Fragilities make markets cautious

Kia ora,

Welcome to Wednesday’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 markets have turned more cautious today even as some key commodity prices keep on rising.

And today, we start with a warning from the US Fed in their Financial Stability report. They say (page 60) China’s commercial real-estate sector bond market woes could spread around the world including to the US if the situation deteriorates there. China Evergrande Group’s grace period has now ended and it now faces its biggest payment test yet. (They need to make a US$148 interest payment this week, and it looks like they just sold a subsidiary for about US$140 mln to Tencent, another large Chinese company.)

In the same report, they also pointed to a worsening of the US's public health situation as a near-term risk.

Americans are, however, using their credit cards more, an updated report on total household debt showed. But credit card debt is tiny compared to mortgages, and lower than both car loans and student debt. Still credit card use is more volatile and a marker for consumer confidence. Overall total household debt not totals just over US$15 tln, and represents 66% of US GDP. That is marginally higher than the 65.5% level two years ago, and well below the 75% level ten years ago.

American producer prices came in +8.6% higher in October than a year ago, holding the same gain as in September. That is the fastest rise since just before th GFC. Perhaps the only 'silver lining' is that they didn't increase from September quite as fast as was expected, so perhaps these increases are topping out.

The latest USDA WASDE update to their agricultural forecasts has them exporting less wheat after smaller crop production. This will raise the world price further, but not too much as Russia, the EU, India and Ukraine are all shipping more wheat into export markets. Their corn production is up however, as are exports. Beef production is raised from the previous month on higher expected slaughter of fed cattle and heavier carcass weights. They expect to export more beef (especially to China), but also import more due to "robust domestic demand". They also report lower milk production, higher export demand, and higher prices.

In China, winter has arrived in their northern provinces. All eyes are on their coal reserves.

The size of the reversal in Chinese steel production is becoming apparent, and it is impressive - in a car-crash sort of way. The iron ore price has fallen more than -60% since its peak in May.

In something of a positive surprise, the German ZEW business sentiment indicator has risen sharply in November, ending a drift down from the recent high levels achieved in May and June.

In Australia, business conditions and confidence rose in October according to the widely-watched NAB survey, as lockdowns came to an end in both NSW and Victoria. Each of the trading conditions, profitability and employment subcomponents contributed to the improvement in conditions, which was driven by gains in NSW. Confidence also rose, and to a six month high.

The UST 10yr yield opens today at 1.43% and down a sharp -7 bps since this time yesterday and retreating. 

The price of gold will start today at US$1829/oz and another +US$5 rise from this time yesterday.

And oil prices are firmer too at just over US$81.50/bbl in the US, while the international Brent price is now just under US$83.50/bbl. Both represent about a +50 USc rise.

The Kiwi dollar opens today giving up yesterday's ½c gain and is back to 71.2 US. Against the Australian dollar we are marginally firmer at 96.6 AUc. Against the euro we are lower at 61.5 euro cents. That means our TWI-5 starts today at just on 75.

The bitcoin price has stayed high and is now at US$66,719 and a +1.0% net firming. Volatility over the past 24 hours has moderate at just over +/-2.2%.

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.