Here's our summary of key economic events overnight that affect New Zealand, with news the commodity super-cycle, that was supposed to last for many years, seems to be very brittle now. And bond markets are pricing for a sharpish slowdown.
And the 'flash' global business activity surveys are out and they paint a somber picture.
The American one reported a contraction in July, all due to services activity. The factory sector is still expanding at the same rate as in June, but the services sector took an unexpectedly retreat. The decline was the sharpest since the initial stages of the pandemic in May 2020. New export orders fell for a second successive month but new local orders are still expanding making the combined new order inflow the weakest in the past two years.
With little other major economic data around, the unexpected contraction in the giant US services sector had an immediate impact on equity and bond markets.
Weaker growth in new orders was also a feature of the Japanese flash PMI for July. But at least both their factory and service sectors are expanding there.
In Europe, their factory PMI slipped into a [minor] contraction while their services sector is still expanding in July - but only just. But none of this will be much of a surprise given the invasion from the east. Perhaps you could say it is quite resilient in the circumstances that they are not in a major contraction.
A lot of the EU result is due to the pressure Germany is under with both their factory and services sectors contracting now. The French services sector is a bright spot.
Back in the US, a California town hit by fires says its debt has overwhelmed it and it may default soon.
Data for Canadian retail sales in May was strong, and a bright spot in the overnight releases. Year-on-year increases are impressive and far more than inflation can account for. But of course this data is quite dated now.
Japan reported June CPI inflation yesterday with their headline rate now at 2.4%, down fractionally from 2.5% in May, and still above the Bank of Japan's target of 2%. It's been above that target for three consecutive months now. And it's been seven years since they have had inflation like this although that was because of a GST hike. Excluding that, it's been 32 years.
In China, the central bank said there were NZ$1.6 tln of bonds issued in June, taking their total issuance to NZ$33.7 tln. That is about 125% of annual Chinese economic activity, just for this official paper debt. Much of this new issuance will be just to keep the lights on, rather than investing for future gains.
In Russia, they slashed their official interest rate by -150 bps. Earlier in the year it was raised fast to weigh against a spike in inflation. Now it is being cut hard to try an invigorate a war-damaged economy with sinking demand.
And we should note that over the past week, the iron ore price has fallen -8%, copper is flat, but it had already fallen -27% since early June. Nickel fell almost -30% from early June. Wheat is down more than -30% since mid June. Soybeans are down -15%. Only coal is holding its new high price. Aluminium is down -15% from early June. And crude oil is down -18% from that early June peak.
In Australia, the big general insurer there, IAG, has reported that natural perils and rising costs will push up premiums by up to +9% for house and car cover. This comes as their shareholder funds shrink as provisions and reserves need to be raised, and it missed profit guidance to investors. Since mid April and before the latest flooding on the Australian eastern seaboard, its share price has fallen -20% and investors worry about what the climate will do to its business.
The UST 10yr yield starts today at 2.75% and down another steep -17 bps from this time yesterday and back to mid-April levels. A week ago this was at 2.93%. The UST 2-10 rate curve is marginally flatter today, now at -21 bps and their 1-5 curve is slightly more inverted at -14 bps. Their 30 day-10yr curve is now at +63 bps and that is a lot flatter. The Australian ten year bond is down a very sharp -17 bps at 3.34%. The China Govt ten year bond is up +2 bps at 2.80%. And the New Zealand Govt ten year will start today also down -8 bp at 3.72%.
On Wall Street, the S&P500 has given up half of its strong weekly gain, down -1.3% today to be now up +1.7% for the week. Overnight, European markets were flat except Paris up another +0.3% and a +2.4% weekly gain. Yesterday Tokyo ended up +0.4% in their Friday session for a +4.4% weekly rise. Hong Kong was up +0.2% yesterday for a modest +0.6% weekly rise and Shanghai was down -0.1% for a good weekly change of +1.1%. The ASX200 ended its Friday session flat to lock in a +2.8% weekly gain, and the NZX50 was also flat on the day to rise +1.3% for the week.
The price of gold will open today at US$1724/oz in New York which is up +US$10 from this time yesterday. It is also up +US$19 from this time last week.
And oil prices are down -US$2/bbl at just under US$94.50/bbl in the US, while the international Brent price is now at just on US$99/bbl. These prices are almost exactly the same as this time last week.
The Kiwi dollar will open today a little firmer at 62.4 USc. Against the Australian dollar we are also a little firmer at 90.2 AUc. Against the euro we are firmish at just under 61.2 euro cents. That means our TWI-5 starts today at 71.1 and this is -60 bps lower than this time last week.
The bitcoin price is little-changed from this time yesterday, up by just 0.8% to US$22,997. Volatility over the past 24 hours has been moderate at just on +/-2.0%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
Daily exchange rates
Select chart tabs
51 Comments
interesting how many articles are attempting to project a slow down in economies -- and they all seem directed to make people believe interest rates will go down and the housing ponzi will continue
However they all seem to convieniently ignore the fact that INFLATION is going nowhere -- and that we are long since past markets and economics performing in a predictable way based on traditional responses to such triggers as official cash rate rises.
Stock market prices totally ignore fundamental levels of returns - for the start of a recession our and many other labour markets are showing the compete opposite response - full employment and significant wage rises - the covid impact on supply and production chains is going nowhere - if anything the more contagious variants whilst less deadly are more disruptive with more people away from workforces -- and of course we have barely begun to see teh impact of price pressures to do with climate change - which will cause underlying cost pressures for Decades to come !
Ah hum, inflation, AIG as above warning premiums likely increase 9%. But that cannot take into account the extra amount insured now required to cover the cost of replacement. Our premium for house, contents & one vehicle is up 18.3% and quite honestly we wouldn’t really know if the amount insured on the house would be sufficient, given the fact that building costs have simply been strapped to a rocket of late. These are what might be described as the invisibles in inflation, along with local body rates and other unavoidable service essentials.
i hear you -- but we are starting to see 5%+ in many countries across EU in particular -- and here in many industries there are significant price pressures -- In Health for example -- there is a current merry go round with nurses social workers and OT's moving roles for 10K + figures as teh staff shortage really hurts -- there are 1000 older adult funded beds empty at teh moment as providers cant staff them -- and the only real option is to pay significant $$ or lose business --- Tradies are demanding huge money -- charge out rates for apprentices are often $60 plus in Auckland -- trades in many cases close to $90- $100 - We may not be seeing huge rises for unionised / Government industries with collective bargaining - - but its certainly happening in many other places such as IT or where staff are negotiating on an individual basis
the extra 4 billion government tax take in May this year from May the previous year -- woudl suggest fairly significant extra $$ being paid to generate that level of increased tax take -- bracket creep and a little more employment not withstanding - remember also -- the number of peopel employed full time has not greately increased -- more 100000 people moving from benefits that see them classed as unemployed looking for work -- to long term benefits not included or classed as unemployed
For inflation to continue at the current rate, supply distribution doesn't just have to continue, it has to get worse. High commodity prices don't just have to persist, they have to climb even higher.
Maintaining these high prices for a year would reduce inflation to zero. You have to believe things will actually continue to increase with the same kind of trajectory.
Could happen, but as far as I can see commodities are cooling, shipping is getting cheaper, wage increases are lower than inflation, housing is suffering. I don't see inflation continuing at these levels for much longer, but I've certainly been surprised before.
Regarding housing, I have a glimmer of hope that this fall will be the equivalent of 1987 for NZ share owners. How much better the country will be if huge swathes of wealthy NZers swear off buying excess properties for investment.
I do find it interesting that people are so convinced central banks can/will jump in and drop rates if the economy slows. Yes they have consistently done this since 2007, but throughout this time we had the risk of deflation, meaning intervening helped them meet all of their objects. Now we have persistent inflation so far above target rate and could take years to return to the target band.
I am pretty sure inflation will be back at least close to target band by May next year. What do you think is going to increase in price a lot from here, especially as demand is destroyed?
I struggle to see many items in the CPI basket increasing more than say 4-5% over the coming year. Some of the big ones like fuel, housing construction and rent could be around 2-3%. Not so sure about food, might be a bit higher, although there’s pressure on supermarkets and their prices.
We still have negative real interest rates, that are inherently inflationary. Go back and look at previous instances where inflation has gotten out of control, and it has never been reigned in without interest rates rising above the rate of inflation. So I believe that only heavy demand destruction, combined with holding rates high, will get it back within a reasonable timeframe. Which is why central banks will be forced to leave interest rates high, even as economies stumble.
The other factor to consider is the past 30 years of deflationary forces were built on the back of the impact of China's economy. Between Covid, the Ukraine conflict, many will now view further offshoring into China as a risky bet. It won't result in sudden onshoring of everything, but people will be hesitant to offshore more production, or move away from alternative sources found during China's prolonged lockdowns. Thus removing the deflationary impulse we have relied on to sustain the low interest rate, debt fueled western economies since 2007.
Miguel, you make some very good points, I like your posts. I believe that "heavy demand destruction" as you put it, is happening now, it just takes time to show in the economic data. In my opinion it won't be a matter of having to raise interest rates above inflation, as inflation will drop below interest rates in 2023.
I also have another prediction, whether inflation drops or not in 2023, Central Banks will stop raising interest rates because their economies will hurt too badly. We all take the path or least pain, I have long predicted a serious recession by early 2023, it seems more people are joining this view today. I think the economies will be in such bad shape come 2023, that the Central Banks (the RBNZ for example) will not be able to keep raising their rates. They will change their famous "path of least regret" to one of letting inflation run above their target range (if inflation happens to still be too high) to help the economy.
The Atlanta Fed GDP predictor is quite clearly pointing to back to back quarters of GDP decline in the US (technical recession). With only 1 week to go before the first assessment is out the tracker says -1.6% so is most unlikely to turn positive now. Last quarter US GDP assessment was -1.6% so if this was any other nation we would be calling this a recession: https://www.atlantafed.org/cqer/research/gdpnow
And we should note that over the past week, the iron ore price has fallen -8%, copper is flat, but it had already fallen -27% since early June. Nickel fell almost -30% from early June. Wheat is down more than -30% since mid June. Soybeans are down -15%.
Shoigu met with Guterres and signed an MoU between Russia and the UN on cooperation in delivering Russian agricultural products and fertiliser to international markets. Link
Yes they have multiple mandates. So if inflation is still a little bit above target by mid 2023, and unemployment is soaring, there is every chance they will be cutting the OCR.
It’s a harder call if inflation is still 5-6% and unemployment is soaring. But I don’t think inflation will be 5-6%. I think it be be somewhere between 2-4%
The world is very, very tightly wound around the previous (and in many countries long-term) cost of borrowing. As we go through this paradigm shift there will be a massive pullback in consumption of everything. Some of it will be delayed, as we see with builders now having virtually no backlog of work from some point in 2023 (which assumes no projects get cancelled). In New Zealand we only experienced cheap rates for a couple of years, elsewhere it has long been the default.
I don't think interest rates will go up much higher because the results they have been looking for are already happening. We are entering a lost global decade, I feel.
When inflation falls to sensible levels rates will stop rising.
However inflation tends to become baked in and is very hard to actually bring back down once its persistent So even if it is only running at 6% in a few months that is still high, prices will be waaay up overall and rates will still need to rise to whatever it takes to combat it.
I dont see rates dropping for a few years. Builders live in a boom-bust-boom cycle in nz so its not new and is widely expected now.
"On Wall Street, the S&P500 has given up half of its strong weekly gain"
Snapchat Shares, that just 9 months ago were trading at $83 went under $10 last night, having fallen nearly 40% yesterday.
That's what happen when misplaced confidence, and most importantly - buyers, disappears.
I think the Fed has deliberate demand destruction in 'top of place' to help get the cost of everything lower. Everything is way over priced, primarily due to covid QE being over played. They know this & are now trying to undo their miscalculated exuberances. We're looking at you Mr Orr.
If govts had kept their head, when all around them (read media) were crying ''Wolf!'' this may have played out somewhat differently. Too late now, as they say, so we're back to fiddling with the interest rates which kills any long term business planning amongst other things.
We come up for our mortgage renewal at the end of October & are looking at a plus 3% on top of our 2.5%. Crunch! We'll weather it, but it will eat into our disposable income. It's upwind for the next 12+ months & will be an interesting period leading into an important election. Yes, I know the blue team are just as bad as the red team, but at least they won't be trying to create our very own apartheid state.
wrong John. i think you mean this
It doesn't look like Joe Biden will be able to pass his Build Back Better bill anytime soon. That's the last bastion of aggregate demand in the world falling over.
World economic weakness is starting to impact the US in their falling exports. China is too slow and too incremental in it's stimulus to even start balancing the scales toward future world growth at the rate of the last decade.
Our log trade is stagnant, our construction market is being successfully strangled by govt inaction and refusal to remove roadblocks caused by it's previous legislation. Govt refusal to allow immigration to fill gaps in our labour market means that growth that would take place naturally as part of the business cycle is being cut back.
There is no govt advance planning to fill the inevitable gap in construction when the roadblocks in credit and the skill shortages choke off what is left of NZ aggregate demand. Still no state advances loan scheme for new home buyers. Just the same neoliberal platitudes.
The tide is going out on inflation. The price I pay for meat at the supermarket hasn't changed much for a couple of months now. Still high but the puff is gone.
The govt is still listening to the commentariat, still living in the inflationary moment, still pushing out it's decoys on the lake of noise. Not looking at what's coming. Gazing at it's navel, no lookout at the masthead. A ship of fools.
"Now we are 5+ are we better off, and if not then when will we be?" The answer to that, is when we are 6 million of course. A certain subset of people will have gained substantial material benefit, developers, bankers etc. Another subset will be overjoyed at the explosion of ethnic food outlets. Another subset will have their tills ringing, as they shift container loads of imported tat. Then we will have the followers of holy scripture that are on a mission to go forth and be fruitful and of course the ones that need cheap labour to retain business viability. We have the political far right that will be ecstatic, because they believe to slice a resource cake more ways equals "freedom" and the far left will be cheering, because they get to make more rules to divvy up the shrinking cake fairly. So all in all, 6 million is the answer, until we get near 6 million, then the answer will be 7 million. The key to being better off, is not setting a figure, it's to keep swallowing happy pills as the figures roll over. Population density is the primary goal and the denser the population, the more likely we'll achieve that goal.
Until the day you need to go to hospital, and spend 8 hours waiting on a chair in AEE, because the hospitals are overwhelmed.
Or when your cousin spends 6 months living in a car with her kids, because there are no houses left for Kiwis.
Or you spend 2 hours in traffic every day because the motorways are too busy...
All commodities apart from natural gas, pricing levels are back to pre- Ukraine War period but that is still about 30 - 70% higher than pre-pandemic Dec 2019 levels. We can't blame the war anymore for inflation. How pricing levels develop further is now mostly depending on domestic factors like (local)government policies, the working of domestic internal markets (Our famous Duopoly; the closure of NZ refining; how far business owners are prepared to absorb the hit from external price rises) and how far demand will be destructed by the interest rate rises we already have seen.
If I look at the latest article from David Skilling, New Zealand scores not very well on domestic inflation YTD with a 5.7% score. If I compared that with other jurisdictions who are far more dependant of natural gas our and have a far lower level of domestic inflation this is not looking good for NZ and I predict inflation will be lingering far longer but on a lower level than what we expect.
On the other hand we are at risk importing inflation again if the NZ dollar drops further. What is not looking good is the drop in volumes of our export products. In May and June the export of Milk Powder dropped 23% and 28% respectively but due to the increase in price it did not affect the value that much. In June it was only -5.7% but our trade deficit is at record levels. Needing to borrow more US$ to pay for our diesel imports.
I agree with several other commentators on this forum that the OCR will not hit 4.0% but will be a 3 something% but it will be held on that level for longer.
I've been in Europe for 3 weeks now and I can confirm the general feeling is quite negative. Germany is extremely worried about their insufficient gas supply, Draghi's demise is opening a lot of question marks about the future direction re Russia, Hungary is doing a move away from the EU and is trying to buy more gas from Russia, France and the EU are not happy with the UK not sticking to the Brexit agreements… It all feels very negative, disunited and I also feel that Russia has the upper hand, because of it's ability to control the gas supply.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.