Concerns high energy prices will crimp expansions, bring stagflation

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 energy issues are biting hard in both China and Europe now.

But first, Wall Street is trading sharply lower with the S&P500 down more than -2% and Dow Jones falling almost -500 points as a spike in Treasury yields dragged shares, especially tech shares, lower. Uncertainty in China isn't helping either. The yield on the 10-year Treasury topped 1.5% and the 5-year rate rose above 1% for the first time since February 2020. Investors are figuring that the US Fed will soon start reducing QE stimulus. They are also starting to wonder if the future is stagflation.

Also weighing on market sentiment are lackluster data. The Conference Board sentiment measures are falling, and by more than expected.

The American trade balance came in virtually the same in August as in July, a -US88 bln deficit. Both exports and imports both rose about +3% in August from July.

The next regional factory survey is from the Richmond Fed and its mid-Atlantic states, and this one has turned negative. That is because the new order flow is dipping now while costs are still rising but the ability to pass them on has stopped.

And the widely-watched Case-Shiller house price index rose +20% in the year that ended in July, as buyers continued to compete amid a shortage of homes for sale. But there are signs the American housing market is starting to cool.

In Congress, two separate forces are imperiling incumbent policies. Elizabeth Warren has come out against supporting a Powell reappointment at the Fed. And the Republicans are looking to veto the OECD BEPS ratification by the US, thus protecting multinational tax avoidance strategies.

And staying in Congress, two senior officials are warning of the risks lawmakers are taking with the debt-limit standoff. Yellen issued more details of the risks she sees. And NY Fed boss Williams issued his own warnings about adverse market reactions that will be difficult to control.

Canada reported some key labour market data, but only for July. However, weekly earnings are shown to be rising +1.8% pa, even though total employment is still -2.5% smaller than pre-pandemic levels. And Canadian inflation is running at +4.1%.

And the Canadian housing authority is warning that their housing market is now at a high risk of a sharp correction.

In China they have begun rolling blackouts in Beijing and Shanghai, home to 48 million people, as the country struggles with crippling power shortages that have hit key factories in a further threat to the economy. Some recent blackouts have been unannounced.

One of the hottest commodities right now is coal. Coal prices surged to a fresh record high of US$210/ton, bringing the monthly gain to nearly +20% and the yearly to almost +160%. Several factors have been pushing coal prices up, including tight supply in China as the country works to achieve emissions standards and reach carbon neutrality by 2060; a lack of mine investment reflecting pressure from socially conscious investors; imports constraints due to coronavirus restrictions and a surge in natural gas prices amid prospects of a shortage in the coming winter, especially in both Europe and China.

China's industrial profits were up +50% in August compared to a year ago. But that expansion was less that they reported in July. Both comparatives are to a pandemic-damaged period. But compared to August 2019, they are up +20%. Profits continue to grow for both state-owned industrial firms (+87%) and private-sector +34%).

But the power crisis has forecasters figuring that the Chinese expansion could run out of steam fast, and soon.

The UST 10yr yield opens today at just under 1.53% and up another +5 bps from this time yesterday, and a three month high. 

The price of gold will start today down -US$12 at US$1738/oz and back near its early August lows.

And oil prices have softened slightly to now just under US$75/bbl in the US, while the international Brent price is even higher at just over US$78bbl. 

The Kiwi dollar opens today at just on 69.5 USc and a -½c drop since this time yesterday. Against the Australian dollar we are quite soft at just on 96.1 AUc. Against the euro we now just on 59.5 euro cents, lower by -50 bps. That means our TWI-5 starts today at 73.2 and down towards the middle of the 72-74 range of the past eleven months.

The bitcoin price has slipped again today and down below NZ$60,000 for the first time in two months, down -4.0%, and is now at US$41,257. Volatility in the past 24 hours has been moderate at just over +/- 2.6%.

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.