US and China data underwhelms

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 of underwhelming data in the top two global economies.

First, US industrial production fell September from August in a retreat the market didn't see coming. But two events crimped the result; Hurricane Ida had an outsized impact, and the chip shortage curbed car making severely. As a result, American industrial production fell -1.3% when a +0.2% gain was expected. It is a miss markets have noticed but are largely ignoring. It is still ahead +4.6% year-on-year, which is strong for them.

In China, more evidence of a sharper slowdown than expected. The Chinese economy expanded at a +4.9% year-on-year pace in Q3 of 2021, and well below the +7.9% growth in Q2. It was also below market estimates of +5.2%. It was the slowest pace of expansion since Q3 2020, and is due to their electricity problems, widespread supply chain bottlenecks, a faltering property sector, and persistent Delta outbreaks.

And it seems likely that this is not yet at its lowest point.

But there were also improving signs in yesterday's data. Retail sales rose +4.4% in September from a year ago, better than the weak +2.5% gain in August. But they are still miles lower than the +8% expansion they had been regular pre-pandemic. Yes, they are recovering, but still quite crimped.

Electricity production fell in September from August, but it was +4.9% higher than a year ago and almost +11% more than in September 2019. Power woes may be getting the blame for China's slowdown but their problems run far deeper than this.

China's industrial production was another disappointment, continuing a slow but relentless atrophy since March with only a +3.1% year-on-year expansion and not enough to drive their economy or employment. Apart from the start of the pandemic, this is actually the smallest expansion in Chinese industrial production in almost 20 years.

We all know about China's problems with its property development sector, and the overhang of unsold housing units and ghost cities. Now these impacts are really biting with reports of steep -30% and -40% haircuts for homeowners and investors who need to sell existing properties. This comes at a time when Beijing is also pushing through steep property tax increases in the name of 'reform'.

All this is now in sharp contrast with the Indian economy that is back expanding sharply, now larger than pre-pandemic levels. RBI's Economic Activity Index indicates that real GDP grew by almost +10% in Q3 from a year ago (p144).

The UST 10yr yield opens today up +1 bp to be now at 1.58%. The Australian Govt ten year benchmark rate is up an unusual +10 bps at 1.76%. The China Govt ten year bond is up an even more unusual +6 bps to 3.06% and its highest in 100 days. The New Zealand Govt ten year leaped by a spectacular +17 bps on the CPI results and is now at 2.35%.

These sharp rises probably mean both the NZD and the AUD are now somewhat undervalued.

The price of gold has slipped by another -US$1 to US$1766/oz.

And oil prices are -50 USc softer at just on US$81.50/bbl in the US, while the international Brent price is now just under US$84/bbl.

The Kiwi dollar opens today at just on 70.8 USc and up marginally since this time yesterday. Against the Australian dollar we are now at 95.5 AUc. Against the euro we are still at 61 euro cents. That means our TWI-5 starts today at just on 74.5, and now well over the top of the 72-74 range of the past eleven months.

The bitcoin price has changed very little this time yesterday, still at US$61,752. Volatility over the past 24 hours has been high however at just over +/-3.0%.

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.