Tackling inflation at its source

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 there has been an international move overnight to try and quell raging inflation levels by tackling oil prices.

But first, the 'flash' November PMIs for the US shows that their expansion remains strong and that is despite it being held back by labour shortages and material delays. They factory expansion rose, their services expansion settled in at prior levels. However, the rate of input price inflation reached a new series high. Sharper increases in cost burdens at both manufacturers and service providers led to soaring prices, with a vast range of materials reported as having risen in cost. The pace of selling price inflation matched October’s series record high, as firms pushed to pass on these higher costs to their customers

The updated factory survey from the Richmond Fed pretty much tells the same story.

Today's well-supported UST 7yr bond auction brought higher median yields yet again.

In China, Aoyuan Group’s dollar bonds dropped sharply yesterday, with some on track for record lows. The property developer defaulted on part of a trust loan two weeks ago, it has emerged. And now a set of Kaisa Group offshore investors have hired advisers because that cash-strapped property developer also missed some dollar bond interest payments due earlier in the month. And the Hong Kong stock exchange is awash in Evergrande shares as the billionaire owner sells up in a bid to rescue his company. He is trying to raise US$3.8 bln to save Evergrande from default.

And their financial industry, burned by the defaults, is shunning the property development sector and adding to its woes.

Meanwhile Beijing is on high alert for mounting headwinds for the world’s second-biggest economy, after the central government promised a new round of supportive measures for smaller companies to protect jobs and growth.

Taiwan industrial production was little-changed in October from September, reporting strong output levels. But it was their retail sales that surprised, reporting a healthy improvement from a sector that has been ho-hum for most of the year.

In Europe, their 'flash' PMIs are holding at good expansions too despite the same cost pressures, and the rising pandemic spread. But Germany is holding the bloc back, and that will likely be an increasing drag as their new pandemic lockdowns bite harder.

The World Health Organization warned yesterday that Europe’s death toll from the pandemic will exceed 2 million by March, as cases have climbed to nearly 4,200 a day and the illness has become the main cause of death in the region. Russia and the UK top the regional case growth, but Germany is gaining fast.

In Turkey, their currency crashed as much as -15% yesterday to hit 13.45 against the USD, a new historic low. President Erdogan has defended his recent sharp interest rate cuts, and he declared Turkey is fighting an “economic war of independence”. He is clearly losing, badly and fast. Consumer confidence is diving. Earlier in the year, Turkey had the 20th largest economy in the world, in between Saudi Arabia and Taiwan. Probably not that now.

In Australia, they are coming to realise that their financial advice model is essentially broken. New laws following with the Hayne royal commission had the effect of driving up the cost of advice, with investors forced to pay $5000 for full-service advice. Most aren't paying that and doing it without proper advice. Only the wealthy can now afford professional advice there.

And CBA has released data to a Parliamentary Inquiry that it says shows customers who use buy now, pay later operators are more likely to overdraw their accounts and fall behind on repayments.

Staying in Australia, their private sector growth accelerated in November, according to Flash PMI data from Markit, supported by a further easing of COVID-19 restrictions which had caused a three-month contraction in activity from July to September. Their factories are expanding faster and their services are recovering quickly. Price pressures are persisting with input price inflation soaring to a survey record level.

The UST 10yr yield opens today at 1.65% and up +5 bps since this time yesterday. 

The price of gold will start today much softer at US$1782 and down another -US$31 since this time yesterday, and a three week low.

And oil prices are +US$2 firmer at just over US$78/bbl in the US, while the international Brent price is now just on US$81/bbl. The US said it is releasing of 50 million barrels of oil from its strategic reserve in an attempt to bring down energy prices. The move is being taken in parallel with other major energy consuming nations, including China, India, Japan, South Korea and the UK.

The Kiwi dollar opens today softer at just under 69.4 USc. Against the Australian dollar we are unchanged at 96.2 AUc. Against the euro we are lower at 61.6 euro cents. That means our TWI-5 starts today at 74.2 and its lowest since mid October.

The bitcoin price is marginally lower since this time yesterday, down to US$57,419 and down a mere -0.5%. Volatility over the past 24 hours has been moderate at just over +/-2.1%.

Join us at 2pm today when we cover the RBNZ's Monetary Policy Statement, and the very likely rise in the Official Cash rate - and the resulting rise in mortgage interest rates.

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.