Here's our summary of key economic events overnight that affect New Zealand with news the northern holiday season can still spring a few economic and market surprises.
First in the US, mortgage applications last week were little-changed from a week ago (down -0.5%) and that is despite mortgage rates falling for a fourth consecutive week to 6.44% for their benchmark 30 year fixed loan. That is its lowest level since April 2023, and interestingly is the same rate that applied 30 years ago in October 1993. If you took out one of these loans back then and had to renew it today (!), the rate would be exactly the same.
In their government bond market, the US Treasury had a 5 year bond tender and that was very well supported - again. There was a massive US$100 bln more offered than they accepted. It gave investors a median yield of 3.59%, down from 4.05% at the prior equivalent event a month ago. Their bond rally is extending, so perhaps it is no surprise investors are so enthusiastic. Lower rates also mean the pressure on their Federal deficit is less than it would otherwise be. On average, the US Federal government pays about 3.35% over all its debt, so today's tender is approaching that average again.
The US holiday driving season is coming to an end with one final burst for their Labor Day holiday this coming weekend. Motorists there are paying -12% less for petrol than they did at this time last year, and on their way home they will be paying -4.1% less than they did a month ago. Energy inflation is not a thing there at the moment.
Today will also be a signature day on the US equity markets after Wall Street closes. Nvidia will release its results and investors will then know if their sky-high valuation is reasonable. And Berkshire Hathaway may hit a capitalisation of US$1 tln, putting it in a very small and exclusive club of seven, all the others big tech companies.
In China, the levels of dissent are rising as their economy wavers, although the rises are containable by Beijing. In the year to October, they were up +16% according to detailed monitoring. Most current dissent is in the south in Guangdong province, but the big central provinces that include Beijing are also seeing rises in dissent. The October monthly levels may end up being the highest of the year. Almost half relate to workforce issues, about a fifth relate to homeowner stress.
And in some parts of China, stress is more than citizen protest. In giant Chengdu, the capital of Sichuan province, they are in an extended and crushing heat wave. Electricity is being rationed with many companies halting production after the local government imposed sharp restriction as the power supply buckled.
Australia released their month CPI Indicator yesterday. It rose 3.5% in July from a year ago, down from June's 3.8% but above consensus of 3.4%. It was the lowest figure since March, as electricity prices fell sharply following the extended Energy Bill Relief Fund rebate. Inflation remains outside the RBA’s target range of 2-3% and that electricity component is hiding some of the higher prices elsewhere. Don't expect Aussie rate cuts any time soon. (Their policy rate is 4.35% with financial markets pricing in one -25 bps cut in December but with low conviction; ours 5.25% with markets pricing in -75 bps of cuts over October and November.)
And staying in Australia (and speaking of extremes), their Green Party said its “Robin Hood” reforms would levy an extra AU$514 bln in taxes over 10 years to pay for sweeping social benefit increases. (Chances of enactment are low however, because they only have 4 MPs in the House of Representatives, plus 12 of 76 in their Senate.) The Aussie Green's alignment to the bikie-gang controlled CFMEU union isn't endearing their policies to a wider audience either.
The UST 10yr yield is now at just on 3.84% and unchanged from yesterday. The key 2-10 yield curve inversion is now only -3 bps and its smallest inversion since July 2022. Their 1-5 curve inversion is little-changed however at -73 bps. And their 3 mth-10yr curve inversion is also little-changed at -149 bps. The Australian 10 year bond yield starts today at 3.98% and unchanged from yesterday. The China 10 year bond rate is also unchanged at 2.18%. The NZ Government 10 year bond rate is now at 4.29% and up another +4 bps from yesterday.
Wall Street is down -0.5% on the S&P500 ahead of the Nvidia and Berkshire data. Overnight European markets were mixed with London unchanged but both Paris and Frankfurt positing small rises. Yesterday Tokyo ended its Wednesday session up +0.2%. Hong Kong ended down a full -1.0% however. Shanghai ended down -0.4%. Singapore was down -0.2%. But the ASX200 ended unchanged in its Wednesday session, while the NZX50 was up +0.2%.
The price of gold will start today down -US$13 from yesterday at US$2506/oz.
Oil prices are down -US$1 at US$74.50/bbl in the US while the international Brent price is now just over US$77.50/bbl.
The Kiwi dollar starts today down -20 bps from yesterday at 62.3 USc. Against the Aussie we are unchanged at 92 AUc. Against the euro we are up +20 bps to 56.1 euro cents. That all means our TWI-5 starts today at 70.1 and unchanged from yesterday.
The bitcoin price starts today at US$58,877 and down another -4.7% from this time yesterday. Volatility over the past 24 hours has been high at just on +/- 3.7%.
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18 Comments
On average, the US Federal government pays about 3.35% over all its debt, so today's tender is approaching that average again.
Are rising interest payments and arms purchases productive demands on taxpayers' resources?
The very definition of the military-industrial complex: a VC fund which CEO Gilman Louie sits on Biden's Intelligence Advisory Board brags: “if the China-Taiwan situation happens, some of our investments will 10x, like overnight.” Link
As wars in Ukraine and the Middle East continue to rage, Vertical Research Partners forecasts top weapon manufacturers will experience record cash flow during the coming years.
The analysis, which was commissioned by the Financial Times, reports, “The leading 15 defense contractors are forecast to log free cash flow of $52 billion in 2026,” with the “Five top US defense contractors are forecast to generate cash flow of $26 billion.”
The cash flow in 2026 will be double the 2021 numbers. The record numbers are part of an upward trend for weapons makers already benefiting from a surge in global military spending and conflict. Link
While it is very easy to decry spending on military equipment and capability, what needs to be considered is what would happen if some of these countries didn't? Ukraine for example would now be Russian, likely with Ukrainians being executed wholesale as "Nazis". A modern holocaust. This is essentially exactly the justification Putin used for his 'Special Military Operation' in the first case. China is running rough shod over the countries which border the South China Sea. They've actually traded gunfire with Vietnamese military units. None of those countries have the level of military capability to adequately defend themselves. Thos are just two of the most obvious examples, but make no mistake there are others bubbling too.
Helen Clark aspires for us to be a "Switzerland of the South Pacific" Neutral and deals with everyone. But firstly Switzerland has a very strong military, and is well capable of putting up a very strong defence. And then there is the Alps. Secondly if you choose to trade with tyrannies, if the world degenerates into open warfare, could and would that trade continue? And how would either combatant side view us? We could easily be tagged as an enemy of one or the other (or both?). And when trading with tyrannies, we are effectively, albeit tacitly, condoning their actions.
History teaches us that the only real way to avoid war is to prepare and be ready for one. Russia perceived Ukraine as weak (and so did everyone else). Would they have invaded if they knew Ukraine was strong in defence?
That goes two ways. From Wikipedia:
""With the beginning of the Russo-Ukrainian War, Russian neo-Nazis have achieved international attention for their militant support of Russian-backed separatist forces in eastern Ukraine. Certain groups, such as the Russian Imperial Movement, have been accused of training white supremacists and neo-Nazis from other countries in Europe. The links between these groups and the Russian government, comprising a policy known as managed nationalism, have become particularly noteworthy since the 2022 Russian invasion of Ukraine after Russian President Vladimir Putin claimed to be pursuing the "denazification" of Ukraine.""
A high level of arms manufacturing should always be potentially available. The Ukraine conflict has shown that the West needs to be able to produce large quantities of artillery shells, missile, vehicles and drones with little notice. We can't rely on high tech solutions or nuclear weapons necessarily saving the day. Geopolitical considerations will mean that high manufacturing output remains a necessity.
Good overview of what's caused the Australian construction industry to fall over:
https://youtu.be/ZiXQkqw-_q4?si=Lo58PwuX2irDnOTT
Can be applied to NZ as well, although NZ didn't have the same sort of government building stimulus as Aussie.
On average one construction company has gone under there per day, for the last 2 years.
As described the Robin Hood proposal by the Green Party in Australia is more than odd. Robbing Peter to pay Paul in any scenario is as nonsensical as it is self defeating. As a proposal, an example of totally inept contradiction surely. The two issues are undeniably of importance and as such each should be approached on its own merits. Just as cross legged as the Green Party in NZ whereby policies are randomly broadcast without any credible consideration of either implementation or impact.
In their government bond market, the US Treasury had a 5 year bond tender and that was very well supported - again. There was a massive US$100 bln more offered than they accepted
Chinese Company PLUNGES 30% (This Confirms Everything)
Chinese e-commerce retailer Temu becomes the latest global consumer business to warn about the economy - exactly what bonds have been doing all year much to the growing frustration of authorities. They'd rather derail lower market rates at the same time as cutting their own? It actually does make a lot of sense as all these things are related.
"Nvidia shares fell 3% in extended trading." Steady as she goes. But the very best bit? "it approved $50 billion in share buybacks."
Share buyback weren't outlawed for ~50 years without reason. Yet here we are, repeating history and hoping it will be different this time.
"For most of the 20th century, stock buybacks were deemed illegal because they were thought to be a form of stock market manipulation. Buybacks have become perhaps the most popular financial engineering tool in the tool shed. And it’s obvious why. Buying back company stock can inflate a company’s share price and boost its earnings per share metrics that often guide lucrative executive bonuses. As Reuters wrote recently, “Stock buybacks enrich the bosses even when business sags.”
Interesting chart here showing that cash availability for future buybacks (in S&P500 companies) is nearing a record low.
https://x.com/kobeissiletter/status/1828854605666488411?s=46&t=MUwQeKa7…
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