Europe faces brutal choices

Kia ora,

Welcome to Tuesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the International edition from Interest.co.nz.

Today we lead with news the fourth pandemic wave rolling over Europe presents them with brutal choices, and will have global consequences.

But first up, we can report that Jay Powell will be re-nominated for a second four-year term as the head of the US Fed. Lael Brainard, an ex-academic, will be nominated as his deputy, replacing Trump appointed Richard Clarida, an ex-PIMCO adviser and academic.

Separately, Clarida has signaled that the Fed will likely taper faster when it announces the decisions at its mid-December meeting.

The Chicago Fed's National Activity Index bounced back strongly in October after a weak September result and activity levels picked up noticeably.

Completed home sales in October were unchanged from September, a slowing in this market. But the median price rise to US$393,900 (NZ$565,100) and the available inventory is now low at 10 weeks sales.

Investor piled in to two UST bond auctions this morning with heavy demand. (2 year, 5 year) But both brought rising median yields.

The Chinese central bank reviewed its loan prime rates and left them unchanged yesterday. That's 19 straight months of no-change.

In Hong Kong, they are getting inflation rising, +1.7% in October from -2.3% in September, even as economic activity is shrinking, a bad case of stagflation there.

In Hong Kong, HSBC is struggling to find an auditor big enough and brave enough to handle its requirements, despite a US$1 bln fee for a ten year contract. The job may go to a second-tier auditor.

In Taiwan we are starting to see some weakness in their export machine, unusual for them. Export orders rose only +14.6% in October, the lowest expansion in a year, and well below the +23% rise expected.

With the spreading fourth wave of the pandemic spreading fast in Europe, consumer confidence was expected to fall from already negative levels. But it is actually falling faster than expected as public safety lockdowns test the tolerance of the vaccine hesitant who despite the risks, are quite high in much of Europe. Despite that, consumer confidence is still above its long term average (which has always been quite negative).

In Germany, Angela Merkel said many citizens don’t seem to understand the severity of the situation. Her health minister said dramatically, by the end of their winter “just about everyone in Germany will probably be either vaccinated, recovered or dead”, leaving little possibility to survive as an unvaccinated German.

In Australia, banking behemoth CBA thinks Aussie house prices will fall -10% in 2023. They say the housing market is in the twilight of an incredible boom but when higher interest rates arrive in 2023, things will turn lower. Not all Aussie bank economists are as negative in their forecasts.

The UST 10yr yield opens today at 1.60% and up +5 bps since this time yesterday. 

The price of gold will start today much softer at US$1813 and down by -US$32 since this time yesterday, and a two week low.

And oil prices are +50 USc firmer at just over US$76/bbl in the US, while the international Brent price is now just over US$78.50/bbl. The US and some other consumer nations are getting ready to release some supplies from their strategic reserves. OPEC is threatening to curtail supplies, in response.

The Kiwi dollar opens today softer at just under 69.7 USc. Against the Australian dollar we are soft too at just over 96.2 AUc. Against the euro we are lower at 61.9 euro cents. That means our TWI-5 starts today at 74.4 and actually its lowest since mid-October.

The bitcoin price is -3.4% lower since this time yesterday, down to US$57,716. Volatility over the past 24 hours has been high at just over +/-3.0%.

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.