Information breakfast; The G7 and the BRICS clash in great power rivalries
Here’s our roundup of the weekend’s main economic events affecting New Zealand, with news that meetings are underway by two powerful economic groupings today – the G7 and the BRICS countries.
The G7 has about twice the economic activity of the BRICS countries, and the BRICS are currently in a bit of a rut, which is unusual for them. The BRICS are meeting “virtually” and India seems to be a weak link, also meeting on the sidelines with the G7. We note that the G7 is active while the BRICS are defensive.
The G7 is set to roll out an expansive set of sanctions against the Russian invaders, including on gold transfers, insurance and the price of oil. A number of BRICS members (like China) could be stuck with these moves. The G7 leaders transform into NATO leaders a few days later.
The annual inflation rate in Japan was +2.5% in May, unchanged from the April 7½-year high, but in line with market expectations. It was also their 9th consecutive month of rising consumer prices, with food inflation hitting its highest level in over 7 years, now exceeding +4%. The Bank of Japan has shown no sign of changing course from its ultra-easy money policies designed to raise inflation, but some kind of change needs to be near.
Meanwhile, very hot temperatures are raising concerns about how to prevent the electrical system from suffering power outages = blackoutespecially in the Tokyo area.
In China, the sluggish economy really puts pressure on job seekers. Their unemployment rate for 16-24 year olds is now above 18%, well above the high general unemployment rate of almost 6%, which is also on the rise. (The equivalent New Zealand the levels are 10.2% and 3.2%; for the WE they are 10.4% and 3.6%.)
Separately, we noticed a change that may or may not be nothing. The aggressive Chinese vice foreign minister and negotiator with Russia, who had bet on the relationship, was brutally demoted. Maybe China knows this relationship isn’t going to help it, and it needs to mend the economic relationship with the United States somehow to revive its faltering economy. Who knows, but it’s worth watching, because a thaw in US-China relations is about the only thing that can move their needle.
Keep an eye on flooding in the vast southern Pearl River system. It’s worse than previous years and it’s not over. Officials call the situation “grim”, but things appear to have eased somewhat over the past day. But new flood advisories are now in place for the northern Yellow River system, also likely to be severe. And in other parts of the country, including around Shanghai, excessive heat seems like a big deal too.
Singaporean industrial production took off in May, rising much faster than expected, especially after the gloomy outlook announced in April. The May rally was broad based.
And in Singapore, Sun Cable said Infrastructure Australia confirmed the economic merit of its NZ$33 billion Australia-Asia Power Link Project supplying solar power to Singapore and eventually Indonesia through the world’s longest submarine high-voltage cable. It’s a project backed by billionaire owner of Fortescue Minerals and billionaire Atlassian. It could start powering its cable as early as 2027 and reach full power by 2029.
Separately, the first PMI readings for the United States are out, and they suggest that factory activity is now slowing, although still expanding modestly. The same goes for their service sector, although this expansion is a bit stronger. But not so hot is that new order levels are now lower than before, the first contraction in new orders since July 2020.
The Kansas City Fed factory survey for June showed that activity was still slowing but still positive. Expectations for future activity also moderated slightly, but also remained at solid levels overall. Supply chain pressures seemed to be easing for these companies.
In its latest updated review, the US Fed released the results of its annual banking stress testswhich showed that banks continue to have solid levels of capital, sufficient according to the regulator’s opinion to allow them to continue lending to households and businesses even in the event of a severe recession.
Sales of new american single family homes in May were at an annual rate of 696,000. That’s almost +11% above April’s revised level and comes after a string of slowing months. Yet the latter level is still nearly -6% lower than in May 2021.
Meanwhile, US gasoline prices appeared to have plateaued and are now off their peak. They are currently at US$3.80/gallon on their futures market, a far cry from the US$5/gal recently announced by the AAA. Even that AAA price is lower, although not much. But the November 2022 futures price is down to just over US$3/gal. The December futures price is now below US$3. If these signals materialize as suggested by money market traders, US CPI inflation could return quite quickly.
In Australia, he appears that the bank owned by Suncorp is on the market, either to be listed or to be sold. NAB is the most likely buyer.
The much watched Economist Livability Index emptied Auckland and Wellington from near the top of their rankings. Cities in New Zealand and Australia are among the biggest drops in this ranking, including Wellington and Auckland, which fell -46 and -33 places respectively. Both countries took advantage of this at the start of 2021, when covid vaccines were scarce: the closure of borders helped to limit cases, which kept the quality of life at a high level. Auckland actually topped the early 2021 survey. However, that changed when a more contagious wave of covid-19 hit in late 2021, making closed borders less of a defence. Although New Zealand’s lockdowns ended in December, before our survey period, its cities no longer have a Covid advantage over well-vaccinated European and Canadian cities.
Container shipping rates dropped -3% last week only for transpacific shipments from China. This is their biggest drop since hitting their peak in September last year. Interestingly, US to China rates are actually rising, against the grain. US imports appear to be get away from chinato various ASEAN countries, particularly Vietnam, and US exports are picking up.
The 10-year UST yield starts today up +1bp from this time Saturday at 3.14%. The UST 2-10 yield curve is unchanged at +7 bps and their 1-5 curve is steeper at +39 bps. Their 30-day-10-year curve is little changed at +194 bps. Australia’s 10-year bond remains at 3.71%. The 10-year Chinese government bond is unchanged at 2.82%. And the New Zealand 10-year government will start unchanged at its low of 4.01% today, reflecting the decline in the Aussie.
The price of gold was at US$1826/oz in New York and down -US$5 at the end of last week. The price of gold could open this week with some turbulence as markets absorb the G7 sanctions on the Russian gold trade.
And oil prices are -50 USc/bbl lower at this time Saturday at just over US$106/bbl in the US, while the international price of Brent is now just below US$109/bbl .
The Kiwi dollar will open today at just over 63.1 USc. Against the Australian dollar, we are a little softer at just under 91 AUc. Against the euro, we are changing little at 59.9 euro cents. All of this means that our TWI-5 today starts at just 71.1.
Bitcoin price has risen since this time on Saturday and now sits at US$21,212, up +1.3%. Volatility over the past 24 hours has been high at +/- 3.8%.
The easiest place to stay on top of the risks associated with today’s events is to follow our Economic calendar here ».