All eyes on China

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 everyone is struggling to understand how the China virus impacts will play out.

China's financial markets may re-open later today. But their industry probable won't as firms stay shuttered after the week-long Spring Festival that has been upended by the virus emergency. And that will have a huge knock-on impact, to not only China's economy, but just about everywhere else.

A financial market re-opening may bring a sharp sell-off, although Beijing will be pulling SOE strings hard to mitigate or prevent that. However, the cost of any Beijing ‘put’ will be very high.

The impact on the New Zealand economy is getting some attention from economic analysts, and generally they see a mild -0.1% or -0.2% dent to our economic growth. All use 2003 SARSs as a benchmark, and all cover their estimates with caveats. But given China's central place in the world economy, much will hinge on what happens this coming week and whether some semblance of normality returns there after China's holiday. At this stage, the biggest local industry to be impacted earliest, will be tourism. But Fonterra is reportedly stockpiling product. And meat works are turning away livestock for processing. The cost of some foods might drop sharply locally as some short shelf-life product is quit.

China's isolation by increasing numbers of countries is gathering momentum. And that isolation is in all sorts of ways: India has banned exports of masks and protective clothing. And China has also now reported cases of the deadly bird flu virus, also in Hubei province. But no humans are affected by that so far.

Other than its full mobilisation to fight the virus, their financial authorities also announced an unspecified but massive program of state support to steady the economy and help firms that will be under immediate stress. It includes a NZ$270 bln of liquidity support for financial markets, but only NZ$33 bln on a net extra basis.

And another current indicator is generating a warning. The Baltic Dry Index is now at well under 500 after being at 1500 in mid December. And it fell even lower in some specialised markets for ore carriers.

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Wall Street fell sharply at the end of their Friday session as investors came to grips with both the economic fallout from the China virus, and also their realisation that they have been too optimistic on the prospects of the US economy. The recent momentum shift lower isn't passing and the China situation will only add to the speed of the decline.

The S&P500 was down a sharp -1.8% and more than a -2% loss for the week.

While US personal spending is holding, personal income growth is slipping. For the full year disposable personal incomes were up +4.4%, but only up +3.2% in Q4-2020 as taxes rose +5.2% pa. The US "tax cut" program is biting now for most, as the benefits all went to the wealthy. Meanwhile consumers are spending as before, ignoring the rising tax take. Personal saving, which had been strong earlier, turned negative in Q4, and unusual American situation.

This blindness to the turning incomes and saving is reflected in another consumer sentiment survey which has it still near its cyclical peak.

Things are a bit more realistic in the latest Chicago Purchasing Manager's survey, where sentiment in this factory heartland fell sharply. It is now at its lowest level in more than four years and that benchmark four years ago was a brief outlier. The current depressing trend has been building for all of 2019 however. Worse, it is being led by sharp drops in new orders. Boeing's woes aren't helping.

North of the border, Canada reported its Q4 GDP growth at +1.5% in November, a small rise from October.

In Europe, the 28 countries of the EU had economic growth at a six year low in 2019, up just +1.1% in the year.

In Australia, their Government has abandoned their operating surplus target, after having [falsely] claimed they were already were in surplus. Support for climate remediation and disaster support, and the China virus fallout, now means their economy will take a "significant hit".

The UST 10yr yield will start today at just under 1.51% and that means over the past week it has declined -19 bps and that is on top or the prior week's -16 bps drop. 

Gold is up to US$1,589/oz as risk perceptions rise. And this is despite data from the World Gold Council that shows that for a second quarter in a row, supply far exceeded demand as both India and China turn away from the yellow metal. Speculation is now gold's game.

US oil prices are still falling, down to US$51.50/bbl and that is a -US$3 drop in a week. Sinking global economic demand is behind the sharp drop. Since the start of 2020, that is more than a -US$10.bbl dive, or -17% and very close to a bear market in crude oil. The Brent benchmark is down even more to just under US$56.50/bbl.

The Kiwi dollar fell -2.3% last week and will start this week at 64.6 USc as China-exposed currencies take a knock. On the cross rates we are holding at 96.6 AUc. Against the euro we are also much lower for the week at 58.3 euro cents. The net of these shifts reduces our TWI-5 to 69.9 and that is the first time below 70 this year.

Bitcoin is a little higher from where we left it on Saturday, up +2% at US$9,428.

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

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