Here's our summary of key economic events overnight that affect New Zealand with news a Chinese bond bubble is a significant threat to regional Chinese banks.
But first up in the US, durable goods orders surged by +9.9% in July from the prior month, rebounding and more from a -6.9% decline in June and exceeding market expectations of a +5% increase. It was the largest rise since May 2020, mainly driven by a surge in transportation equipment orders. Excluding defense, new orders increased 10.4%. Pre-pandemic, it is the largest single monthly jump since 2010. But a lot of this is just making up for tepid rises in prior months. Year on year these July orders are up +3.0%
So yes, it is a good result, but not quite as spectacular as the month-on-month gain suggests.
It is not even either. The Texas oil patch reported yet another slip in their factory activity, extending the weakness in Lone Star factories to 27 straight months. But a 'bright spot' (less negative spot?) was that the shrinkage in new orders eased sharply.
The Germans are also feeling a pinch in their business sector. Their Ifo Business Climate indicator eased to its lowest level since February, driven by increased pessimism among companies for their current situation. Both the factory and service sectors are suffering. Although it wasn't as sharp a retreat as was anticipated, the surveyers said "The German economy is increasingly entering a crisis". That might be overstating it in a Germanic way, but it still isn't good.
Overnight, the EU had two bond auctions, both moderately well supported. The May 2028 bond went for an average yield of 2.56% and down from 2.94% at the prior equivalent event 12 weeks ago, and the April 2034 bond went for 2.84% and down from 3.07% at the prior equivalent event eight weeks ago.
In China, worries about a bubble in bond valuations is worrying their central bank. We have been reporting very low Chinese Government bond yields for some time. Lower yields boost the price of these 'safe' benchmark bonds, attracting hot money and driving the yields lower / the prices higher. Among the investors are big regional banks. The worry is that if this bubble bursts, those investors stand to lose so much their bank will fail - a bit like SVB. And there are conflict-of-interest problems in their bond markets too.
Back in the US a new trend is worth following. Their affordable home sector, one backed by Federal support, is facing a crisis. Not because of land or construction costs, but the cost of insurance which is rising far faster than owners or occupiers can afford. It also undermines the lenders who support the sector.
The UST 10yr yield is still at just on 3.81% and up a minor +1 bps from yesterday. The key 2-10 yield curve inversion is still at -11 bps. Their 1-5 curve inversion is unchanged at -75 bps. And their 3 mth-10yr curve inversion is also little-changed at -152 bps. The Australian 10 year bond yield starts today at 3.92% and unchanged from yesterday. The China 10 year bond rate is still at 2.16%. The NZ Government 10 year bond rate is now at 4.20% and down -3 bps from yesterday.
Wall Street has started its week down -0.3% on the S&P500. Overnight European markets were mixed between London's +0.5% rise and Frankfurt's -0.1% fall. Yesterday Tokyo ended its Monday session down -0.7%. Kong Kong ended up +1.1%. Shanghai ended virtually unchanged. Singapore was up +0.2%. The ASX200 was up +0.8%, and the NZX50 ended its Monday session up +0.5%.
The price of gold will start today up +US$6 from yesterday at US$2518/oz. We make that an all-time record high although it has been slightly higher intra-day.
Oil prices are up +US$2 at under US$77/bbl in the US while the international Brent price is now just over US$80/bbl. Supply risk is driving today's rises, largely based on domestic security issues in Libya.
The Kiwi dollar starts today down -20 bps from yesterday at 62.1 USc. Against the Aussie we are marginally softer at 91.6 AUc. Against the euro we are also marginally softer at 55.6 euro cents. That all means our TWI-5 starts today at 69.6 and down -30 bps.
The bitcoin price starts today at US$63,854 and down -0.5% from this time yesterday. Volatility over the past 24 hours has been modest at just on +/- 1.5%.
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45 Comments
I am sure all those Chinese banks have great interest rate risk management departments run by the Chairman's grandson... who prefers play station gaming to working.
It does not feel remotely possible that insurance costs here in NZ are going to be anywhere near the RBNZ top 3% level, I would think we are going to average double that over the next few years and way more if its Life and you are above 55 (probably half of that just rate card adjustment due to age). People used to pay off the mortgage and have less need for Life cover in their 50's, 60's in the past.
Construction in the 56 level Saescape apartment building in Auckland halted, as China Construction runs into financial trouble.
https://www.rnz.co.nz/news/chinese/526159/china-construction-suspends-w…
So has Nikki's apartment.
https://www.oneroof.co.nz/news/nikki-connors-luxury-apartment-a-mortgag…
Hi Dr Y- I'm quite interested in this project as I work and invest in commercial property.
My understanding is China Construction Bank are sitting on a number of bad loans- Duval BTR, Seascape etc etc and there have been rumours that they are considering pulling out of NZ. Probably just a rumour but who knows?? There must be significant stress back in China without worrying about little old NZ.
In terms of the project I have heard of the issues with the foundations for years- similar issues plagued the Park Hyatt. The latest estimate I heard to complete Seascape is >$150m so I'm not confident that we will see progress onsite for years. We could be looking at that skeleton for some time.
In China, worries about a bubble in bond valuations is worrying their central bank. We have been reporting very low Chinese Government bond yields for some time. Lower yields boost the price of these 'safe' benchmark bonds, attracting hot money and driving the yields lower / the prices higher. Among the investors are big regional banks. The worry is that if this bubble bursts, those investors stand to lose so much their bank will fail - a bit like SVB. And there are conflict-of-interest problems in their bond markets too.
Our bubble burst a while ago as it did for every central bank that undertook QE (LSAPs.):
by Audaxes | 28th Sep 22, 7:11pm
The government has to extinguish the RBNZ purchase price liability to banks which was surely higher than the issue price of the deposit created and credited to the government at the time of bank syndication and tender events of each and every issue purchased under the LSAP programme. Hence the Crown Indemnity for the Large Scale Asset Purchase Programme - currently revealed at $9.083bn. Link
ANZ is embroiled in allegations it manipulated government bond sales – what exactly does that mean
[ We've covered this extensively over the years. Little point in pointing to just another article about it. Ed ]
Yes the LSAP, and the FLP were foolish, let alone letting the FLP run when signals indicated stimulus from bank lending was increasing at a rapid rate. But hey ho, the stats looked good for GDP and the media were raving about NZ so they basked in the temporary glory Shame Robo got another well paid job after he bailed and Orr got double his salary for 5years while so many regular kiwis have to eat the consequences of their decisions for years to come.
I guess regular Kiwis were too busy at the time filling their boots with cheap debt buying overpriced homes and useless crap to care how Orr and Robbo were conjuring up all that magic money in the background.
We all got easy pay hikes and oversized loan approvals, and decided to spend up on stuff we couldn't afford under "normal" circumstances. Well, the normal circumstances are here now, so the regular folks have to deal with it.
In the words of George Carlin: "if you have selfish, ignorant citizens you get selfish, ignorant leaders".
"AustralianSuper, the country’s largest superannuation fund, has been forced to write off more than $1.1 billion in equity and loans..."
But in terms of the portfolio size, that's not much, right?
When we stop seeing $1,100,000,000 as 'not much' it's time to have a rethink.
https://www.afr.com/technology/australiansuper-takes-billion-dollar-hit…
More to come?
For our part, we ultimately adapted to deranged Fed policies by becoming content to gauge the presence or absence of speculative psychology – based on the uniformity or divergence of market internals – without assuming that either speculation or risk-aversion have reliable limits. So yes, this time was different, but in a very dangerous way. Faced with a zero-interest rate world that combined ‘fear of missing out’ with a belief that ‘there is no alternative’ to yield-seeking speculation, investors unwittingly drove the most reliable stock market valuation measures to levels beyond the 1929 and 2000 extremes. Unfortunately, those valuations also imply dismal long-term returns in any world not permanently dominated by FOMO and TINA psychology. Measured from the recent bubble peak, the likely consequence will be a long, interesting, 10-20 year trip to nowhere for the S&P 500. There’s also a strong possibility of an interim loss in the S&P 500 in the range of 50-70% over the completion of this market cycle, or as we observed between 2000-2009, a sequence of cyclical lows punctuated by several extended recoveries.
– John P. Hussman, Ph.D., April 2022, Repricing a Market Priced for Zero
I believe there's more to come, much more. Many assets have not been revalued down properly, and they won't be until such time as they are forced to be. That's when the next financial crisis will occur. I see commercial property at high risk of being re-priced sharply lower, this will of course affect lending institutions badly.
I'm curious about this also. From recent experience the banks are extremely reluctant to 'pull the pin' and have been taking a softly, softly approach with clients. I think they are playing for time- they would rather watch the market stagnate over the next 3-5 years than force a hard re-set in the market by calling in loans.
Valuers in the meantime have been hiding behind the 'lack of sales evidence' in order to maintain higher valuations. I am yet to hear of any banks questioning valuations or pursuing valuers which was commponplace in the aftermath of the GFC.
Watching and waiting.......
NZ banks have indeed been very "understanding" or passive with residential RE, but I know that they have taken a more pro-active stance about commercial RE. I know of commercial investors who have been pressured to sell by some banks, that's not the case for residential.
Looks like DGM is back baby
In which case these make for some interesting reading ...
Author lays out some things that mae be on the horizon.. albiet with some religious undertones thrown in
https://brittgillette.substack.com/p/how-the-current-global-financial
"
A growing crisis is inevitable, and the reason is simple… The Bank of Japan is trapped."
https://brittgillette.substack.com/p/6-potential-triggers-for-the-next
I agree. The full scale of Biden's Inflation Reduction Act is yet to make its way through the US economy. Many industrial projects are still at early stages of development/planning and will go into construction later this year.
Expect more tightness in US labour market and potential wage increases as the subsidies create hundreds of thousands of skilled jobs in engineering, construction, high-value manufacturing, logistics and several related sectors.
Good morning all- seeking some advice from those in the know.
A younger relative has reached out to me to ask for financial advice. He is 25, single, working towards finishing his builders apprenticeship.
I have been considering what advice I am going to give him. I am thinking of giving him a copy of "Rich Dad Poor Dad" and telling him to spend less than he earns and set up an AP and invest regularly in a US index fund via a Sharsies account.
Any other pearls of wisdom?
Ahh to be 25 again. I would be just going out having fun but not spending all my money every week. I had a savings target even way back then and it was $800 a month. Complete that builder apprenticeship no matter what, I still had a year to go on my electronics one in 1987 when it all turned to shit, jumped around a couple of times before managing to complete it.
That the future is not the past.
Ultimately hes too late to the Currency devaluation & Greater fool scheme underlying Rich Dad Poor dad investments.
Best bet is to work on the "single" bit.
Find a partner with a Rich Dad and get to work on that so he can enjoy life NOW
Live within 90% of his means. Yes spending less than he earns, but there is more to it than that. Put 10% of what ever he earns into an account he can forget about (this is the funds for investing). Make sure any interest paid is compounding. Sharsies or Hatch, I use Hatch. (I'd be interested in opinions of the relative benefits of the two platforms?) Don't just paradigm on the US market though. Look at Aussie and NZ and others. Learn about share investing and get advice. (That he asked in the first place is a great sign)
Always look to extend his own personal capabilities and skills, even outside the building sphere. Believe in himself, do not lose that faith. Set high standards and live by them.
That's great advice IMO, James. Stick to your own advice.
Edit: don't tell him about Interest's comment s section, he will mostly learn to make excuses. "Not born at the right time" "It's Adrian Orr's fault" "the government's fault", "there's no opportunity in NZ" etc…
My bit of wisdom: Perseverance is gold. No matter what you undertake in life, you will meet setbacks, you can't give up easily, you need to keep going by finding ways around the obstacles.
Whose tried to update their Rabobank account with the new fangled phone app security/log in system?
Good luck! And get ready for a place in the phone queue to get your account unblocked.
A hint: Don't use any saved website info you may have, and clear your cache before logging in. Then...wait for 20 minutes; hoping your funds are still there and not in Nigeria, to get access to your accounts.
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