Here's our summary of key economic events overnight that affect New Zealand with news markets turned very optimistic this week and 'greed'; replaced 'fear' among investors.
First, American producer prices rose +2.6% in June from a year ago (+0.3% for the month), the most since March 2023, and rising from an upwardly revised 2.4% rate in May. Markets had expected a rise of 2.3%. Under the hood, inflation pressures still lurk but remain at a much more manageable level.
But despite all the vastly improved economic signals, American consumer sentiment still lags. According to the widely-watched University of Michigan survey, it fell for a fourth straight month in July to its lowest since November. Nearly half of consumers are still concerned about high prices and economic uncertainty persisting as their upcoming election looms.
Estimates of the Bank of Japan currency intervention are now emerging, describing the scale of their efforts to stop the yen from rising. They probably spent ¥3.5 tln (NZ$35 bln) in Thursday's effort. That did have an impact, but is was small and the fear is that it will fade. Even the enormous warchests of central banks find it tough to move currency markets, even if the judgement is right that the JPYUSD rate is out of kilter.
Japanese industrial production rose +3.6% in May from the prior month to be up +1.1% from a year ago, solidifying the evidence of an improving Japanese economy. No doubt the recent lower yen has helped, especially at the pressure from energy prices has waned substantially.
India's inflation rate rose to 5.1% in June. up a rather startling +1.3 in June alone. From a year ago, food prices were up +9.4% however within that. This rise was not expected, although their central bank is not expected to react to it because they have given themselves a very generous 2% to 6% target range for inflation. But they are now well above the 4% midpoint and the froth developing in their breakneck economic expansion will need to be dealt with soon.
Industrial output in India rose +5.9% in May from a year ago, well above market expectations of a +4.9% gain and marking the highest growth rate since October 2023. Manufacturing which accounts for nearly 80% of total industrial production, expanded by +4.6% with surged growth noted in the pharmaceutical sector (+7.5%), basic metals (+7.8%), mining (+6.6%) and electricity (+13.7%).
Despite strong efforts by their central bank to encourage lending, Chinese banks extended +¥2.1 bln in new yuan loans in June , a sharp contraction from the +¥3.1 bln in June the previous year, and slightly below market expectations of ¥2.2 bln. The slip aligned with the sharp slowdown in outstanding loan growth, dropping to +8.1% in June from +9.3% in the previous month, to mark the smallest amount of loan growth since data started being recorded in 1998. A year ago it grew at +11.3%. Total 'social financing' in June was -22% less that the same month a year ago.
China's exports were expected to rise +8% in June ahead of new American tariffs. But they actually rose +8.6% to a 15 month high. Their imports fell -2.3% however when a +2.8% rise was expected. That divergence meant they reported another big surplus - which will undoubtedly spread the fear of Chinese dumping from its over-capacity situation.
They reported they imported almost -16% less from New Zealand in June than in the same month a year ago. They exported +2.4% more to us. For Australia, imports were down -5.2% and exports down -4.9%. For the US, their imports from them were down -4.9% and exports to them up +1.5%. Overall trading with China is pretty muted now. The only destinations that China has good exports to were Brazil, Vietnam, Indonesia, and surprisingly Taiwan. Everyone else - Russia included - is very ho-hum. And total trade (imports and exports) is only healthy with Vietnam, Malaysia, and Brazil.
In the Chinese style that "everything is security", Beijing is pushing its shipping companies to build and own more of their vessels. COSCO is in a massive building phase, adding 100 new ships. CMG is doing the same. And bulk cargo lines are also ordering big - all from Chinese shipbuilders of course. It is turning into a monumental industrial program, not doubt bolstering the PLA's navy capacity at the same time.
In Australia, the number of permanent arrivals in the country is now almost at a new record high in a very sharp rebound. +12,680 people arrived in the country in May, taking the annual level to +161,000. The record high permanent arrival level was +163,400 in February 2009.
The latest OECD review of corporate tax rates shows that New Zealand as one of the highest effective rates globally among both OECD and non-OECD nations, and a very high effective marginal corporate rate in these comparisons. (See pages 37, 42 and 47.) We also have a higher than average level of corporate tax (to GDP) collected than most other countries.
The UST 10yr yield is now at 4.19% and unchanged from yesterday. A week ago it was at 4.28% so a -9 bps net fall since then. The key 2-10 yield curve inversion is less at -28 bps. Their 1-5 curve is still at -77 bps. And their 3 mth-10yr curve inversion is deeper at -118 bps. The Australian 10 year bond yield starts today at 4.34% and down a mere -1 bp. The China 10 year bond rate is down -2.26%. The NZ Government 10 year bond rate is now at 4.55% and down -7 bps from yesterday. A week ago it was 4.77% so down a net -22 bps through the MPR.
Wall Street has ended its Friday session with the S&P500 up +0.6% to end its week up +0.8%. European markets were similarly up +1.2% but London trailed with a +0.4% rise. Tokyo ended its Friday trade down -2.5% and that left a weekly gain of only +0.8%. Hong Kong ended yesterday with another streak up, this time by +2.6% so they ended their week up +3.5%. (Oddly, this rally is driven by the impact on Chinese property developers of a US rate cut.). Shanghai was virtually unchanged on the day but booked a +1.1% weekly gain. Singapore was up +0.7% yesterday. The ASX200 rose +0.9% again to be +1.8% higher for the week. And the NZX50 rose its own +0.6% in Friday trade to be +2.9% higher for the week.
The Fear & Greed index has shifted over into the 'greed' range on the improved outlook in most economies.
The price of gold will start today up +US$1 from yesterday at US$2414/oz, up +US$24 from a week ago. The last, and only, time it was over US$2400 was in mid-May. It's record high is US$2,450/oz.
Oil prices are still at just under US$81.50/bbl in the US while the international Brent price is back down -50 USc at just on US$84.50/bbl. A week ago these prices were US$83/bbl and US$86.50/bbl respectively.
The Kiwi dollar starts today up more than +¼c from yesterday and now at 61.2 USc and back nearer the week-ago level of 61.4 USc. Against the Aussie we are still at 90.2 AUc. Against the euro we are still at 56.1 euro cents. That all means our TWI-5 starts today up +10 bps at 69.9 but down from the 70.6 of a week ago.
The bitcoin price starts today at US$58,526 and up +1.1% from this time yesterday, up +3.5% from this time last week. Volatility over the past 24 hours has stayed modest at just under +/- 1.7%.
Go the All Blacks!
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43 Comments
All the business commentators in NZ blaming RBNZ for our dire economic situation need to check the cold hard facts for a change.
Real GDP per worker in NZ has remained somewhat stagnant at 2011 levels, meaning cheap debt and net migration grew the bulk of our economy since. The US oil glut and Chinese industrial overcapacity in the last decade helped keep tradable inflation super low.
Wages in NZ are generally high because workers have to be compensated for high housing costs, not because of their skill premium. We have the 2nd lowest tertiary graduation rate in STEM fields. Our capital markets also run fairly shallow and infrastructure is outdated.
What do we have to offer to businesses looking to invest in productive operations here?
Case in point, we actually have one of the highest minimum wages in the OECD when measured as % of GDP per capita.
Exactly. That is why I was pushing so hard around the 2005-2010 period for action on housing. Clark then Key dropped the ball. That was the time for urgency. By 2015 it was far too late. And now it’s way way way too late. Bishop’s proposals will have marginal impact.
"Inflation pressures still lurk but remain at a much more manageable level". I think Arthur Burns said something similar.
(US inflation fell back... and appeared to be coming under control. However, it surged into double-digits... before dropping back to 6% ... and then soaring again back over 12%.... the... lesson is, that inflation takes years, if not decades, to get under control....)
https://www.capitaleconomics.com/blog/pivoting-central-bankers-must-fac…
The UST 10yr yield is now at 4.19% and unchanged from yesterday. A week ago it was at 4.28% so a -9 bps net fall since then. The key 2-10 yield curve inversion is less at -28 bps.
Beijing is pushing its shipping companies to build and own more of their vessels. COSCO is in a massive building phase, adding 100 new ships. CMG is doing the same. And bulk cargo lines are also ordering big - all from Chinese shipbuilders of course.
While we were busy debating whether industrial policy works, our entire shipbuilding industry went to Asia. Link
China’s subsidies create, not destroy, value
Nearly 250 years after the publication of Adam Smith’s ‘The Wealth of Nations’ and the West has lost the economic plot
American ports are also some of the least efficient among the top economies of the world.
Part of the reason being the mass privatisation of public infrastructure since the 80s in the US. The private owners can't be bothered investing in expensive capital upgrades.
Yep Audaxes, having been one of those who read the likes of Adam Smith, I have always been a firm believer in rewarding those who innovate or produce. Thing is China is going great guns providing the things we need. What is so wrong with that? Yes I know . They are gathering our wealth. Does anyone honestly think they will turn that wealth against the World like Hitler? I suppose it can be argued that Putin is trying to do just that. It certainly puts the World in a conundrum.
Personally I would like to think China is mature enough to stop at it's historical limits.
NZ should be mature enough to realize that it is in the Asian sphere of influence, so tread carefully.
Saturday morning thought. Why wouldn't inflation in the US gravitate towards the interest rate. That is what is happening in NZ - higher rates are pushing prices up as much as lower demand is pulling them down. It's why we have sticky inflation. The case I'd make on why...
- The price of money flows through into the price of everything else - wages, business costs, dividend commitments, discount rates etc. It's the same with other systemically important prices - e.g. oil or electricity. If oil prices go up, we expect other prices to follow as the higher costs are absorbed - why wouldn't it be the same when the price of money increases?
- We have low levels of competition and firms know that their competitors are facing the same cost pressures as they are - so you get implicit price coordination. Firms will downsize - adjust volume - before selling things at a loss (with occasional fire sales as they close).
- Wages / salaries are floored at minimum wage, very slow to respond to higher unemployment, and 30% to 40% of salaries are effectively set by Govt (directly or through fixed-price contracts).
- NZ has sky high private debt levels (138% of GDP last quarter), which means that banks are pulling 10% of GDP from households and businesses and giving it to people with a low propensity to spend (savers and equity investors). That is $42bn of cost added to the economy. Who is paying that cost (price)?
- Two-thirds of households are insulated from higher mortgage rates and, with Govt forced to deficit spend as benefit claims increase etc, the dynamic described above can be sustained for a long-time - with inflation gravitating towards the interest rate.
Worth looking at non-tradable inflation over the stable period between 2010 and 2019... The average NT inflation was about 2.7%. The OCR averaged 2.4%.
Is inflation sticky though ? I mean it was but going forward we have prints around 0.6 quarterly. That’s 2.4% annually. September quarter will see a higher print but the product of rates rises is more a factor of decades of poor council management. I dunno but just see now job security is a factor wage pressure disintegrates as does pricing power.
Yes, petrol prices, international airfares, fruit & veg prices etc should pull CPI down into the 2s (my point is that it has taken us 6 months longer than G7, US, Euro20 etc). But, our rates, insurance, rents, tobacco, and insurance costs look like providing a rock solid 200pt foundation for CPI going forward. So, it will only take a couple of imported price spikes (oil, airfares, food etc) to send CPI back over 3%. Or, perhaps, the National Govt will actually adjust the ETS so that it bites properly on fuel prices? Worth a look at the volatility in the selected price data.
My guess is that RBNZ will either (a) take ages to reduce the OCR and thus prevent inflation settling lower, or (b) they will crash the OCR to 2% because the economy is in meltdown, and this will accelerate the drop in CPI as businesses will be able to reduce prices without going bust. They will claim credit for taming inflation regardless!
No...access. The ability to trade currency for real resources...already some currencies have been priced out of (wrong descriptor..lost the ability) access....that number of currencies will only increase....how that is attempted to be addressed will be of interest.
That is not inflation, but rather the tradability /desirability of currency...some will retain it, some wont.
A crash of the OCR to 2% will tank the NZD and we will re-import inflation. Other big concern is that our biggest export customer has reduced their imports from us by 16%. The New Zealand current account deficit will increase further with more pressure on the economy and more borrowings/overseas investment required to maintain our current lifestyles which is imported from overseas.
Yes, a crashed OCR would be a mistake (for the avoidance of doubt).
I would argue that our relatively comfortable lifestyle is the result of us having a currency and central bank at or near the top table. We export govt debt to close our current account deficit and our currency stays stable while we have top table credibility. It's getting precarious though - particularly as we enter a self-induced long recession that makes us look clueless
Re: your third point- hourly wages are effectively fixed, but what I am keeping an eye on is under-employment. Around the GFC, quite a few consultancies (including where I worked) took staff to 9 day fortnights or even 4 day weeks. I haven’t heard much of that this time, although I suspect it’s coming (companies probably tried to avoid it when the job market was still fairly robust…)
I am sifting candidates for a senior role between commenting on here! Ridiculously high-quality field, lots of people from the big consultancies. A lot of the big public service agencies responded to Govt limits on consultant / contractor spend by bringing people onto payroll (a couple of thousand people in late 2023 / early 2024). That is over now and things are going to get very messy. Unless of course the new Govt tell agencies to ignore their previous advice and hire the big four to give them the answers they want!
What field if I may ask? We are noticing a fiar number of engineers who left their technical jobs in the last 5 years to join government consultancies in general business case writing or project/programme advisory roles.
A surprising amount of talent was trapped in low impact jobs, which an economy of our size and scale can't actually afford.
Why wouldn't inflation in the US gravitate towards the interest rate.
The CPI Report: There's More Than Meets the Eye
The June consumer price estimates at first seemed like good news. Two months in a row at low and now negative changes. But these past two months have shown a little more weakness than most had bargained for, instead so many of the details consistent with recession indications spilling out from all over the economy. No wonder bond yields dropped sharply, though, alarmingly, swap spreads got there well before today.
Hi Jfoe, a lot of what you are posting on the forum makes sense. I share a personal example with you regarding your observation of :'Firms will downsize - adjust volume - before selling things at a loss (with occasional fire sales as they close)'.
I am renovating a villa in Riccarton, Christchurch. I needed to get some serious electrical work done so I invited a number of electricians to quote. I got only 3 out of a maximum of 5 which were only 3% apart, 600 NZD difference. I chased up the other 2 who didn't respond and they informed me they didn't quote because they were winding down their business and go into some sort of retirement.
The shutting up shop and retiring (perhaps early) seems to be a common theme....and with credit tight and demand low many SMEs cannot sell to the next generation and so the associated employment disappears.
Some concerning examples I have noticed locally....firms you'd expect to be the last to go.
Peter M, we are having the same issue but with plumbers. The ones that used to work in the more remote areas are retiring and there are very few who are interested. To be honest it is the same with most trades people, if it ain't close to home try someone else.
Perhaps we need some hard times to make them realize that staying away from their Missus or whatever for a few days to make some money isn't the end of the world.
Re ABs - before the last test I said the lack of world class quality at number 10 and in the loose is a problem. Let’s see how McKenzie goes tonight. For mind, a very good Super Rugby player but not up to international standard. His tactical kicking needs to be much better. He also needs to moderate his running game a little. Good luck to him and the ABs tonight. Eden Park brings out the best in them.
McKenzie is too light and fluttery at 10 for heavy, tight test rugby. But the problem really starts at 9, slow and hesitant delivery last test. No back line can make yardage when made flat footed. Yes, and the loose forward combination needed a re-think too. Could be big division in the AB camp today too. Sumner (Robertson) play Sydenham (Ryan) for a semi spot.
Vancouver high-end condos flooding the market and China is being blamed. Even so, Canada is still the 3rd most desired country for real-estate investors from China.
One downtown condo that was bought for almost $3 million is now on the market at $2.3 million. At the elite, funky Alberni, designed by starchitect Kengo Kuma, an “extremely high” inventory of 26 condos is for sale, says realtor David Hutchinson.
At the similarly over-the-top Hotel Georgia, 14 units are listed. The 48th-floor penthouse was once put on sale at $35.8 million, now it’s going for $20.8 million. In the neo-futurist Vancouver House, where Hutchinson says even storage lockers have sold for $150,000, more than 30 opulent apartments are up for grabs. There have only been three sales in six months, and those are smaller units going at about 10 per cent below list price.
https://vancouversun.com/opinion/columnists/vancouvers-high-end-condos-…
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