Wall Street shows signs of fatigue as McConnell sets an IED

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 week where central banks may have to rescue dysfunctional public policy again.

First in the US, there is another Fed policy position review this week on Thursday and all eyes will be on tapering signals. But this decision is likely to be overshadowed by the growing partisan fight in Congress over raising their debt ceiling. While the Democrats granted the Trump presidency a holiday from this self-imposed restriction, the Republicans are using it to hobble the Biden spending plans. This seriously raises the likelihood of a technical US default soon - they will make their debt payments, just not on the scheduled dates.

This intransigence triggered UST bond yields to rise at the tail end of last week. It may also weigh on the Fed's decision-making.

And the closely-watched University of Michigan sentiment survey came in at the same level in September as it was in August - and that isn't good because August was a sharp dive to a decade low. The worries all center around inflation. There is unease that it won't be transitory, which for consumers could be self-fulfilling. A strong view is that now is not a good time to buy a house.

Equity markets are showing concern. While the overall S&P500 fall in September so far has been -2.0% market watchers are eyeing a larger decline than we had in September or October 2020. With the S&P500 futures indicating a -1.3% fall when Wall Street opens tomorrow, that would take the loss so far this month to -3.3% and something market watchers will take seriously, wondering what it signals.

North of the border, Canada goes to the polls tonight in a Federal election. Apparently it is too close to call according to most polls.

China's central bank also reviews rates this week, on Wednesday. No change is expected but more targeted liquidity measures are expected as their economy grapples with a general slowdown, the pandemic, and property industry stress.

The central bank injected NZ$20 bln (¥100 bln) into their financial system late on Friday through seven and 14-day reverse repurchase agreements, the most since February, as the Evergrande situation seems to be getting worse. Evergrande bond holders can't find buyers, which points to sharp losses and ugly margin calls, both of which can cause a cascading impact and general contagion.

Worse for China, a top analyst sees Q3 delivering zero growth as the overall economy slows fast now. One reason is that their car-making industry is stumbling and for the same reason the US auto industry is too - a lack of computer chips.

And the iron ore price has dived further in China in what is being described as a "brutal collapse". It is now below ¥600/tonne and a -55% fall since it peaked May 2021. Their environmental agency is planning a new winter air pollution campaign that is expected to curb steel mill activity sharply. There are tales of 'panic selling' surfacing now, especially in Australia.

Singapore's exports sagged in August and by more than expected. A good bounce-back from a weak July was expected but it didn't happen, so this has been a big miss. In fact August exports were lower than for July and that ate into the year-on-year gains which are now pretty modest.

The UST 10yr yield opens today at just over 1.36%, off -1 bp from this time Saturday. 

The price of gold will start the week at US$1754/oz which takes it back to about where it dipped briefly to in mid-August. It wasn't a good week for the yellow metal.

But oil prices have drifted -50 USc lower over the weekend so in the US they are now just over US$71.50/bbl, while the international Brent price is now under US$75/bbl.

The Kiwi dollar opens today at just on 70.3 USc and little-changed since this time on Saturday. Against the Australian dollar we are at 96.9 AUc. Against the euro we are just under 60.1 euro cents. That means our TWI-5 starts the week at just under 73.8, still near the top of the 72-74 range of the past ten months.

The bitcoin price has slipped again today, now at US$47,406 and a minor +0.9% firmer than where we left it Saturday. Volatility in the past 24 hours has been modest at just under +/- 1.4%.

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.