China doubles down on coal production

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 the Evergrande contagion seems to have started.

But first up today we should note that the overnight dairy auction brought no overall change in prices in USD terms, and a small +0.5% gain in NZD terms as there has been a small depreciation in the Kiwi dollar since the last event. This overall result was less than expected. It seems that food isn't really participating in the current rise in commodity prices. (Although we should also note that the price of palm oil has reached a new record high, giving very unfortunate price signals for an industry that does much environmental damage.)

And speaking of economic signals for environment damage, Beijing has ordered its banks to ramp up funding for thermal coal production. Just three days of China's CO2 emissions are more than New Zealand's annual CO2 emissions so by this order they have probably cancelled out any gains we make for the period to 2030. (Interestingly, the renewed focus on building thermal coal reserves does not extend to China buying Australian coal.)

China may be on holiday this week, but dominos seem to be falling in the Evergrange saga. Other property development businesses are missing payments, and some lenders are struggling to control the fallout.

In the US, the LMI that tracks their logistics and supply chain activity, slipped slightly from a very expansionary level. Keeping it elevated are cost metrics. Weighing on it are inventory metrics, but these are interesting. Demand is emptying the supply chain faster, but supply bottlenecks are restraining goods entering it.

The US trade balance for both goods and services worsened in August to a deficit of -US$73.3 bln in the month, taking the annual deficit to -US$817.5 or -3.6% of GDP and up from -3.1% in the same period a year ago. That is a fresh record deficit. 

The latest survey on the activity in their giant services sector supports the view of a fast expansion, coming in both higher than expected and marginally higher than for August. Activity like this may see Q3 GDP estimates revised higher for the US economy.

In Europe, their expansion is coming with very high rises in producer prices. They were up more than +13% in the year to August, the most in a record that extends back to forty years. But it is largely driven by high energy costs.

Other prices are starting to rise and flow though supply chains. Cotton prices are spiking. And courier and freight companies essential in the supply chain are raising rates. The latest is DHL, with a +5.9% increase. They followed FedEx with a similar rise.

Australia reported a record high trade surplus of AU$15 bln for the month for both goods and services. That was half as much again as analysts had expected. Surging natural gas and coal exports were very much stronger than expected.

The UST 10yr yield opens today at just over 1.52% and up +5 bps from this time yesterday. 

The price of gold will start today softer, down -US$9 at US$1760/oz.

And oil prices are up again, up +US$1.50 to just under US$79/bbl in the US, while the international Brent price is just over US$82.50/bbl. These levels are new seven year highs.

The Kiwi dollar opens today marginally firmer at just on 69.7 USc. Against the Australian dollar we are unchanged at 95.6 AUc. Against the euro we firm at 60.1 euro cents. That means our TWI-5 starts today at 73.3, and still in the middle of the 72-74 range of the past eleven months.

The bitcoin price is higher again since this time yesterday, up another +2.9% to be now at US$50,014. Volatility in the past 24 hours has been moderate at just over +/- 2.2%.

And finally, join us at 2pm for the latest update to the Reserve Bank's official cash rate, which is widely expected to rise by +25 bps to 0.50%.

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.