Weekend briefing; Difficult ride in transition to inflation-fighting mode
Here is our summary of key overnight economic events affecting New Zealand with news that the road is getting very rough as we shift into inflation-fighting mode.
Financial markets are reassessing stock prices on clear signals that the Fed’s efforts to lean more against inflationary forces are gaining momentum. Not only will p/e equity ratios fall, there is likely to be considerable collateral damage in less developed countries as the fight against inflation intensifies. The US dollar is rising rapidly and the Chinese yuan plunged overnight to its lowest level in a year, and it has been a painful week for Chinese stocks (see below).
But the factory sector in the United States is growing faster, even with concerns about future construction. Their Manufacturing PMI reached its highest level in 7 months due to a faster increase in production, new orders and employment. An increase in export orders is also to come. Inflationary pressures have remained high, but companies are managing to pass the full effect on to customers. But all this does not really improve sentiment as inflation and geopolitical uncertainty make it difficult to be optimistic even if the current situation improves. These sentiment concerns weigh more heavily on their services sector, but this also continues to develop well.
Retail sales in Canada They were expected to slide in February, but they rose in the data releases overnight, albeit only marginally. They would have increased much more if vehicle sales had not been weak there.
Producer price in Canada increased very sharply in March, now exceeding +18% per year. In fact, it’s their fastest pace in nearly 50 years.
Japan finally seems to have some [minor] inflation. Consumer prices rose by +1.2% in March, the highest since October 2018, after a gain of +0.9% a month earlier. The latest figure marked the 7th consecutive month of annual inflation, with food prices are rising at the fastest rate in more than 5 years at +3.4%.
And the lightning April PMI for Japan have brought signs that their economy is expanding this month. The latest data showed that Japanese private sector activity improved at a faster pace. Service companies recorded an expansion in activity for the first time since last December, while manufacturers saw their production levels increase for the second month in a row. April data signaled the strongest expansion in four months, although the pace of growth was only marginal, to be fair, mainly because new order levels were not rising. But it’s better than a contraction.
However, EU growth accelerated in April as the recovery in demand for services compensated for a virtual stall in their manufacturing sector. But prices are rising at record rates. In Germany, a decline in manufacturing output contrasts with continued growth in the service sector. But in France, business activity is growing at its fastest pace in more than three years. the UK however, still registers an expansion, but at lower levels. UK retail sales were particularly weak in March, registering a decline.
In Australia, respected Westpac economist Bill Evans has Noted that “underlying” inflation will reach 3.4% when the March data is released next week, and that their unemployment rate will fall below 4% in April, and “based on this forecast, we expect the RBA to decide to raise the cash rate by 40 basis points at its June 7 Board” to 0.5%.
Australian businesses continue to grow at healthy levels. Their private sector recorded a third consecutive month of growth, according to flash PMI data. Production and demand grew at high rates in April, leading to a continued expansion in labor capacity. Supply constraints, however, persisted, contributing to record input cost inflation, while backlogs also rose solidly.
And it should be noted that the prices for but have reached their highest price in a decade and could easily reach a new all-time high soon. This will aggravate the global food crisis.
The 10-year UST yield today starts to fall -2 bps to 2.90% and takes the weekly rise to +7 bps. The UST 2-10 yield curve is flatter at +19 bps. Their 1-5 curve is also flatter at +89 bps. Their 30-day-10-year curve is also flatter at +244 basis points. The Australian 10-year bond is now at 3.11% and up +5 bps. The ten-year Chinese government bond is up +1 bp to 2.89%. And the New Zealand 10-year government up +8bps to 3.60%, up +17bps in one week.
On Wall Street, the S&P500 ended Friday’s session down -2.3% as the prospect of aggressive monetary policy tightening seemed to scare investors. For the week, they are heading for a -2.3% loss. Overnight it was similar red ink across European markets, but Paris and Frankfurt ended with small weekly gains of +0.4%, London with a weekly retreat of -0.8%. Yesterday, Tokyo ended its Friday session down -1.6%, but that locked in a net gain of +1.0% for the week. Hong Kong fell -0.2% capping a week where they lost a whopping -3.8%. Shanghai made a small +0.2% gain on Friday, but that still left them with a -3.1% loss for the week. The ASX200 ended down -1.6% to end the week flat. The NZX50 closed down -0.4% on the day but closed the week up a net +0.3%.
The price of gold starts today down US$-14 since this time yesterday at US$1933/oz. That’s down -US$44 for the week though.
And oil prices are -US$1.50 lower at just under US$101.50/bbl in the US, while the international Brent price is now slightly above US$105.50/bbl .
The Kiwi Dollar will open today down more than -1c at 66.3 USc, taking it to its lowest since mid-February. Against the Australian dollar, we are slightly firmer at 91.6 AUc. But against the euro, we are more than -¾c weaker at 61.4 euro cents. All of this means that our TWI-5 starts today at 72.8 and again -70 basis points lower. The devaluation so far this month has been -2.6%, but longer term it has only returned to its 10-year average.
Bitcoin price fell -5.4% from this time yesterday to US$39,415. Volatility over the past 24 hours has been elevated to just under +/- 3.0%.
The easiest place to stay on top of the risks associated with today’s events is to follow our Economic calendar here ».