US and EU expand fast; China disappoints

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 the OECD's global minimum tax deal is now much closer.

But first in the US, last week's initial jobless claims report was a positive one with 359,000 added in the week, well lower than what was expected and a post pandemic low. However there are still 3.4 mln people on these benefits and until this level gets down to under 2 mln, it won't be back to pre-pandemic levels. They are getting there, but slowly now, with job cuts announced in June at a very low level and now at a 21 year low. All eyes now turn to tomorrow's US non-farm payrolls report and a +700,000 gain expected.

Around the world, there was a solid upturn in global manufacturing extending but stretched supply chains are driving up costs nearly everywhere. The dominant driver of this expansion is in the US where they recorded their equal fastest expansion ever in the Markit survey, and a minor pullback from very high levels in their ISM survey. Both surveys recorded strong order intakes and very elevated cost pressures. Both reported labour shortages.

In Europe, they set a new record high factory PMI, driven in large part by Germany - but many other large countries are doing very well too, including Italy, France, the UK and Spain.

In China, the Caixin PMI dropped back last month and adds to signs from the official PMI released yesterday that momentum in industry is waning. The surveys point to a levelling off in demand and easing of price pressures, even as supply shortages continue to constrain output. This was a larger decline than the fall in the official survey released yesterday. The average of the two continues to point to a timid expansion in industry, now at its lowest since February.

Japan's business confidence survey has hit its highest since 2018. But like China, Japan's factory expansion continues at a more modest pace too, but it is still much faster than in China. Ditto for South Korea and Taiwan. And even Australia. (An alternate Aussie report records a record expansion.) All of them report supply-chain pressures but cost pressures are not as pronounced as in the US or Europe.

Australia's trade balance for both goods and services was AU$9.8 bln in May and has been in surplus for 41 consecutive months, from the start of 2018. The annual surplus has swelled from +AU$23 bln for 2018 to +AU$74 bln for 2020 - with rising commodity prices the key driver of the improvement. Their trade surplus is expected to widen further in Q2 2021 on still higher commodity prices.

Australian dwelling values rose +1.9% in June from May, taking annual growth to +13.5%. This was led by houses, which rose +15.6% over the year, compared to a +6.8% lift in unit values. 

Internationally, 130 countries have endorsed setting a minimum 15% tax rate for global companies. It is a deal that could start in 2023. Two holdouts are low-tax jurisdictions like Ireland and Hungary, but China, India and Turkey who were thought to be sceptical have now signed on.

Bank in Washington, a return of an old problem is about to emerge. During the pandemic the debt ceiling law was suspended. But at the end of July it is reinstated and that means US federal debt becomes a political football again.

The UST 10yr yield starts today at 1.48% and back up +3 bps. 

The price of gold is now at US$1774/oz which is up +US$5/oz from this time yesterday.

Oil prices are up +US$1 today. In the US they are now at just on US$74.50/bbl, while the international Brent price is still just on US$75.50/bbl.

The Kiwi dollar opens today just on 69.7 USc and a -¼c softer since this time yesterday. Against the Australian dollar we are firmish from yesterday at 93.4 AUc. Against the euro we are little-changed at 58.8 euro cents. That means our TWI-5 starts today unchanged at 72.6.

The bitcoin price is now at US$33,505 and down another -3.5% from this time yesterday. Volatility in the past 24 hours has remained high at +/- 3.3%.

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.