Here's our summary of key economic events over the weekend that affect New Zealand, with news metals prices eye a boost from the Chinese housing rescue.
But first in the week ahead, it will be one dominated by the RBNZ's Wednesday Monetary Policy Statement, one that itself comes about a week before the new Government's first full Budget - and that too is likely to have a key influence on monetary conditions. No-one is expecting any change to the OCR, but signals for when it will be cut will be keenly awaited.
In the US we will get advance PMIs for May, durable goods orders, and new and existing home sales for April. China (today), South Korea and Turkey also have rate decisions due this week. And inflation rates will be released for Canada, the UK, and Japan. Sentiment surveys will be released in Australia and the EU, along with retail sales data in Canada.
Wall Street has just booked a strong set of earnings reports. Most S&P500 companies have reported now (93%), and they have reported a +5.7% rise in profit growth, matching the outsized gains in Q2-2022 which was off the back of the prior pandemic weaknesses. Almost 80% of these companies came in with better than expected earnings-per-share, and 60% better than expected revenues. These sort of outcomes help explain why both the Dow and the S&P500 are at record highs. And why many investors don't think these equity markets are overvalued. But we should note that PE ratios are higher than long-term averages now.
In China, industrial production growth recovered in April after a disappointing March to be back to the expansion level in the prior three months. But this is the only 'good news' in Friday's data dump from the Middle Kingdom.
Their retail sales rose by only +2.3% year-on-year in April, down from +3.1% in March and missing market forecasts of +3.8%. That is quite a miss.
Electricity production slipped in April from March to be up only +3.1% in the year. That is a long way lower than the +8% rise in the year to December. If 3.1% is a proxy for GDP, they are not on track to achieve Beijing's growth targets.
Prices for new dwellings fell their most since July 2015. Prices for resales fell even more. The depth of their property sector retreat is laid bare here - and this is official information. It is no wonder they considered a wholesale state intervention in the sector.
To clear away the drag that their property market has created, Beijing has taken some 'drastic moves'. The central bank has removed the lower limit banks can charge for home loan rates, nationally. It has cut interest rate benchmarks for housing-related lending by -25 bps.
And it has allocated ¥300 bln (NZ$42 bln) for lending aimed at buying by local authorities for unsold housing for "social purposes". They said the ¥300 bln of central bank cash will translate into an estimated ¥500 bln of credit overall.
We should keep an eye on their giant car manufacturing industry too. Its sales options are being constrained by new US tariffs, plus the market-dominant players are cutting prices aggressively as well. (BYD cut another -5% last week.) Few are going to report profits in the current year, and many may not even survive. Competition this fierce is unstable for a nationally-important manufacturing base. It would be no surprise if Beijing has to step in to clean things up here too.
And we should keep also an eye on what is happening to China's Agriculture minister. He was in charge of their food security program, and has suddenly fallen out of favour, receiving the standardised accusation of 'corruption' from Beijing authorities.
More generally. the UN says India’s growth will rise in 2024 to +6.9%, from the 6.2% they estimated in January, driven by strong public spending and growing private consumption. The other big mover is Brazil, up to an expected +2.1% in 2025 from a January estimate of +1.6%. The US is still expected to expand +2.3%, Japan by +1.2%, China by +4.8% and the EU by +1.0%. Australia is +1.6%. New Zealand is ignored by this UN review.
The EU released its final April CPI rate which came in at 2.6% for the bloc, 2.4% for the Euro Area. Both were little-changed from March but sharply lower than a year ago. In April 2023 the EU rate was 8.1%, the Euro Area was 7.0%. Getting rid of dependence on Russian oil and gas has not been at the cost of higher inflation. But we should observe that the range is wide across the bloc between countries. Denmark recorded at 0.5% annual inflation rate in April, whereas Belgium 4.9% and they are less than 700 kms apart.
We should note that the social tensions in New Caledonia are echoing in the nickel market because there is an important mine there. It is the world's third largest producer, and may help explain why France isn't taking any backward steps. Global nickel prices have risen more than US$2000/tonne, up +11.3% over the past week over supply fears. It is a key ingredient for making stainless steel.
In Australia, casino operator SkyCity Entertainment (SKC) has said it had agreed to a proposed penalty with the AML regulator AUSTRAC, admitting it had broken the law by not carrying out customer due diligence with higher-risk customers. It will cost them NZ$73 mln to resolve the matter. It has provided for about $150 mln in its accounts in anticipation, so oddly it will get a profit boost when it reconciles the provision with the actual penalty.
The UST 10yr yield is now at 4.42% and unchanged from Saturday but down -8 bps from this time last week. The key 2-10 yield curve inversion is holding at -41 bps. Their 1-5 curve is still at -69 bps. And their 3 mth-10yr curve inversion is still at -96 bps. The Australian 10 year bond yield is now at 4.29% and unchanged. The China 10 year bond rate is unchanged at 2.32%. The NZ Government 10 year bond rate is now at 4.66% and also unchanged from Saturday.
The price of gold will start today down -US$4 from Saturday at US$2415/oz. That is up US$45 for the week and just off it's all-time high. Silver has shot up too, up +12% over the past week.
Oil prices are still up at US$79.50/bbl in the US while the international Brent price is still just on US$83.50/bbl. Both are a bit more than +US$1 higher than a week ago.
The Kiwi dollar starts today down -10 bps from Saturday at just over 61.3 USc. That is up almost +120 bps in a week. Against the Aussie we are still up at 91.7 AUc and a new one month high. Against the euro we are also firm at 56.5 euro cents. That all means our TWI-5 starts today just on 70.4, unchanged from Saturday and up +80 bps in a week.
The bitcoin price starts today at US$66,732 and down a mere -0.2% from this time Saturday. And up +10.6% from this time last week. Volatility over the past 24 hours has been low however at +/- 0.8%.
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46 Comments
Ah the great depression. Do you know there was all sorts of dodgy financing of new cars for the family. The culmination of a whole decade of a wild west new era without any guardrails
Im frankly worried if trump is elected he will want credit and want wall street to fly. His fragile ego wouldn't cope with a period of consolidation
US Govt is deficit spending at a similar level to NZ during 2020/21 (relative to GDP). This generates a surplus in the wider economy that is being gathered up by corporates (higher profits). The same happened here during 2021 - the quantum of profits went up (and margins).
When the economy heats up, the mechanisms that channel money to rentiers work overtime. This is the way.
From day one, the Biden administration has flooded the economy with borrowed money in the form of transfer payments, subsidies, and grants designed to purchase the political support of favored constituencies such as those in the green tech sector. At the same time, Biden-controlled federal agencies have unleashed a tidal wave of crushing regulation designed to reduce the productive capacity of disfavored constituencies such as the oil and gas industry. The inflation that afflicts us was inevitable.
President Biden has asserted that fighting inflation is the “top economic priority” of his administration. Such a statement would be laughable if the subject matter was not so serious. This president has no intention of altering the policies that define and drive the progressive agenda. There is no war on inflation or, indeed, any serious attempt to bring it under control and stabilize prices. Inflation is baked into the progressive model of government that depends on the continuing disbursement of borrowed money to political supporters.
Under President Biden, the national debt has increased a whopping $13 Trillion and now stands at over $34.6 Trillion. Concerned commentators point out that it will require much sacrifice, potentially disruptive sacrifice, to pay off or even materially to pay down the national debt. They lament that elected officials seem to lack the will and have no plan to deal with the national debt.
In fact, the progressive political class does have a plan to deal with the national debt. Their plan is to perpetuate inflation and thereby to engineer a slow-motion stealth default on the debt that will enable them to continue to enjoy without disruption the political benefits that flow to them from their irresponsible debt-funded vote buying. Link
An oft overlooked benefit of China's housing woes (glut?) is they'll have plentiful and cheap housing for many years to come. Oh that NZ had such problems, ay? I.e. Kiwi household's biggest expense, and cause of much angst, would be removed or at least lessened. NZ might be a much better country to live in as a result.
This may have changed since, but I remember reading around 12-14 years ago that the 'designed life expectancy' of buildings in China was around 40 years - compared with something like 80 and 100 in NZ and the UK respectively - and somewhat less in the US. I might be misremembering this of course. Keep in mind that this is 'designed' not 'actual'. If corners are cut during construction (e.g. substandard/under-spec rebar) then, well... At the time I remember thinking that a serious earthquake in a large Chinese city could be catastrophic.
Sure, but from memory this was the average for existing buildings.
My google-fu is not great, so I can't find the reference to average design lifespans, but here is a similar reference: https://nextcity.org/urbanist-news/china-urban-policy-unit-5-year-plan (from 2016)
the average life span of a building in China is only 25 to 30 years. (By comparison, the average lifespan of a U.S. building is 74 years, and in the U.K. it’s 132 years.)
Obviously, these are actual average lifespans - not necessarily designed. They also don't provide good sources so this could easily be a reflection of the number of new buildings influencing the average.
Chinese buyers are generally much more aware of the construction quality than Kiwis are. And are less likely to be fooled by shiny fit-outs. Consequently, they'll will pay more per square meter for higher quality construction projects. This behavior is a feature most countries where there are far higher proportions of apartments. I.e. easy to hide poor quality in a single building but much harder in an apartment building.
Chris,
"I.e. easy to hide poor quality in a single building but much harder in an apartment building". There are many apartment owners here in Mount Maunganui who would disagree. I am not one of them, but regularly see the white plastic sheeting covering yet another block.
Like I said above: "Chinese buyers are generally much more aware of the construction quality than Kiwis are."
With regards some of the apartment builds you refer too: Many of us were watching the construction and shaking our heads. One architect I know bought a camera with a telephoto lens to document what they they saw. Alas, no one listens to old men with experience. Too many purchasers were buying a dream location, and not a few were buying for perceived un-taxed capital gains based upon nonsense like "house prices double every 10 years" and "if I buy x then I can fund another purchase every year".
Sorry if you or someone you know got caught, Linklater.
My advice would be to never buy a new or new'ish apartment until you're 100% certain of the build quality of the entire building. If you can't get that information, or don't understand it, stay well away. Over time, information about the build quality becomes public or leaks out, and the less knowledgeable can purchase with a greater safety margin.
Majority are well built, central heating, great sound proofing and they have the usual emergency lighting and fire doors. You can also find crumbling apartments and leaky builds in NZ, MSM love to find they failed projects rather than report on the actual success of housing hundreds of millions, ask yourself why the reporters or vloggers dont they go to India or the philipines and walk around a slum, in a country the scale of china you will find examples of failled builds in every city.
I lived in small town apartments complex. They contain thousands of apartments, gated with security, underground carparks, and large common area for sports playground etc. There is always a percentage at one time vacant or being fitted out out.
They have massive earthquakes https://en.wikipedia.org/wiki/1920_Haiyuan_earthquake
About 258,707~273,407 died
they already have 50 MILLION vacant apartments, with some estimates as high as 100million and a declining population!
One of the issues is unless a significant amount of these get purchased then it won't really solve anything as most of them sit empty either because of lack of demand (built in the wrong area - some cities have vacancies rate >20%) or because the owners don't want to rent them out and devalue them further. either way these units will have to be paid for one way or another, and at some point the owners will likely just abandon them as taxes continue to mount and reality sets in that they are worthless. that will be a harsh reality as property was always seen as the go to investment in china - bank deposits have never had yields and having cash in the bank was deflationary
" or because the owners don't want to rent them out and devalue them further."
You are misunderstanding the culture.
There are many people in China that consider the renting out of a property as being "in business". They don't want to be "in business". Further, many Chinese don't trust their banks so holding term deposits is considered risky. Thus the property is simply a slowly appreciating non-cash asset. My Chinese in-laws do this. I think they're mad. But my wife reminds me the culture is different and her parents have no need of more money, but would rent it out if there was a shortage of housing in the areas they have purchased.
Key point from the article (from the reputable Jeremy Grantham):
Today is in the top percent on the Shiller P/E of all time, and when you start from this level, you have a very hard time going up materially. You’ve done it once or twice, but you’ve only done it for a while: in the last gasp of 1929; in the last gasp of 1999; and notably and most impressively in Japan, where maybe for two and a half years you kept going. And in each case, they ended incredibly badly.
Meanwhile, back on the home front some businesses are booming ...
https://www.stuff.co.nz/business/350278517/industry-where-insolvencies-…
To clear away the drag that their property market has created, Beijing has taken some 'drastic moves'. The central bank has removed the lower limit banks can charge for home loan rates, nationally. It has cut interest rate benchmarks for housing-related lending by -25 bps.
The Rentier Economy is a Free Lunch
You’ve had, for the last – really since the 1980s, but even since World War 1 – this movement to prevent industrial economies from being low cost. But the objective of finance capitalism, contrary to what’s taught in the textbooks, is to make economies high cost, to raise the cost every year.
That actually is the explicit policy of the Federal Reserve in the United States. Turn over the central planning to the banking system to essentially inflate the price of housing, with government guaranteed mortgages, up to the point where buying a home is federally guaranteed up to absorbing 43% of the borrower’s income.
Well, you take that 43%, you take the wage withholding for social security and healthcare, you take the taxes; the domestic market shrinks and shrinks. And the finance capital strategy is exactly what it is in the United States today, in Europe. Shift all of the money away from the profits of industrial capital that are reinvested in making new means of production. To expand capital into a shrinking economy where the financial sector intrudes more and more into the economy of production and consumption and shrinks the economy. Hudson
Wellington local Govt management expertise goes from strength to strength
"An accidentally released memo has revealed at least $5.2 million of “must do” pipework lies beneath $55m worth of new Thorndon Quay bus lanes and cycleways – which could be ripped up if regular leaks persist."
"An email trail, accidentally forwarded on to The Post by Wellington Water on Monday, said the draft memo “should have been out of scope” from the information supplied to Robinson." Of course it should /sarc
https://www.thepost.co.nz/nz-news/350277264/leaky-pipes-buried-under-ne…
The UN Special Rapporteur on unilateral coercive measures and human rights, Prof. Dr. Alena Douhan @AlenaDouhan, has just spent 12 days in China, most of it in Xinjiang, to study "the impact of unilateral coercive measures on the enjoyment of human rights". She confirms that the sanctions put on China - mostly by the US, but also other Western states - under the guise of protecting "human rights" are actually very harmful to the very people these sanctions cynically claim to "protect" because they impoverish them, and that they are illegal unilateral coercive measures. You can read her full 14-page statement here: https://ohchr.org/sites/default/files/documents/issues/ucm/statements/20240517-eom-statement-sr-ucm-china.pdf Link
Starwood’s $10bn property fund taps credit line as investors pull money
Heavy redemption requests come as fears rise over real estate valuations
Want some totally meaningless (and misleading) statistical nonsense related to property investment / ownership in NZ?
I give you the link below and refer specially to the two tables labelled "Profit And Loss: Who's Made The Most Money?" and "Resales: Who Made Money, Who Lost Out?".
Both tables proport to tell you something meaningful. Neither do.
Both omit the length of time between original purchase and the recent sale. For the tables like this to be even remotely meaningful they should be reporting the gross percentage return per annum while making it clear the per annum return is a gross figure that excludes rates, insurance, reno, maintenance, etc and all other costs, while pointing out that 'investors' get to carry losses over whereas OO do not.
https://www.oneroof.co.nz/news/revealed-the-sellers-who-have-made-the-m…
The sellers who have made the most money so far this year
Surely buyers are paying top dollar for top dollar? Same as stocks.
Why is it so hard to accept that speculative bubbles can burst? Interest rates were driven to zero for a decade. Yield-starved investors chased stocks to valuations beyond the 1929 and 2000 extremes. That speculation front-loaded more than a decade of future market gains into the present. Those gains are now behind us, embedded in breathtaking multiples. If history is any guide, a collapse in valuations is likely to return those gains to the future.
The process of losing speculative gains and recovering them over time is what I’ve often called a “long, interesting trip to nowhere.” It bears repeating that the S&P 500 lagged Treasury bills from 1929-1947, 1966-1985, and 2000-2013. 50 years out of an 84-year period. When the investment horizon begins at extreme valuations, and doesn’t end at the same extremes, the retreat in valuations acts as a headwind that consumes the return that would otherwise be provided by dividends and growth in fundamentals.
There is no birthright to ever-rising valuations, particularly given that market internals, fiscal subsidies, and the Federal Reserve’s latitude for recklessness have all turned against this speculative bubble. The record stock prices that investors observe here are the product of a) record valuation multiples that have been inflated by a decade of zero interest rate policy and resulting speculation by yield-starved investors, times; b) record earnings that embed distorted profit margins inflated by trillions of dollars of temporary deficit spending.
Investors are paying top dollar for top dollar. Link – Hussman
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