China in new virus battle

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 China is in a new pandemic battle.

But first, there was another dairy auction today, and this one brought lower prices again - this time down by -1.0% in US dollar terms but in NZ dollar terms it was a more serious -2.3% fall. Almost all this drop is attributed to the high-volume WMP product which fell -3.8%. On top of the continuous sliding from March, these declines are mounting. In March, prices jumped +15%. Since they have given up all of that to be just +1% higher than before the big March gain. Analysts and Fonterra will be re-thinking their 2021/22 farmgate price forecasts. On a pure formula basis, today's prices take it back to $7.92/kgMS and at the lower end of most analyst's ranges and even below Fonterra's mid-point.

In the rest of the world, the US LMI logistics managers index is holding at its very high level, boosted this month by rising wholesale prices.

US factory orders for June came in slightly better than expected, but also slightly lower than for May.

New data shows that rents are on the move sharply higher in the US as tenant demand soars. In June, they were up +15% for new leases from a year ago, and average occupancy is at a 20 year high at 97%.

In China, they are implementing a wave of travel restrictions and quarantine orders to confront a delta-strain pandemic resurgence brought in from Russia, the scale of which has not been seen since the country’s initial explosion of cases from Wuhan last year. Mass testing and cash incentives for dobbing in suspected sufferers are part of the new efforts. Of particular concern to officials is to keep the virus out of Beijing - "the capital must be protected at all costs".

China is not unique in battling the delta strain of course - but they are unique in the mass social controls they bring to bear on their populations - and if they still have problems using these, it is hard to see how others can get on top of their outbreaks without full vaccination coverage. Policymakers are starting to adopt policy resignation strategies, and trying to make these sound 'positive'.

Yesterday afternoon's RBA decision to not delay the tapering of its asset purchases is a hawkish signal to markets. It seems likely they will hike rates in early-2023. There were expectations they would delay the tapering of its bond purchase program in response to the Sydney lockdown. But they said they are still on track to reduce its QE purchases from AU$5 bln per week to AU$4 bln starting in about a month. They may even reduce it from there again before the end of 2021. This hawkish stance dragged the NZD higher with the AUD.

According to official data, the number of dwellings consents approved in Australia fell -6.7% in June for a third consecutive month, following a -7.6% fall in May and a -5.0% fall in April. But that is after a record high in March and the June 2021 level is +29% higher than the pre-pandemic level by a massive +29%.

Similarly, Aussie lending for housing fell in June from a record high in May to be a massive +91% higher than the pre-pandemic level in June 2019.

The UST 10yr yield starts today at 1.18% and little-changed overnight. 

The price of gold is now just at US$1810/oz and down -US$6 from where we were yesterday.

Oil prices have drifted lower again today and by another -US$1/bbl so in the US they are now just over US$70/bbl, while the international Brent price is just over US$72/bbl.

The Kiwi dollar opens today just on 70.1 USc and up since this time yesterday from the RBA decision. Against the Australian dollar we are little-changed at 94.8 AUc. Against the euro we are up at 59.1 euro cents. That means our TWI-5 starts today at 72.8 and marginally higher.

The bitcoin price is now at US$38,145 and down another -4.1% from this time yesterday. Volatility in the past 24 hours has been moderate at +/- 2.7%.

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.