The economic currents get choppier

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 it’s tough at the top.

With many financial and economic market indicators at or near records, investors are sensing that the only way from here is either drifting, or down.

Iron ore prices are now dropping sharply as China’s intensified drive to lower steel output prompts mills to start cutting production to avoid sanctions. The prices Chinese mills are paying dropped -10% last week although they still remain +28% higher than at the start of 2021. Nickel prices, a key ingredient for stainless steel, are shooting higher and that is both about supply shortage as still-high demand

The Baltic Dry Index remains high (up +70% since the start of 2021) but has flat-lined over the past week. It too is down -10% from the start of the month. But for containerised cargoes, there is no let-up yet, with prices now up another +7% in just two weeks averaging NZ$12,800 per 40ft container.

There were a couple of early PMI indicators released over the weekend for some major economies we follow and they are all quite positive. In the US their factory sector expanded at a series high (best in at least 14 years) with strong new order levels. But costs and prices are rising faster, and labour shortages show no signs of easing for manufacturers. It wasn't quite as bullish in the giant American services sector but the expansion is still strong (just less so). This loss of momentum is being attributed to labour shortages and difficulties acquiring stock.

In Europe, they are seeing their fastest expansion in more than 20 years. New factory order levels are very high as are the pace of cost increases. But the rate of price increases being pushed through is easing. Their services sector is expanding at a 15 year high. Germany is pushing higher but France's recent burst may be topping out even if it remains strongly expanding. The UK recovery is stuttering however.

Taiwan reported strong industrial production in June, up +27% from the pre-pandemic June 2019 levels. But they also reported very weak retail sales, down -14% from June 2019 in a very sharp drop after pandemic restrictions were suddenly imposed. The restaurant trade was particularly hard hit, making the fall the largest since they began this retail trade data series in 1999.

The growth streak for the Australian private sector ended in July according to flash PMI data which showed business activity now in contraction. Survey respondents signaled that renewed pandemic restrictions affected demand and output countrywide.

In Shanghai, they are bracing for a new large typhoon after other parts of inland China are still digging out of the Henan disaster. But so far, the Shanghai situation is only precautionary.

The weather extremes in parts of the world are raising demand for electricity, and quite sharply. And the fastest way to respond is to burn more thermal coal, much of which is low grade. The price of thermal coal is soaring. China's political disputes with Australia isn't helping and volumes from the US are now driving this trade.

And China joined India and Russia in killing new calls for stronger climate action at the G20 meeting. What resulted was meaningless. Australia also succeeded in keeping the Great Barrier Reef being called 'endangered'.

Back in the US, Janet Yellen as US Treasury Secretary has warned Congress that unless it acts within this coming week to raise its debt ceiling, the Administration will have to take "extraordinary measures" to prevent a US debt default. (Congress suspended the debt limits under a bipartisan deal with Trump but that lapsed with the replacing Administration.)

The UST 10yr yield starts today at just on 1.28% and a -1 bp dip. 

The price of gold is now just on US$1802/oz which is unchanged from this time Saturday.

Oil prices have risen marginally in the US they are now just over US$72/bbl, while the international Brent price is still just over US$73.50/bbl.

The Kiwi dollar opens today just on 69.7 USc and very slightly softer since this time Saturday. Against the Australian dollar we are slightly firmer at 94.8 AUc. Against the euro we are unchanged at 59.3 euro cents. That means our TWI-5 starts today unchanged at 72.9 - which is about where it was a week ago.

The bitcoin price is now at US$34,449 and up a sharp +6.9% since this time on Saturday. Volatility in the past 24 hours has been low however at just under +/- 1.7%.

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.