Weekend briefing; Is the commodity supercycle already over?
Here is our summary of the key overnight economic events affecting New Zealand, with news on the commodities super cycle, which was supposed to last for many years, appears to be very fragile now. And the bond markets anticipate a sharp slowdown.
And the “flash” surveys of global business activity have come out and paint a bleak picture.
the american recorded a contraction in July, entirely due to services activity. The factory sector continues to grow at the same pace as in June, but the service sector unexpectedly pulled back. The drop was the steepest since the early stages of the pandemic in May 2020. New export orders fell for a second consecutive month, but new local orders continue to rise, making the influx combined new orders the lowest in the past two years.
With little other major economic data, the unexpected contraction of the US services sector giant had an immediate impact on the stock and bond markets.
Weaker growth in new orders was also a feature of the Japanese Flash PMI for July. But at least their factory and service sectors are growing there.
In Europetheir factory PMI slipped into a [minor] contraction while their services sector is still expanding in July – but barely. But none of this will really come as a surprise given the invasion from the east. Perhaps you could say that it is quite resilient in the circumstances where they are not in a major contraction.
Much of the EU result is due to pressure Germany is under with their factory and service sectors now contracting. The French tertiary sector is a point of light.
Back in the US, a fire-hit California town says debt has overwhelmed it and it could soon default.
Data for Retail sales in Canada in May was strong and a bright spot in overnight releases. The year-over-year increases are impressive and far greater than inflation can account for. But of course, this data is quite dated now.
Japan reported June CPI inflation yesterday with their headline rate now at 2.4%, down slightly from 2.5% in May, and still above the Bank of Japan’s 2% target. He’s been above that target for three consecutive months now. And it’s been seven years since they’ve had inflation like this, even if it was because of a GST hike. Without that, it’s been 32 years.
In China, the central bank said NZ$1.6 trillion of bonds were issued in June, bringing their total issuance to NZ$33.7 trillion. That’s about 125% of China’s annual economic activity just for this official paper debt. Much of this new issuance will simply be used to keep the lights on, rather than investing for future gains.
In Russia they cut their official interest rate by -150 basis points. Earlier in the year, it was raised quickly to combat a spike in inflation. Now it is difficult to try to reinvigorate a war-damaged economy with declining demand.
And note that over the past week, the price of iron ore fell by -8%, copper is stable, but it had already fallen by -27% since the beginning of June. Nickel has fallen nearly -30% since early June. Wheat is down more than -30% since mid-June. Soy is down -15%. Only coal maintains its new high price. Aluminum is down -15% since early June. And crude oil is down -18% from that peak in early June.
In Australia, the big general insurer there, IAG, has reported that natural perils and rising costs will push premiums up to +9% for home and auto insurance. This comes as their equity dwindles as provisions and reserves need to be increased, and investors have missed it. Since mid-April and before the latest floods on the Australian east coast, its stock price has fallen by -20% and investors are worried about the impact of the climate on its activity.
The 10-year UST yield starts today at 2.75% and is down another -17 basis points from the same time yesterday and back to mid-April levels. A week ago, it was at 2.93%. The UST 2-10 yield curve is slightly flatter today, now at -21 bps and their 1-5 curve is slightly more inverted at -14 bps. Their 30-day-10-year curve is now at +63 basis points and it’s much flatter. The Australian ten-year bond is down very sharply by -17 basis points to 3.34%. The 10-year Chinese government bond is up +2 basis points to 2.80%. And the New Zealand government 10-year will also start today down -8bp to 3.72%.
On Wall Street, the S&P500 gave up half of its strong weekly gain, down -1.3% today to now be up +1.7% over the week. Overnight, European markets were flat with the exception of Paris up +0.3% and a weekly gain of +2.4%. Yesterday, Tokyo ended up +0.4% in its Friday session for a weekly gain of +4.4%. Hong Kong was up +0.2% yesterday for a modest weekly gain of +0.6% and Shanghai was down -0.1% for a healthy weekly change of +1.1%. The ASX200 ended its Friday session flat to lock in a weekly gain of +2.8%, and the NZX50 was also flat on the day to rise +1.3% for the week.
The price of gold will open today at US$1,724/oz in New York, up +US$10 from the same time yesterday. It is also up +US$19 from this time last week.
And oil prices are down -US$2/bbl to just under US$94.50/bbl in the US, while the international price of Brent is now just US$99/bbl. These prices are almost exactly the same as this time last week.
The Kiwi Dollar will open a little firmer today at 62.4 USc. Against the Australian dollar, we are also a little firmer at 90.2 AUc. Against the euro, we are firm at just under 61.2 euro cents. That means our TWI-5 starts today at 71.1 and that’s -60 basis points lower than last week.
Bitcoin price was little changed from this time yesterday, up just 0.8% to US$22,997. Volatility over the past 24 hours has been moderate at just +/- 2.0%.
The easiest place to stay on top of the risks associated with today’s events is to follow our Economic calendar here ».