NZ backs Australia in China dispute

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 New Zealand is backing Australia in its dispute with China over arbitrary tariffs on barley.

But first, the US dollar is falling against a resurgent Chinese yuan, dipping to 6.37 to the US dollar now and back to levels last seen three years ago. The appreciation of the yuan will suppress their trade surpluses but it will also suppress inflationary impulses building quickly in the Chinese economy. To combat the natural instinct to import more, Beijing may have to adjust its opaque border and customs policies if the rush gets too unseemly, but that will be done secretly given its public commitment to its international trade and tariff agreements, including the one with New Zealand.

Exporters in Guangdong province are facing a new threat. Not only is a rising yuan trouble for them, rising material costs are too, as are shipping costs, and now they face electricity rationing. Demand exceeds supply because many new projects have failed to get started in the region and that may mean more coal-fired production.

And so far, we are not seeing the price of key industrial commodities like iron ore or coal falling in price after last weekend's warnings from Beijing. However, shipping costs are easing.

Flooding in the Yangtze River basin is an annual threat, but like last year, this year is also shaping up to be especially damaging. Almost 100 rivers have already exceeded flood warning levels. This too will have food price implications.

Australia is moving ahead with its dispute with China over the Middle Kingdom's imposition of sudden tariffs on a number of commodities, including barley. The WTO case against China is underway, and a twelve countries have joined in the action, including New Zealand. China is in the box seat of course because it will take more than three years to resolve and even if China loses, it will have extracted a price on Australia just from the delay. And China will always appeal a loss. Meanwhile, Australia is also about to launch a WTO action against China over wine restrictions.

Rural conditions are amazingly friendly in Australia again this year, with huge harvests reported, and at a time other major cereal producers are struggling. Australia has the extra production China needs, but Chinese sensitivities mean it will be sold elsewhere and China will pick up higher cost supplies from others.

In South Korea, they have raised their 2021 growth forecast to +4% as trade, investment, consumption and employment all recover faster than was earlier expected.

In India, their monsoon is about to start. This is a huge event for world grain security. Last year’s monsoon rain was +9% higher than normal, and it was +10% more than the long-term average in 2019. Last year's good rains helped crops and boosted India’s food grain output to a record in 2020-21.

It is Memorial Day in the US so their working week including Wall Street won't start until Wednesday our time.

Over the weekend they announced that household personal income fell by less than expected in April as pandemic support started to be withdrawn from households. Personal spending was unaffected by that pullback, rising the expected +0.5% as their jobs market picked up strongly and covered the transition.

However most economic interest in this data was on the PCE number for April, the inflation measure the Fed is reportedly more focused on for policy reasons than the CPI. It was up +3.6%. That was lower than the March level which was revised up to +4.7% (The April CPI was +4.2%.)

In the industrial heartland of America, the latest Chicago PMI paints a buoyant picture, reaching its highest level since November 1973. 

The latest American consumer sentiment survey keeps the level unchanged from their mid-month reading, but down from April. Overall sentiment is much improved since January, but is still not back to pre-pandemic levels.

The new US Administration has launched its Budget with projections of spending and deficits out to 2035. The numbers are very large. It's been called a spending surge, but actually in 2020 and 2021 US Government spending ran at 32% of GDP whereas this budget takes it back to about 24%. What will be rising are taxes, from 16% of GDP to just under 20%. Both are still low by international standards. (New Zealand runs at 33%, and we are mid-pack.)

There is criticism, some of it partisan. Maybe because it includes a massive +US$13 bln extra for the IRS for increased oversight of high income and corporate tax returns to ensure compliance; provide new and improved online tools. Others say the massive extra 'recovery stimulus' is unnecessary and adds new inflation risks.

The US budget deficits are expected to run at about -US$1.4 tln per year over that period and that is about -5.6% of US GDP, falling to under -4.6% by 2027. For perspective, the New Zealand budget deficits are expected to run at -4.5% of GDP this year and -5.2% next year. 

The UST 10yr yield starts today unchanged at 1.58%. 

The price of gold starts today up at US$1904/oz, a gain of +US$2 since this time Saturday. Over the past week, the gold price has risen +US$26 or +1.4%.

Oil prices start today little-changed at just over US$66.50/bbl in the US, while the international Brent price is just under US$69/bbl.

The Kiwi dollar opens today at 72.5 USc and almost a -½c retreat most of which happened on Friday. Against the Australian dollar we are still down at 94.1 AUc. Against the euro we are holding at 59.5 euro cents. That means our TWI-5 starts today at 74.1 which while lower is above week-ago levels.

The bitcoin price is now at US$35,876 a+1.6% rise from this time Saturday. Volatility in the past 24 hours has still been very high again at +/- 4.6%. And in Australia, their tax authorities are warning 300,000 taxpayers their have identified who trade in cryptos that they must report the results of this activity.

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.