Equities higher, but economies lower

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.

If you are one of the many new listeners who have joined us recently, welcome – we appreciate your company.

Today we lead with news promises of ever more stimulus are still motivating equity markets.

But first up today there was another dairy auction and this one was positive, up +1.8% from the prior auction and the most since the start of the year. In New Zealand dollars, prices are virtually unchanged. Volumes sold are rising. WMP (+2.2%) and SMP (+3.1%) led the way. But this auction's positive outcome is unlikely to change any farm gate milk price forecast. But at least it is a positive way to end the 2019/20 milk season.

In the US, the bounce-back of retail sales in May from April was a bit better than expected, but it still leaves them a whopping -6.1% lower than for May 2019 and that is a loss of trading revenue of -$42 bln on top of the April decline of -$99 bln. It is a sharp retreat, causing an earthquake in American retail sales and the industries that support them - like commercial property.

The latest Johnson Redbook weekly retail sales report shows June sales down -2.4% from last week and down -8.3% year-on-year.

It is a similar story for American industrial production - a small +1.4% bounceback in May from a sharp April drop, but leaving the year-on-year result more than -15% lower. Production of business equipment was down -27% year-on-year.

The effect on the real economy is large and banks are not escaping the impact. Profits of American banks are down -70% in the March quarter compared with Q4-2019, and more than -20% lower than a year ago. The review covers 5116 American banks and 373 of them are now posting losses. It is certain that the Q2-2020 results will be much worse.

More stimulus is coming. The US Administration is preparing a US$1 tln infrastructure package focused on transportation projects in an effort to get some momentum back.

The equity markets like stimulus, and the S&P500 is up +2% so far in mid-day trade. That follows even greater rises in Europe overnight that most exceeded +3%. Yesterday, Shanghai rose +1.5%, Hong Kong was up +2.4% and Tokyo led them all, up almost +5%.

Border tensions between India and China have turned violent, with the two sides clashing in a disputed area in the Himalayan Mountains, leaving 20 Indian soldiers dead. The leadership of both countries don't exude confidence that this will be de-escalated soon.

Retail sales in Indonesia fell very sharply in April, and are likely to be even lower in May.

In Australia, there are now more people being hired than there are being fired according to the latest payroll data, but the unemployment rate is likely to rise when their official figures are released tomorrow. Analysts expect their May jobless level to have risen to 7% and up from 6.2% in April.

And the release of the latest RBA minutes reveals uneasiness about how equity and asset valuations are rising as the economic fundamentals deteriorate.

The latest compilation of Covid-19 data is here. The global tally is now 8,084,400 which is up +118,000 in a day and a similar rising pace. Global deaths now exceed 438,000. Beijing city has raised its coronavirus emergency level, shut schools, and imposed travel curbs as coronavirus cases mount to over +25 per day. They are testing 70,000 people per day now.

Just over 26% of all cases globally are in the US, which is up +20,000 since this time yesterday to 2,123,100. A half of that increase is in four Sun States. US deaths now exceed 117,000.

In Australia, there have been 7347 cases (+12 since yesterday), 102 deaths (unchanged) and a recovery rate of just over 93% (rising). 17 people are in hospital there (unchanged) with 3 in ICU (-1). There are now 389 active cases in Australia (+7).

The UST 10yr yield is up +4 bps from yesterday at 0.75%. 

The gold price is little-changed today, up +US$2 to US$1,728/oz.

Oil prices are firmer again today, up by +US$1.50. They are now just under US$38.50/bbl in the US. The Brent price is just under US$41/bbl.

The Kiwi dollar is marginally softer this morning at 64.5 USc. On the cross rates we are little-changed at 93.6 AUc. Against the euro we are also unchanged at 57.2 euro cents. That means our TWI-5 is marginally lower at 69.2.

The bitcoin price is still in its quiet phase, firmer by less than +1% at US$9,464 today.

You can find links to the articles mentioned today in our show notes.

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