz.
Today we lead with news it’s a topsy-turvey world and the big drivers of global economic activity are not helping.
While the world is focused on social injustice protests, and the coronavirus, the bond market has been moving quickly with falling prices for long term bonds, and rising yields.
It seems investors are moving back into equities as the mood lifts about restarting major economies. If it lasts, this will have an unfortunate impact on government budget deficits that have mushroomed recently to battle the economic impacts of the pandemic. Sharply higher liabilities combined with interest rates that have almost doubled from very low levels, will eat into tax revenues very fast. Yes, central banks can create new money to buy increasing amounts of government debt, but obviously they can't do that forever. And if markets push bond interest rates higher, the taxpayer will need to shoulder an increasing load just to make the interest payments.
In the world's largest bond market, the US, the Federal Reserve has been much less active in the past few weeks, as evidenced by a noticeable slowdown in the growth of its balance sheet. Last week it reported growth of +US$68 bln taking the four-week total growth to +US$444 bln. That is far slower growth than in the same four weeks a month ago when it rose +US$638 bln. The rise in March was +US$1.6 tln.
Investors are starting to assume the Fed will adopt the Japanese tactic soon of setting target interest rates for benchmark bonds and flooding issuance if market pressure raises them at a pace the US Government can't afford.
In a surprising announcement, the US Administration reported that "nonfarm payroll employment rose by +2.5 million in May, and the unemployment rate declined to 13.3%". Markets were anticipating further deterioration of -8 mln jobs and a 20% jobless rate. Apparently, no one noticed a jobs hiring spree in May and a minor rise in their participation rate - until Saturday. The private sector monitoring of the same labour market, and the rising layoff levels are apparently 'fake news'. The "greatest comeback in American history" didn't see any improvement for Black or Latino Americans however, intensifying the dubiousness of the reported data.
To be fair, the US Agency responsible for the May payrolls data have cautioned that data-collection issues that have plagued them throughout the crisis, continued in May.
But Wall Street ignored those caveats and jumped higher anyway on the news, with the S&P500 up +2.6% and a weekly rise of +5%.
But the US Fed didn't get the message. It reported that consumer debt fell at a remarkable -20% annual rate.
Across the northern border, they too reported labour market data that was more optimistic than expected but the effect was within normal statistical tolerances. Employment grew marginally in May from April.
Back in the US, China is apparently canceling purchases of US farm commodities. They imported only US$9 bln from the US in May while exporting US$37 bln to them. That is behind a huge -16% fall in May imports, which along with a smaller-that-expected -3% fall in exports, boosted the Chinese trade surplus in May to +US$63 bln. It also helped them report an unexpected rise in foreign exchange reserves to US$3.1 tln at a time most analysts were expecting a decline after a general depreciation of the yuan.
But despite the low level of imports, China's recovery seems to on track. New personal loan lending, including credit card loans and consumer loans, shows signs of improvement in May. In particular, home mortgage loans in some regions have recovered to pre-coronavirus levels.
And the latest data from the Chinese central bank indicates that assets of the Chinese financial sector exceeded US$$47 tln in the first quarter of 2020, up almost +10% from a year ealier. Chinese banks apparently have assets equal to two thirds of global GDP. If you find that hard to believe, you won't be helped by official data that shows the total assets of all American commerciual banks is now just over US$17 tln.
Not only are iron ore prices rising on rising demand, but so are copper prices now.
China however is advising its citizens not to travel to Australia, in an escalation of the trade and security tiff between them. Beijing says the risks of "discrimination and violence" against its citizens is high at present. That will restrain the flow of students at Australian universities. But there is some [minor?] evidence that those who were aiming for American, British or Australian universities may transfer their focus to ... New Zealand.
If the UK also moves to block Huawei from bidding on its G5 contracts, that is likely to ruin HSBC's Hong Kong and China business, the bank is reported as claiming, and especially after Britain moved to offer Hong Kongers a path to citizenship in England.
Singapore is reporting that retail sales fell a remarkable -40% in April as their lockdown bit. In May they are reporting that Singapore banks attracted rising deposits from protest-hit Hong Kong. Record inflows follow unrest in their rival.
Meanwhile in Japan, they are reporting the largest decline in household spending since 2001 when their data on this was first collated.
The latest compilation of Covid-19 data is here. The global tally is now 6,855,900 which is up +152,000 in a day, still rising at an increasing pace. India and Russia are reporting more than 10,000 new cases a day. Brazil is reporting more than 30,000 a day. Global deaths are now over 401,000.
Just under 28% of all cases globally are in the US, which is up just +8,000 since this time yesterday to 1,927,400. This is also a slower rate of increase. US deaths are now exceed 110,000.
In Australia, there have been 7260 cases (+5 since yesterday and +9 over the weekend), 102 deaths (unchanged) and a recovery rate of just over 92% (unchanged). 18 people are in hospital there (-3) with 3 in ICU (-1). There are now 455 active cases in Australia (-5).
There were zero cases again yesterday in New Zealand, so now only one person is left with it in the whole country. We are now at sixteen days with zero new cases.
The iron ore price is ignoring official Chinese warnings about a frenzy and is higher yet again today, and on high volumes of trades. Thermal coal prices are being ignored by buyers, dropping to ten year lows. Mines are shutting.
The UST 10yr yield is up +8 bps at 0.89%. For the full week, it is up a remarkable +26 bps as investors start pricing risk back into American Government debt - in fact, long term debt from all governments.
The gold price started a yo-yo ride at the end of last week with large falls then rises. Since Friday, it is down -US$40 to US$1,681/oz.
Oil prices will start the week sharply higher. The US crude price is up about +US$2 to just on US$39.50/bbl. The Brent price is up to just over US$42/bbl.
And the Kiwi dollar has risen further. We are now just on 65.1 USc, another +½c gain and the last time we were this high was at the end of January. On the cross rates we are to 93.4 AUc and a one month high. Against the euro we have are up almost +1c to 57.6 euro cents. That means our TWI-5 has moved up to 69.8.
Bitcoin is lower than this time Saturday, down -2.5% to US$9,504.
Finally, if you are one of the new listeners how have joined us recently, welcome – we appreciate your company.
You can find links to the articles mentioned today in our show notes.
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