Markets listen to their inner fears

Kia ora,

Welcome to Friday'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 equity markets are now listening to the 'fear' signals the bond markets have been sending recently.

Overnight, there has been wild swings in markets. The bond squeeze deepened and spread to shorter-term US Treasuries, there has been a sharp sell-off in equities, and there is a continuing and sharp rise in the USD. A risk-off sentiment grips investors.

Not helping in the US, was that the expected improvement in the jobless claim levels last week didn't eventuate. There are still 3.2 mln people on these benefits and still far above the pre-pandemic levels of below 2 mln.

And investors are looking ahead and seem to be worried that the Q2-2021 growth spurt might be it for the other side of the V bounce back - and that the trajectory after that won't be so bullish.

This comes as current data about consumer appetites for new personal debt is rising in the US. Demand for car loans, credit cards and personal loans were up +11% compared to the equivalent 2019 levels according to one credit score reporting service.

And the Fed's own consumer credit data for May reveals its own continuing strong rise, jumping sharply by a +10% pa rate and marking the fifth consecutive month of solid rises exceeding +5%.

In Europe, the ECB changed little in their usual policy position, but they did approve a climate change action plan which is being seen as 'ambitious'. Investors are unsure how this will change the financial landscape. And that uncertainty is elevated because the ECB delayed releasing its policy guidance.

In China, their big story is all about how Beijing is cracking down on their tech giants, and hard. That crackdown is both on their growing financial power, and their reach into social communications. These enterprises have become central to Chinese commercial life, too big to fail, and are being drawn in to tight state control. The stock price of many of these firms is falling hard in Western markets.

In Australia, expectations are rising that new macroprudential restrictions will be introduced before the end of the year. APRA is already using a soft touch approach, but harder limits look likely in the next few months. Housing finance continues to rise rapidly, with investor lending now surging. This points to a further sharp acceleration in credit growth, which is set to outstrip income growth by a significant margin, something that regulators have highlighted as a criterion for acting. Measures being considered were: increasing the serviceability buffer on the mortgage rate (currently at +2.5%), targeting high LVR, and targeting high DTI loans.

May international air cargo data was out last night and it was particularly strong, coming in more than +10% higher than pre-pandemic levels. In the Asia/Pacific region the gain on that same basis was only +5%. It was North American that drove these gains. Air cargo capacity continues to slowly improve despite the lack of international passenger traffic. Having said that, the market remains tight, with no clear decline in cargo load factors. June is also likely to be equally positive.

But international air passenger travel is still dead-in-the-water, down more than -85% since May 2019. The only domestic air travel markets open 'normally' are China and Russia. (Australia is down -30%; the US is down similarly.)

The UST 10yr yield starts today down at 1.29% and down another -2 bps, and extending its retreat. 

The price of gold is now just under US$1800/oz which is down -US$3/oz from this time yesterday.

Oil prices have stabilised overnight, up by +50 USc. In the US they are now just over US$72/bbl, while the international Brent price is now just over US$73.50/bbl.

The Kiwi dollar opens today just under 69.5 USc and down almost -¾c from this time yesterday. Against the Australian dollar we are lower too at 93.5 AUc. Against the euro we are sharply lower at 58.7 euro cents. That means our TWI-5 starts today well down at 72.3 and an -80 bps retreat.

The bitcoin price is now at US$32,968 and down -4.5% from this time yesterday. Volatility in the past 24 hours has been a very high +/- 4.1%.

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 on Monday.