Risk sentiment sours

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 interest rate signals are moving a lot today as perceptions of risk change in many directions.

But first, today's dairy auction has brought quite a sharp shift lower in overall prices. They were down -3.6% in US dollars from the prior even two weeks ago, although with the lower exchange rate the decline in New Zealand dollars was 'only' -2.1%. SMP fell a hard -7.0% and Cheddar Cheese by -9.2%. The dominant-volume WMP fell by -3.0%. Since the +15% jump in early march, these prices have depreciated by a net -7.3% since, essentially cutting away half that March gain. The shift lower today will no doubt have analysts reassessing the 2021/2022 farm gate payout forecasts.

Also slipping more than expected is the closely-watched ISM services PMI in the US for June, although its fall is from a record high in May. This is a story about supply-chain constraints with severe difficulties getting supplies and sky high prices. Amongst the data, the employment index turned to contraction. It was data that undermined benchmark bond yields when it was released. The companion Markit services PMI also fell (and also from a record high) but it didn't show the jobs pullback.

In Europe there was also a much sharper than expected reversal of business sentiment in Germany, although it should be noted that the view of current conditions is still quite upbeat.

And EU retail sales volumes rose a bit more than expected in May from April, and that makes them +6.5% higher than in May 2019.

The Taiwanese unemployment rate rose in May more than expected and mainly due to the pandemic re-emergence in that month. It actually jumped back to the pandemic peak level as they had in May 2020, or 4.1%.

In China, after decades of dancing around the issue, it looks like they are preparing to raise their retirement age, which currently is among the world's lowest at 50 for blue-collar female workers, 55 for white-collar female workers, and 60 for most men.

In Australia, their central bank yesterday held its cash rate at 0.1% but moved to scale back its massive AU$237 bln program of crisis quantitative easing. Their weekly additions of +AU$5 bln will now be lowered to +AU$4 bln as the first step. Markets responded by bring forward their expectations of a rate hike there - to June 2023 (and far, far later than the November 2021 rate hike expectations in New Zealand).

In Sydney will have another week of ‘lockdown lite’ as the NSW government tries to make it the city’s last. But it's a gamble.

We should also note that yesterday, the one year New Zealand swap rate surged +7bps higher and the two year was up another +8bps. That makes the rise since the beginning of June +22 bps and +30 bps respectively. This will have bank mortgage pricing people pulling out their calculators.

The UST 10yr yield starts today at 1.37% and down a sharp -6 bps after their long holiday weekend. 

The price of gold is now at US$1795/oz which is up +US$3/oz from this time yesterday.

Oil prices have fallen quite hard today, down by -US$3. In the US they are now just under US$73/bbl, while the international Brent price is now just over US$74/bbl.

The Kiwi dollar opens today just on 70.1 USc and marginally lower than this time yesterday. The interim rise we saw yesterday afternoon has now all vanished. Against the Australian dollar we are slightly firmer at 93.6 AUc. Against the euro we are little-changed at 59.3 euro cents. That means our TWI-5 starts today unchanged at 72.9.

The bitcoin price is now at US$33,831 and recovering +1.2% from this time yesterday. Volatility in the past 24 hours has been a moderate +/- 2.8%.

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.