Commodity prices resume upward push

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 there is new energy emerging in commodity price rises, driven by the good US and EU economic recoveries.

But first, overnight data shows that American factory orders rose at a slightly faster pace than expected in August, confirming the recent strength in their manufacturing sector reported by other measures like the PMIs.

This is all the more impressive because their vehicle manufacturing sector is stuck in the slow lane, stifled like everyone else by the shortage of computer chips. Sales in September ran at only 9.7 mln vehicles/year, another sharp drop from August, itself a reduction from the 18.5 mln annual rate they were running at in April.

The key problem is that cars use old-style basic chips, the really cheap versions. And chip-makers have moved on and don't want to invest billions in old tech to sort this problem out. And vehicle makers don't want to pay for the new-style chips. It is hard to see when this standoff ends, but almost certainly carmakers will have to reengineer their products to accept updated technologies. It won't be a short process.

Meanwhile in Canada, building permit levels really disappointed in August data released overnight. They have been on a downward slide since March. A pickup of +3% was anticipated in August, but another decline eventuated, down -2.1%.

In China, they are using their holiday week to ensure the Evergrande collapse doesn't have economy-wide consequences. Almost 30% of China's GDP relies on the property sector, and Evergrande is just one of many drivers in that sector in shaky financial shape. But Evergrande itself, as large as it is, only represents 2% of their GDP. So Beijing's energy is going in to save the rest, not Evergrande. Likely, bond holders will lose all their investment.

In Japan, their new Prime Minister has said he doubts China can qualify to be a CPTPP member. This comes as China offers up promises of "unprecedented market access" if it is let in. But China expects some rule-bending for that prize to be won.

Commodity prices are rising sharply in October. Yesterday we noted the rise and rise of coal prices. Today it is oil prices. And there may be more to come because OPEC has declined to raise output significantly into a market with rising demand. Prices are now at seven year highs. The inflationary impacts won't be minor. Some American analysts see US$100/bbl oil over this coming northern winter. Natural gas prices are already at 13 year highs and they are just getting started and that has caught some sceptics short.

The UST 10yr yield opens today at just over 1.47% and up +1 bp from this time yesterday. 

The price of gold will start today firmer, up +US$8 at US$1769/oz.

And oil prices are up sharply, up +US$3 to just under US$77.50/bbl in the US, while the international Brent price is just under US$81.50/bbl. These levels are a seven year high.

The Kiwi dollar opens today slightly firmer at just on 69.6 USc. Against the Australian dollar we are unchanged at just on 95.6 AUc. Against the euro we still at 59.9 euro cents. That means our TWI-5 starts today at 73.2, 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 +2.1% to be now at US$48,618. Volatility in the past 24 hours has been moderate at just over +/- 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.