China to join US in running a massive budget deficit

Kia ora,

Welcome to Thursday'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 China is about to join the US and Japan in running massive budget deficits.

But first, American housing starts and building permit issuance continued at a high rate in January, even if it was a small pullback from the December levels. Good weather conditions generally helped both, compared to the same month a year ago. Interestingly however, completions are still only at about the level of a year ago.

Final data for 2019 shows the Chinese running down its investment in US Treasuries. They declined -US$54 bln in the year with -US$20 bln of that coming in December alone. Their holding are now at US$1.069 tln and well below the US$1.15 tln that the Japanese now hold. In fact, the Japanese increased their holdings of long term US Treasuries by +US$115 bln in the year, more than making up for the Chinese pullback.

Inflation in Canada is picking up, rising from +2.2% in December to +2.4% in January.

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Global COVID-19 deaths have now officially risen to more than 2000, with the official infection level at almost 75,300. A week ago these two metrics were 1115 and 45,200. There may be a slowdown in this data, but it is a minor slowdown. Widespread scepticism about the official data is probably justified.

And despite the virus emergency in Hubei Province, almost 1.5 bln passenger travel journeys were made during their Spring Festival holiday this year. But that level was -50% lower than the level in 2019.

And remember Chinese conglomerate HNA? They won the bidding to buy UDC and then the deal fell over. Well, a Chinese province plans to take over the highly leveraged company and sell off its core airline assets, the latest example of how the government is stepping in to contain the economic fallout from the coronavirus outbreak.

And in the 'believe-it-or-not' file, the latest Chinese central bank Monetary Policy Report claims that there will be limited economic fallout from the COVID-19 emergency. But despite this, rumours of more substantial policy stimulus is coming, swirl in China. In fact, China may raise its budget deficit to -3.5% of GDP, but even at that level it will be well short of the American -5% of GDP. A new issue will be, with the world's three largest economies spending much more than their revenue, how long can the global economy sustain that sort of distortion?

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In equity markets, the yo-yo continues, turning up today. It started in Asia with Tokyo up +0.9% and Hong Kong up +0.5% yesterday (although Shanghai was down -0.3%). New Zealand and Australian stock markets were up +0.4%. Then overnight European markets rose almost +1.0% across the board. And today, Wall Street is up +0.6% so far in mid-day trade. It is hard to know why investors' herd mentality swings as it has given the sharp trade risks, but it does. The central bank 'put' seems to underpin investor confidence that their elevated valuations won't be allowed to fall, especially in the US as it approaches an election.

The UST 10yr yield is holding today and is now at 1.57%, a +1 bp increment

Gold is up another +US$4 to US$1,607/oz today. Since the start of the year, gold has risen +6% in USD terms and a remarkable +12% in NZD terms.

US oil prices are up strongly today, up by about +US$1.50 to just under US$53.50/bbl. The Brent benchmark is also higher at just on US$59.50/bbl.

The Kiwi dollar will start today lower at just over 63.8 USc. In USD terms, and that is a -5% devaluation since the start of the year. On the cross rates we are holding at 95.6 AUc. Against the euro we are unchanged at 59.1 euro cents. That means our TWI-5 is now at 69.9.

Bitcoin has risen again and is now back up at US$10,194 and a gain of +2.6% since this time yesterday.

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

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