Hackers strike again; China funds to flow

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 the Russians and Chinese are coming.

But first, it is a public holiday in the US, Independence Day, with everything there essentially closed until Wednesday (NZT).

China is also essentially 'closed' as they take time out to celebrate the anniversary of the CCP, and fawning over Chairman Xi.

Taking advantage of the holidays have been a ransomware group, who launched a massive strike over the weekend, affecting thousands of organisations worldwide, including in New Zealand. No-one actually knows where this threat originates from, but they are thought to be based in Russia because the group does not target Russian organisations, nor those in former Soviet-bloc countries. Nor China.

We can use this break to note that our investment portfolios are likely to have a growing portion of Chinese debt investments in them as China gets more comfortable about its financial market opening-up. Benchmark Chinese debt still has relatively high yields (their Govt 10 yr yields 3.11% today), giving it an attraction to many fund managers, with the added prospect of large capital gains ahead as it reverts to much lower global yields. At the same time, China is keen for its domestic investors to go international. That is because without a two-way flow their currency would very likely strengthen sharply. Sharper funds outflows from China may be a feature of the post-COVID investment scene.

In the US, non-farm payrolls beat most expectations, rising +850,000 in June from May when a +700,000 rise was expected and the May rise was a revised-up +583,000. But as regular readers will know, these are seasonally adjusted numbers. The raw number has been far more favourable in the prior two months, basically gaining +1 mln each month with payrolls rising from 143.3 mln in March to 144.4 mln in April to 145.4 mln in May. In June they actually rose to 146.5 mln, another gain of +1.1 mln. These are all far better than the statistically adjusted levels. In a year, US non-farm payrolls have risen more than +8 mln. However, compared to June 2019 they are still more than -5 mln lower. So while recent trends may actually be better than generally reported, they still have a very long way to go to recover the pandemic losses. It is this overall gap that has bond investors thinking the US Fed is probably a long way off raising their policy rate, further away than what analysts had previously assumed.

US factory orders in May also came in better than expected with a +1.7% rise vs a -0.1% slip in April.

Canadian building permit data wasn't so positive. After four consecutive months of reaching new highs, the total value of building permits dropped an unexpected -15% in May. Every component was down, with multi-family dwellings in Toronto accounting for almost 60% of the overall national decline.

Internationally, we got CPI data from South Korea and India late last week. The South Korean index was essentially unchanged in June but remains well above their central bank's 2% target at 2.4% pa. In India, price data was for May and it was up over +6% pa with the drivers being much more than lockdown-related.

In Australia, bank mortgage lending to investors hit a six year high in May, up a startling +13% from April, and up +90% above May 2019 (May 2020 was pandemic affected). This is its strongest rise in six years. Falling vacancy rates and improvements in their labour market (which generally leads to more demand for rental property) are both green-light signs for investors. Overall housing lending was up +4.9% in May from April, and up +97% from May 2019.

Staying in Australia, their energy regulator reported that wholesale electricity prices fell below zero a record 3662 times last year as solar power generation surged, threatening the profitability of coal power plants. (see page 9) This situation also drove fast-tracked new rules to prevent wind and solar generators deciding to switch off to curb losses.

The Baltic Dry index ended last week at 3285 and its highest weekly close since May 2010. The iron ore price continues to defy Beijing, holding its high level this week. Ditto metallurgical coal. However, Beijing is successful depressing the prices of other semi-precious metals. Corn prices are remaining high but prices for rice and soybean are slipping.

The UST 10yr yield starts today at 1.43% and down -11 bps in a week. 

The price of gold is now at US$1787/oz which is down -US$4/oz from this time Saturday and unchanged in a week.

Oil prices unchanged. In the US they are still at just under US$75/bbl, while the international Brent price is still just on US$76/bbl. However at these levels they now exceed the 2018 peak and are back to 2014 levels.

The Kiwi dollar opens today just on 70.3 and holding its Saturday rise. But compared with this time last week this is still -40 bps lower. Against the Australian dollar we are little-changed at 93.5 AUc. Against the euro we are unchanged at 59.3 euro cents. That means our TWI-5 starts today unchanged at 73 but -50 bps lower than this time last week.

The bitcoin price is now at US$35,546 and up a sharp +6.4% from this time Saturday. Volatility in the past 24 hours has been a moderate +/- 2.1%.

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 tomorrow.