China facing big challenges

Kia ora,

Welcome to Tuesday'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 China is facing some substantial challenges.

China is in a tough spot with its currency. Too much foreign currency has built up domestically in their banks and their official reserves are high too. Previous attempts to use this funding for international investment has failed because the projects they invested in turned out to be largely poor investments. This build-up is putting hard upward pressure on the yuan exchange rate. These private reserves now exceed US$1.1 tln and growing fast (+35% in a year) and the public ones are a similar level (and fairly stable).

China is still in its week-long CCP anniversary celebration. But their PMI reports are not really helping the mood (nor would, if anyone was noticing). The private services PMI is recording a sharpish turn away from expansion to just a steady state and its tamest result for a year, just barely expanding now. That is much more of a pull-back than what the official services PMI recorded. An under-reported pandemic spread there may be the cause.

Japan's services PMI is actually contracting, but noticeably less now as they are getting to live with the latest pandemic outbreak.

There was a services PMI out in Australia too. There, service sector activity expanded at a healthy level in June even if it wasn't as strong as recently. It was affected by the lockdown in Victoria that extended into June. Nonetheless, overall expectations remained positive alongside hiring activities, although some firms highlighted issues related to a shortage of labour. Pricing pressures however accelerating at a record rate in June.

After a record high in April, Australian building permit levels fell sharply back in May, driven by a -10% fall in approvals for private sector houses. 

Aussie job ad data also softened in June, but it is still at far higher than the pre-pandemic levels.

Singapore retail sales recorded a disappointing result, even though this was only May data. Sales fell more than expected from April, and their retail sales index is still -13% lower than for May 2019.

And staying with May data, the OECD is reporting that CPI inflation rose to 3.8% pa in their member countries, driven by energy prices, and largely influenced by the +5% rise in the US.

The US is still on holiday, so no economic news from there. However in Canada, their widely watched business outlook survey continued to rise and reached its highest level on record, suggesting that positive business sentiment is broadening. But some of this is probably just a relief rally. A companion consumer sentiment survey is also bullish, with expectations for spending growth near a survey high, likely reflecting pent-up demand. Some respondents say they plan to spend part of the savings they have built up over the past 16 months. Older Canadians are cautious, younger ones relieved. One interesting aspect of this survey is that most people say they would like to work remotely after the pandemic. This will have big implications for housing preferences, demand for office space and public transport.

The UST 10yr yield starts today at 1.43% and unchanged while the US is on holiday. 

The price of gold is now at US$1792/oz which is up +US$5/oz from this time yesterday.

Oil prices higher by +US$1. In the US they are now just under US$76/bbl, while the international Brent price is now just under US$77/bbl. OPEC has so far been unable to agree on raised production quotas.

The Kiwi dollar opens today just on 70.2 USc and marginally lower than this time yesterday. Against the Australian dollar we are soft too at 93.3 AUc. Against the euro we are little-changed at 59.2 euro cents. That means our TWI-5 starts today down slightly at 72.9.

The bitcoin price is now at US$33,397 and down a sharp -6.0% from this time yesterday. Volatility in the past 24 hours has been a very high +/- 4.2%.

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.