Here's our summary of key economic events overnight that affect New Zealand, with news the pull-back from China by international investors seems to be gathering pace.
But first we should note that the US will be on holiday this weekend, their Memorial Day (like our ANZAC Day but with more retail). This marks the start of their summer season when investors traditionally pull back from markets a little. But to be fair, it is less of a 'thing' now than it used to be. They return Wednesday, NZT.
US durable goods orders rose by +0.7% in April from March, following a +0.8% increase in March and defying market expectations of a -0.8% drop. That makes them a very impressive +7.9% higher than in April a year ago and augers very well for their factory sector in coming months. It was mainly driven by strong demand for transport equipment.
An updated University of Michigan consumer sentiment survey result for May was released coming in very much better than the preliminary version which recorded a drop. Yes there is still an easing but only a minor one. And this current level is +17% higher than a year ago.
After three dour and disappointing consecutive months, Canada's retail sales sparked into life in April with its best rise in a year. But it will still be only +2% higher than a year ago and less than inflation's bite.
In Japan, their inflation rate fell to 2.5% in April from 2.7% in March. Their core inflation rate dropped to 2.2% from 2.6%. While these falls were not unexpected, they are the lowest levels since January.
Singapore's industrial production recovered sharply in April after the big miss in March. But it still isn't back to year-ago levels.
China's isolation by foreign investors is becoming quite stark. New net foreign investment grew a paltry +US$8.3 bln in April from March which looks like it is a decade low. For a country the size of China, this is a 'rounding error'. In April 2023 it was only +US$14.1 bln and also considered low. In fact the total new foreign investment in the first four months of 2024 was -31% lower than in the same period a year earlier which itself was weak. The international de-risking trend is biting hard now as the nation turns inward.
Bloomberg has an interesting story about the record withdrawals from Chinese bank deposits in April. One-year term deposits at China’s largest banks pay a record-low of just 1.45% pa. There was a large -NZ$880 bln outflow in deposits from banks in April, -1.3% of all deposits, and much of it flooded into bonds and "wealth management products". The policy goal is to spur national economic impetus by making these funds work harder. But China has had significant issues with "wealth management products" in the recent past so this is a very risky strategy. There is a history of a lot of people getting hurt - and very angry.
Speaking of the apparent dangers of modern life, we should also note that Morgan Spurlock has died, aged 53. He was the director and subject in the movie "Supersize Me" about the risks of a fast food diet.
We don't often note it, so this is an opportunity to observe that the price of naphtha, a byproduct of crude oil refining (the gas you see flared off at refineries), and a crucial component in the production of plastics, remains remarkably stable. It is still at the same nominal level it was in 2006, so in inflation-adjusted terms the core raw material in plastic resin production has fallen more than -55%. It will be very hard to substitute something that has become so extremely cost-effective. And that is just the start. Clever manufacturing techniques allowing thin-walling (getting the same or improved functionality with less material use) enhances its advantages. In fact the growth in overall global plastics production seems to be ending. But not the reduced product size innovations. However the key advantage is that consumers will always choose the best-made, best-presented, best-priced option and that will almost always be an item involving plastic components. The cost and technology advantages can't be beat. Small effective specialised products make recycling much tougher however.
The UST 10yr yield is now at 4.46% and down -2 bps from this time yesterday. But that is up a net +4 bps in a week. The key 2-10 yield curve inversion is more at -49 bps. Their 1-5 curve is unchanged at -68 bps. And their 3 mth-10yr curve inversion is also more at -92 bps. The Australian 10 year bond yield is now at 4.35% and down -1 bp. The China 10 year bond rate is unchanged at 2.32%. The NZ Government 10 year bond rate is now at 4.84% and up +4 bps from yesterday. A week ago it was at 4.66% so up a sharpish +18 bps from then.
Wall Street is ended its Friday trade with the S&P500 up +0.7% but unchanged in a week as they go into their long holiday weekend. European markets were little-changed overnight, except London which fell -0.3%. In fact London was down -1.2% for the week. Yesterday Tokyo ended its Friday session down -1.2% and giving up the prior day's rise to be -0.3% lower for the week. Hong Kong fell another -1.4% and ended the week down a sharp -5.2%. Shanghai was down -0.9%, another large retreat for them to be -2.1% lower for the week. Both are a vote of no-confidence in Beijing's property crisi response. Singapore was down -0.2% on the day. The ASX200 fell -1.1% yesterday in sympathy with China and down the same for the week. But the NZX50 was down only -0.2% yesterday and up an unusual +0.7% for the week, by far the best of the bourses we follow.
The Fear & Greed index has moved back into the "neutral" range as risk appetites ease. The Fed's stance on inflation took the shine off this week - and maybe the "sell in May" seasonal meme,
The price of gold will start today down a minor -US$2 from yesterday at US$2334/oz, but down -US$85 from a week ago.
Oil prices are up +US$1.50 at just under US$78/bbl in the US while the international Brent price is up a bit less to just on US$82/bbl. These levels were US$79.50 and US$83.50/bbl a week ago, so -US$1.50 less since then.
The Kiwi dollar starts today up +¼c from yesterday at just over 61.2 USc but -¼c lower than this time last week. Against the Aussie we are unchanged at 92.3 AUc. Against the euro we are still at 56.4 euro cents. That all means our TWI-5 starts today just under 70.6, and up +20 bps from both yesterday and a week ago.
The bitcoin price starts today at US$68,999 and up +1.8% from this time yesterday. And that is up +3.2% from this time last week. Volatility over the past 24 hours has been moderate however at just on +/- 2.0%.
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65 Comments
The Chinese investor is moving mountains now.
Seeing the massive overbuild and ensuing crash there in the Resi Property market, lack of trust in CCP policy, lack of trust in banks and very low bank deposit rates......has them again flooding the 5000 year old assest class:
Both gold and silver have had massive inflows of cash from Chinese investors and mum and pops types, as they exit property en masse.
I've seen this particulary over the last few months, when the Chinese wake up, switch on their computers, or go to the local gold vendor, the GOLD AND SILVER market surges.
This, at a time, when precious metals should be in the absolute doldrums, as interest rates are still high and may go higher......as they say "may we live in interesting times"
Mountains are being moved in this massive asset switch.
The average Joe probably spooked by the Taiwan drills plus the CCP are printing money like there is no tomorrow..
Plenty of retail demand in China and across Asia. Suspect it's stronger than in the suburbs across Nu Zillun, Australia, etc. However, Costco sales of gold in the US have been strong. Gold price is up 20% over past 12 months and 82% over past 5 years so CAGR suggests demand is not some recent phenomenon and arguably better than holding cash.
Budget on Thursday. Will Tax cuts = more Inflation? Or longer inflation?
One wonders whether the RBNZ wasn't influenced by the impact of the promised tax cuts and their impact on inflation. It would have been a factor in holding the OCR until the outcome is known albeit they played the whole issue with a straight bat and barely mentioned it - directly at least. But were the effects of the tax cuts buried in their graphs?
What do others think? Is the OCR being held higher for longer because of tax cuts? Was the suggestion another hike in the OCR was warranted because of tax cuts?
US National debt has risen under every President since WWII. In that time only Clinton has slowed it down.
https://fiscaldata.treasury.gov/datasets/historical-debt-outstanding/hi…
The MPS data shows RBNZ have downgraded their estimate of govt spending over the next 18 months. They're not expecting spending increases (on a YoY basis) until the start of 2026. My understanding though is that RBNZ don't have a sneak preview of the budget so they have to guess what is in like the rest of us?
It's worth a look at Michael Reddell's blog on the MPS. I couldn't be further apart from him politically, but I share his views on the obvious inconsistencies in the RBNZ forecasts (for which he was once responsible). I do not share his views on excess demand etc.
That's an absolute must read for people who don't understand our frustration at the RBNZ's MPC. Mr Reddell's observations have no answers to them in the MPS. (link repost: Michael Reddell's blog on the MPS.)
"The problem is most people don’t understand this. "
Or is the problem that most people are too lazy to even try to understand it? So instead they go back to the 'pub economics' equally ignorant people taught them? (Sorry. I know that sounds harsh. But am I wrong?)
Chris
I expect that while tax cuts may be part of the budget as promised, they are most likely to be effective only from the start of next financial year (1 April 2025) as is the norm for any tax change. The stimulus effect of this is not going to be felt for well over a year - lots will happen prior to that.
Don't expect to see anything in your pay packet for another 11 months.
Chris
”leaving tax cuts that long”?
It has been the norm for tax changes - either cuts or addition taxes - to be introduced to be effective from the start of next financial year for the need for consistency during the tax year. This includes such things as the loss, and now reinstatement, of interest deductibility for landlords. That is how the tax world works for the simplicity of applying taxes over the tax/financial year.
To avoid disappointment, the reality is do not budget on seeing anything addition due to tax cuts in your pay pack until 1 April 2025.
(To my knowledge, exceptions to this are such things as taxes on cigarettes - annually in January indexed to inflation - and also alcohol in July. There is no necessity for these to be consistent over the tax year.)
Cassandra raises a few good questions
"...it doesn’t leave one with any more confidence that the Bank knows what it is doing than we can have now about how they handled the period from mid 2020 to mid 2022, which delivered us this persistently high inflation – and attendant arbitrary wealth redistributions – in the first place."
Excess demand and the Reserve Bank | croaking cassandra
Imagine for a moment we do move away from sucking huge amounts of planet heating hydrocarbon juice out of the Earth? Will the fraction that is used in plastic manufacture still be viable. Investment in plastic production relies on investment in oil production.
Obviously the intention is to keep heating the planet, but what if actually we chose to keep Earth viable for human habitation? Would we keep the hydrocarbon industry functioning just for plastic feedstock? What would happen to the rest of fractions from the refining process? Would we stock pile them in some huge reservoir? Nah. It would be burnt. Plastic production=global heating.
The invention of plastic really was significant when you consider that for the longest time prior, manufacturing materials were limited to metal, wood, earth, stone, plant fibres, and more recently and to a limited extent glass/silicon. Is there any alternative on the horizon that can come close in terms of convenience? It's going to be a hard one to retreat from.
Sure is hard to give it up. Plastic is amazingly versatile. Almost magic, while at the same time sterilising humanity.
https://www.sciencedirect.com/science/article/pii/S0048969723048830#:~:…).
I'm old enough to remember the time before mass plastic invasion of our lives. Was life bearable? Yes. We had yet to be fully trained in consumer throw away society.
Perhaps plant based plastics would be a partial replacement, but unlikely to be as "cheap" as the hydrocarbon industry provides?
I remember in the 1950s listening to my father discussing with some other ex WW2 pilots the introduction of bakelite to various equipment and fittings in their aircraft as the war progressed. They didn’t like it or trust it much. Too brittle and flammability for such as headphones wasn’t a happy thought.
Personally, I tend to avoid buying products that have plastic components where it is unnecessary (e.g. a can opener). For the most part it's not too difficult and the options available are of a high (and often higher) quality. The major exception is electronics (though the amount of plastic used can vary a lot between options).
We had one of those. Got rid of his boy. Instead he put a brick on the accelerator of his truck, strapped the steering wheel, and let it idle along the road as trotted alongside & delivered house by house. Couldn’t last, he was potted and had to stop and was furious about it. Just a little short bloke wth a quick temper. I called him pint sized once in fun but be didn’t see that as being funny .Quite the opposite in fact. But I was locking in senior rugby in those days, so he only threw words.
I was thinking about that the other day. If the council provided standard glass bottles and a roadside pickup service and cleaning (similar to beer crate bottles), with commercial businesses able to use those cleaned bottles for the price of a plastic one, we could significantly reduce plastic. I’d always choose a glass bottle over plastic if I just rinsed it and put in a special recycling bin. They could be used for milk / beer / wine / condiments / etc.
Yes, you only need to walk around the supermarket to see how much we rely on plastic. Could you imagine how much food New Zealand would NOT be able to export without plastic? Then have a look at your car, including the "rubber" tyres, clothes, carpet and how much is in a house build. We are a long, long way away from ever giving it up.
Janet Yellen says many Americans still struggling with inflation
US Treasury secretary expresses concern over ‘substantial’ increases in living costs
Its only commercial, it won't spread to residential..... I think residential lending in NZ is 72% of all bank lending here.... There is a tiny bit of concentration risk in that number.
A while back the RBNZ ran a risk analysis on this, maybe its worth re reading it...
https://www.rbnz.govt.nz/hub/publications/bulletin/2022/rbb2022-85-02
In the scenario, which begins on 1 April 2022, the New Zealand economy experiences:
- Falling house prices of 42% (47% from the peak in November 2021)
- Equity prices falling 38% (42% since December 2021)
- The unemployment rate rising to 9.3%
- Gross Domestic Product contracting by 5%
- The OCR peaking at 5.5% and the 2-year mortgage rate at 8.4%; and
- In addition to the economic scenario, banks are impacted by and required to model a 1-in-25-year cyber risk event.
China's isolation by foreign investors is becoming quite stark. New net foreign investment grew a paltry +US$8.3 bln in April from March which looks like it is a decade low.
America must face reality and prioritise China over Europe
This does not mean abandoning US allies on the continent but is based on a sober assessment of military capabilities
Jamie Dimon admits to ‘tough’ going for JPMorgan in China
Investment banking business has ‘fallen off a cliff’, chief executive tells bank’s flagship Shanghai conference
This is what unlimited friendships with gangsters bring.... some of your old friends back off a bit....
Its all BS, China and Russia are only friends against the west.... Russia should be scared of China, it will slowly creep West and North by stealth immigration and own the business space from the locals. China is more scared of Muslim influence then Russia , there is no knowing what gods going to tell them to do....
Interesting article about the Aussie mortgage brokering industry. Will go straight to the juicy bits. Making out like bandits.
According to the Mortgage & Finance Association of Australia’s Industry Intelligence Service Report, brokers are now making $181,199 in average gross annual earnings, more than double the median salary for a full-time worker. (By way of comparison, two decades ago, the average broker was earning about $65,000, at a time when the median income was $40,000.)
According to the MFAA’s report, Australia boasted 19,456 mortgage brokers last year, an increase of 871 compared with the previous year. Their average gross annual earnings of $181,199 in the six months between October 2022 and March 2023 was made up of annual upfront commissions per broker of $108,103, while average annual trail commissions per broker came to $73,096.
But top mortgage brokers are earning much more.
According to the Mortgage Professional Australia’s Top 100 Brokers of 2023 – based on the value of loans in the 12 months to the end of June – the average written by the country’s leading mortgage brokers was $175 million. But the top-rated mortgage brokerage wrote $457 million of residential loans.
https://www.afr.com/companies/financial-services/inside-the-unstoppable…
There was an article on here that stated the upfront and trailing commissions that NZ banks where paying....
I thought for a moment, ok I like the look of this business.... once the dust settles here I may just take a closer look.
It seems on the surface though quite disruptable by technology, like insurance...
wow that was quick - digital disruption here already - today in AFR
Commonwealth Bank will launch a new digital-only mortgage product that will push in-house lending at the expense of less profitable broker-originated loans, igniting frustration within the industry about the major bank cutting brokers out of deals.
Known in the industry as channel conflict, major lenders are going straight to customers threatening to leave for a rival, even after they had already engaged a mortgage broker to find the best deal, brokers say. The customers are offered a better rate than those available to the brokers which, if accepted, means brokers do not earn their commission.
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