Here's our summary of key economic events over the weekend that affect New Zealand, with news China's debt problems are just growing and more investors are worried.
But first, in the week ahead we will get some key data. In the US, they have a Fed rate review on Thursday and markets will be eyeing signals about when rates might move. Some think a March cut is coming. Then on Saturday, the January non-farm payrolls report on their labour market is out. And PMIs, consumer sentiment data, and factory order data will round out their big economic signals. Their earnings season is in its third week and there are some very large companies reporting, including most of the FAANGs (or now more accurately, MAMAAs). EU GDP will come this week too along with CPI updates from them, South Korea and Australia (on Wednesday). Locally it will be building consent data and the large end of month stats dump from the RBNZ that will interest us.
Over the weekend we got data on Chinese industrial profits which rose +16.8% in December above the same month last year. And that was the fifth straight month they have risen. But the bar is low. The year ended with overall profits -2.3% lower over the whole twelve months, and in calendar 2022 they had fallen -4.0%.
2024 is going to be a tough year for Chinese corporates. They are facing a record obligation to pay bond debt maturities, which will total ¥6.8 tln, (or NZ$1.55 tln). Their problem is that creditors are either increasingly unwilling to roll it over, or will demand significantly higher interest rates to do so. Both scenarios will hurt, and the pain will grow as the year progresses. Debt obligations have been growing much faster than GDP, making creditors skittish. And in the three years to 2026 the redemption obligation rises to ¥20 tln, so the problems won't fade with time.
In the recent past, investors have continued buying Local Government financing bonds (LGFVs) which are part of the overall corporate debt, assuming that they are guaranteed by the government. And none have failed outright yet. But these LGFV bonds linked to "infrastructure" (read, their property development sector) are based on unprofitable enterprises, and maturities are jumping 40% in 2024, accentuating the pressures. Recently, institutions have been dealing with this pressure with very high interest rates (8+%) and much shorter maturities (less than 3 years). It doesn't take a rocket scientists to see what is about to happen. This will only work out if Beijing underwrites everyone, which does seem increasingly unlikely. Xi won't be happy in the trap and will probably want to 'teach' the financial markets a lesson.
The scale of the problem is highlighted in an updated report on the country's macro leverage ratio. It rose +13.5 percentage points in a year to 288% in 2023 as a measure of non-financial debt to GDP.
To put off the reckoning, last week China rolled out some very large and unexpected stimulus, much of it targeted. Their central bank now seems to have an outsized role in these efforts and the signals are more is to come, with the central bank providing cheap funds via its "Pledged Supplemental Lending" programs. These recent moves cost about ¥3 tln in total.
But investors from well-known global institutions and local icon firms at a Hong Kong Government promotion event last week cast doubts on how effective the policies would be. The event was supposed to talk things up, but in fact it just allowed participants to confirm that others share their gloom. So far, key concerns such as China's property crisis and low confidence appear unaddressed.
Singapore was expecting to report a bounce-back in industrial production in December after the November fall. But it didn't happen. They reported another, albeit smaller, retreat. Analysts there aren't anticipating any significant improvement in the first half of 2024.
American inflation seems to be cooling, and in a way that the US Fed will like. While overall PCE inflation was unchanged at 2.6%, their core PCE rate came in lower than expected at 2.9%, down from 3.2% in November. Remember this was running at almost 5% a year ago.
And all this happened while personal spending rose in the December quarter, and by more than anticipated. Higher activity and lower inflation is a goldilocks outcome. 'Real' personal consumption is +3.2% higher than a year ago - that's after inflation!
And to add to the vibe, personal income has come in +4.2% higher than year-ago levels on the same 'real' basis, showing households are more than keeping up with inflation.
Markets are back thinking this might give the Fed an opportunity to reduce policy rates by mid-2024; some think as early as March. One thing on their mind with falling inflation and a policy rate at 5.5% is that real interest rates are effectively rising now.
December American pending home sales also rose rather strongly in December, up +8.3% from November to finally best year ago levels by +1.3%. They haven't had a gain like this outside the pandemic period since early 2017. A surge in California helped although most regions showed gains. And recall, we noted last week a similar strong rise in new home sales nationwide.
The UST 10yr yield starts today at 4.14% and down -2 bps from this time Saturday. A week ago it was 4.16% so little-change since. The key 2-10 yield curve inversion is slightly more at -22 bps. Their 1-5 curve inversion has stayed little-changed, now by -75 bps. And their 3 mth-10yr curve inversion is also little-changed at -124 bps. The Australian 10 year bond yield is now at 4.24% and unchanged from Saturday. The China 10 year bond rate is unchanged at 2.51%. The NZ Government 10 year bond rate is down -1 bp at 4.74%. It was at 4.82% a week ago so an -8 bps fall since then.
The price of gold will start today up another +US$3/oz from Saturday at just on US$2019/oz.
Oil prices are up another +US$1 at just over US$78/bbl in the US while the international Brent price is now just over US$83/bbl.
The Kiwi dollar starts today at just under 60.9 USc and marginally lower from this time Saturday. Against the Aussie we are unchanged at 92.7 AUc. Against the euro we are also unchanged at 56.1 euro cents. That all means our TWI-5 starts today at 69.9 and unchanged since Saturday and little-changed in a week.
The bitcoin price starts the week firmer again. It is now at US$42,307 which is up +0.9% from this time Saturday. Volatility over the past 24 hours has been modest at just on +/- 1.3%.
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38 Comments
Real' personal consumption is +3.2% higher than a year ago - that's after inflation!
Yes, increased demand in competitive markets pushes companies to increase supply and expand into new areas. This increases supply, economies of scale and competition - pushing down on prices.
Economists make the fatal flaw of thinking that the markets work like their models - e.g. that each additional unit produced costs more than the previous one. Sadly, the economists that get the limelight in NZ are particularly wedded to the broken orthodoxy - so we get 'higher demand is inflationary' nonsense on repeat.
Not just economists, it's journalists (claimed, so-called) too.
Gyles Beckford on Morning Report today, a classic case. It is clear that exponential growth based on physical consumption of a finite planet, will cease; fact. It is clear that ex the fossil-energy pulse, we won't be extracting, processing, consuming, excreting and much. Fact.
But having chosen to ignore those facts - and implications thereof - 'journalism' is reduced to regurgitating surveys of the very people that journalism is not telling the truth about growth. Surveys of pre-conditioned ignorance can be described in many ways, but 'journalism' is not one of them.
Aren't they just reporting what they are told? I suggest the real problem is that they are not challenging what they are told. I'm not sure that they are aware that the information they are being fed is not flawed simply because there is no evidence of it. To be sure though, they have to be pretty thick to not be aware, or extremely gullible and buying into the ideology being fed to them. How do we tell?
Perhaps by getting them to run themselves through this?
https://dothemath.ucsd.edu/2015/04/programmed-to-ignore/
We could then select our information-seeking by category.
Not tat there'd be much to select from.....
you can lead a horse to water.....
But then they'd still have to be able to think their way through the BS they're being told. I read an article last week which suggested that some investigative journo's still believe we can save ourselves through tech developments.
The Trump denial syndrome is far more prevalent than is comfortable and numbers seem to provide ideologies more weight than science, logic and reason. After all Christians and Muslims still believe that God will save us. Someone should point out that that is only after we are dead!
But when you die you go to heaven and its all sweet and paradise for ever more.
Unfortunately in many parts of the world this thinking is still prevalent so emotion rather than logic or facts come to the fore - and in places like US of A its actually a bigger problem given that people deny that it is an issue
Theory is just that. Monetary theory was initially a concept that was put into practice I think initially by Volcker. It worked until it didn’t as is the problem now. Conceptually when they were discussing controlling the price of money to be contractionary or expansionary they could have chosen oil. It’s a vital product that is contractionary when the price goes up and vice versa. But they chose money and here we are 50 years later in dire need of a new approach. Seems no real attempt to attack the status quo in any intellectual or political institutions.
At a higher level oil may seem suitable, but in reality it is not. What money actually is, is a universally accepting trading medium which hold value when trading for goods. The overall issue we face now is the control of money. Gold or other precious metals are too scarce, but for a while, and in places it is still used. Digital alternatives are an attempt, but their biggest problem is that there is no intrinsic value that under pins them and because they are not controlled, and are a digital (not real) currency they are unstable.
So the real issue is fake money, the USD/petro dollar, the issues that killed the gold standard and debt is money. The price of money is obviously a false concept that is now embedded in the narrative. What are simply tokens with no real value have been given an overarching power all because of a belief system and fear.
There is still much tech to discover, develop and deliver. We are just only beginning, as a species we have learned a lot from other species to create innovation. Earlier in my lifetime there were quotes that there is nothing new and everything had already been discovered eg motor cars, telephone. If that was true we have sure been doing a lot of improving over the last 50 years to 100 years
With your way of thinking I worry for your grandies and great grandies that they have to listen to your limiting cogitations.
Bollocks. All the 'tech' you refer to, is physical and built within a dissipative format. The materials were extracted, consumed, degraded, discarded.
And no, we haven't. We developed internal combustion, and applied it to travel. That's pretty much it. We applied scientific knowledge to communication. That's pretty much it. And you assume perpetual growth from that? Astounding.
Are you still growing at the rate you did from 0-5? Or in your teenage years? Does any other species grow indefinitely (given that we're learning from them and all)? Ask yourself: Why not? It will be the start of a long and interesting intellectual journey.
Except it won't, because you won't. I wonder about that, the way I wonder at cars parked outside churches on a Sunday; it's amazing how many deny the inconvenient; the disturbing, the potential alterers-of-assumptions-held.
Stone Age, Iron Age, Bronze Age all made their way with the benefit of fire, wind and water flow. Electricity came along and so to the telegraph, not a lot other than that, industrial powering etc. For not much more than a century though the uses and use of oil has been the greatest mover & shaker the world has ever witnessed. Yes sir, this is the Oil Age alright. What comes next then.
Great point, Foxglove. They were really the firewood age, the charcoal age, and the wind-and-water age.
Calling them stone, bronze etc, conflates the energy source with the material we applied it to. That is one of the flaws in our current narrative; energy blindness.
We've also learnt a lot from other species who live in microcosms of abundant resource. The sequence usually goes: lag phase (as the species prepares for the ideal living conditions), exponential growth phase, stationary phase (when resources are quickly running out), then death phase. The death phase usually occurs very quickly.
I think you highlighted what's wrong in NZ when you said, "increased demand in competitive markets". NZ's markets are far from competitive. And therein lies the rub.
Imported stuff from competitive markets should behave as we see in larger and competitive markets. But doesn't. (Partly due to supply chains as we have seen. But also due to monopolies and oligopolies within those product & supply chains.)
Whereas stuff produced locally never shows a smooth supply curve - instead its often very lumpy with the few suppliers (even a single supplier) running into production constraints and then having to invest in new plant & equipment before production can increase to meet demand. This lumpiness in the supply curve allows all sorts of pricing shenanigans. And because the number of suppliers is so small, they get away with it.
Of course, one can also lay blame with consumer's entrenched product selection. Were consumers more savvy they would stop purchasing products where the prices were rising, and find substitutes. One needs only look at how unseasonal produce continues to be bought outside of season to get a feel for this. Another example is 'brand dedication' when far cheaper brands are virtually identical.
NZ's small market can't really be compared with large markets easily. Adjustments need to be made for such comparisons and each adjustment introduces potential errors and biases.
Agree Chris, and made worse by monopoly and duopoly providers that are not actually visible such as construction companies that own wholesale and retail operations as well as the timber manufacturer, the saw mill, concrete plant, quarry etc etc. Vertical integration with different company names giving the appearance of competition
Yes, I chose the words carefully!
We do not have sufficient competition across many sectors. I wonder whether this means that prices just tend towards the most that people can afford to pay - so higher wages / benefits just drive higher prices and profits, which then drives wages etc. The only brake on this feedback loop is the net flow of credit money into the economy.
They were well chosen indeed. (See the 'How the price of toilet paper explains inflation' for some TP-nomics insights.)
re .. "The only brake on this feedback loop is the net flow of credit money into the economy."
Et tu, Jfoe? lol. I'm not sure I'd agree that's its the only brake.
How about a pricing Czar? Give the czar absolute power to slap 'windfall' taxes onto any business they feel like whenever they want. The czar can hand out 'please explain' notices for any price increases that must be responded to with financial data within 20 working days. Any hints of greed and the czar can slap on a windfall tax to be paid at the end of the businesses financial year. Methinks businesses would think very carefully about their next price increases, and their current prices. Especially toilet paper manufacturers. ;-)
Markets are back thinking this might give the Fed an opportunity to reduce policy rates by mid-2024; some think as early as March. One thing on their mind with falling inflation and a policy rate at 5.5% is that real interest rates are effectively rising now.
Janet Yellen Bets $2 Trillion That Rates Will Not Be Higher-For-Longer
In 2023, the Treasury added $2.6T to the national debt. While that number alone should be enough to scare anyone, the details reveal something even more concerning. $2T of it, or 77%, was financed entirely with short-term Treasury Bills maturing in less than a year. The chart below shows the debt issuance trend over the last 20 years. As shown, the Treasury typically relies on medium-term debt (2-10 Year Notes) to fund the budget deficit. 2023 was a massive change in standard procedure as shown by the giant light blue bar on the right of the chart.In 2023, the Treasury added $2.6T to the national debt. While that number alone should be enough to scare anyone, the details reveal something even more concerning. $2T of it, or 77%, was financed entirely with short-term Treasury Bills maturing in less than a year. The chart below shows the debt issuance trend over the last 20 years. As shown, the Treasury typically relies on medium-term debt (2-10 Year Notes) to fund the budget deficit. 2023 was a massive change in standard procedure as shown by the giant light blue bar on the right of the chart.
"China's Betavolt New Energy Technology has unveiled a new modular nuclear battery that uses a combination of a nickel-63 (⁶³Ni) radioactive isotope and a 4th-generation diamond semiconductor and can power a device for 50 years."
https://newatlas.com/energy/betavolt-diamond-nuclear-battery/
profile,
Interesting. I will try to follow the story.
I came across an article last week with the heading; Hundreds of Pacific Islands are getting bigger despite global warming. The research comes from the University of Auckland. Coastal geomorphologist Dr. Paul Kench said that coral reef sediment was responsible for building up these islands. Another study, Nienhuis et all 2020, found a 'net land gain' in river deltas globally.
In other words, the picture is more complex than comes across from much of the media. Something I'm sure you will agree with.
I read something a year or two ago, re the decrease in river flow due to agriculture and hydro stations.
Also this one, https://niwa.co.nz/news/dramatic-changes-in-new-zealand-river-flows-res… which also shows lower river flows due to "climate change"
In essence the volume of fresh water is no longer making it to the ocean, ergo we are not seeing the sea level increases forecast.
Keep an eye on mini-nukes. These are very small (container sized), self contained electricity generators using small nuclear reactors. Cost per Mwh is greater than wind, solar and other mainstream renewables though. But who knows, maybe the cost comes down ... Or the environmental cost of not using them to displace CO2 generators means countries overseas have no choice. (We in NZ have many choices before these need to be considered.)
https://en.wikipedia.org/wiki/Small_modular_reactor
Of course, they'll go down like a cup of cold sick in NZ. ;)
Why would the Fed drop interest rates? Are they worried about deflation? Their economy is doing quite well, surely a higher risk of inflation than deflation right now.
People seem to think these rates are only temporary, but maybe it’s the incredibly low rates that were temporary.
It's a school of thought that's gaining traction, i.e. If economies are tickety-boo at current rates, why drop them?
In a nutshell - to hold rates artificially high costs a lot of 'public' money.
Further, it transfers wealth from the indebted (usually younger & poorer) to the non-indebted (usually older and wealthier). ditto between countries.
It also has undesirable effects on innovation, start-ups, housing, competition, etc. etc.
Overall, central banks need to step out of the debt markets. Their job is not to 'make' the market except in exceptional situations.
For them to stay for too long will give credence to claims markets are under central control, aka a 'command economy'. (And we all know communism wasn't great when central control became corrupt. The old adage that "power corrupts and absolute power corrupts absolutely" has much grounding in history.)
Trade balance figures out today. Both imports and exports down. But a tiny improvement in the deficit.
https://www.stats.govt.nz/news/exports-and-imports-down-compared-with-2…
Can we say 'recession' now?
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