Here's our summary of key economic events over the weekend that affect New Zealand with news inflation stress is building worldwide and will have an increasing influence on elections and the ability of governments to hold on to office.
Firstly in China, the pandemic emergency is not improving - in fact it is getting worse in Shanghai. It is hard to know how bad it is elsewhere with a broadening clampdown on news reports. It might be concentrated only in Shanghai as it seems, but you would think the Chinese media would say so if that was the case. The risks to global supply chains are rising, not falling. The depth of their economic retreat isn't obvious. We are left seeking signals in oblique ways, like calls for 'helping hands'.
More directly, vehicle sales in China fell by -11% in March compared to the same month a year ago. Recall in February they rose almost +19% on the same basis, so the shift down is dramatic and the first drop of the year. It has clearly been induced by sinking consumer confidence in the face of lockdown pressures.
And house-buying is in the doldrums too.
And overseas money is starting to pull out of Chinese markets. Foreign investors sold a net -NZ$9 bln in Chinese stocks and bonds in Q1-2022, nearly the highest outflow on record. The amount isn't large, but the switch from large positives is. ESG issues weigh on Chinese investment, now it seems to have aligned itself with autocracies.
Japanese consumer confidence fell again and this survey is now at its lowest level in a year. Apart from the pandemic shock, we haven't seen such Japanese glumness since the GFC crisis.
But Taiwanese exports rose at a fast clip again, but now this is as expected and the latest March data didn't beat estimates. But in value terms, this was their best month ever and by a long shot, and nearly +5% more than the prior record set in November 2021.
Taiwanese CPI inflation is up to a 3.3% pa rate, which is fast for them and the highest in ten years.
The Indian central bank left its policy rate unchanged at 4% and its accommodative settings in place. But they are now talking about shifting to tighter settings soon, prioritising the inflation fight rather than growth. They are talking of 'tectonic' upward shifts in food prices (p86). Wholesale rates are rising and their 10 yr bond yield spiked on the commentary, hitting 7%.
In Russia, S&P has declared them in selective default on their foreign debt. That is because they used rubles to pay bond obligations and they were insufficient to meet the contracted obligation in US dollars.
The big global news is that food prices rose very sharply in March, pushing on up to all-time records. In fact the rise from February was the largest one-month jump ever, and the rise from early 2020 has been relentless and fast. All categories of food rose fast, but it was most noticeable for cereals which jumped +17% in one month alone. We have a looming global food crisis, one that will hit developing and emerging markets hard and return billions to poverty. An ex-UN food boss is urging calm, but that is necessary because a sense of panic is developing over this situation. It is worth noting that meat prices are not rising as fast as grain prices, not yet at least.
The USDA World Agricultural Supply and Demand Estimates (WASDE) released over the weekend backed that up. American supplies are stable, but the international situation has created raging uncertainty and sharply higher prices. Global stocks of wheat are at a 5-year low.
In the US, re-worked supply chains are inducing a faster run up in wholesale inventories. But it turns out this is still a minor influence - strong sales in a strong economy is the major reason those stock levels are up. It may have expanded at a +4% pa rate in Q1-2022, and faster since. The inventory/sales ratio has remained lower than normal and is still sitting near historic lows.
After a very strong expansion in February, the Canadian labour market expanded further in March although this time pretty much as expected. Their rapid shift from part time to full time employment was in evidence again this month. Wages only rose at a modest +3.4% pace however.
And we should note that Turkey's troubles are only getting worse. It now has a consumer inflation rate of 61% (officially, at least), and producer prices are rising at the rate of +115%. An iron grip will be needed there to avoid an explosion of anger and misery, and the problem in Turkey is, those suffering most supported Erdogan into power.
The first round of the French presidential election shows the country very split. The incumbent president seems to be getting about 30% of the vote, the far-right candidate about 24%, and the left's candidate about 20%. A second round will be required between the top two, and the left looks like it will swing to Macron if only to prevent Le Pen from a victory - in a scenario that has run many times in France.
The Australian election has been called - for about the last possible legal date, May 21. The opposition starts ahead, and the incumbent government is counting on another 'miracle' recovery. The opposition needs to gain seven seats in their 151 seat parliament to win. But if the incumbent government loses just one seat, it will mean a hung parliament. Cross-bench parliamentarians are a very odd bunch, given their even odder voting system.
At the end of last week in the US, there was another heady rise in benchmark bond yields, although things settled back at the close of the Wall Street Friday session. The UST 10yr yield will start the week at 2.70% so that is a +32 bps rise for the week. The UST 2-10 rate curve starts today positive at +19 bps. A week ago it was inverted by -5 bps. Their 1-5 curve is unchanged at +98 bps (+86 bps last week). Their 30 day-10yr curve is marginally flatter at +246 bps (+220). The Australian ten year bond is now at 2.99% and an eight year high (2.79% a week ago, so up +20 bps since). The China Govt ten year bond is unchanged at 2.80% (2.83%). And the New Zealand Govt ten year starts today at just on 3.47% and a seven year high. A week ago it was at 3.31% so a +16 bps weekly rise.
It is earnings season on Wall Street again, and that is likely to dominate equity price signals over the next few weeks.
The price of gold starts today at US$1947/oz and +US$4 higher than this time on Saturday.
And oil prices are a little-changed today from Saturday at US$97.50/bbl in the US. And the international Brent price is now just over US$102/bbl.
The Kiwi dollar will open unchanged at 68.5 USc. Against the Australian dollar we are marginally firmer at 91.9 AUc. Against the euro we are still at 63 euro cents. That all means our TWI-5 starts today still just over 74.2 and -30 bps lower for the week.
The bitcoin price is up fractionally from Saturday and now at US$43,076 and a +0.7% rise. Volatility over the past 24 hours has remained modest at +/- 1.0%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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82 Comments
https://www.metvuw.com/forecast/forecast.php?type=rain®ion=nzni&noofdays=3
That cyclone is not looking good news for growers. Poor old Gizzy going to get a drenching again. How much will this one cost...?
I tend to use https://forecast.predictwind.com/ these days as it allows you to compare multiple models. ECMWF seems to be the best for cyclone tracking plus it has a 8 km resolution for micro-site influences. All of the models have pretty much converged on one track now; it is not looking good for the East Coast.
Around here a lot of subdivisions terra form the land to build their concrete slab base. They like flat land where there used to be slopes. Also sometimes they add a metre or so to add to the view. A friend's house now has flooding problems after rain but never did before.
In Russia, S&P has declared them in selective default on their foreign debt. That is because they used rubles to pay bond obligations and they were insufficient to meet the contracted obligation in US dollars.
U.S. blocks Russia’s access to dollars for bond payments, heightening risk of default.
The US banking system has defaulted on it's legal obligations to Russian USD depositors.
If I owe money to the bank, and I can't repay it because a third party has taken all my cash, I don't think the bank will accept a hand-written IOU in lieu of dollars. It's my problem, not theirs. Offering roubles when the contract states dollars is the equivalent of paying in supermarket coupons.
The article is behind a paywall, was the payment nominally sufficient to meet their obligation at the current exchange rate? If so it should really only be viewed as a technical default.
A technical default is a deficiency in a loan agreement that arises from a failure to uphold an aspect of the loan terms (other than the regularly scheduled payments).
It was covered in a recent Oddlots Podcast: https://www.bloomberg.com/news/articles/2022-03-21/here-s-why-a-russian…?
Ashley Church has declared that the housing market won't crash, thank goodness - everyone can relax now.
No. There’s no crash coming, nor anything that looks remotely like a crash.
https://www.oneroof.co.nz/news/ashley-church-four-reasons-the-housing-m…
Greed and FOMO is only one (small) part of why prices have gone up so fast and for so long.
Most posters don't realise this, or don't care to learn. Much easier to just blame the landlords and wish them pain and devastation.
Average wage earners cannot buy a house now* and it is truly awful. But if you are pointing the finger at landlords, you're pointing the the wrong direction (well you need to grow a few more arms so you can point at a lot of people).
KJeldorian to buy average house in Auckland it is 12 X Average wage couples income. The house prices are way over valued and a 50% drop would still leave them over valued now rates are turning from emergency levels to game is over the market will crumble as so many people and speculators are over leveraged and got their because of FOMO and greed this will put them in a position where deposit will be gone and in negative equity for years. The market will find a bottom where average wage earners can afford to buy a still have a life.
Sure:
Increased demand through immigration
Decreased (stunted) supply through NIMBY / poor council planning
Incentivizing investment in housing instead of productive assets
No financial education taught in schools
Excessive marketing (not just housing but everywhere)
Stock market crashes and fears of reinvesting there
Christchurch earthquakes
RBNZ recklessness
Just scratching the surface...
One more Kj - banks becoming more predatory.
In the 1980s for example the banks paid decent interest on bank deposits, today they are a blatant rip off. I don't know what the difference in laws governing the banks were, but I suspect there was a significant change that occurred by stealth.
Yeah, it does. "Thou shalt not steal". Housing inflation caused by monetary policy is stealing. Anyway, you were campaigning for interest rates freezes yesterday, you can't just define morality by what favours you monetarily. We have negative real interest rates. That's stealing.
Once again, deeply flawed from Church. I would estimate CCCFA was about 30% responsible for FHBs disappearing, 70% unaffordable high prices and rising interest rates. Despite prices falling back circa 5% from peak, prices are still way too high, and interest rates are increasing. FHBs won’t be back in any meaningful numbers in 2022.
And he’s Far too dismissive of a 20% fall occurring.
Where I do, of course, agree with him is that the RBNZ will not raise the OCR far enough to destroy the housing market. Even if my call of a peak OCR of 1.75 proves incorrect, I still doubt very much it will go higher than 2.5.
To even consider "calling a peak" makes some very specific assumptions. ie That the OCR rates have to have a peak in the near term. What about the scenario that it rises really slowly for a really long time? Or rises slowly then starts rocketing up later only to take off like a hypersonic rocket even later?
Inflation's stress gets pervasive
The real inflation index you don't need to trust
Check it yourself. Daily, unbiased, data-driven, real-market inflation rate available on-chain for your DeFi product.Link
Earlier investors and speculators left property market and now is FHB particularly in Auckland as how many FHB even though having 20% deposit on a million dollar house can afford a mortage of more than $1000 per week and interest hike has just started
https://www.newshub.co.nz/home/money/2022/04/new-zealand-property-first…
Likes of RBNZ has distorted the economy, which will take time to heal and will not be without bloodbath.
Just last year mortage was between $650 to $750 per week for $800000 mortage - not bad and today is between $950 to $1150 per week.
One may not drown in five feet water but than every centimeter is fatal unless knows swiming / is cash rich. Unfortunately many borrowed in extreme under FOMO and may be worst hit.
Today on a mortage repayment of $650 to $750 could only borrow between $500000 to $600000 and hard to get anything in Auckland. So speculators are out by choice but FHB are been forced out by government and RBNZ.
I think this increase in debt won't sink a lot of people as the bank stress tests these loans at about 6%. However these debt serf's will have to accept a substantially lower quality of life due to the higher interest rates. There will be no family holiday's, sky t.v and rib eye steak. They will spend the next 20-30 years grinding away just trying to get on top of this debt. All in all the current group of people who brought houses in the last 2-3 years will have a quality of life substantially lower than the generation preceding them.
If earlidr stress test wss at 6% when interest rate was ar 3% or 4%, noew at 6% it will be at 8%., Beside more than getting loan, the issue of paying it without stress on family is to be seen.
You are correct, will have to live in bread and butter unless income increases substantially. Irony is that even by sacrificing on living, will still be in shithole as that is what is available in that budget.
What people misunderstand about the stress test, is that it is the amount that the bank can see the lender having the ability to liquidate in cash or in other assets to keep paying the mortgage to keep the bank's position secure. At least long enough to get the property to market and sold to cover the bank's position.
That will include, you selling any other assets, like boat, bikes etc, cashing in Kiwisaver, working extra hours, cutting back on holidays, health and education expenses, etc.
What it is not, is an ability for the homeowner to keep living the lifestyle they were accustomed to prior to their mortgage costs increasing.
It ain't called a 'Stress' test for nothing.
I'm not sure about the generations in between Donny, but i bought my first home in the mid 1980s and what i had to do to afford it left no quality of life, as it is defined today, at all! Every last cent was gong to the mortgage. It took relocating to Whangavegas to change that!
I'm keen to know what rules there were around extra payments in the 1980s compared to modern loan products, which seem quite restrictive.
One way to ease the burden on people facing declining family home values could be to force banks to accept extra payments without punitive break fees or costs to do so - so that people have a shot of getting ahead of their debt even if their asset values are plummeting. Not sure how you'd go about legislating it though, and I'd imagine it would come with severe push-backs from the banks.
With westpac you can make up to 20% increase in payments on any fixed mortgage. It can be any figure you like from 0-20% and you can change for every payment if you like.
https://www.westpac.co.nz/home-loans-mortgages/manage/pay-off-your-mort…
Back then it doesn't seem to be an issue. There weren't "break fees" like there are today.
I had a discussion with a chap i knew who was a local bank manager, some years back. We discussed break fees. i asked him what they were and he explained that the bank was losing out on making money when a loan was paid back early. So I asked him at the time if banks sat on the funds of a repaid loan and didn't re-lend them out to other customers. he didn't like the question and tried to dodge it, so i told him that the rationale for "break fees" was BS and didn't stand up to scrutiny. I didn't understand fractional banking at the time, but would have laid that on him too. As it was when i owned a bunch or rental properties, break fees didn't exist and my bank did all right for me and from me.
Construction in Aus looks like it's in real trouble as well, same as here, I suspect: https://www.9news.com.au/national/condev-probuild-privium-more-major-au…
I think the construction slump later in in 2022 and into 2023 is going to be especially ugly. Possibly uglier than the GFC because there are so many additional factors this time.
After the GFC there was the Christchurch rebuild to boost the economy/industry but I can’t see any further big government spending on the horizon now, not after the Covid splurge. After the GFC, NZ economy was somewhat protected by the relative strength of the Chinese economy (as was Australia) but that is not going to be the case this time either. China is struggling.
The supply line, materials shortages and inflation issues aren’t going to have disappeared by then and the industry has swelled so much recently to employ more people than a normal building boom, because of border closures. A withered hospo and retail sector saw a lot of extra people joining the trades, becoming RE’s or else some other housing market aligned industry. There have been a lot of froth jobs in this housing/building boom.
Not much of the Covid cash has gone into productive industries, so if the building and housing market bubble bursts, it’s going to be a lot of job losses, in what looks to be a global recession looming.
People are understandably worried about inflation, but there is a perfect storm brewing here. And I don’t think there is much RBNZ can do to shield NZ from it either way.
In the US, re-worked supply chains are inducing a faster run up in wholesale inventories. But it turns out this is still a minor influence - strong sales in a strong economy is the major reason those stock levels are up. It may have expanded at a +4% pa rate in Q1-2022, and faster since. The inventory/sales ratio has remained lower than normal and is still sitting near historic lows.
There’s a novel idea
Walmart to offer new truck drivers $95K-$110K a year to combat shortage
https://www.google.co.nz/amp/s/www.nbcnews.com/news/amp/rcna23482
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