Inflation risk dawns on equity investors

Kia ora,

Welcome to Wednesday'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 equity market investors are waking up to the risk inflation will have to asset values.

But first in the US, there was more evidence overnight of a strong jobs market with job openings reaching an all-time high in the latest March data. There is a growing a gap between open positions and workers willing and able to take those roles.

Perhaps a reflection of the much better jobs situation, Americans are paying off their credit cards at the fastest rates in years.

But their Federal government isn't following suit. There was another very large UST debt auction overnight, this time for their 3yr note. It was well supported raising US$89 bln from the $171 bln bid. The Fed was allocated US$31 bln of it. The median yield was 0.3% pa and that compares to the 0.35% at the prior equivalent event.

US retail sales in early May are still showing positive gains on a year-on-year basis, good ones month-on-month.

In Germany, economic sentiment among businesses improved markedly, reaching its highest level since 2000. That is not to say current conditions are great, but the expectation they will improve sharply as the pandemic fades there, is strong.

In an eagerly awaited release, the official 2020 Census data was revealed for China yesterday, claiming a population of 1.412 bln, and a tiny rise from the 1.4 bln in 2019. Others suspect it actually declined. In any event, it is a turning point for their population. Their fertility rate dropped sharply in 2020, -22% lower than in 2019. Only 12 mln babies were born in 2020, down from 14.7 mln in 2019. Men outnumber women by an even larger margin. And only 63.4% of their population is now of working age, down from over 70% ten years ago. Now 91% of the country is Han Chinese with minority communities (Tibet, Uighur, etc) shrinking as they are swamped and marginalised. Their overall median age is now 38.4 years. (For perspective, New Zealand's working age population represents 65.3% of the total population. Our median age is 37.6 years. New Zealand is a younger place.)

China's producer prices jumped again in April, up a fat +6.8% year-on-year and a big rise from the March rise of +4.4% pa. In the past, the flow-through to consumer prices wasn't that strong. But this time it is expected to be more direct. However, April consumer prices aren't yet showing that impact, with them up just +0.9% year-on-year. But watch out for the flow-on impact over the next few months, something that could have a global impact.

The expectation of an impending sharp rise in inflation is behind today's sharp equity market retreats as markets start to realise rising yields will mean lower asset valuations.

Meanwhile, China is still trying to hurt Australia with trade retaliation. Some Chinese LNG importers have apparently been told informally by Beijing to avoid buying Australian cargoes, posing a potential threat to Australia’s huge export trade in this fossil fuel.

In Australia, their 2021/22 Budget was released overnight and it is aggressively expansionary. It ratchets up a lot more Federal spending than expected, risking an overheat situation, and possibly earlier RBA rate hikes than currently anticipated. This is an 'election budget' even though an election isn't anticipated until about May 2022. There is a lot of new spending, especially for aged care, NDIS (their ACC), mental health, the extension of the business tax write-off concessions. A consequence is that their fiscal deficit won't improve as was expected and deficits will remain large. The credit rating agencies might have some concerns as net debt-to-GDP will now rise for the next five years when they were expecting it to fall.

The UST 10yr yield starts today at 1.62% and back up +2 bps from this time yesterday. 

The price of gold starts today at US$1835/oz and that is down -US$2 since this time yesterday.

Oil prices start today still at just over US$65/bbl in the US, while the international Brent price is just under US$68.50/bbl. Neither are big movements either way.

The Kiwi dollar opens today at 72.7 USc and a little lower overnight. Against the Australian dollar we are little-changed at 92.7 AUc. Against the euro we are lower at 59.8 euro cents. That means our TWI-5 starts today at 74.

The bitcoin price is now at US$56,465 and -0.9% lower than this time yesterday. Volatility in the past 24 hours has been a high +/- 3.5%.

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.