China revision brings sudden new caution

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Kia ora,

Welcome to Friday's Economy Watch where we follow the economic events and trends that affect New Zealand.

I'm David Chaston and this is the International edition from Interest.co.nz.

Today we lead with news the unexpected revision upward to the China virus data has markets stepping back and reassessing their views.

But first, inflation is rising in the US, now up to 2.5% in the year to January with core inflation up 2.3%. Today's CPI rise was driven by petrol (+12.8%), rent (+3.3% and medical care (+5.1%). And these price rises are wiping out all the rising wage gains the Americans are fond of talking about.

And the American budget deficit is inflating fast too. For the year to January the Federal budget deficit rose tp -US$1.06 tln and borrowing rose even faster to US$1.1 tln in the past year. Both were worse that the December result by some margin, and both exceeded the deficits the previous Administration left by an +80% larger deficit and +60% higher borrowing. And that is quite remarkable because the prior Administration had to deal with the GFC and this one was gifted a rising economy.

Across the Atlantic, the UK is also about to go on a major deficit spending spree without matching tax income.

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In China, there was a huge 'revision' of the number of COVID-19 virus infections, up from 45,200 previously to now 60,400. And the death toll has also been revised higher, from 1115 to now 1370.

The risks to their economy are magnifying. Even before the emergency, trade was going off the boil. Preliminary data shows that car sales tumbled -18% in January from a year earlier and are expected to drop more than -30% in February. Meanwhile sales of electric cars plunged more than -50% in January and, down for a seventh consecutive month.

The virus emergency is pushing Chinese commerce even more firmly online, and that will have a lasting impact. Housing sales are taking a back-seat, and developer stress will become extreme soon with large financial consequences. One will be for the New Zealand log trade.

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Equity markets are in the red everywhere today. The S&P500 is the latest to slip lower after some sizable falls in Europe, first triggered by the China data revision, and then by UK government ructions. The FTSE fell more than -1% and by far the largest decline by global markets. Shanghai was down -0.7% yesterday, Hong Kong by -0.3% and Tokyo by -0.1%. The ASX200 was a rare gainer (+0.2%).

The UST 10yr yield is now just on 1.61% and similar to this time yesterday.

Gold has risen again today, up another +US$7 to US$1,577/oz.

US oil prices have made another small gain today and are now just over US$51.50/bbl. The Brent benchmark has also firmed to just under US$56.50/bbl. Demand for oil is now expected to shrink for the first time in more than ten years as the economic impact of the Chinese virus spread.

The Kiwi dollar will start today softer at just on 64.4 USc. On the cross rates we have also dipped to 95.7 AUc. Against the euro we unchanged at 59.4 euro cents. That has weighed on our TWI-5 to 70.2.

Bitcoin is still over US$10,000 and is now at US$10,196 which is a -2% fall in a day.

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

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