Global economy takes a one-two punch

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 China's economy appears to be contracting now, and the giant US economy is slowing at the same time.

But first, just a reminder that this is a long holiday weekend in both the US and Canada, their Labor Day weekend (Labour Day in Canada!), signaling the end of their summer holiday season. If you are an investor and "sold in May, and went away", then this is when you return to the markets. (Wednesday, our time.) Volumes will rise from here.

China is on its way back from its summer holidays too, but not to an expanding economy. The private Caixin PMI for their services sector was very weak, contracting at a faster rate. It is now at a 20 month low. New order levels retreated. This is lower than the official version which also signaled a sharp retreat, confirming not only a loss of momentum, but an outright contraction in their service economy.

China's heavy truck sales plunged in August, down almost -20% from July, and down more than -50% from August 2020. Excavator sales fell sharply too. Recovery seems to depend on new Beijing stimulus.

In Japan, Prime Minister Suga said he won’t seek re-election as ruling-party leader, effectively ending his term after just a year. The old revolving door for Japanese prime ministers might be returning.

In Europe, retail sales in July were another market disappointment. A flat result was expected, but a sharpish fall was reported, down -2.3% from the prior month. Instead of being up +5.4% year-on-year as they were in June, they are now only up +3.1% year-on-year in July.

And the ECB meeting will be in the spotlight this week with investors looking for any clue whether the central bank is ready to start reducing its massive asset purchase program.

Back in the US, after adding 1 mln new jobs in July on top of a similar strong gain in June, and an expectation that August would add +750,000, the American non-farm payrolls report disappointed everyone. Only +235,000 new jobs were added in August, apparently because employers are looking at the spreading Delta pandemic with concern. This means that still a net -5.3 mln jobs haven't been recovered since the start of that pandemic.

One reason hiring hesitancy is being blamed on Delta, is that wage rises remain strong. Holding on to existing workers is now the priority if there is to be a bumpy road ahead. Average earnings are up +4.3%, both on an hourly and a weekly basis. (That might be good, but it is less than their CPI. Inflation is corrosive now.)

This weak jobs report does throw out some uncertainty on whether the Fed will taper this year, or not. And it has sharply shrunk the economic growth some Fed models are recording for Q3.

The view on their giant service economy is mixed. The widely-watched ISM services PMI reported a fast expansion although growing slower. The internationally benchmarked Markit one also reported a good expansion, but at a much more modest level and slowing quickly.

Australian retail sales retreated -2.9% in July from the same month in 2020, sucked lower by the NSW lockdown. June's results were also negative, dropped by Victoria's lockdown, so the recent trend isn't positive. New Zealand will be the same of course.

The UST 10yr yield opens today at just under 1.33%. 

The price of gold is holding but down by a minor -US$2 from this time Saturday, now at US$1828/oz.

Oil prices have fallen slightly again too, so in the US they are now just under US$69/bbl, while the international Brent price has dipped to just over US$72/bbl.

We should also note that the NZ carbon price surged up to over NZ$60/NZU on Friday. See this.

The Kiwi dollar opens the week at 71.5 USc and +1½c higher than at the start of last week. Against the Australian dollar we firmer too at 96.1 AUc. Against the euro we are +100 bps higher in a week at 60.3 euro cents. That means our TWI-5 starts today at just on 74.3 and above the 72-74 range of the past ten months.

The bitcoin price has held from this time Saturday at US$50,319 and still it’s highest in 16 weeks. Volatility in the past 24 hours has been low at just under +/- 1.0%.

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.