Inflation with stagnation

Kia ora,

Welcome to Monday'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 sharply rising commodity prices are being caused by shortages that are undermining economic activity. Inflation with stagnation.

First up today, the price of copper is taking off again. Its price hit a record high at the end of last week as surging power prices threaten to curb supply at a time when stocks are at rock bottom. The crunch will hurt China the most, as it consumes more than all other countries combined. However, it controls little production and is on a fast hunt for supplies it can control, especially in Africa.

And the price if zinc has risen a spectacular +30% in the past ten days. This is caused by sharply rising European power prices which are forcing smelters to shut down.

Prices are in focus this week. Today the New Zealand CPI data will be released for Q3 and it is expected to show prices rising north of 4% and an annual rate, and maybe at a 5.3% annualised rate in Q3.

Then China will reveal its Q3 economic growth rate. Commodity prices, supply-chain problems, Evergrande and Delta all may have an impact on the quarter's result.

The northern hemisphere winter is approaching and every country from China to the US is struggling with high energy costs that will sharply raise the costs of winter heating this year. In the US, a new analysis shows that those using heating oil will pay more than +40% more than last year; those using propane +50% more.

Every country is hungry for fuel, and none more so than China.

Globally, future energy use will be dominated by electricity generation, and the big increases required to 2050 will come from solar, it has been forecast. The same estimates also show that while they won't grow, the use of coal and natural gas will still be a big and important fuel sources for electricity generation for the next 30 years at least. These estimates don't see nuclear making any comeback.

In China, there has been a rare public comment from Beijing on the Evergrande situation, and it was to squash fears of systemic risk. Their central bank has rebuked the company calling it "poorly managed" and wants Evergrande to step up asset disposals and resume its stalled projects. And the official said most individual financial institutions did not have highly concentrated exposures to Evergrande.

Despite these soothing comments, the Chinese Communist Party's anti-corruption unit has dispatched inspectors to 25 financial institutions, including top state-owned banks, in what appears to be a crackdown prompted by the Evergrande debt crisis.

In the US, data out over the weekend for September shows retail sales have been stronger than in earlier indications. They increased +0.7% from August, and August was revised up to a +0.9% gain, both beating market forecasts of a small fall. It is another sign of resilience from consumers despite supply constraints affecting vehicles and computers. The biggest increases were seen in sales at sporting goods, general merchandise stores, and at petrol stations.

But American shoppers aren't feeling that buoyant. The widely-watched University of Michigan survey slipped back slightly to levels that were as weak in the early stages of the pandemic. Something doesn't quite square between spending freely and feeling apprehensive.

Even though the New York Fed's Empire State survey of factories fell back to August levels, they are reporting growth above its long term trend, widespread price increases that seem to be able to be passed on, and optimism about the future.

However, American firms generally are finding it almost impossible to pass those rising costs on in their export prices, and are just having to suck it up with sharply rising import prices.

Canadian factories have the same cost pressures with producer prices up +15% year-on-year to September, although there has been a small slowing over the past few months.

The economic implications of being left out of the global economy are worrying the Australians. Their prime minister looks like he is ready to adopt some sort of soft carbon target, but not because it is the right thing to go for the global climate, but because "climate change is as much about the global economy as the environment, and Australia will be left behind if it does not respond". And it also looks like he has been shamed into going to the Glasgow COP26 climate summit.

The UST 10yr yield opens today down -1 bp to be now at 1.57%.

The price of gold has slipped by -US$1 to US$1767/oz.

And oil prices are another +50 USc higher at just on US$82/bbl in the US, while the international Brent price is now just under US$84.50/bbl. The number of new US rigs in production has now almost doubled in the past year. But despite the recent fast return, it is still only a quarter of what it was ten years ago.

The Kiwi dollar opens today at just on 70.7 USc. Against the Australian dollar we are at 95.3 AUc. Against the euro we are at 61 euro cents. That means our TWI-5 starts the week at just on 74.4, up +130 bps since this time last week and now well over the top of the 72-74 range of the past eleven months.

The bitcoin price has firmed very slightly from this time Saturday, up +0.7% to be now at US61,771. Volatility over the past 24 hours has been modest at just under +/-1.1%.

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.