NZD ends strong, equities with a whimper

Kia ora,

Happy New Year wherever you are, and 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 news markets are tailing off and in wind-down mode.

In global equity markets today, it is a sea of red as investors pull back at the end of the year. The one exception was Shanghai, which was up +1.2% yesterday.

Bond investors are pulling back too, with prices lower and yields higher.

According to the US White House, the United States and China will likely have a signing of the Phase 1 trade deal early in the new year. But it will unlikely be the photo-op the US President wants with President Xi. Rather officials will do the signing, or so says the Chinese.

The US posted a -US$63.2 bln merchandise trade deficit in November, lower than the October deficit of -US$66.8 bln and significantly lower than the -US$72.9 bln deficit one year ago. Although exports fell almost -2% year-on-year, the lower goods deficit was driven by sharply fewer imports, especially of industrial supplies and capital equipment. That decrease accounted for two thirds of the annual improvement. It is a sign that American companies are just not investing in productivity.

The closely-watched Chicago factory PMI in their industrial heartland is still contracting, although the December report says less so. And the latest Fed regional survey in the oil patch shows their expansion is very tame, rising less than expected.

Meanwhile, wholesale inventories rose +3.2% year-on-year and retail inventories rose +2.2%.

Rising were pending home sales in November, up +7.4% year-on-year. But the results were spotty, with two of the four broad regions reporting slippage from October.

We should also note that the US population seems to be stabilising at 328 mln, growing at its slowest rate in 2019 in almost a century. Slowing immigration and a very low birth rate put it on track to emulate Japan with a rapidly ageing population. Surprisingly, their death rate is rising. This is an unexpected development, because it had been widely expected that the Unites States would continue to expand and remain a relevant economic power well into the 2100s. But maybe not now. Demographics is destiny.

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In China, they seem to be stepping up with some overdue mature bond market reforms, pushed by a wave of defaults. Defaults have been rare until this year and non-existent five years ago, because there was an expectation Beijing would bail out SOEs. But no more. There has been a raft of them this year. Their bond market is huge, second only to the US and larger than Europe with NZ$12.3 tln on issue. And as a part of this, outstanding corporate bonds total NZ$4.25 tln, also second only to the US. Beijing is rushing through a series of reforms and refusing to do any more bailouts. So now credit will be priced properly and real international-grade credit ratings are being issued. New laws on defaults, winding-up processes, on trustee obligations, are suddenly building a proper market, one that includes junk bonds and repricing.  It's a monumental change that will affect the global bond markets.

China seems to be still attracting foreign investment at a healthy clip. The number of overseas-funded projects with an outlay of at least US$100 mln were up to 722 in the year to November, a +15% rise on the same period in 2018.

And China imported 644,000 tons of meat last month, an 80% increase from November a year ago. They have greatly expanded the number of countries from where they source meat, from 4 to 21. Pork prices are now falling quickly.

In Australia, they had to make a sudden call on emergency power reserves in Victoria last night to fill a shortfall in supply, as power station outages and bushfires threatened the grid and hiked the risk of blackouts - just when households were winding up their air-conditioners after another scorcher.

The UST 10yr yield is up +2 bps at 1.92%. 

The gold is marginally firmer today, up +US$4, now at US$1,515/oz.

US oil prices are little-changed at just under US$61.60/bbl and the Brent benchmark is now just on US$68.50/bbl.

The Kiwi dollar is rising, now at 67.3 USc and a new five month high. On the cross rates we are also firm at 96.2 AUc. Against the euro we are likewise firm at 60.1 euro cents. That puts our TWI-5 at just on 72.1 and a new six-month high.

You can find links to the articles mentioned today in our show notes.

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