Eyes on Victoria and a new lockdown

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 bumpy road to recovery is getting stressed in Australia.

In Melbourne, health authorities and Victoria’s cabinet were in crisis meetings last night regarding whether to impose a new lockdown as they raced to contain a ballooning coronavirus outbreak. They are making a decision today, but if they get this wrong, these past two days could be the time a wider spread takes hold. A lot is riding on this delay. A new full lockdown is the likely result, throwing the pandemic recovery there into reverse.

In the US mortgage applications fell again last week, a decrease that was larger than the usual small gains and drops over the past few months.

Bond yields slipped slightly in the US as investors piled in to a big US$72.8 bln 5 year UST bond auction, offering US$152 bln for the US$61 bln that the US Fed didn't take. The median yield was 0.74% which was lower than the 0.80% achieved at the prior equivalent event. 

In China, Beijing seems to be digging in on its effort to clean up their debt market exposures. Defaults of Chinese onshore bonds reached ¥61 bln in the March quarter, up +18% from the same period last year. And now earlier signals that it will allow defaults among China’s heavily indebted local government financing vehicles (LGFVs) for the first time is causing jitters in financial markets. Bond yields are rising except for Beijing's own issues

Over the years, these financing platforms have contributed to a sharp rise in off-budget local government borrowing, which Beijing is now seeking to control. In 2018 it was estimated this “hidden debt” to be worth between ¥30 tln and ¥40 tln and it will be very much more now. Much of the LFGV borrowing is not recorded and transparency about how the funds are used is weak. There is probably more than NZ$10 tln on issue or as much as 50% of Chinese annual GDP.

Basically, China is struggling to suppress its bubbles in an economy awash with money and debt.

Inflation also has the attention of the Beijing senior leadership with more promises of action to stem the rising level of producer prices. There is some impact in the past few days for commodities like iron ore and coal, but prices are only back to where they were a week or month ago. And regulators have stopped efforts by banks to sell commodity-tied derivatives to retail investors. But for food commodities, that impact is yet to be seen for corn, soybean or rice.

Maybe the weather has something to do with that. This time last year, we were reporting major flooding in China, and the damage then was quite significant and certainly more than they are used to in their rainy season. The rains are back this year and early signs suggest they could be in for another extra heavy flood season.

The UST 10yr yield starts today +2 bps higher at 1.58%. 

The price of gold starts today up at US$1893/oz, a dip of -US$6 today.

Oil prices start today marginally firmer at just over US$66/bbl in the US, while the international Brent price is just over US$68.50/bbl.

The Kiwi dollar opens today +½c firmer at 72.8 USc and pushed up after the RBNZ suggested the OCR may be raised sooner than previously indicated. Against the Australian dollar we are up at 94.1 AUc. Against the euro we are up at 59.8 euro cents. That means our TWI-5 starts today at 74.4.

The bitcoin price is now at US$38,905 and +2.6% higher than this time yesterday. However, volatility in the past 24 hours has still been very high at +/- 4.9%.

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.