Re-thinking financial asset valuations

Kia ora,

Welcome to Monday’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.

Today we lead with news investors globally are having a re-think about the valuation rises that have gotten embedded since the pandemic. Warren Buffett is now cashed up.

But before that, although it will be a relatively quiet week for international economic data releases, it is a big week at home. The important Q2-2024 labour market report gets released on Wednesday and there will be more real estate market data early in the week. Plus there is a full dairy auction on Wednesday morning.

There will be living cost data released in Australia. And before that we will get the RBA's rate review decision late tomorrow. And inflation expectations survey results will be released this week across the ditch. China will update its CPI and PPI. Plus there will be slew of services PMIs out everywhere too. Wall Street will start to wrap up its Q2 earnings season reports with some big later reports. By the way, Warren Buffet's Berkshire Hathaway reported its Q2-2024 position late last week - and it has about US$270 bln/NZ$450 bln in cash (or cash equivalents) on hand. See page 3 here. That is actually more than the NZ$409 bln NZ GDP over the past year.

But basically it is the Northern Hemisphere holiday season, so financial market activity will be relatively light for the rest of the month. (In fact, it is a public holiday in Canada today.) This tends to accentuate any changes more than they would otherwise be.

In China, their central bank said it will be pushing commercial banks to "do more" for the "real economy". It wants to shift the financial sector’s focus to "benefiting people’s livelihoods and boosting consumption" over the coming months. This change in emphasis follows pressure from the CCP Third Plenum meeting chaired by President Xi earlier in the week. The practical impact? Perhaps more debt issued for projects that have immediate effects but little long-term gains.

There are calls for monetary authorities to allow higher inflation as some sort of spur to 'growth'. Meanwhile, commodity prices keep on sinking as the overall stall extends. None of this is coming at a good time for China and they take their summer break. That tends to be when the leaders 'relax' at their seaside compound. If they don't return with better plans and actions, there will be some grumpy countrymen.

One initiative underway is to boost its urban living. In 2012, a bit over half of China's population lived in cities. In 2023 that had risen to two-thirds. Their new goal is to get it to 70% by 2029 thereby generating a surge in new economic activity. But there will be issues from this drive, not the least of which is food security.

Meanwhile, flooding pressures are not easing. And that too has implications for food security and agricultural output, especially for gains.

Singapore's widely-watched local PMI was modestly positive in July, but far less positive than the internationally-benchmarked version.

The US economy added only +114,000 jobs in July, well below a downwardly revised +179,000 in June and forecasts of 175,000. It is also the lowest level in three months, below the average monthly gain of 215,000 over the prior 12 months, signaling that their labour market is in fact cooling off. But most of the weakness was in the tech sector with almost all other sectors holding their own.

Pressure on wages is easing too, with weekly earnings up only +3.3%, again driven by their tech sector.

Their jobless rate rose marginally to 4.3%, up from 4.1% in June. (s.a.) There are now 162.0 mln people employed, a record high, in a 169.7 mln labour force. (not s.a.)

This weakish American report actually had little impact on global markets because they were mostly sharply lower before this release and there was no added change after. You can claim it was 'priced in' and perhaps it was. But there is a broader re-ranking going on with a settling back in risk appetites. We shouldn't be surprised - markets never go up forever. The US Q2 earnings season reporting has been strong, but it is the less-than-stellar outlooks that are influencing investors.

Meanwhile, US factory orders, which were expected to show a dip in June, did just that but the dip was larger at -3.3% than the -2.9% correction anticipated. The June fall comes after four consecutive rises however.

But American new vehicle sales rose more than expected in July to an annual rate of 15.8 mln, a good bounce back from the 15.2 mln vehicle sales rate in June.

We should also note that the UN-based International Seabed Authority has just elected a Brazilian scientist to lead it, it first scientists Secretary-General. This is expected to sharply slow seabed-mining activity everywhere.

The UST 10yr yield is now at just on 3.79% and unchanged from Saturday. 

The price of gold will start today up +US$9 from Saturday at US$2443/oz.

Oil prices are holding lower at just over US$73.50/bbl in the US while the international Brent price is just under US$77.50/bbl. A week ago these price were US$76.50 and US$80 respectively.

The Kiwi dollar starts today down -20 bps from Saturday at just on 59.4 USc. Against the Aussie we are holding at 91.5 AUc. Against the euro we are up +40 bps at 55 euro cents. That all means our TWI-5 starts today at 68.6 and up +20 bps. A rising Yen had influence on this too.

The bitcoin price starts today at US$58,163 and down an extreme -7.8% from where we left it on Saturday. That is a -US$9,330 drop in a week or an eye-watering -13.8%. Volatility over the past 24 hours has been moderate however, at +/- 2.5%.

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.