Has the fear of inflation vanished?

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 policy makers no longer seem to fear inflation even as the global economy gears up post-pandemic and commodity shortages loom.

In China, ANZ analysts are pointing out that as much as 40% of the total 'social financing' that supports the expansion of their real economy was in fact borrowers needing more to make interest payments. Given that total social financing rose +13% in 2020 and is slated to rise even further in 2021, their debt-based financing has reached a tricky spot for public policymakers. They can't restrain this 'growth' without undermining loan quality and therefore bank balance sheets and putting their banking sector at risk. They are seeing plenty of room to let this rise by claiming their macro leverage ratio is currently 'stable'. It is certainly something of a global-scale distortion to watch.

In India, they may be getting on top of their pandemic spread and their economy is returning to a more normal state. Vaccination rates are rising fast. But for India, "normal" isn't a helpful term. Consumer confidence isn't high and there remains a lot of industry slack. Inflation, perhaps a localised case of 'stagflation', is embedded and unlikely to go away, meaning their central bank has few opportunities to lower the cost of debt in India. That makes it an expensive place to invest.

Back in China, trading in iron ore futures shows buyers are failing to drive the price lower, as Beijing wants. Yes, it took a small dip a week ago, but has risen since and although it is not quite back to prior levels it certainly hasn't retreated significantly and remains +85% higher than a year ago and +30% higher than at the start of 2021.

If the US and Japan economies rise in 2021 as anticipated, this could put the squeeze on China. It won't then be the dominant buyer of many key commodities and that will likely raise prices further, itself an inflation-fuelling event.

In fact, analysts are now seeing key commodities like copper with huge price upsides. Miners are reluctant to bring on more capacity due to being restrained by regulation, and being burned the last time they did that through an oversupply rush. For them, a better strategy is to ride what they thing is a new "supercycle". Similar industry tracks are in place for lithium. If it turns out like that, it will be inflationary - the age of product deflation may be ending.

In the US, the Fed has announced that its looser capital requirements for banks during the pandemic will expire at the end of this month, a signal that they expect the US economy to speed out of its COVID funk. The Fed is different on this side of the pandemic, with no fear of inflation and is an unusual beast to read because of that lack of fear.

We keep an eye on the food security situation in China a lot for its obvious implication for New Zealand's agri-food industries. But we should also note the extended long-term drought conditions in the US, especially in the Western states. This too will have a global impact on food supplies and prices.

In Canada, their recovery is mixed at best. Their retail sales are still shrinking on a month-on-month basis, even if they are up a minor +1.3% above the pre-pandemic level a year ago in February 2020. Those year-on-year gains are shrinking however.

We should also note that Turkey is in a financial crisis again. Inflation is running at a high +18% and their government has burned through most of its reserves trying to keep their currency at their target level while keeping interest rates below the inflation rate. It is not sustainable and their central bank raised its policy rate to 19% a few days ago. That had their autocratic president fuming, so he has fired the central bank chief, replacing him with a professor who favours low interest rates in the interests of 'stability'. The Turkish currency is consequently under very heavy devaluation pressure, now worth 14c and down from 28c five years ago. It is sure to go lower.

The latest UN World Happiness Report for the pandemic-dominated 2020 sees New Zealand unchanged at 9th in the world. Australia slipped one place to 12th. The US improved five places to 14th. The UK slipped one place to 18th. Interestingly, Sweden improved one place to sixth.

The UST 10yr yield is unchanged from Saturday at just on 1.73% and a rise of +9 bps in a week to a 15 month high. 

The price of gold starts today up +US$2 in New York at US$1745/oz.

Oil prices are holding at just under US$61.50/bbl in the US, while the international price is now just under US$64.50/bbl.

The Kiwi dollar opens today at over 71.6 USc and marginally softer. Against the Australian dollar we are holding at 92.6 AUc. Against the euro we are also little-changed at 60.2 euro cents. That means our TWI-5 opens today at 73.8 and slightly lower compared to where it was a week ago.

The bitcoin price will start today at US$57,340 and down -2.6% from this time Saturday. That is also below where it was this time last week. Volatility in the past 24 hours has been high at +/- 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. We will do this again tomorrow.