Dairy prices stand out in a risk-off market mood

Kia ora, 

Welcome to Wednesday'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 Wall Street is back but in a restrained mood, concerned where the Fed is going. Commodity prices are weaker, bond yields are higher, and the USD is exhibiting a bit of a risk-off tone. Equities are little-changed as traders return.

But first up today, there was another dairy auction this morning, after a three week gap this time. And this commodity isn't being hurt. Prices rose +4.0% overall in USD terms, although they were only up +1.2% in NZD terms, held back by a firming currency. This was a popular event with the most bidders in more than a year. The key WMP product rose +3.3%, SMP was up +7.3% and both butter and cheese each rose almost +4%. It also comes as the second firm auction in a row, bolstering the notion that dairy prices may be on a rising trend.

In the US, their logistics managers index (LMI) stayed unusually high in August, indicating continuing expansion of supply chain networks. It reflects firms stocking up on inventory in advance of Q4 and is a global feature. Transportation networks bring in goods from Asia are clogged. There is no sign of relief on the horizon for ports, as maritime bookings were up 40% from last August, giving more evidence that we are seeing the beginning of peak season quite early this year.

Exports from China surged almost +26% in August 2021 from a year earlier, far above market estimates of +17% and accelerating from a +19% rise in July. This is consistent with the strong demand we are seeing in the US especially, but also the EU. This is the 14th straight month of growth in Chinese exports, despite pandemic-induced port congestion, container shortages and higher commodity prices. With exports this strong, and factory activity quite weak, it does indicate that domestic demand for manufactured goods must be really struggling. But imports were strong too.

Taiwan exports also stayed high. But their imports were even stronger. Taiwanese exports will get a value boost as the world's largest chipmaker is pushing through higher prices.

In Europe, their Q2 GDP has been revised higher.

German industrial production in July was reported better than expected although the expansion was pretty modest, to be fair.

And things probably haven't improved from there with a key economic sentiment survey coming in at its lowest since March 2020. Delta is undermining confidence.

In Australia, their central bank stuck with their decision in July to taper its bond purchases from AU$5 bln to AU$4 bln per week. But in extending the next review date from mid-November to mid-February it has effectively lifted the purchases it is likely to have expected by around +AU$13 bln. It has also significantly lifted its growth forecast for next year, consistent with a phasing out of QE as early as May 2022.

Australian services PMI data sank sharply into contraction in August, all based on the NSW and Victorian lockdowns. Building permit levels were also confirmed as quite weak. (Of course, if we had similar data in New Zealand today, it would likely be weak for the same reasons.)

And the iron ore price fell to a nine-month low yesterday. But the aluminium price rose to a 13 year high.

The UST 10yr yield opens today at just over 1.37% and up +4 bps. 

The price of gold is much weaker, down by another -US$26 and now at US$1797/oz.

Oil prices have fallen by -US$1/bbl, so in the US they are now just under US$68/bbl, while the international Brent price has dipped to just over US$71/bbl.

The Kiwi dollar opens today at 71 USc and -40 bps softer than at this time yesterday. Against the Australian dollar we holding at just over 96 AUc. Against the euro we are softer at 59.9 euro cents. That means our TWI-5 starts today at just under 74 and still right at the top of the 72-74 range of the past ten months.

The bitcoin price has slumped overnight, down -9.1% from this time yesterday to US$46,965 and decapitating the big gains of the past week. It is the biggest loss since May, and was driven lower with margin calls as the declines mounted. Volatility in the past 24 hours has been extreme at +/- 11.6%.

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.