Xi battles economic pessimism at home

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.

And today we lead with news economic conditions in China are in focus today.

But first looking ahead, this week we get second tier American data around trade and PMIs (especially for services). It is the same in many other countries including China and Australia. Chinese CPI and PPI data is due this week. Canadian labour market data and EU retail sales data are coming too. Australia (tomorrow) and India (late Thursday) will have interest rate decisions. And StatsNZ will release our labour market data for Q4 on Wednesday which will be closely watched.

First up today we can report that the IMF has been reviewing China's economic prospects and it sees growth slowing relentlessly. GDP will slip to +4.6% in 2024 they say and keep retreating to 3.4% by 2028. The IMF sees them stuck paying the price for low quality development in the past, and now demographics limits their ability to up their game in a meaningful way. The seeds for this growth retreat were planted years ago.

And China’s real estate market is having a rough start to the year, with January new property sales plunging to a monthly low not seen in five years, despite government measures to boost the ailing sector as it grapples with a liquidity crisis. New property sales were down -34% in January from a year ago and down -48% from December.

Last week, Chinese stock markets fell sharply, with Shanghai down a startling -6.2% for the week. And this is presumably after 'home team' intervention. Investors are unhappy. Authorities are nervous. Voices for major emergency stimulus are growing. It isn't helping that the pessimistic mood is spreading just as millions disperse to their villages for Chinese New Year, potentially spreading uncertainty across the country quickly. It also isn't helping that authorities are claiming all is well, nor that the Ministry of State Security has made it a crime to say things aren't going well in the economy.

Across the Pacific, the US economy added many more jobs in January than expected. Equity markets rose on the news, the US dollar strengthened, and bond yields rose on the view that the Fed may not cut rates as soon as they expected if the US economy is in a stimulatory phase.

At the headline level, American payroll employment rose +355,000 in January and that is almost double the expected +180,000 rise the market was expecting. It is the second consecutive very strong result.

Behind this result we see that on an actual basis employer payrolls are +2.9 mln higher than a year ago at 155.6 mln at the end of January, maintaining the "about +2%" annual growth pace they have had since July, which is an eased pace from the "about 2½%+" pace earlier.

Looking more broadly, the household survey increase isn't as fast. There are now just under 160 mln people employed, the difference from the payrolls report being the unincorporated self-employed. It is quite clear more people are transitioning into company payrolls now, so the overall growth isn't quite as strong as the payrolls data suggests.

Average weekly earnings, which had been rising at about a +4% page in 2023, slipped to +3% from a year ago in January. However markets focused on average hourly earnings which rose more than they expected, up +4.5% in a year. But they are looking at the wrong data - the broader average weekly data is what they should be looking at because that encompasses working hours.

After a strong rise in November, American factory orders rose only modestly in December from a month ago to be +1.4% higher than year ago levels. There is nothing encouraging about that although the January PMIs suggested the pace picked up in the next month.

Consumers in this market are clearly feeling better however. The University of Michigan sentiment survey reported a big improvement and its highest level in 2½ years. They called the change a "surge".

The American earnings season for Q4 results is in full swing now and the news is 'good'. Investors are responding to better-than-expected results and have pushed the S&P500 up to an all-time record high. Wall Street is about halfway through the expected corporate reports and so far earnings growth is +7.8% reported. If that is maintained that would be the best of any 2023 quarter. However we should note that is "above expectations" - and expectations weren't high. Sure, cost control and productivity drives are helping - and effective - but in mid 2023 expectations were higher and have been scaled back considerably since. It is against this scaled-back version that things look good. And most companies are not signaling forward momentum from here. They are cautious, saying if they can hold the line they will count that as a success. So be wary about "better-than-expected results".

In Australia, mortgage approvals rose almost +12% over all of 2023 but ended the year on an unexpectedly soft note with a -4% monthly fall. And that December month data ties into housing market figures on prices and turnover that shows their residential real estate market momentum has slowed and that affordability pressures are starting to bite.

And staying in Australia, the port dispute between Dubai-owned port operator DP World and the MUA union has resulted in a big win for port workers. They won a +23% rise over four years (with background help from the Canberra government), ending a dispute that has tied up some of their largest ports for months. Port charges are expected to rise significantly as a result.

The FAO World Food Price Index fell for a sixth consecutive month in January, a fresh three year low, since February 2021. Prices of cereals were down notably as global wheat export prices declined amid strong competition among exporters and the arrival of recently harvested supplies in Australia and South America both a which have had excellent growing conditions. Also, meat prices fell and dairy prices were stable. Overall global food prices are back to levels that held between 2007 and 2014. Food is 'cheap' in inflation-adjusted terms, worldwide.

The UST 10yr yield starts today at 4.02% and down -2 bps from Saturday. 

The price of gold will start today up +US$4/oz from Saturday at just on US$2040/oz.

However oil prices are little-changed at just under US$72.50/bbl in the US while the international Brent price is now just under US$77.50/bbl.

The Kiwi dollar starts today at just on 60.6 USc and holding its lower Saturday level as the greenback rose. It is -¼c lower than a week ago. Against the Aussie we are still at 93.2 AUc. Against the euro we open at 56.2 euro cents. That all means our TWI-5 starts today at just on 69.9 and down -10 bps from Saturday.

The bitcoin price starts the week slightly lower, now at US$42,893 and down -0.7% from this time Saturday. Volatility over the past 24 hours has been low at just on +/- 0.6%.

Tomorrow is Waitangi Day in New Zealand, a public holiday. This update will not be produced tomorrow.

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 Wednesday.