Investors turn wary about what lies ahead

Kia ora,

Welcome to Thursday'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 steady rise in the US economy continues.

But investors seem ambivalent about the progress, and are not convinced the inflationary pressures will last and result in higher interest rates.

The US Fed has released its latest update of economic conditions across all its regions in its Beige Book. Their overall economy was said to be expanding at a faster rate than a month ago, and now at a "moderate pace". This was helped by increased vaccination rates and relaxed social distancing measures, while they also noted the adverse impacts of supply chain disruptions.

Selling prices rose moderately they said, while input costs rose more briskly. Continuing supply chain disruptions intensified cost pressures. Strong demand, however, allowed some businesses, particularly manufacturers, builders, and freight companies, to pass through much of the cost increases to their customers. Looking forward, the survey did see more cost increases and higher prices in coming months.

Meanwhile, Fed speakers are floating the idea that tapering is on its agenda.

The steady decrease in US mortgage applications continued last week, and it is becoming quite the trend. And it is not due to mortgage rates rising recently. It is "rapidly rising home prices" that are holding back buyers, apparently. Fear of a sudden house price correction looms large in the US.

In China, hopes that iron ore prices will rend lower seem to be in vain. Coal prices are staying high as well, and there is new demand for thermal coal.

This is China's rainy season and flooding is severe in many parts, especially in the Yangtze and Pearl River basins.

Retail sales levels in Germany took an unexpectedly large turn lower in April. A -2% fall was expected from March in the seasonal pattern. But the actual fall was -5.5%. True, March was strong and was revised higher, but still, this April result has been a head-turner.

The Australian GDP result for Q1-2021 was a good one. Their economy is transitioning strongly from recovery to expansion, supported by still-high levels of fiscal and monetary stimulus. GDP is now +1.1% above pre-pandemic levels. The strength is consistent with the ongoing improvement in their labour markets, while leading indicators point to further strength over the coming year. (The New Zealand GDP result for the same period will not be released until Thursday in two weeks.)

And the Victorian lockdown has been extended for another week. And now risks are growing in southern coastal NSW.

The OECD is reporting that inflation among its members jumped to +3.3% in April, and that is the highest rate since 2008.

And the ILO says the labour market crisis created by the pandemic is far from over, and employment growth will be insufficient to make up for the losses suffered until at least 2023.

Wall Street opened today's session strongly again but like yesterday all those gains have slipped away by early afternoon trade. European markets closed about +0.4% higher. Yesterday, Tokyo closed yesterday +0.5% higher, Hong Kong closed -0.6% lower and Shanghai closed down -0.8%. The ASX200 ended its session up +1.1% but the NZX50 Capital Index ended down -0.2%.

The UST 10yr yield starts today down -3 bps at 1.59% as the 10-year break-even rate, a key measure of inflation expectations, has slipped in recent days, stirring debate over whether it has finally peaked after this year’s near-relentless climb. 

The price of gold starts today at US$1908/oz, a bounce-back of +US$6 from this time yesterday.

Oil prices start today another +US$1 firmer at just over US$68.50/bbl in the US, while the international Brent price is now just over US$71/bbl, and that is a two year high.

The Kiwi dollar opens today at 72.3 USc and another small softening overnight. Against the Australian dollar we are down to 93.3 AUc. Against the euro we are slightly softer at 59.2 euro cents. That means our TWI-5 starts today at 73.8.

The bitcoin price is now at US$38,001 and a large +5.1% jump from this time yesterday. Volatility in the past 24 hours has still been high again at +/- 3.4%.

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.