The scale of the virus black swan keeps on growing

Kia ora,

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 with news apprehension is growing at the scale of the coronavirus impacts.

Firstly, an update on the official virus data. It has doubled in the past week to be 40,600 confirmed cases (an equivalent levels of unconfirmed cases) and the death toll has also more than doubled in a week to 910.The recovered-to-death ratio is approaching 4 - which is a minor positive.

Not only are there issues with testing a virus few fully understand yet (and one that seems to be mutating), but the incubation period may be longer than the originally assumed 14 days. It may be as long as 24 days in some cases.

The human toll is tragic, not only the deaths and infections, but the upending of more than 100 million lives in China. Beijing's ability to forceably control that anger will be a real test of their power.

And the economic cost will be large too. The implications for New Zealand can't be known at this stage, but they won't be positive. The RBNZ will get an early chance tomorrow to give their assessment, and risk signals are all we are likely to get, rather than official rate moves. No-one knows enough to pull any triggers yet.

Back in China, much of "the world's factory" remains largely closed. Some firms are reopening, especially software and services firms. But supply chain freezing means that most manufacturing firms remain closed. And that means we are facing a major global economic shock - the widely anticipated 'black swan'. More than 300 Chinese companies are now seeking bank loans totaling at least NZ$12 bln to help to soften the economic impact on them. This will just be the start of public support for a staggering private sector.

And one of the great ironies of this is that Beijing's vaunted mass facial recognition system is ineffective, now that 'everyone' is wearing masks. The Hong Kong defence against the surveillance state is nationwide now.

And Beijing is instructing banks to "automatically extend" maturing term deposits - presumably to prevent a run on banks.

Consumer inflation in China is jumping, up +5.4% in January 2020 from the same month in 2019. In December it rose at the rate of +4.5% pa. Food prices are up +15.2% in a year as the ASF impacts linger. Beef prices are up +20% and lamb prices are up +10%. Fresh vegetables are up +17% in a year. How the coronavirus impacts February is unclear from this data. Producer prices are rising too, but only taking them back to the tiniest gain year-on-year. It's inflation for households, deflation for businesses. Today's China CPI data means that inflation is now rising in the three largest countries that are important to New Zealand.

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Canadian housing starts came in much better in January that expected. And Canadian building permits did too.

The Sentix global investor confidence survey reports the obvious - the optimistic start for 2020 has been undermined by the China virus and investors are turning cautious worldwide.

Closer to home, the iron ore price has shifted sharply lower. And the Baltic Dry shipping index continues to fall.

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Equity prices were lower overnight after moderate falls in Hong Kong and Tokyo. Shanghai bucked the trend with 'home team' buying. European markets shed about -0.5%. But Wall Street is up modestly in a mid-day recovery trade today.

It is bond investors who show more concern, marking down yields in a continuing drive for safety.

The UST 10yr yield is at just on 1.55% and a -3 bps decline from this time yesterday. 

Gold has risen again, up another +US$4 to US$1,574/oz.

US oil prices are down sharply again today at just over US$49.50/bbl. The Brent benchmark has also dropped to just under US$53.50/bbl. Since the start of 2020, these prices have fallen just about -20% so oil is in a bear market.

The Kiwi dollar will start today lower at just 63.8 USc and its lowest level so far this year. On the cross rates we are lower too at just on 95.6 AUc. Against the euro we holding at 58.5 euro cents. That takes our TWI-5 down to 69.6.

Bitcoin has slipped back -2.7% after briefly breaching the US$10,000 level and is now at US$9,838.

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

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