Here's our summary of key economic events overnight that affect New Zealand with news that, apart from fossil fuels, we are seeing a broad retreat in most commodity prices today.
And first, even though the slip was small last week, American mortgage applications fell again week-on-week taking this downward trend to nine of the past twelve weeks. Benchmark mortgage interest rates fell for a second straight week.
April data for American durable goods orders came in marginally softer than expected. They rose +0.4% month-on-month to US$265 bln in April, following a downwardly revised +0.6% rise in March. They are now +10.5% higher than a year ago. This is a sign business spending moderated somewhat. In a good positive sign, orders for capital goods rose more than +14% year-on-year in a rising trend.
The release of the May US Fed minutes revealed that most of their policymakers judged that +50 bps increases in the fed funds rate would be appropriate at the next couple of meetings. They also recorded that a twist to a restrictive stance of policy may well become appropriate, and the timing of that shift will depend on the evolving American economic outlook. There is an urgency here that they want to recover lost ground as inflation has burst on them faster than they expected. But markets seem unconvinced of their commitment, especially as those minutes hinted a late 2022 pause may be needed.
There was another large US Treasury bond auction a few hours ago, this one for their 5yr bond, and this one very well supported too. Like yesterday's, median yields are slipping. Today's came in at 2.66% compared to the prior equivalent event a month ago at 2.72%.
The American federal budget situation is being repaired fast. This year's deficit is expected to be under US$1 tln, a sharp improvement from the -US$2.8 tln last year. Recall it hit -15% of GDP at the end of the Trump presidency. This year it may have recovered to -5% of GDP. Still, surpluses don't seem to be on the horizon any time soon.
China seems to be going the other way, worried things are slipping into dangerous territory. In a huge teleconference attended by 100,000 local officials, Premier Li warned China's economy is facing the risk of "sliding out of a reasonable range"... "for an economy as large as China, once the economic operations fall out of a reasonable zone, it will take a long time and huge costs to bring it back," he is reported to have said. Meanwhile, President Xi is nowhere to be seen dealing with the growing economic crisis. He is meeting with security officials.
Malaysia's CPI inflation came in at 2.3% extending the trend of modest to moderate inflation levels in ASEAN countries. Overnight their finance minister said there is now room for them to start raising interest rates.
Yesterday we noted a surprising improvement in German business sentiment. Today we can note an equally surprising, if minor, improvement in German consumer sentiment. It is still quite negative, but less so. In the circumstances of war and super-high inflationary pressures, it is not a result you might expect.
The ECB is warning a house price correction in Europe is looming as interest rates rise.
In Australia, the incoming administration is warning that their federal financial situation is worse than they expected, and with the RBA about to raise interest rates as inflation zooms, they are additionally constrained on spending plans over and above their election promises. They are saying economic pain could be with them for some time to come.
The UST 10yr yield will start today at 2.75% and little-changed. The UST 2-10 rate curve has flattened slightly to +25 bps and their 1-5 curve is little-changed at +74 bps. Their 30 day-10yr curve is also marginally flatter at +220 bps. The Australian ten year bond is now at 3.23% and down a mere -1 bp. The China Govt ten year bond is marginally softer again at just under 2.80%. But the New Zealand Govt ten year is up +6 bps at 3.55%.
Wall Street has marked time today with the S&P500 up +0.3% in late Wednesday trade. The NASDAQ has recovered some of yesterday's dump. Overnight, European markets were all up about +0.7%. Yesterday, Tokyo ended down -0.3%, Hong Kong recovered +1.2%. Shanghai closed up +0.7% with a late surge. The ASX200 ended its Wednesday session up +0.4%, while the NZX50 fell -0.7% on the day.
The price of gold is lower today, down -US$14 since this time yesterday at US$1851/oz.
And oil prices are virtually unchanged today and still just on US$109.50/bbl in the US, while the international Brent price is still just at US$111.50/bbl.
The Kiwi dollar will open today little-changed against the US dollar, now at 64.6 USc. Against the Australian dollar we are firmer at 91.4 AUc. Against the euro we are also firmer at 60.6 euro cents. That all means our TWI-5 starts today at 71.5 which is up +20 bps from this time yesterday.
The bitcoin price has risen +1.7% from this time yesterday and is now at US$29,788. Volatility over the past 24 hours has been modest at +/- 1.9%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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118 Comments
In Australia, the incoming administration is warning that their federal financial situation is worse than they expected, and with the RBA about to raise interest rates as inflation zooms, they are additionally constrained on spending plans over and above their election promises. They are saying economic pain could be with them for some time to come.
I'm hearing some house builders in Queensland in particular are shutting up shop or winding down their operations, apparently an impossible market to make money in.
Sounds like there's going to be the same phenomenon going on across the globe.
Yep this is the first industry to start laying off people as we head to stagflation. You are going to have to be on some sort of salary and secure position to borrow 800-900k at 8-9% interest rates, as well as all the other inflationary pressure's, gas is not going to come down anytime soon. $350 payment will cover a grocery basket for a week. One can already see the bigger building firms offering 6-7% return on investment, just like before GFC.
I wouldn't be surprised if most of those in lower-wage jobs in sectors with high exposure to economic downturns are also among the households that are the most financially geared on the housing market.
Worse still, these people have most likely put every last bit of their savings down as a deposit (the equity which is going to be wiped out soon) to get on the property ladder. So no buffer whatsoever to weather the financial shock about to come!
Which is why house prices have a floor. Unless our population goes into serious decline, house prices will hold up. There will be a few bargains no doubt as a few builders go under but it will be the same old suspects with their "Vulture Fund" just sitting there in cash that are already preparing for that.
"Unless our population goes into serious decline, house prices will hold up. "
Really ! How reassuring. But wait, isn't our birth rate 1.6 births per woman when ZPG is 2.1 ? And with the torrent of the generally young, educated, skilled and generally white taking off to greener pastures, isn't this something of a perilous assumption ?
Just read on Facebook from a Property Accountant company in Waikato:
Currently can't rely on immigration to improve house market or to increase rents
With a spreadsheet here showing the customs Arrivals/Departures stats from April 2020 to 24 MAY 2022. Total = Net Loss of 114,636.
Dec21 11,241 loss, Jan22 6,793 loss, Feb22 8,338 loss, Mar22 5,996 gain, April22 16,310 loss, May22 292 gain.
So where have all the houses gone?
Trying to find a rental right now to house my family, and the rental market is brutal! Every rental, no matter how run-down or expensive, has 100 or more applicants.
Every rental agent that I chat to says that they are overwhelmed by applicants. Every viewing has lines of people waiting by the door.
We have had years of low or negative immigration now, and plenty of construction activity. Yet there is a very real shortage of houses for Kiwis (Kiwi families) to live in. My family is in a stable position financially, but it is heartbreaking to see the other parents at these viewings who are obviously under a lot of stress who are trying, and failing, to find a roof to put over their children's heads.
Perhaps there are a lot of empty houses? Do we need some kind of empty house tax?
According to most here, rents should be falling. This isn't going to happen though and your anecdotal evidence supports this. Potential buyers will hold back (don't want to buy, can't afford higher interest rates, think prices will fall) and landlords are exiting the market. Perfect storm.
Go onto Trademe and look at 4 bed houses for rent in Auckland. There are a few hundred, don't envy you.
The new tax rules mean you cannot buy a house and rent it out.
Call it closing loophole if you want to buy the red teams spin, but the rental supply will crash as a result and there is no new wave of incoming new builds now that anybody with half a brain is putting their build plans on hold.
I've been watching many Landlords carefully pulling the houses apart, piece by piece. Hauling trailer loads of weather boards, doors, flooring and timber framing off to Musgroves building recyclers.
They'll then leave the land empty as a middle finger to society, and the Government who dared to make them pay their fair share of tax.
My wife had a minor nose-to-tail in our Q7 (value approx $34K) a few months ago, not enough hard enough for her coffee to spill in the cupholder, or her bag to slide off the front seat. A tiny scratch on the back of the ute she hit. The car had a radiator puncture from the ute's towbar, and panel damage, but she was able to drive it to the side of the road because there was no engine or suspension damage. It was written off, and we got a full payout with no negotiation of value. Mad times.
I'm glad Australia might have to dial back on growth, the cost of living and wage gaps have been getting too large. New Zealand is in the potentially perilous position of having its future poached for the benefit of an oversized mining camp. We need to catch-up now.
One for the techno-optimists:
https://thegreatsimplification.libsyn.com/dr-simon-michaux-minerals-bli…
A withdrawal and apology just based on the musings of one obscure scientist in Finland?
There is always an "expert" to support every view possible. And if you want, you can always find pessimistic "experts" about any technology. You are very pessimistic about nuclear, about rubbish dump mining, etc. Which is fine, but remember that there are plenty of "experts" who are very optimistic about these technologies as well.
by Yvil | 25th May 22, 9:47pm
When Covid hit and Labour shut the borders and locked us down in April 2020, we had no guests at the motel at all. Instead of complaining, I pitched hard to MSD (= WINZ) to provide emergency accommodation. It was the best move to stay alive, so, yes we provide emergency accommodation as well accommodation to tradies and the few remaining NZ travellers.
by HouseMouse | 25th May 22, 9:54pm
right so there we go! Yvil the slumlord, and Yvil the HYPOCRITE. The guy who's often whingeing about the government, about welfare and handouts. And there you are effectively getting a handout from the government.
You're a dick, you really are. You've really been found out here, I'm afraid.
There we have it folks. What a hypocrite.
Maybe I get a bit carried away some times, I apologise for that, I guess I have a low tolerance for BS, hypocrisy and misrepresentation. But I like to think I have offered a fair bit over the last few years.
interestingly, several people have posted for the first time on this website showing appreciation for my observations, and asking my views. I take that as a complement.
by Yvil | 4th May 19, 4:02pm
I would never rent to beneficiaries, they're far too much trouble as tenants. If they can't look after themselves and need benefits, how could you expect them to look after someone else's house
https://www.interest.co.nz/personal-finance/99504/government-provide-mo…
Yes, I stand by that, I would never rent a house to beneficiaries. The reason why we ave WINZ guests at the motel is that we have staff 24/7 to look after them, (we had the police at the motel on Saturday night and on Monday for some the beneficiaries). In a residential tenancy, there is of course no one to check on the beneficiaries daily.
Why slag Yvil. He's just doing what he can in the situation he faces.
That said the emergeny accommodation thing and it's causes are evil. It's the fault of people much further up the foodcain than Yvil. We have a government and bureaucracy who could not implement any fundamental fix or intend to. .
Direct your anger there.
I'm not slagging Yvil for providing emergency accommodation. I think in a civilised society it would be appalling to have families in need of shelter while accommodation stood empty, so I have no issue with emergency housing being provided by motel owners. I don't think that makes those providers slumlords or parasites or anything else. Merely pointing out that in his own words, Yvil vowed never to rent to beneficiaries - until it started to cost him money. HouseMouse was right to call him a hypocrite.
Again, I stand by that, I would never rent a house to beneficiaries. The reason why we ave WINZ guests at the motel is that we have staff 24/7 to look after them, (we had the police at the motel on Saturday night and on Monday for some the beneficiaries). In a residential tenancy, there is of course no one to check on the beneficiaries daily.
Yvil's point is about business survival. Government policies took his business away from him, but luckily government policies then provided him with a means of getting part of it back. he never said he gets more off WINZ than off commercial motel customers. But half a feed is better than no feed. That is his point. He also mentions that he is providing a much needed social service as well. Cut out the moaning about him.
When the devil drives, needs must
A biblical example occurs about Yvil (pun intended) - Jephthah vows to God that he'll sacrifice the first thing he sees as thanks for victory in battle. Turns out it's his daughter...He goes ahead with it anyway even though he knows human sacrifice is not allowed. What's better, breaking a vow with positive implications, or keeping it with inhuman consequences?
A bit harsh HouseMouse. Yvil's heart is in the right place. He has taken full advantage of opportunities as he has found them and according to the rules and regulations of the land. He is, perhaps, a bit tone deaf at times. Some ingrained cultural minutiae differ to the classic Kiwi approach. I'm sure he wishes only to help others in the best way he knows how.
I have friends who own motels and they would never have rented to WINZ before people because you have potential conflicts with your paying guests.
COVID didn't lead to a reduction in business it went to zero business. Many motel owners have large annual leases and ongoing fixed costs are huge. So you don't "tighten your belts", you get cleaned out. Would anyone on here lose everything as a noble gesture to business principles because the government decided to close the borders? No, you would all adapt, hustle and try to find a way. The pivot meant they stayed alive, were able to pay their staff and now they are transitioning away from WINZ and back to tourism.
So many armchair critics choking on their rage on this website. If you're angry, go after the government which tactically agreed to this situation.
Now this is a curious comment; "Meanwhile, President Xi is nowhere to be seen dealing with the growing economic crisis. He is meeting with security officials." Ignoring the link because i can't read Mandarin but there are a whole bunch of connotations in reading this. Just what is the meeting about? National security, personal security, party security? Some positive, some negative. No matter which side of the fence you sit on.
Seems its all about various super-excellent police stuff...just hit the English button in Chrome for Google translate...
Xi Jinping Meets with Representatives of National Public Security System Heroes, Models and Meritorious Collective Commendation Conference
"....commending the national super-excellent people's police, the Ministry of Public Security's commending the outstanding people's police of the national public security system outstanding units and the national public security system were read out...."
The United States, as the near unanimous vote to provide nearly $40 billion in aid to Ukraine illustrates, is trapped in the death spiral of unchecked militarism.
Indeed: Ukraine after 90 days of war
It’s very interesting. There has been a quite a bit of discussion recently that there is a power struggle emerging in China with Premier Li attempting to sidelining President Xi. Xi, having concentrated power in his own hands over the last few years, is seen as personally responsible for the trouble China is currently facing and Li is using this as opportunity to push back, positioning himself as the economic ‘fixer’.
The 2-year Treasury right now is the key point, the spot on the yield curve which is influenced mostly by potential alternative rates including those offered by the Federal Reserve. Because of this, the market for the 2s is looking forward at what those alternate rates are likely to be, then pricing yields accordingly.
Since the FOMC sets those alternative rates, most of the time – like the whites and reds in eurodollar futures – the 2s simply project forward policymakers’ intended rate path. If officials say they are going to aggressively raise their policy rates, that’s where prices in the 2s are going to begin.
However, there comes a time when it just isn’t so simple as Fed says, market does. Even short-term maturities like the 2-year note are going to face complications, including those which might be priced into the back end of the yield curve. Inversion there, as it is now, indicates a strong emerging consensus about all manner of eventual negative outcomes only starting with recession. Link
Strobe,
Reading between the lines are you also wondering if it isn't the best approach that the central banks say they are going to get inflation under control, but in the meantime inflation is eating away at the debt that has been racked up so the slower they are the more debt has been inflated away.
So eventually when inflation comes back into their target band they also get to say we helped clear some of the excessive debt.... or have I just put my tinfoil hat on a bit tight this morning?
I thought I had come up with it myself regarding to Covid conspiracy theories - I've had experience working in government and my version of Occam's Razor based on that experience was
Never attribute to government conspiracy that which can be adequately explained by incompetence
Before I named it after myself I checked the web. Napoleon used a version
Never ascribe to malice that which is adequately explained by incompetence.
Turns out there is 'nothing new under the sun...everything is vanity'.
MidNZ,
I would recommend watching Princes of the Yen to help you understand how governments, central banks and retail banks can collude together, pretending to have the best interests of the people at heart, while systematically enriching themselves at the expense of society.
Princes of the Yen | Documentary Film - YouTube
Based on the experience of the Japanese and what caused their bubble in the 80's and ultimately lead to now decades of stagnation - that is what we could be facing due to a lack of regulation and the excess lending against our housing market.
As long as the pay increases come with it of course. If you have inflation + rising interest rates, but wages aren't going up to compensate then the debt burden is not being reduced, it's being made worse.
A borrower with a $500k mortgage has effectively had a $10k p.a. pay cut, if they locked in 2.5% a couple of years back and are now refinancing at 5%.
Net income surely.
If you consider the $500k loan to be serviced at 30% (common serviceability metric, not necessarily actual) of gross income at 2.5%, that's $455/wk off a ~$79k income. After tax single income $1,170/wk in this scenario, leaving $715 for bills and food.
Moving to 5%, payment changes to $617/wk, leaving $552. If you adjust $715 for 7% inflation over 1 year, you'd need $765 to cover the same costs. So $213 down a week = $11,000 net income deficit.
The gross income needed to cover the net decrease would be $96k. So a $17k gross deficit in this specific scenario.
Nzdan,
You are right, I was just trying to keep my example simple. If pay doesn't go up (Or even worse unemployment goes up and a decent salary is lost and replaced with the unemployment benefit) then yes at an individual level the debt burden is worse.
But at the same time at the macro level the debt burden will be lessening if there are defaults that begin happening due to this. Terrible for the individual but from the current narrative it seems like the medicine that is being prescribed?
Sure that is definetely the case for people with larger mortgages. Those with low mortgages it might be an extra $50 a week, with a house paid off it has no effect and without a mortgage and looking to get into the market it will be better to have a lower overall debt.
I know people love to speak about wealth effects but I would argue that people spend more when they don't have to save nearly every dollar towards a house deposit and then most of their income to a mortgage to an overseas bank.
That could happen, talking big until it gets back into the target band on it's own, either way it's still up huge. One point I think Government/Central Banks are missing and I don't see it pointed out by many economists is that inflation expectations are a new beast due to social media that they are having little control over.
In times past the main source expectations could be sourced mainly from funded Newspapers/Radio and TV News, now its social media driven by anyone and everyone with a phone. I can't scroll more than 5 videos on Tiktok without somebody speaking about inflation, showing raised prices in supermarkets, telling people how to ask for more money at work due to inflation, it's all inflation, inflation, inflation smashing social media, especially younger people. I know what I just said was a bit off topic but something I have been noticing the past year or two that was never the case before.
Strobe,
I don't think it is off topic, it is possible but unlikely that the RBNZ has updated its communication plans to communicate with people who source their information through these methods. This means that the "experts" fill the vacuum and as inflation seems to be impacted by perception I think it is a big risk
Xi will be gone in a year but it is going to be a scary year and I think we're going to see a massive power play complete with secret police and information control.
He got the messaging to the Chinese people wrong on vaccines and now the people aren't vaccinated enough, the vaccines they do have aren't very good, and the messaging didn't adapt as variants came to the fore and changed the nature of the health threat. Dead man walking.
He can't even deflect attention with a quick war vs Taiwan because a) the USA has pledged to defend the island and b) the economic devastation being unleashed on Russia is nothing compared with the wind back China would experience.
Do you think Xi would concur? He is in the enviable position of head of the only party with no elections to contend with and powerful population control. Is it possible that China is prepared to take a serious medium term hit to its economy to permanently damage the Western economy (remember Xi and his party have the tools to stay in power regardless). This from Soros speech yesterday:
Soros said that China’s harsh response to a resurgence of coronavirus cases with a “zero Covid” policy have pushed the world’s second-largest economy into free fall. Unless President Xi Jinping reverses course, which Soros views as a near-impossibility, this will only gather momentum, the 91-year old said. The damage, piled on top of a crisis in China’s debt-laden real estate sector, will be so bad that it will affect the world economy, he said.
“With the disruption of supply chains, global inflation is liable to turn into global depression,” Soros said.
The assumption here is that leaders like Putin and Xi actually care about their countrymen. The evidence is that they dont and are happy to use them as cannon fodder or sacrifice their wellbeing if it is in the best interests of the leaders. So lauding their thuggish police force is something he will see as a good thing to do to keep them on side
We should remember this when trading with China as we are even further down the pecking order than their fellow countrymen and a shortage of food hasnt cost them their positions previously. After all hunger within the populous would be the fault of the evil west
An earlier comment referred to USA extending the Ukrainian war. Really!! Ukrainians have been slaughtered by Russians (and others) more than once in the last 100 years - Stalin alone responsible for more than 6 million deaths so lots of Ukranians see this as an existential struggle (yet again) as do some of their neighbours - extending the war is not driven by USA but Putin is happy to spread that lie along with all the others
I disagree. Both Putin and Xi would have happier lives if they ran away to California with some of their loot and wrote their memoirs. They do think they are sacrificing themselves doing the best for their fellow countrymen (rather similar to our labour Govt thinking it is doing the best for poorly paid hard work Kiwis). They have just lost touch. Remember Nicolae Ceaușescu making his speech to the masses and the astonishment on his face when he was booed.
They are quite different from say Mobutu in the Congo or Duvalier in Haiti who knowingly pushed their populations into desperate poverty.
I wish I believed you are right about the 'wind back China would experience'. I doubt it; too many vested interests wanting to keep in with China; it would be portrayed as a civil war whereas Ukraine was an independent nation and officially recognised as such even by Russia. Who recognises Taiwan as an independent country and what military and economic clout do they have? How many retired politicians and academics depend on Chinese organisations for some of their income? The Chinese Communist Party has played a long game smartly. With the control they have over all their media they can change political direction instantly (ref like Stalin's enmity to Hitler changed overnight).
Wall Street has marked time today with the S&P500 up +0.3% in late Wednesday trade. The NASDAQ has recovered some of yesterday's dump.
Lucky, it was starting to look very much like more unicorns would be slaughtered. I was starting to fear people would realise earnings do matter.
Re Xi's longevity, I agree with what you and others have said and would like to add that all this takes place against a background of the long simmering Xi - Jiang Jemin feud which is coming to a head as it is life or death and Xi' policies have cost Jemin's faction copious losses in power and MONEY. Big time.
When Covid hit, govts panicked as demand evaporated and injected stimulus to prop up the economy. Those graphs scared the crap out of them when you lose 30% gdp its not a surprise. What they didn't realize was supply chains were massively constrained as well due to lockdowns. This resulted in large amounts of money chasing lesser goods. Inflation was the result.
Now, when a business experiences higher input costs from materials and labour, they tend to absorb the hit and suck it up for 6 months. But when things don't improve they pass it on, prices increase. Inflation then comes entrenched.
Central banks incorrectly diagnosed inflation as transitory because they figured supply chain issues would be fixed. It hasnt, in fact it has worsened with energy crunch shut down of factories, conflict, nationalism of critical components/raw materials in the supply chain, food supply conflict, ESG pressures, labour shortages. Hence why interest rates now need to go up quickly to tamper demand. Because supply cannot keep up.
Asset prices (stocks, property etc..) have been inflated by 0% interest rates, enormous risk taking and leverage. Now these cards are going to topple, so we can return to an economy that makes sense, where there is a fair return on money.
Its just the classical boom bust cycle, central banks just made 2 mistakes (too much covid stimulus with no solution for supply, inflation is transitory assessment was incorrect)
You're spot on there with your assessment. I also think that RBNZ/Government has realised that by letting the housing market go unobstructed that it leaves them with little option to use their main inflation weapon when necessary. If houses were a more comfortable 3 - 4 DTI a 3 - 5% OCR would be no trouble at all to reign in spending, however last few years people have taken no regard to interest rate rises and ticked up as much as the retail banks would allow.
Interesting, that Mike Smith, former Labour official, has said the quiet part out loud: Noone, especially Parliament, has got to debate let alone Authorise, the military assistance to Ukraine. Effects on relationships with China, in particular, unknown but most likely not positive.
"We should not just be able to enter into war at the whim of the government of the day.
The present situation is disastrous because it's removed any chance of a negotiated peaceful settlement and any chance of a continued independent policy."
Re the Xi meeting link. His official title in this article is listed.
"General Secretary of the CPC Central Committee, President of the State, and Chairman of the Central Military Commission Xi Jinping"
I assume "dictator of China" was taken up?
Seems like china's woes are somewhat under reported at present?
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