Even a China stumble doesn't derail the global expansion

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 news the US economy is powering a global expansion, covering a weakening Chinese economy.

But first up, the overnight dairy auction was a good one. Prices rose another +4.2% and are now up +5.4% since the start of the year and up +3.3% above year-ago levels, the largest year-on-year rise since July 2022. In New Zealand dollars the rise is +5.4%. WMP was up +3.4% and SMP was up +4.6%. But the most encouraging signals are from the foodservice commodities like cheddar cheese, up +6.3%, and butter, up +10.3%. This is the ninth good rise in the past twelve auctions so analysts will be reaching for their calculators on this one to look at a possible raising of their farmgate milk payout price forecasts.

Elsewhere, the weekly monitoring of American retail sales at bricks & mortar stores revealed a strong rise last week, up more than +6% from a year ago and showing excellent above-inflation growth. It is an impressive signal that Q1-2024 is developing positively for them.

American household debt is also rising, and although it hit a new record high, the rise was a modest +US$212 bln in Q4-2023 from Q3-2023 to US$17.5 tln. Home loan balances accounted for half the rise (up +0.9%) boosted more by rising interest rates than activity. Credit card balances however rose +4.6% in a quarter (+US$50 bln) but car loans rose only +0.8% in the same period. Of some concern is that delinquency rates rose for all debt types - except for student loans.

The ISM services PMI jumped much more than expected, continuing the strong data we have had in 2024. It validates the strong labour market data we have had recently. The result was led by a healthy jump in both new orders and the level of order backlogs. American service industry companies are however cautious about lingering inflation and the associated cost pressures.

In Japan, Toyota has raised its profit forecasts as it hybrid business soars. That is notable because EV makers are going the other way with shrinking margins and profits.

In China, it is clear Beijing is rattled by their economic stutter. Markets are betting big that some major short-term stimulus is about to be announced. It is also backed up by announcements that home team financials will be big buyers in stock markets, a manipulation that will benefit traders - and give them a profitable lifeline to quit markets. It seems like a naive strategy by Beijing. But you never know, it might work. China is also expecting interest rate cuts soon.

China is also struggling with a major cold weather snap, right at the start of their major New Year travel season. It is widespread and a big weather event.

The level of "de-risking" from China is expected to be on display in export data due out very soon from China and import data from the US. Analysts are expecting the trade deficit to be its lowest between the two countries since 2003 (when George W Bush was president). It has retreated fast in the past three years.

In Taiwan, inflation is easing, coming it at only 1.8% in January, a sharpish fall from 2.7% in the previous month. They were expecting a sharp easing, but only to 2.2% so this shift is an outsized one.

EU retail sales volumes declined in December from November, and rather sharply too. That puts them down about the same year-on-year.

But they are getting an unexpected boos from a rise in German factory orders in December, boosted by orders for major capital equipment. It was an impressive turnaround from November and recorded a creditable +2.7% gain in real terms from a year ago.

Across the ditch, the Aussie central bank held it policy rate in its Tuesday review. This was as expected. Perhaps the only observation worth noting is that they didn't wholeheartedly signal that they are done raising rates, something markets were perhaps expecting. They are still looking for reassurance that recent trends are sustained. The Aussie dollar rose on that thought; true not by much, but it did rise. The RBA has kept the option open to raise rates if inflation's retreat doesn't pan out.

And staying in Australia, retail sales barely rose in their Q4-2023 period in real, inflation adjusted terms. But on a per-capita basis retail volumes fell for a sixth straight quarter, down -3.5% compared to the same period in 2022.

The UST 10yr yield starts today at 4.09% and up +5 bps from Monday. 

The price of gold will start today down -US$3/oz from Monday at just on US$2037/oz.

However oil prices are +US$1 higher at just over US$73.50/bbl in the US while the international Brent price is now just over US$78.50/bbl. But they are still in this tight range that have been in for a while.

The Kiwi dollar starts today at just on 60.7 USc and holding its lower Monday level. Against the Aussie we are still at 93.2 AUc. Against the euro we open at 56.5 euro cents and a small gain. That all means our TWI-5 starts today at just on 70 and up +10 bps from Monday.

The bitcoin price starts today higher at US$43,183 and up +0.7% from this time yesterday. Volatility over the past 24 hours has been modest at just on +/- 1.2%.

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 tomorrow.