Instability builds

Economy Watch

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 the string of losses and instability is building - just at the RBA and RBNZ meet to to review their OCR settings.

As something of a canary, private equity deals are failing to get funded now. You can’t do a leveraged buyout without the debt, and financing markets are seizing up. Certainly banks are much less willing to do the debt part of these deals. More than US$1 tln in these deals were done in 2021, and 2022 started strong. But now markets are repricing valuations and that undercuts deals in process. Investors no longer agree the price-to-earnings ratios that private equity is pitching. Some icon deals being promoted are failing. Further, many private equity portfolio companies will be facing cost pressures they can’t pass on to customers. High-cost leverage can push weak businesses into a critical condition. Expect to see some big-time collapses and value-destruction. Some will be very public. Failures will raise the price of debt for others in similar situations.

However first in Japan, new official data shows that last week, their government spent about NZ$34 bln intervening in the foreign exchange market to prop up the yen. It worked but it drained nearly 15% of funds it has readily available for these types of interventions (meaning they have about NZ$225 bln left in these reserves which doesn't seem a lot for the world's third largest economy).

Japanese industrial production surged unexpectedly in August to be +5.1% higher than a year ago, its best non-pandemic result since 2014.

Meanwhile Japanese retail sales rose by +4.1% in August from a year ago, exceeding market consensus of +2.8% and following a +2.4% gain a month earlier.

In China, there were PMIs released late yesterday. The official factory PMI reports a very slight improvement to a steady state (neither expanding not contracting). But the private Caixin version has it going the other way, a growing contraction.

The official release also included data on their services sector and that was negative, falling from a modest expansion in July to no expansion in August. That is the third straight month of a decrease in their services expansion.

This coming "Golden Week" isn't going to generate any travel-induced activity. Authorities are warning everyone to stay put during the week. Some cities are even putting their whole community into a lockdown again.

And in an ominous sign, ocean carriers are cancelling dozens of sailings on the world’s busiest routes including Chine to the US West Coast during what is normally their peak season, the latest sign of the economic weakness hitting companies as inflation weighs on global trade and consumer spending.

Hong Kong retail sales were reported for August, and they weren't flash, falling -2.9% year-on-year.

And staying in Hong Kong, Bloomberg is reporting that the value of Chinese firms listed there has sunk -14% to their lowest valuation on record. They are now trading at just 60% of their book value, the cheapest ever.

Investors may shifting funds back to the US in a risk-off flow, but not all funds are flowing that way. The rush out of China also is seeing investment move to Vietnam - and India.

India reviewed its policy interest rate late on Friday and as expected it raised it by +50 bps to 4.9%.

In the US, the inflation measure the Federal Reserve takes note of, the PCE, slipped in August from July to be +6.2% higher than a year ago. But the "core" result rose slightly to 4.9% and "stubbornly high". Personal income rose again at the expected rate, but personal spending rose faster than expected.

US petrol prices have stopped falling, still at about US$3.80/gallon as a national average and stable for the past month - and still +20% higher than a year ago.

The latest University of Michigan consumer sentiment survey has stayed very low, even if it did rise marginally from July.

In Europe, German reported that its labour force didn't grow in August, the first time in 18 months that this has happened. They also said the numbers out of work fell by -125,000 and their jobless rate stayed at just 3.0% of their 44 mln labour force.

Meanwhile the EU said its overall inflation rate rose to +10.0% in September. German inflation was higher at +10.9% whereas French inflation was at 6.2% which was about the lowest of the larger countries in the block.

European Union countries agreed to impose emergency taxes on energy firms' windfall profits, and began talks on their next move to tackle Europe's energy crunch - possibly a bloc-wide oil and gas price cap.

In Australia, their Productivity Commission is reminding policymakers that first home buyer subsidies push up housing values is counter-productive and doesn't make home ownership more affordable. "This money would be better spent preventing homelessness", they say.

The UST 10yr yield starts today at 3.83% and unchanged from this time Saturday. A week ago it was at 3.70%.

The price of gold will open today at US$1661/oz. This is down -US$1 from this time Saturday but up +US$20 from this time last week.

And oil prices start today unchanged from Saturday at just over US$79.50/bbl in the US while the international Brent price has risen to be just under US$85.50/bbl. These levels are similar to where we were at last week and eight month lows. Natural gas prices are still falling. OPEC is reported to be considering a big production cut in an attempt to prop up prices.

The Kiwi dollar will open today at just under 56 USc more than -1c lower than where we ended on Friday and back to a 13 year low (pandemic excepted). Against the Australian dollar we are unchanged at 87.7 AUc. Against the euro we are down at 57.5 euro cents. That all means our TWI-5 starts today at just 66.3, and down -160 bps in a week. That is an 11 year low (also pandemic excepted).

The bitcoin price is now at US$19,197 and down -3.0% from this time Saturday. Volatility over the past 24 hours has been low at just on +/- 0.9%.

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

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

Kia ora. I'm David Chaston and we’ll do this again tomorrow.