Commodity prices up almost across the board

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 commodity prices are on the move up in a serious way.

But not for iron ore because of central decisions made in Beijing, instructing their steel mills to reduce output. And more cuts are coming. The price of iron ore is now falling, and quite fast. It is down almost -20% in China trade over the past two weeks, and most of that fall in this past week.

However, the price of other minerals are all on the rise. The lead price is at a 3 year high at US$2424/tonne Lithium is also at a three year high. Some are at an all-time record high like the tin price at US$35,965/tonne.

A nine year high was recorded for the nickel price at US$19,892/tonne. A ten year high for the aluminium price at US$2624/tonne.

Further the Baltic Dry index is remaining high.

But of course, the biggest commodity price shift is for oil.

The gains for commodity exporters so far this year have easily outweighed their losses last year when pandemic spread and crushed demand for raw materials. It has been forecast that US$550 bln will shift from importers to exporters in 2021, nearly double the US$280 bln transferred the other way last year when prices collapsed. Russia will benefit the most, with its net exports rising almost +US$120 bln in 2021. Australia, Saudi Arabia, Brazil and the UAE follow, each will post gains of more than +US$50 bln. China’s net exports will drop by around -$218 bln. That’s far higher than the figures of around -US$55 bln for the next-worst off countries, India and Japan.

We will get the food commodity index on Friday this week.

All this is happening as China is in summer holiday mode and the senior leadership of the Government typically go on holiday at this time for about two weeks, the Beidaihe break. Actually, China's leaders never acknowledge they take holidays and it is not clear why. But they do, and everyone knows it.

But they will be eyeing a very weak PMI data set released over the weekend with factories barely expanding and their service sector's expansion slowing. Both came in weaker than expected. Extreme weather and rising raw material costs are behind the stall.

China also announced it is shutting its Taishan nuclear reactor after fuel damage, an event revealed by its minority French partner a month or so ago.

And China is fighting a new spread of the pandemic, one they say started from Russia.

As we reported on Thursday, US PCE inflation is high. Over the weekend we got more detail about household incomes and household expenditure patterns in the June quarter. That showed incomes flat and no longer falling as they did in April and May as more pandemic support was withdrawn. Household spending however inched up +1%. Most of these levels were about as expected. (But the rise of the pandemic delta variant and its wide impact is coming after these Q2 gains.)

Not expected however was the extended strength of the Chicago PMI report. A fall away from the record May levels was expected, but these appear to be holding very high in the industrial heartland of the US.

Also holding at near historic highs is the latest consumer sentiment survey, this one from the University of Michigan. It is lower in July than for June and that is due to concerns about inflation. But the extended elevation is impressive. This survey is also reporting that consumer views on inflation may be self-reinforcing. That say the way higher current prices are being viewed "will only increase the willingness of consumers and firms to act in ways that accelerate the upward spiral in prices and wages".

Good economic data isn't helping the US Federal debt management crisis. Their Treasury has started 'special measures' and the reimposed debt limit took effect on August 1. It is a debt limit that is slightly less than annual GDP.

Following up Friday's US Q2-2021 GDP +6.5% result, there have been a raft of other GDP growth releases around the world. Canada says its economy contracted in May, adding it its April contraction. But it rose in June and they should post a strong year-on-year gain due to the base pandemic effect. It is doubtful however Canadian economic activity in Q2-2021 will be above Q2-2019.

Hong Kong also reported a shrinking Q2-2021 level of economic activity compared to Q1-2021. Hong Kong's economy has been shrinking from well before the pandemic.

Taiwan is the mirror opposite, expanding and expanding faster. Their drought emergency seems to have passed. Economic activity is expanding fast and they now expect it to be +12% higher than the re-pandemic 2019 year.

Germany also reported a good Q2-2021 GDP result, although not quite as good as was expected. (The miss might have been because beer sales fell.)

That enabled the EU to report a good Q2 expansion in economic activity. It is out of recession. Actually, Portugal, Austria, Spain and Italy led the way, countries you don't generally associate with economic prowess.

The UST 10yr yield starts today sharply lower at 1.23% and down -6 bps over the past week. 

The price of gold is now just under US$1814/oz and up +US$2 from were we reported it on Saturday.

Oil prices have been stable over the weekend and in the US they are now just over US$73.50/bbl, while the international Brent price is just under US$75.50/bbl.

The Kiwi dollar opens today just on 69.7 USc and reflecting a risk-off mood. We start this week pretty much where we started last week. Against the Australian dollar we are marginally higher at 95 AUc but that is our highest level this year. Against the euro we are unchanged at 58.8 euro cents. That means our TWI-5 starts today at 72.6 and -25 bps lower than this time last week.

The bitcoin price is now at US$40,994 up +4.8% since this time on Saturday. Volatility in the past 24 hours has been moderate at +/- 2.2%.

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.