Markets confused: is inflation's rise long term?

Kia ora,

Welcome to Thursday'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 inflation is embedding itself worldwide now.

The US Fed's monthly Beige Book describes an economy that "strengthened further from late May to early July, displaying moderate to robust growth". However it only reported modest employment gains. But it does report "broad based" pricing pressures where "the majority [of firms] expected further increases in input costs and selling prices in the coming months." The only relief was a pull-back in sky-high lumber prices

That evidence of inflation continued in the data as well with producer prices rising more than the high rise expected, now up +7.3% from a year ago at an accelerating pace.

They were up at an even faster pace in Canada, rising a startling +16% on the same basis in June - although there are signs this is tailing off there.

Overnight the Canadian central bank sort of copied the RBNZ with a similar policy shift - signaling a reduction in bond-buying, in preparation for normalising their policy interest rate. It also sees higher inflation ahead. However, the Canadians were not as gung-ho as the RBNZ.

China has reported a record grain harvest this season, with increases in both cropped areas and yields - but this domestic milestone isn't enough to improve their food security.

China's foreign direct investment inflow was also strong in the first half of 2021, up +29% from a year ago, and up +27% when compared to the same period in 2019.

Singapore said its economy contracted at a -2.0% annual rate in Q2-2021 after it rose +3.1% in Q1-2021. (Their year-on-year only looks 'good' because of the base effect.)

EU industrial production data for May was released overnight and it disappointed analysts, down -1% in the month and its year-on-year gain was trimmed to less than expected.

Inflation in the UK was reported higher than expected, too.

The EU and China announced "ambitious" plans to slash greenhouse-gas emissions that will increase costs for industry and consumers, but drew criticism from environmentalists as not going far enough to slow climate change. The agreement includes new duties on imports from high-emitting countries.

The renewed pandemic outbreak in the Australian east coast states is expected to cost substantial reductions in economic activity. There will undoubtedly be echoes in New Zealand.

There were 97 locally acquired cases in NSW yesterday and another 20 in ICU over a very wide age range. Their lockdown has been extended another two weeks until July 30. And sadly, there is a new outbreak in Melbourne now, spread at an MCG AFL game. You probably should assume another Melbourne lockdown will be announced soon. The Trans-Tasman bubble is toast for some time now, you would think. An increasing number of Aussies now think 'normal' is more than a year away.

The UST 10yr yield starts today at 1.36% and back down the 5 bps it rose yesterday. Bond markets seen to think the inflationary surge is temporary. 

The price of gold is now just over US$1824/oz which is up +US$19/oz from this time yesterday.

Oil prices have fallen back -US$2/bbl today and in the US they are now just over US$72.50/bbl, while the international Brent price is now just under US$74.50/bbl.

The Kiwi dollar opens today just over 70.3 USc and a gain of more than +¾c from this time yesterday. Against the Australian dollar we are up a similar amount at 94 AUc. Against the euro we are up +½c at 59.4 euro cents. That means our TWI-5 starts today up +70 bps at 73.1 although that is only back to where it was a week ago.

The bitcoin price is now at US$32,863 and virtually unchanged from this time on yesterday. Volatility in the past 24 hours has been low at +/- 1.6%.

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.