Fears rise over a commercial property meltdown

Kia ora,

Welcome to Friday’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 news there are some significant jitters being felt in a widening range of banks globally as debt maturities for commercial property spook everyone.

But first in the US, the number of peopleclaiming for jobless benefits rose for a second consecutive week to the highest level in eleven weeks. There are now almost 2.2 mln people on these benefits and that is the highest in more than a year. Still these overall levels are low in historical context, and compared to the size of their workforce. We will get an update on that tomorrow when the non-farm payrolls data is released. Analysts are expecting a gain of +180,000.

However, there was a sizable rise in the number of job cuts reported in January. They typically spike in January so it is hard to assess whether this is out of the ordinary. But this year the spike was more than usual, in fact the highest January since 2009. Job cuts in the financial and tech sectors were prominent in this latest data.

But the factory sector might be turning a corner, up. The widely watched ISM factory PMI improved to in January to its 'best' level since October in a sharp and unexpected change. The sector is still contracting although at a much softer pace, as demand moderately improved and output remained stable. The improved bit was that new order levels expanded sharply.

The internationally-benchmarked S&P/Markit PMI version delivered a very similar story for Fanuary, but was more positive, suggesting the overall sector is actually now expanding.

In India, their central bank has ordered Paytm to immediately cease trading. The ubiquitous payments app and its related bank have ignored regulator warnings about the risks it has been taking. Paytm is backed by both Japan's Softbank, and China's Ant Group.

As expected, the EU euro-area inflation report for January came in at 2.8%, holding the lower levels it has reported for the past four months. Again it is lower energy costs that is keeping a lid on rising food prices (+5.7%) but they will be encouraged by the 2.0% rate for other goods.

The Bank of England also acknowledged that inflation risks are "more balanced" there when they held their 5.25% policy rate unchanged today in another split decision.

Internationally, there were a wide range of factory PMIs released by S&P/Markit for January and they showed an overall improving trend - in fact this sector is no longer contracting globally, the best it has been since mid 2022. And that supports the recent improvements to future global growth prospects that the IMF released recently and we reported yesterday.

It is also supported by global passenger air travel data for December which was up strong from a year ago. However, compared to pre-pandemic levels it is not quite there yet. Domestic air travel is higher but international travel is not. In large part that is because the Chinese travellers are staying home still.

But the global commercial property market looks like it is just starting a serious downward spiral. Lower valuations are squeezing leveraged owners, many of whom have large maturities imminent. And that is rocking banks. In the past few days banks from Europe (Deutsche), the US (New York Community Bancorp) and Japan (Aozora) have signaled serious consequences from these revaluations. Although it has been long-foreshadowed we may be entering a very rough patch for banks exposed to the sector. About NZ$1 tln is immediately involved.

The peaking of container shipping freight rates may be underway because these rates fell -4% last week, the first fall late November. And this is despite no resolution to either the Red Sea crisis or the Panama drought. Rates from China to Europe mostly fell. And freight rates for bulk cargoes remain modest even from a long 50+ year perspective.

The UST 10yr yield starts today at 3.87% and down -9 bps from this time yesterday as bond markets price in more anticipated Fed rate cuts. 

The price of gold will start today up another +US$13/oz from yesterday at just on US$2063/oz.

But oil prices are little-changed at just over US$76.50/bbl in the US while the international Brent price is now just under US$81.50/bbl.

The Kiwi dollar starts today at just on 61.3 USc and -10 bps softer than yesterday. Against the Aussie we are up +30 bps at 93.4 AUc. Against the euro we are a touch softer at 56.5 euro cents. That all means our TWI-5 starts today at 70.3 and unchanged from yesterday.

The bitcoin price starts today softer. It is now at US$42,627 down -2.0%% from this time yesterday. Volatility over the past 24 hours has been moderate at just on +/- 2.2%.

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 on Monday.