Financial markets gird for bubble risk fallout

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 that while the 'real economy' is barely able to expand - but is in fact doing so modestly - there are two extreme bubbles brewing - in AI firm valuations, and in precious metals valuations. One or both will end sometime, and the losses will be extraordinary when they do, likely hurting the 'real economy' when it happens. But who knows when? Financial market risk aversion is in evidence today in the bond markets.

There are other stresses of course (geopolitical, retribution stupidity, commodity distortions, climate, etc.) and they have to play out at the same time.

But first in the US, their economic data is dominated today by the October version of the Philadelphia Fed factory survey for the important Pennsylvania rust belt region. That reported an unexpected sharp slowdown in activity and a six month low in this index. If there is a silver lining however, it is that new order levels picked up from what were very low levels. Not helping however is that firms are again reporting higher than average cost increases. Most firms reported struggles passing on those higher costs in higher prices.

American house-building activity has been struggling for the past five months but sentiment in the industry picked up in October somewhat, mainly on the expectation that lower interest rates would help. It's a sentiment improvement,not an activity improvement however.

Yesterday we noted slightly improved factory sentiment in the New York state area. But today we can report that their services sector is in a tough spot, in fact its lowest since the pandemic-affected January 2021. It is glum there and firms are not expecting much improvement.

In Canada, their small business sentiment has turned negative too.

But Canada's housebuilding sector is on a roll, reporting strong housing starts again in September and well above what analysts were expecting. That is now five of the past six months with elevated housing start data.

Across the Pacific in Japan, core machinery orders, excluding the large volatile sectors, fell -0.9% in August from July to ¥8.9 tln but it was much less than the sharp -4.6% drop in July. Analysts had expected a small gain however.

And staying in Japan, it now looks like Sanae Takaichi will in fact become prime minister after more coalition talks.

In France, the Macron-allied new prime minister has survived a no-confidence vote (on the second attempt) bringing some stability to their political mess.

In Australia, their September jobless rate ticked higher to 4.5% and their jobs growth, especially full-time jobs growth, came in lower than expected.

For the first time since June when rates started falling fast, global container freight rates rose last week, overall by +2%. In the meantime they had fallen -52%, so that suggests these costs may be bottoming out. They are now -50% lower than year-ago levels. There were modest rises everywhere, even in outbound China rates. There will be activity trying to front-run potentially new tariffs by the US, and there is Christmas-goods flows starting too.

Bulk cargo rates rose a net +2% last week too, but in between it was unusually volatile. These latest levels are now +12% higher than year-ago levels.

The UST 10yr yield is now at 3.97% and down -8 bps from this time yesterday.

The price of gold will start today at US$4273/oz, up +US$77 from yesterday and far away a new ATH. Silver is up to just under US$54/oz and an ATH. Platinum is roaring too, now at US$1732/oz and up +71% from the start of the year and approaching its 2011 highs.

American oil prices are down -US$1 at just on US$57.50/bbl, with the international Brent price now just on US$61/bbl.

The Kiwi dollar is at just on 57.3 USc, and up +10 bps from yesterday. Against the Aussie we are up +60 bps at 88.4 AUc. Against the euro we are down -10 bps at 49.1 euro cents. That all means our TWI-5 starts today at just on 61.8, up +10 bps from yesterday. Also, see this.

The bitcoin price starts today at US$108,652 and down another -2.0% from this time yesterday. Volatility over the past 24 hours has been modest at just on +/- 1.9%.

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.