China's property contagion at a key point

Kia ora,

Welcome to Tuesday'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 all eyes are on China's bond markets today.

But first, it is Columbus Day in the US, a Federal holiday but not one observed everywhere and markets are operating on a subdued basis.

They have had time to reflect on the 'disappointing' non-farm payrolls report and are coming to the conclusion it wasn't as bad as the headline number suggested. That revision has markets with more conviction the Fed is still on its tapering path.

And in turn, some key commodity prices are rising today. Crude oil is up to a seven year high, and aluminium prices are now at a 13 year high. Even chocolate prices are rising fast again.

In Japan, their machine tool orders for September came in very strong, up +79% from the same month a year ago, and up +46% from September 2019. By any measure this is a strong pandemic recovery and indicates the world's factories are investing in new equipment. In fact, apart from the peak at the end of 2018/early 2019, this is back at an historically high level and augers well for Japanese technology firms.

In China, bond yields are rising fast, even infecting the yields on official Beijing bonds. Driving the ruckus are property firms with it now clear Evergrande will miss a third round of bond payments and almost certainly go into default when the grace periods expire. The Fantasia problems are mounting. Now Modern Land and Sinic have become the latest to scramble to delay bond payment deadlines. As you might expect, none of this is playing out in Chinese media - even the Hong Kong media is ignoring the pressures. But investors know the risks are rising and sharply bidding up bond yields (bond prices are falling, even for Chinese government bonds).

And now, suddenly falling house prices are getting some cities to spruik housing again to prevent a run. Distressed developers quitting inventory is very unstable.

And we should keep an eye on seasonal flooding in China, especially in the Yellow River basin where local reports talk about peaks "that have not been encountered in many years".

The 2021 Nobel Prize for economics has been won by three US-based economists who have developed 'natural experiment' techniques that have spread to other sciences. One labour market economist showed why minimum wage increases in fact hardly ever seem to lead to job losses (among a large body of work recognised). The others pioneered how rigorous conclusions can be extracted from social research.

The UST 10yr yield opens today at just over 1.61% and very little-changed while the Americans are on a partial holiday. 

The price of gold will start today little-changed again at US$1756/oz.

And oil prices are up another +US$1.50 in an extended firming trend to just over US$80.50/bbl in the US, while the international Brent price is upd at US$83.50/bbl.

The Kiwi dollar opens today just a little firmer at just on 69.5 USc. Against the Australian dollar we have softened to 94.4 AUc. Against the euro we marginally firmer at 60.1 euro cents. That means our TWI-5 starts today just slightly firmer at just on 73.2, but still right in the middle of the 72-74 range of the past eleven months. 

The bitcoin price is higher again than this time yesterday, up +13.8% to be now at US$57,347. In NZ dollars, it is back over $80,000 and its highest since April 2021. Volatility over the past 24 hours has been high at just over +/-3.1%.

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.