Supply chain inflation dampens growth

Kia ora,

Welcome to Friday’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 inflation from the global supply chain woes are taking the wind out of the global economic expansion.

The American economy grew at an annualised +2.0% in Q3-2021 according to initial estimates, well below market forecasts of +2.7% and slowing sharply from +6.7% in Q2. It is the weakest growth of the pandemic recovery. The levels of government stimulus continues to fade and a surge in COVID-19 cases, plus global supply constraints have weighted on both consumption and production. Still, economic activity was +4.9% larger than in Q3-2020 and +1.9% larger than Q3, 2019.

US jobless claims came in at 245,000 last week, lower than the prior week and lower than expected. There are now just under 2 mln people on these programs, and now almost back to pre-pandemic levels.

US pending home sales were down -2.3% in September, partially reversing from an +8.1% surge in August and much worse than market forecasts of a flat reading. It is being called a 'dip' by the industry, but that overlooks that this activity has 'dipped' in seven of the past twelve months and is now lower than a year ago. A retreating trend in sales activity is well set in this market.

Meanwhile the Kansas City Fed manufacturing survey is quite upbeat. All the key indicators were more positive in October than September and while cost and supply chain pressures are still hurting, two thirds of survey responders said they expected them to ease in the next 6-12 months.

There was another well supported US Treasury bond issue earlier today, for their 7 year maturity, and the same story as for previous recent auctions applies: yields are rising.

In China, central bank officials are admitting that they have underestimated the strength of the cost inflationary push in their economy. They have apparently lowered their sights on 2021 growth goals. And to ease the pressures on private firms, they are deferring some tax payment dates.

In Japan there are signs of improvement in their retail sector with sales up +2.7% in September from August which was an unexpected improvement.

Overnight there were two major central banks reviewing their monetary policy positions - the Bank of Japan, and the ECB. Neither announced any material changes.

EU business and consumer sentiment in October were at good levels (for them).

EU inflation expectations rose sharply in October and to a new ten year high. This is hardly surprising in the current environment when Germany's inflation rate has risen to 4.5% in October, and you have to go back to 1992 to find a higher rate.

But at least containerised shipping costs continue to ease, even rates out of China

In Australia, Westpac’s respected Bill Evans is now saying the RBA will start raising their official policy rate in February 2023, a year earlier than the previously expected 2024 restart indicated by the RBA. Following Westpac, ANZ's analysts have joined him too. This has motivated a general shift higher in Aussie wholesale rates which were already on the firm side. And there are questions about how wholesale markets are functioning.

The UST 10yr yield opens today up +4 bps to 1.57%. 

The price of gold is having another rise today, up +US$7 to US$1802/oz.

And oil prices are down by -US$1 to just on US$81.50/bbl in the US, while the international Brent price is now just over US$82.50/bbl.

The Kiwi dollar opens today +30 bps firmer at 72.1 US. Against the Australian dollar we are little-changed at 95.4 AUc. Against the euro we are a fraction softer at 61.7 euro cents. That means our TWI-5 starts today unchanged at just on 75.3, still well over the top of the 72-74 range of the past eleven months, and possibly now resetting this range.

The bitcoin price has recovered by +3.9% since this time yesterday, and now at US$61,197. Volatility over the past 24 hours has been high at just over +/-3.1%.

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 on Monday.