Here's our summary of key events overnight that affect New Zealand, with news inflation is up in key economies, and Aucklanders are about to get a jolt as well.
Firstly, the US Fed's preferred measure of inflation hit +2.0% in May, up sharply from +1.8% in April, and above the +1.9% markets were expecting. The PCE non-core inflation rates was +2.3%. And this data came as personal consumption slipped noticeably. When prices start rising faster than growth, we will call it 'stagflation'. Not there yet, but US policy seems to be driving us in that direction. (By the way, not everyone thinks inflation is rising in the US.)
General Motors, the world's fourth largest vehicle manufacturer, warned overnight that tariffs proposed by the Trump Administration could force it to scale back its huge domestic US operation at the cost of American jobs.
The US Administration has also broken with tradition by warning the supposedly independent Federal Reserve that it must only raise interest rates "very slowly". The same official claims the US budget deficit is shrinking (!)
Like its Conference Board rival, the University of Michigan consumer sentiment survey is also sliding on the 'expectations' front, although the main levels are holding. That same survey showed an overwhelming level of support for more trade and less tariffs.
In the trade wars, Canada struck back at the Trump administration over American steel and aluminum tariffs overnight, vowing to impose punitive measures on C$16.6 bln worth of American goods until Washington relents.
Canada's GDP rose at the rate of +2.5% in April, slower than for March, but in line with analysts estimates. The trade war with the US is taking the gloss off their performance.
EU inflation also came in at +2.0% although the core rate (without fuel, food and alcohol) was at +1.0% in May
In Australia, regulator APRA says many super funds there are misrepresenting their 'cash' investment options by including risky credit instruments and derivatives. Such options have delivered better returns than pure 'cash' up until now, so members will get a surprise when funds are forced to comply with the new tighter guidance. KiwiSaver 'cash' funds here don't suffer the same distortions, but there are similar examples of bending the margins here.
The UST 10yr yield is marginally firmer at the market close at 2.85% and up +1 bp in New York today. That inflation data has virtually no impact on benchmark bond rates. The Chinese 10yr is at 3.49% (down -5 bps from yesterday) while the New Zealand equivalent is now at 2.88%, down -1 bp from yesterday.
American corporate bond spreads are still widening however.
The VIX is generally trending up again and now just above 15.3, although that is slightly lower than yesterday. The average index level over the past year is 12. The Fear & Greed index has switched back to the 'fear' side with an index value of 36 (50 is neutral).
Gold is marginally firmer in New York but now a just US$1,251/oz in New York which is a chunky -US$18 drop for the week.
Oil prices are up again today, and now just under US$74.50/bbl. The Brent benchmark is now just under US$79.50/bbl. These both represent about a +US$5 rise in the past week. The US rig count has slipped a few this week. Locally, don't forget that Auckland motorists will be hit with a +11.5c/ltr new fuel excise tax starting. Expect considerable cost flow-through to everything transported, and the impact to be national. That will have the same effect as the crude price rising from US$79.50/bbl to US$90/bbl.
The Kiwi dollar is ending the week unchanged at 67.7. USc. On the cross rates we are at 91.5 AUc and at 58 euro cents. That puts the TWI-5 at 71.1 and almost -2% lower that where it was at this time last week.
Bitcoin is now at US$5.875 and almost unchanged since yesterday but still its lowest level since late October 2017. It's peak-to-trough change is now -70% and close to the famous Dot-Com bust of 2001. Hundreds of other cryptos have now become worthless and law enforcement authorities are checking trading behaviour of many promoters.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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42 Comments
In local news, it is officially confirmed that conveniently adjusted consumer price inflation is now comfortably within government guidelines at 1-3% (excluding house price hyperinflation and petrol price rises and food price rises and tax rises and iphone price rises and rates rises and....).
What, government propanda here in New Zealand? Surely not. Yer gotta larf though.
kiwi dollar dropped through some key support levels - could trade below 68.5 for a long time and maybe much lower - oil still going up and its not just the regional fuel tax - another 4 cents nationally coming on top
Does not matter what they say is excluded and whats not - it will hit peoples pockets - and businesses will most likely pass the costs on very quickly to ensure public perception is that the increases are linked to fuel tax and government changes - not simple price gouging
Only so much pain before it really starts to hurt !
A region-wide fuel tax is a perfect Universal Pricing Signal for businesses. It allows biz to raise prices, point to 'the new tax' as the reason, and thus avoid any hint, whiff or suggestion of Collusion, Cartel behaviour or the like.
And to keep the series running:
TWI - 72.47, Treasury BEFU assumption 'around 75'
WTI - 74.25 Treasury BEFU assumption 'around 60'
In other news, in signs of a stand off in the ongoing cheese wars, it seems the US cheese mountain has reached new highs:
Commercial and government cheese storage facilities now have a whopping 1.39 billion-pound surplus, counted by the Agriculture Department in May and published in a report on June 22. It is a 6 percent y/y and a 16 percent jump since the government launched ‘quantitative cheesing’ to buy excess supply in 2016.
Will New Zealand benefit in cheese war?
https://www.zerohedge.com/news/2018-06-29/americas-cheese-stockpile-jus…
It is now Sunday. Should we not therefore all sing in unison “ Oh what a friend we have in cheeses.” Except to say also that from what I have encountered over 90% of American cheeses ie the Kraft & similar brands, are just plain damn awful. They need to off load their mountain to foreign destinations where there are protein shortages. Just as EEC eventually got rid of their beef mountain(s) to the old USSR.
"General Motors, the world's fourth largest vehicle manufacturer, warned overnight that tariffs proposed by the Trump Administration could force it to scale back its huge domestic US operation at the cost of American jobs"
Trump is achieving the exact opposite of what he set out to do and he doesn't even realise it...
probably fake news. Super cheap car loans meant people in the States have bought forward, everyone has a new car in the last few years, sales are back because they ate tomorrows lunch yesterday..
I will stick out my neck further from my prediction of around 3 months ago and say:
- Emerging markets will collapse in early 2019
- The US will start a recession in Q3 of 2019
- NZ's GDP growth will near 0% from Q3 2019 (which is catastrophic for the government as it means no money to fund its many ambitious projects)
- I have one more prediction for NZ in 2019 which I will keep to myself for my own business interests.
Yvil, smart move. Being completely debt free in the event of this morphing into a deflationary spiral might make a better fit. It's hard to picture another GFC without full blown deflation occurring. This is the reason I took out a five year TD earlier this year. On strong rated banks, I can see these 5-year rates plummeting into the late 2s or early 3s as activity slows.
Zachary, I think your reading to much into paths. Look up to the horizon and what do you see? What we hope for is now more likely different to what will transpire. A long period of price stagnation would be nice wouldn't it? It's now out of our hands. Whatever transpires, lower deposit interest rates combined with less activity is the coming norm.
I must admit though, it's a surprise to see how much your views have changed Yvil.
Zach, I admit I am. I don't care much about any paths though, I see my role as looking after my family as well as I can, financially, emotionally, socially etc so I will do what's best for us (some here will see this as being selfish, I don't care).
Since the beginning of this year I can see more and more dark clouds for asset values:
1) Internationally, trade wars, emerging markets struggling, increasing oil prices and the attempt to "normalise" interest rates without having remedied the massive amount of debt
2) Within NZ, the government is hellbent on reigning in property values with the ban on foreign purchasers, ring-fencing losses, extending the bright line test = CGT to 5 years + a tax working group chaired by tax happy Cullen looking at a land tax, wealth tax and others and building more houses.
All the above leads me to believe that it's more likely for asset values (I'm interested in property) to depreciate rather than appreciate.
This is quite bizarre that there should be such a common discourse on this site, and on Monday of all days!
Yvil, I think you're right on your predictions but disagree on the timing. I doubt if this will all wait until Q3 2019, I personally think your predictions may be a quarter late. All being said no need to spark a rush for the exits just yet as there will be some nice volatility to play in the meantime. Here's to a bit of reduced leverage and some sensible recognition of the risks.
While we're in the mood for predictions, my prediction is that the housing 'bear market' (It will be greater than 20%) will bottom at some point in 2024 and will start with a heavy injury (10-15% over next 18 months) before a slow bleed to the bottom. Auckland will be first out in 2025
Being debt free is absolutely ridiculous.
You should be borrowing by leveraging to purchase income producing assets.
This is what all successful business people do and as interest rates will not see 6% again on housing, you are missing out big time.
An unencumbered house property is not the way to secure your future financially.
The thing is that so many people are risk adverse and are too conservative and that is the difference between people who will do well and the ones that won’t.
Then we elect a spend more government and the currency falls in purchasing power. A median Auckland house cost $250,000 in 2000, now it costs $850,000. So $1 in 2000 is now worth 29 cents. Not as bad as Argentina, but the direction of travel is the same and these things tend to accelerate. Labour, National and the RBNZ have been abject failures in this regard, and the last election confirms the direction of travel.
The housing discussion is about secondary issues like Kiwibuild. There is no discussion of changing the drivers of our decline, even though it would be relatively easy to do so at this stage. The main driver being excess foreign capital driving up house prices and the exchange rate and thus reducing the profitability of our export businesses and thus the wages they can afford. House prices are then reinforced by immigration driving up the number of people per square metre of housing.
BadRobot, it is an opinion, possibly an educated guess, based on the fact that property has always been a good investment in Christchurch. The Man 2 has never failed following his own advice of careful buying and ensuring positive returns. This is a fact of his life. He is super conservative and sensible too.
Again you never call out The Man 2's opponents who constantly offer opposite opinions as 'facts' supposedly committing the same sin.
I can see both points,
TM2 is talking about CASHFLOW, which is like the oil in the engine, I'm convinced interest rates are not about to up for a very long time, therefore TM2 claims he will be OK even if the asset value decreases.
Didge and HO are focussed on ASSET VALUES, they are probably right too in saying it's not much fun to have capital losses
Property investing is not gambling, providing you buy wisely.
What is gambling is the sharemarket, where your shares that you have put your hard earned money into can be worthless.
Leveraging is a painless way of getting ahead where you do t need to put any money in, unlike share security where Banks won’t let you leverage against shares.
Why is that I wonder, maybe it is because landed property is stable and shares and equities are not!!!!!
Housing brings in an income plus capital gain assured, providing they are bought at value with upside.
No brainer really, and thing is anyone who is prepared to work can do it!
So much false information in such a small amount of space. You can get margin lending on shares very easily, up to 70% LVR depending on the company at ASB, there are other providers who will differ.
https://www.asb.co.nz/content/dam/asb/documents/asb-securities/2017/asb…
Leverage is not a 'painless way of getting ahead', it increases your vulnerability to price drops and increases your chance of suffering losses and being wiped out. You are being incredibly irresponsible.
No investment class is stable, and housing is towards the risky end of the spectrum. There is no assurance of capital gains, as can be seen in the Christchurch market over the last few years. Losses are quite possible.
I'm not saying housing is a bad investment or that you should only invest in shares, but please try to do a little research before appearing to give advice.
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