Are those smoldering embers really out?

Kia ora,

Welcome to Tuesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the international edition from Interest.co.nz.

And today we lead with news that both bond and equity investors are still buying - despite major repricing underway in the giant bond sector. The S&P500 is up today. The UST 10yr benchmark yield is higher too.

But as the embers of last week's bank blaze smolder, investors are assessing where to next. Scepticism that the risk to banks is over, is high. But the weekend unveiling of a new large central bank facility coordinated by the Fed only brought token demand overnight, which is a good sign.

The pressure on some American regional banks remains however (especially First Republic where a second rescue is underway), and investors wonder about the sense of the Swiss concentrating all their risks on one giant global bank.

And although most investment managers think the regulatory actions taken so far will be sufficient, their investments in bank bonds are at serious risk after the Credit Suisse bonds were essentially wiped out. There is now a serious repricing of risk in these bonds underway, and questions about the very future of the US$275 bln market in high-yield bank bonds that are used to underpin bank capital requirements.

However, with the Fed reviewing the situation in its meeting this week, investors seem to now expect a rate hike pause, although +25 bps is still priced in for this Thursday's announcement (NZT). Equity investors aren't shying away from buying.

But in Hong Kong, there was a very sharp sell-off of bank shares, especially those of HSBC which fell more than -6% yesterday. There were also sharp markdowns of other European-based banks overnight.

As widely expected, China kept its key lending rates steady for the seventh straight month at its March fixing late yesterday. The one-year loan prime rate (LPR), which the medium-term lending facility uses for corporate and household loans, was left unchanged at 3.65%; while the five-year rate, a reference for mortgages, was held at 4.3%.

Taiwanese export orders fell for a sixth straight month in February, hurt by both slower Chinese and other global demand. These exports are a bellwether for global tech demand. If there is a positive, it is that the latest fall it is that they shrank at a slower pace in February.

In Germany, producer prices are retreating now and were down less than -4% on an annualised basis, the fifth straight month of decline. Energy prices are keeping overall prices elevated still. On a year-on-year basis they slowed for the fifth straight month to a 17-month low of +15.8% as sharp hikes through September are still echoing in this data.

The German central bank had an improving assessment of the prospects for the German economy in its latest update.

Locally, the most likely impact on the global bank turmoil will be that risk premiums rise for debt funding. Benchmark yields may fall, but those risk premiums are likely to rise, limiting the 'benefit' of lower interest rates.

The UST 10yr yield starts today at 3.49% and up another +5 bps from this time yesterday. 

The price of gold will open today at US$1976/oz and down -US$13 from this time yesterday.

And oil prices start today down another -50 USc from yesterday at just under US$66/bbl in the US. The international Brent price is now just under US$72/bbl.

And we should also note that lithium prices continue to fall sharply, now down almost -50% from their peak in November. This should ease the cost of EVs.

The Kiwi dollar is down -¼c against the USD and now at 62.5 USc. Against the Aussie we are -½c lower at 93.1 AUc. Against the euro we are also -½c lower at 58.3 euro cents. That puts the TWI-5 at 70.5 with a -40 bps retreat.

The bitcoin price is a tad softer today, now at US$27,651 and down -1.1% from this time yesterday. And volatility over the past 24 hours has been moderate at +/-2.4%.

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.