2024 starts with worrying hesitations

Kia ora,

Welcome to Wednesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the international edition from Interest.co.nz.

And today we lead with a quick news wrap-up so you can get back to your 'time-off'.

First, we kick off the New Year with another dairy auction, this one again modestly positive. The key WMP price was up +2.5% from the prior event. Butter was up +2.1%. But both cheddar cheese and SMP eased. Overall the result was +1.2% higher than the prior event in USD terms, up +1.5% in NZD terms as the Kiwi dollar slipped in its first trading of the New Year. Volumes sold were modest. Demand from China for WMP and butter was ok, but these buyers were quiet for SMP indicating their foodservice demand remains subdued.

There were final December factory PMI's released everywhere over the past few days and these paint an overall picture of weaker demand and both output and employment levels slipping lower. Of more of a worry perhaps is that neither input nor output prices are receding, suggesting price inflation will be hard to contain.

In the key US economy, their factory PMI was weak with a renewed contraction in output as orders fall at sharper pace. They also reported a rise in producer inflation.

As has become standard recently, there are mixed signals coming out of China. The private Caixin factory PMI is expanding but barely and didn't show the retreat expected. But it is displaying a yo-yo tendency around a steady state. However the official PMI does show an extended contraction by their factory sector. The Caixin survey tends to focus on mid-sized private companies. The official survey is more attuned to larger State-owned factories. And that is now contracting at the same rate as June 2023, and has contracted consistently since April 2023.

Unfortunately for them, their services sector isn't picking up the slack. Yes, it is expanding - just - but not be enough that anyone would notice. December is the third month in a row that the official services PMI has failed to fire.

The Chinese central bank has used its controversial Pledged Supplemental Lending program to inject NZ$80 bln extra into property lending support.

South Korean exports rose +5.1% from a year earlier to a 17-month high of US$58 bln in December. Shipments to the US rose +21% but they fell -3% to China, Korea's top export market. But the overall result was lower than expected and lower than the +7.7% gain in the previous month. But it was the third consecutive month of increase in exports, and has been driven by a rise in semiconductor exports. Meanwhile, South Korean imports fell rather sharply, down -11% mainly on lower oil prices. Compared to the recent nine straight months, imports are tracking a stable path.

It has been a very tough few days in Japan, first with having to deal with a deadly earthquake mid-winter. Now an Airbus aircraft from a domestic flight caught fire on a Tokyo airport after crashing with a Coast Guard plane on quake-aid duties. Fortunately everyone escaped from the passenger plane, but there were deaths on the Coast Guard plane.

Singapore released its 'flash' Q4 GDP result overnight. That is fast - we have to wait until mid-March for ours. The Singaporeans have current data for their policy makers to absorb and respond to already. They report the city-state's GDP grew by +2.8% in Q4, accelerating from a marginally revised +1.0% in Q3. This was their 12th straight quarter of economic expansion and the strongest pace since Q3 2022. The service sector contributed most to this recovery, modest by their usual standards. In the 20 years to 2018 it averaged +5%.

A new analysis for 2023 shows that compared to 2022, investments by sovereign wealth funds fell -20% to US$125 bln in 324 transactions; while investments by Public Pension Funds fell -26% to US$ 80 blnin 268 deals. Of the sovereign wealth fund investing, about a quarter can be accounted for by activity by Saudi Arabia's Public Investment Fund. Sovereign wealth funds had a tough year - in fact in the six months through October our own NZ Super Fund has posted negative returns in four of the last six months, and in six of the past twelve months.

One reason for poor performance generally might be exposures to commercial real estate. In the US, of the 605 buildings with mortgages expiring soon, there are 224 that Moody’s Analytics estimates owners will have trouble refinancing this year, either because the properties carry too much debt or because their rental performance is poor.  There are now roughly US $800 bln in American commercial mortgage-backed securities and delinquencies on office loans financed by them topped 6% at the end of November, up from 1.7% a year earlier. The expectation is that a lot of pain and write-downs will happen in 2024 and the pattern will be repeated worldwide, made worse because most of the "long term funding" that expires this year was on interest-only terms.

Shipping giant Maersk has backtracked from its reuse of the Suez Canal and Red Sea routes, putting that normalisation of hold after an escalation of attacks.

The UST 10yr yield starts the year higher than where we left it on New Year's Eve, now at 3.95% and up +7 bps. 

Wall Street has started its 2024 session down -0.8% in Tuesday trade on the S&P500. The Nasdaq is down -1.8%. Overnight European markets opened their 2024 account with very small changes. Yesterday Tokyo did not trade as it is a standard holiday there yesterday and today. Hong Kong did however and fell a sharp -1.5%. Shanghai had their own -0.4% retreat. On the other hand, the ASX200 rose +0.5% in its first 2024 trading session. The NZX50 was closed of course.

Investors appear convinced that major Western central banks are close to a general policy shift from raising interest rates to cutting them. But as day one trading suggests, there is nervousness because economies have not really adjusted yet to a world where money is not cheap. After big rallies in 2023 it is hard to see similar gains in 2024.

The price of gold will start today unchanged from New Year's Eve at just over US$2062/oz.

Oil prices are -US$1 lower at just over US$70.50/bbl in the US. The international Brent price is now just over US$76/bbl.

The Kiwi dollar starts today at 62.5 USc and down almost -1c from where we left it on New Year's Eve. Against the Aussie we are nearly -½c softer at 92.4 AUc to start the year. Against the euro we are marginally softer at 57.1 euro cents. That all means our TWI-5 starts today just on 70.6 and down -50 bps.

The bitcoin price starts today much higher at US$45,095 and up a sharp +7.9% from where we left it prior to the New Year. This 2024 level is higher than at any time in 2023. Volatility over the past 24 hours has been high at just under +/- 3.3%. ETF buying activity is said to be behind the rise today.

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

You can get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston. And we will do this again tomorrow.