Breakfast briefing; ECB bursts into action

Business / news

US data off its highs; Japanese exports shine; ECB bursts in action on fighting inflation; South Africa follows; container shipping costs retreat; UST 10yr 2.92%; gold up and oil down; NZ$1 = 62.1 USc; TWI-5 = 70.9

22nd Jul 22, 7:20am by David Chaston

Here's our summary of key economic events overnight that affect New Zealand, with news central bank actions to lean harder against inflation got more pointed today. And that has moved bond markets especially.

But first, US jobless claims inched higher again last week and now 1.45 mln people are on these benefits, well off their all-time lows of a month or so ago, but still historically very low.

The Philadelphia Fed factory survey for July is now showing retreating conditions. They report on a heartland manufacturing area and the fall away in new orders will be of a special concern. The price pressures are easing but they still remain high from an historical perspective. On the 'plus' side, the jobs and current activity categories of this survey remain quite positive.

Nationally and more generally, the Conference Board leading index remains off the boil, but only minorly and little changed in July from June, and is still historically very high.

As expected, Japan reported a larger trade deficit in June from the higher cost of oil. But the deficit wasn't as large as some had feared. However, the more important news here was the unexpected strength in Japanese exports, reinforcing that there is strong global demand for Japanese high-tech machinery. Exports rose more than +19% in June from a year ago, the 16th straight month of gains.

Even though the Bank of Japan is seeing higher inflation of +2.3% core, and up from 1.9%, and they are watching commodity prices rise, they have left their ultra-loose monetary policy settings unchanged for a 78th straight month. They downgraded their 2022/23 growth forecast from +2.9% to +2.4%.

In China, HSBC has become the first foreign lender to install a Chinese Communist Party committee within its investment banking subsidiary in the country.

The European Central Bank has turned suddenly active. They raised their three key interest rates by +50 bps, the first increase since 2011 and ending eight years of negative rates, in an attempt to bring inflationary pressures under control. This was double what was anticipated. They also said that further normalisation of interest rates will be coming soon. And they started a new bond purchase scheme to help more indebted member states to cap the rise in the borrowing costs "and limit financial fragmentation".

The South African central bank also surprised markets with an outsized rate hike. +50 bps was expected but they delivered +75 bps to 5.5%.

In Australia, there are growing calls to shut their border with Bali to keep the foot & mouth disease out. Fear of what it will do there is rising fast. Returning surfers seem to be the primary risk.

Container shipping costs fell again last week and are now -24% lower than a year ago. The biggest retreats are for the China trade. The Baltic Dry index is going sideways.

The UST 10yr yield starts today at 2.92% and down -11 bps from this time yesterday. The UST 2-10 rate curve is little-changed today, now at -19 bps and their 1-5 curve is slightly more inverted at -9 bps. Their 30 day-10yr curve is now at +108 bps and a little flatter. The Australian ten year bond is down -7 bps at 3.51%. The China Govt ten year bond is down -1 bp at 2.78% and a one-month low. And the New Zealand Govt ten year will start today also down -1 bp at 3.80%.

On Wall Street, the S&P500 is up another +0.6% in their Thursday trade to be up +3.0% so far for the week. It's an earnings rally, and analysts see it continuing for a while yet. Overnight, European markets were mixed with Paris up +0.3% and Frankfurt down -0.3%. Yesterday Tokyo ended up +0.4% in their Thursday session. Hong Kong was down -1.5% and Shanghai was down -1.0%. The ASX200 ended its Thursday session up +0.5% and the NZX50 was up +0.6%.

The price of gold will open today at US$1714/oz in New York which is up +US$13 from this time yesterday.

And oil prices are down -US$2.50/bbl at just under US$96.50/bbl in the US, while the international Brent price is now at just over US$100.50/bbl.

The Kiwi dollar will open today a little softer at 62.1 USc. Against the Australian dollar we are nearly -½c softer at 90.1 AUc. Against the euro we are also softer at just under 61 euro cents. That means our TWI-5 starts today at 70.9 and -20 bps lower from yesterday.

The bitcoin price is lower from this time yesterday, down by -3.2% to US$22,807. Volatility over the past 24 hours has been high at just under +/-3.5%.

There will be no video version today due to staff shortages.

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40 Comments

by Jonny.Foe | 22nd Jul 22, 8:24am 1658435052

ECB hiking rates. Let's be clear that this means debtors paying more to creditors to protect the value of the Euro against the US dollar.

Countries across the world are now realising that selling financial assets to cover trade deficits is pretty dumb.

It is also going to be quite confusing watching the ECB hiking rates whilst continuing to use QE to protect the value of Italian bonds.

by Audaxes | 22nd Jul 22, 8:21am 1658434878

Why is Europe is such awful shape? Consider the plight of Germany. In May (deStatis), Germans paid 35% more for 9% less imports. These are not typos. When you pay a third more to get almost 10% less you are going to find yourself in deep, deep trouble. Link

by Audaxes | 22nd Jul 22, 9:05am 1658437517

Sanctions reality versus hyperbole Japan increased LNG imports from Russia by 26.4% in June yoy to 617k tonnes Japan’s imports from Russia gained 22.9% and reached 153.9 bn yen in June. Japan's exports to Russia fell by 49.9% in June to 39.8 bn yen Link

Japan borrowing roubles to finance deficit?

by JustAnOpinion | 22nd Jul 22, 10:21am 1658442110

The golden rule of business, the Japanese know it, as do the Indians.

by Advisor | 22nd Jul 22, 8:42am 1658436126

Countries across the world are now realising that selling financial assets to cover trade deficits is pretty dumb

I don't see either political faction in NZ taking our current account deficit situation seriously.

Capital flows are to cover it for the foreseeable future.

by Jonny.Foe | 22nd Jul 22, 9:00am 1658437218

Agreed - and we import billions of dollars of crap we don't actually need.

by gnx | 22nd Jul 22, 9:01am 1658437319

And billions more crap we do need

what gives?

by Advisor | 22nd Jul 22, 10:13am 1658441619

Precisely. We can't realistically make stuff here again. However, other small advanced economies of the world have placed themselves securely within the knowledge value chain of their import items. Lack of a skilled and specialised workforce is a major roadblock in NZ replicating such economic success.

As a result a problematic amount of our foreign dollars are generated by labour-intensive industries.

by murray86 | 22nd Jul 22, 1:49pm 1658454548

Don't necessarily agree that we can't make stuff here any more. I suggest that we must be able to for national resilience. Yes it may be expensive to establish the capability, but it always is., and it will never be cheaper. We just need a Government with the vision and courage. Anything else will make us vulnerable to the whims of global politics.

by Jonny.Foe | 22nd Jul 22, 7:52pm 1658476375

Exactly. The world is going mad, and we need sanity.

by KH | 22nd Jul 22, 10:36am 1658442990

Continuing deficits is certain doom. It's serious.

by taimaiakka0 | 22nd Jul 22, 8:02am 1658433735

ECB bursts into action, well as I see that most reserve banks following FED were already in ACTION of dropping the OCR to zero and printing/ distributing money.

This is just trying to cover up their blunder.

How come no reserve bank governor is answerable and held accountable. Has our very own Mr Orr admitted in public that they goofed up, instead start blaming everyone and everything except themselves for the mess and very recently for years were talking about Transitory Inflation, where evident proved otherwise but were in denial to suit their vested biased narrative.

by Audaxes | 22nd Jul 22, 9:09am 1658437761

The rate of interest – the price of money – is said to be a key policy tool. Economics has in general emphasised prices. This theoretical bias results from the axiomatic-deductive methodology centring on equilibrium. Without equilibrium, quantity constraints are more important than prices in determining market outcomes. In disequilibrium, interest rates should be far less useful as policy variable, and economics should be more concerned with quantities (including resource constraints). To investigate, we test the received belief that lower interest rates result in higher growth and higher rates result in lower growth. Examining the relationship between 3-month and 10-year benchmark rates and nominal GDP growth over half a century in four of the five largest economies we find that interest rates follow GDP growth and are consistently positively correlated with growth. If policy-makers really aimed at setting rates consistent with a recovery, they would need to raise them. We conclude that conventional monetary policy as operated by central banks for the past half-century is fundamentally flawed. Policy-makers had better focus on the quantity variables that cause growth. Link

by Jonny.Foe | 22nd Jul 22, 11:03am 1658444600

The irony is that the work of Bill Phillips (of the famous curve) recognises that the economy is a complex system that cannot be reduced or understood using simple 2-dimensional models. He also recognised, like Minsky, that the economy would never be in equilibrium. Economists took his work and simplified it - bastardising his insights to suit their idealogy. It's like scientists going through Einstein's work and deciding that the '2' in E=mc² is a reference to a missing footnote.

by Carinaz | 22nd Jul 22, 8:14am 1658434496

Was reading email from Bernard Hickey where he seems confident that inflation will come down to level acceptable but the Question is - When and also Will it come down by its own or Will it come by counter action taken by reserve bank like raising OCR

https://thekaka.substack.com/p/fridays-chorus-europes-financial?utm_sou…

What is the defination of " Off the boil" is it between 2% - 3% or is it if it does not rise and falls slightly say 6.9% than we can say it is off the boil.

by Yvil | 22nd Jul 22, 8:28am 1658435335

Taimaiakka/Carinaz, why don't you just post under one single name?

by nz-it-worker | 22nd Jul 22, 8:53am 1658436783

So he can upvote himself. It’s a form of digital onanism. He’s got a bunch of other user names as well, Richard1965 and some others.

6 upvotes guaranteed.

by Baywatch | 22nd Jul 22, 9:20am 1658438412

Sounds a bit sad..some of the commentators on this site seem to have an addiction

by RickStrauss | 22nd Jul 22, 11:36am 1658446598

Like another TTP.

by JimboJones | 22nd Jul 22, 8:44am 1658436267

I think the answer is that no one knows for sure. Personally I think the safest thing for the RBNZ to do is to wait 3 or 4 months and see if inflation does come down after such a big rise in interest rates. But it looks like the RBNZ is just going to keep on raising with the very real risk that they overshoot and cause a recession and then need to quickly drop rates again. If they do overshoot that will be very embarrassing for them, it definitely wouldn't be the first time, and it would have to be the end of Orr.

by Adam B NZ | 22nd Jul 22, 8:45am 1658436343

Inflation will peak at some stage and we will see some disinflation. But... Given the current global geopolitical and economic situation combined with this ongoing pandemic and many other factors, I believe inflation will stay well above the 2 to 3% range for the next few years at least.

by Audaxes | 22nd Jul 22, 8:27am 1658435244

Euro Tumbles, Spreads Blow Out As Market Realizes ECB's TPI Is Just Another Useless Word Salad

Last but not least, is the ECB sneaking into the TPI's bizarro term sheet that private sector securities will also be eligible for purchases!

This means the next time Putin shuts off the gas and Italian yields go stratospheric, the ECB will just start buying Italian corporates.... and why stop there, when you can go all in on European ETFs next.

by Audaxes | 22nd Jul 22, 8:53am 1658436795

Three Chinese airlines to purchase nearly 300 Airbus aircraft

EU cannot complete order without Russian titanium.

Russian Titanium Maker Is Pulled Off Sanctions List

EU prevents action against Airbus supplier VSMPO, fearing a Moscow ban on the metal’s exports

by micthwic | 22nd Jul 22, 9:19am 1658438396

Another pearler from Kainga Ora, 400 houses to be built in Kaikoura. Where are the jobs?. I know a few are for oldies but are the rest for single mothers? I can see kk following in the footsteps of nearby Waiau. The gangs will be quick to follow. Part of the plan is to use land adjacent to upmarket Ocean Ridge subdivision. There will be a few gagging on cups of cold sick this morning.

by HouseMouse | 22nd Jul 22, 9:49am 1658440162

Kaikoura????? 400?????

by Baywatch | 22nd Jul 22, 10:02am 1658440979

Well they can go catch crayfish to supply the pub who sell it for $85 each...and that was last years prices? (The locals are experts on gouging tourists while claiming poverty).

by willamonte | 22nd Jul 22, 11:01am 1658444466

Yeah I had trouble digesting that one too. I figured maybe there is a shortage of retirement options there and the govt was stepping in to fill a gap. I would love to know the reasoning behind it.

by Uninterested | 22nd Jul 22, 11:43am 1658447039

And Kaikoura gets more and more isolated as they continue to reduced the speed limits in that area.

by RickStrauss | 22nd Jul 22, 11:54am 1658447671

Is there no train going up that way?

by Baywatch | 22nd Jul 22, 1:55pm 1658454920

What's your hurry. Spectacular drive on a sunny day!

by Jethro | 22nd Jul 22, 1:13pm 1658452427

Agree that the headline 400+ houses does prompt wondering about employment. However have a look at the Star article, Stuff article and Kainga Ora site The money is for infrastructure. It will facilitate further section development in Ocean Ridge plus the Vicarage Site. The Vicarage site is for 83 affordable houses - in a town where there is a dearth of good quality options for the elderly or young families. The balance of projected housing on Ocean Ridge will presumably be developed over time in line with demand. It will improve cycle and road access to town. At this stage it looks like a positive to me.

by JustAnOpinion | 22nd Jul 22, 1:05pm 1658451906

Thanks for the insight, makes sense.

by Squishy | 22nd Jul 22, 9:24am 1658438682

The European project is increasingly becoming Northern Europe carrying Southern Europe.

Countries aren't repaying debt, they are borrowing ever more while their populations age and decline. They are painting themselves further into a corner.

by RickStrauss | 22nd Jul 22, 11:35am 1658446544

Northern countries have been buying the debt so Southern countries would buy their export goods. Will have interesting effects if they stop lending to Southern Europe.

by Advisor | 22nd Jul 22, 11:55am 1658447714

Ironically, the frugal four and a few other northern states have benefited economically from the political inefficiencies down South by attracting the productive enterprises and jobs from those countries.

by JustAnOpinion | 22nd Jul 22, 4:27pm 1658464048

Perhaps there was not much to attract? Productivity has always been a problem for Southern Europe. Having worked in Italy and France my view is that is a choice, a cultural impose. Both the Italians and French are more than capable of high technology industry and indeed are more innovative in Technology than their Northern cousins but they also live more social lives with extended family still being the standard arrangement.

by Advisor | 22nd Jul 22, 11:50am 1658447428

by DDS | 22nd Jul 22, 10:46am 1658443566

I can't remember who said it, but I remember there was a commenter here who said house prices would really start to sink when people started walking away from new builds they'd contracted into because it becomes cheaper to lose the deposit and buy a different house than go ahead with the purchase they already agreed to.

Well! Just today I had a conversation with a friend about exactly this (he had crunched the numbers and figured walking away was better). Then I opened Reddit and checked the personal finance NZ thread - and guess what, there are people discussing whether or not they should do this there.

Looks like we're about to see the fall accelerate!

by gnx | 22nd Jul 22, 11:45am 1658447156

I was doing a development last year.Commercial. Got concerned about who was buying the units. All businesses related to construction.Pulled the pin and sold the land.Gave the deposits back.Gut feeling was saying run.

What was interesting was the bank got our S&P agreement checked by one their panel lawyers…at our cost. They required a clause in there that gave the bank authority to check with another bank how much equity the buyer had.

Having it in writing is one thing. Chasing the debt is another.if you haven’t noticed our judicial system isn’t quick.

by HouseMouse | 22nd Jul 22, 1:56pm 1658454997

Another easy prediction:)