Turmoil everywhere

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 of turmoil everywhere.

But first, you will probably know that New Zealand is suddenly back in a full Level 4 lockdown with one (presumably) delta case detected in the Auckland community. That has thrown financial markets a swift curve ball and the RBNZ Monetary Policy meeting outcomes will probably not be what markets were expecting this time yesterday. We will know at 2pm today. In the meantime our currency is sliding lower and wholesale interest rates are heading lower as well.

Overnight there was a dairy auction and surprisingly there was an unexpected, if small, overall price rise - and only the second rise in the past ten auctions, even if it was small. The dominant WMP price did fall -1.5% as expected, but SMP rose unexpectedly and both butter (-4.0%) and cheese (-2.8%) also rose. The overall result was a +0.3% gain in USD terms, but with the NZD falling sharply, the gain was magnified in local currency to +1.7%. Volumes offered and sold at the auction were modest for this time of year and almost -30% less than this time last year. But overall prices are +27% higher than this time last year.

Separately, international financial markets turned sour overnight mainly on a surprisingly poor American retail sales data for July. A minor dip was expected after a strong June, but a major dip was reported, more than wiping out June's gain. A sharp fall in car sales is behind this result but sales of general goods were weaker too. Sales in July 2021 may be well above those of July 2019 but this is still a perception of weakness.

Perhaps offsetting some of that gloom was a larger than expected rise in American industrial production in July. It is a strong rise versus the July 2020 result but that is just a base effect. The better-than-expected gain is the one from June.

In China, Beijing's moves to decapitate the leadership of its tech industry and exert strict controls over how it operates is sending messages to foreign investors about the risks of doing business in China. If they do that to their own, they will have no hesitancy effectively nationalising 'by other means' foreign holdings, is the fear. Not only are Chinese equity markets sharply retreating, foreign direct investment is turning away.

Meanwhile, China carried out assault drills near Taiwan on yesterday with warships and fighter jets exercising off the southwest and southeast of the island, in what the China's armed forces said was a response to "external interference" and "provocations".

In Australia, one of the world's largest miners, BHP, has made some important strategic decisions overnight, quitting its petroleum businesses, betting on decarbonisation, and pivoting to businesses involved in food security. It is also dumping its London stock market listing. It also announced a bumper profit result.

And the RBA minutes of their last meeting shows the delta variant could be a game-changer for their monetary stimulus plans, with the central bank prepared to provide more support if there is a significant setback to the recovery. Any move to reverse a July decision to scale back weekly bond purchases would likely require the economic shock to flow into 2022, given the RBA believes that’s when further buying will have “maximum effect”, they said.

And the Canberra parliament has opened a formal inquiry into housing affordability in Australia.

The sudden surprise pandemic lockdown has thrown expectations for the RBNZ Monetary Policy changes into disarray. Join us at 2pm when they will update us on what they are doing. We will have full coverage.

The UST 10yr yield starts today at 1.25% and down -1 bp. 

The price of gold is basically unchanged from this time yesterday, down just -US$1 at US$1786/oz.

Oil prices are -50 USc softer from this time yesterday, so in the US they are just under US$66.50/bbl, while the international Brent price is just under US$69/bbl.

The Kiwi dollar opens today sharply lower, down by more than -1c at just under 69.1 USc in a big retreat. Against the Australian dollar we are down -40 bps at 95.2 AUc. Against the euro we are down -70 bps at 58.9 euro cents. That means our TWI-5 starts today at just 72.4, down -80 bps but still in the narrow range of between 72 and 74 we have been in for eleven months now.

The bitcoin price has weakened slightly today and is now at US$45,892 and is down -1.3% from this time yesterday. Volatility in the past 24 hours has been moderate at just under +/- 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.