Breakfast briefing; "Don't fight the Fed"

Business / news

Bond and equity investors nurse losses as the US Fed gets muscular; shipping rates fall but aircargo volumes rise; China's troubles spread; UST 10yr 2.61%; gold and oil lower; NZ$1 = 69.2 USc; TWI-5 = 74.8

7th Apr 22, 7:19am by David Chaston

Here's our summary of key economic events overnight that affect New Zealand with news investors are about to learn whether the maxim "don't fight the Fed" is still valid.

Minutes from the March Fed meeting showed many officials would have preferred a +50 bps increase in their benchmark interest rate, instead of a +25 bps hike. Depending on economic and financial developments, they clearly want to move faster. These minutes also showed they are considering reducing their balance sheet by about -US$95 bln per month, a lot more than expected, and starting next month. 'Normalising' is now front and center, and is to quickly morph into inflation-fighting mode. The signal in these minutes is as clear as the stark one issued by Vice Chair Brainard yesterday.

Now out of the Fed, one ex-official says they will be trying, intentionally, to inflict losses on both stock and bond investors, as part of their inflation-taming strategy.

Housing investors, even homeowners, may face losses too. American mortgage applications extended their falls last week due to rapidly rising mortgage rates. That makes it drops in eight of the last nine weeks.

As a side note, we should report that Mexico is turning out to be a serious winner as American companies re-jig their supply chains away from China, and Asia generally.

There was another sharp fall recorded last week in trans-Pacific container shipping rates. They are far from normal (old normal) but they are heading in that direction now and have been for the past five weeks. Bulk cargo freight rates are declining too.

Going the other way global air passenger traffic is rising again and the recovery is quite fast, especially international travel even if it is off a low base.

And global air cargo traffic levels for February are stronger, even when compared to pre-pandemic 2019.

However, all this data is a month old. March data suggests the Russian invasion of Ukraine has taken the top off global trade in March, down -2.8%. Of course, that is mostly an EU thing.

But in China, their economic troubles are deepening. Their services PMI sunk sharply in March, according to the private Caixin survey. Unlike the 2020 one with was part of a short-sharp global retreat, they have this one on their own. Services activity fell at its quickest rate since February 2020 amid notable drop in sales. Input cost inflation picked up more than they expected. Business confidence dived to a 19-month low.

We have previously noted the food supply problems in Shanghai that is under a hard lockdown. We should also note that growing numbers of Chinese farmers are required to isolate, jeopardising harvests in some areas. It is not major at the moment, but if it spreads, it could be.

And it is pretty clear now that the long weekend Qingming/Ching Ming/Tomb Sweeping Festival holiday saw tourism activity fall at least -30% from normal as vast numbers of people stayed at home to avoid pandemic risks. This will have notable economic impacts.

In Australia, regulator ASIC has extended its product intervention order imposing conditions on the issue and distribution of contracts for difference (CFDs) for a further five years to 23 May 2027. CFDs enable speculation, not investing, they say.

And ASIC is being much more active in controlling crypto launches, including by the big banks. They clearly don't want a wild-west rush, one that seemed to have some momentum.

The UST 10yr yield opens today at 2.61% and up +5 bps from this time yesterday. The UST 2-10 rate curve starts today positive at +10 bps and with its brief and shallow inversion gone. Their 1-5 curve is unchanged at +95 bps. Their 30 day-10yr curve is steeper at +242 bps. The Australian ten year bond is unchanged at 2.93%. The China Govt ten year bond is -2 bps lower at 2.80%. But the New Zealand Govt ten year is sharply higher, up +18 bps at just on 3.45%.

Wall Street equity investors are still absorbing the consequences on them of a future with much higher yields. The S&P500 is down another -0.9% in Wednesday afternoon trade. Overnight, European markets all fell, Paris by -2.2%, Frankfurt by -1.9% and London by -0.3%. Yesterday, Tokyo ended down -1.6%. Hong Kong was down -1.9% but Shanghai closed flat. The ASX200 ended its Wednesday session down -0.5% and the NZX50 ended down -0.4%.

The price of gold starts today at US$1921/oz and virtually unchanged since this time yesterday.

And oil prices are down sharply, down more than -US$4 to just over US$96/bbl in the US. And the international Brent price is now just over US$101/bbl.

The Kiwi dollar will open -½c lower than at this time yesterday at 69.2 USc. Against the Australian dollar we are firmer at 92 AUc. Against the euro we are also softer at 63.5 euro cents but holding recent gains. That all means our TWI-5 starts today at just over 74.8 which is an overnight -30 bps slip.

The bitcoin price is down a sharpish -4.6% since this time yesterday now at US$43,883. Volatility over the past 24 hours has been high at +/- 3.1%.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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51 Comments

by Audaxes | 7th Apr 22, 7:33am 1649273609

Now out of the Fed, one ex-official says they will be trying, intentionally, to inflict losses on both stock and bond investors, as part of their inflation-taming strategy.

The largest money market (eurodollar) in the world has doubts.

by Foxglove. | 7th Apr 22, 7:44am 1649274270

imagine the entire population of the USA is not without doubts either. Having lurched through and out of a pandemic, now only to face a highly burdensome realigning of the broad financials is not going to lighten the load at all. Generally speaking, Americans are happy if their back yard is in good order. President Biden has then, more than a few challenges on his plate.

by murray86 | 7th Apr 22, 8:06am 1649275616

Certainly an interesting challenge for him. An old adage that often gets cited here comes to mind 'You get the leaders you deserve" and the US is very much a demonstrator of that. In a protest against the endemic corruption of the political establishment the public voted in one who was even more blatantly corrupt and got a total shambles that highlighted a lot of the divisions in their society. Like us, the American grass roots appear to be searching for ways to improve their lot, getting rid of the bad parts of their system while preserving the good (although that will involve some serious compromises for them!) but the misstep potentially made it worse, not better. It is odd that they are so wed to the blue/red ideological divide with no room or tolerance to give either a new party or independent candidates a real chance?

by Foxglove. | 7th Apr 22, 8:20am 1649276426

I read that Alexander Hamilton had declared that corruption was sewn into the constitution. Certainly when we lived there it was an unavoidable presence in every part of life. Unfortunately I believe the great majority of voters, vote on the basis of intransigent party loyalty which in turn is based on what’s in it for them. Because the two major parties contest control from the White House right down to municipal catchments, it is a very serious business of who is going to get this works contract, position or whatever. To put it more crudely, there are millions of snouts at the ready, waiting for their trough to be filled, and that’s what the vote is for.

by theglc | 7th Apr 22, 9:24am 1649280287

seems to me that the tightening is being pushed by politics as the Dems now see a huge challenge on their hands in the midterms. Inflation is one of the key issues even resonating amongst die hard Dem voters.

Biden needs inflation to be under control by Nov.

The Dem leadership under Biden/Harris just looks corrupt, incompetent and disorganized. In my Opinion Tulsi Gabbard looks like a potential Nominee at the next Election, if the DMC can handle her honesty.

by EdwardD | 7th Apr 22, 2:39pm 1649299188

I'm also impressed by Tulsi Gabbard

by murray86 | 7th Apr 22, 9:40am 1649281227

It seems that when we write political documents, guidelines or establish political structures the greatest mistake is that we assume the best of people when in fact history should teach us that we are all flawed. From that perspective any such document should carry safe guards to ensure standards are maintained and the public interest protected.

by Foxglove. | 7th Apr 22, 10:22am 1649283720

The Hawaiians have a way of illustrating it. What they call the politician tree. It’s a tree that grows initially straight upright and then the trunk begins to bend and continue to bend. Way back we had a guide who pointed out more than a few of them on a tour round Oahu.

by powerdownkiwi | 7th Apr 22, 10:53am 1649285593

It is important not to conflate social stuff, with physical. Some physical activities/repercussions can be altered socially - but some are inexorable; overshoot being the biggie.

Biden cannot solve that, any more than anyone else, given the current growth mantra. If we address degrowth - in all its facets, then maybe we'll get a leader into the future, rather a leader doubling down on the past (which, by definition, is a follower....)

by murray86 | 7th Apr 22, 11:19am 1649287147

No leader anywhere in the world is talking about constraints on consumption. The howls of protest would likely see them lynched at the nearest tree if they did, because such discussions automatically lead to some very uncomfortable areas.

by RickStrauss | 7th Apr 22, 11:44am 1649288663

No one wants to be the bearer of bad news. It's a game of hot potato.

by taimaiakka0 | 7th Apr 22, 7:44am 1649274245

Fed had prepared the market for 0.5% increase and will be more firm with their monetary policy.

Market has to bleed for once, do it now or delay but cannot avoid. More the delay bigger the pain. If reserve bank would have started reserving the excess thrown in March 2020 by January / March 2021 when it was evident, damage would not have been much and maybe would have been coming out of it now, instead when it is just starting and will go deep.

by theoutlawtorn | 7th Apr 22, 8:00am 1649275225

Could somebody help me understand when it might be a good time to buy bonds?

Part of my investment strategy is ensuring passive income via dividends. In this respect bonds are quite good but I do understand that rising rates reduces bond yield. Is this reduction in yield reflected in reduced dividends or reduced bond value? Or both? As bond values drop, would it make sense to buy now (it's cheaper) for future dividends? Or is this the wrong way to look at it?

Much appreciated.

by murray86 | 7th Apr 22, 8:07am 1649275640

Last month?

by ShoreThing | 7th Apr 22, 8:31am 1649277081

Reduced bond value. Rising interest rates increase bond yield, which means the price of the bond is going down. Bonds pay coupons which is the coupon rate multiplied by the par value, i.e. a 5% coupon rate on $1,000 bond pays $50 coupons. The price you pay for the bond determines what yield you get, if you pay $900 for the bond you get a higher yield and vice versa. Bond prices are going down so yields are rising. If you're happy with whatever yield you get on a bond then you can hold it to maturity and you've got a pretty secure return. In terms of timing the market it's always a tricky thing to do but market seems to be pushing yields up so wait a bit before buying and you'll pay less therefore lock in a higher yield.

by Fluffybunny | 7th Apr 22, 10:38am 1649284731

Does waiting for a higher yeild also not also delay when the higher yeild is then paid out?

by ShoreThing | 7th Apr 22, 10:47am 1649285265

No. The coupon payments are fixed values paid on a schedule until maturity, when the par value is repaid. If you anticipate that yields are going to be higher in the future, you are basically anticipating that you will be able to pay a lower price for the same bond at some time in the future. In the 5% coupon $1,000 par bond example, this might be equivalent to not purchasing that bond now for 1,200, but instead buying it in three months for 1,100. Your coupons will still be 50 each year, but you're getting 50 / 1,100 (~4.6%) per year yield instead of 50 / 1,200 yield (~4.2%). This is a simplification of how bond yield works because the time until coupon payment when you buy the bond, coupon frequency and maturity date all affect the actual yield to maturity, but illustrates the point.

by chebbo | 7th Apr 22, 8:32am 1649277179

KiwiBonds are targeted at retail investors, and might be worth a look. You don't have to worry about movements in bond prices, since you're paid a fixed rate of interest rather than a coupon. You will always get your money back.

They are far more liquid than NZGBs, and can be redeemed before maturity if you're prepared to pay the interest rate penalty. They also carry no counterparty risk, as is the case with bond ETFs.

by Audaxes | 7th Apr 22, 8:41am 1649277687

They are far more liquid than NZGBs

Is that a fact ? I would have thought NZGBs recent entry into a world index would have been prohibited if trading was illiquid.

by ShoreThing | 7th Apr 22, 8:47am 1649278066

For a retail investor, yes.

by Audaxes | 7th Apr 22, 9:00am 1649278814

I'm a retail investor who has not had any issues trading and participating in NZGB tenders. I can agree that $size matters in this market.

by chebbo | 7th Apr 22, 9:14am 1649279693

Cashing out NZGBs before maturity means finding a willing buyer on the secondary market. That's not to say there won't be one, but the fact that KiwiBonds don't even require that much surely qualifies them as being more liquid than NZGBs.

by Uninterested | 7th Apr 22, 9:28am 1649280501

I am doing an early repayment on a kiwibond that is paying 0.2%! Its been in that for just over a year. So its pretty much a no brainer to do this given that if I wanted I could reinvest it at 2.3%.

by chebbo | 7th Apr 22, 9:33am 1649280790

For sure. You don't forego too much in the way of interest by breaking early, when you're only earning 0.2%. Might be worth looking at shorter durations if you expect rates to keep climbing too.

by Audaxes | 7th Apr 22, 9:54am 1649282062

I have never failed to find a buyer and in fact most banks institutional desks make a living doing as much. Access to flow is the elixir of bond trading fortunes.

by linklater01 | 7th Apr 22, 9:10am 1649279438

theoutlawtorn,

I agree with Shorething. Think of a bond as a seesaw. If one end falls and here's it's it price, the other end rises, the yield. For existing investors, the income doesn't change and if bought at par, then a falling price doesn't matter either as it will be redeemed at par on the maturity date. But for new investors, this is potentially an opportunity and one i am looking at closely.

by Galloleous | 7th Apr 22, 10:20am 1649283641

Bonds only make money in the secondary market when interst rates are going down, as your one you brought earlier has a higher coupon rate than the ones bening issued now, so people would rather buy that in the secondary market than the new ones being issued now but at a lower coupon rate.

Bonds are the worst investment you can make, they are all at a negative real rate. So you are giving the insitution your money with the gaurantee that you will get back less purchasing power after the time duration.

Please read or listen to anything by Greg Foss ( a 32y bond trader), bonds are dead, there is so much risk behind them.

There are $3 TRILLION of Negative Yielding Bonds: Greg Foss - YouTube Great short video.

Why Every Fixed Income Investor Needs Bitcoin - Bitcoin Magazine: Bitcoin News, Articles, Charts, and Guides

Bitcoin Value In Credit Default Swaps - Bitcoin Magazine: Bitcoin News, Articles, Charts, and Guides

by The Person | 7th Apr 22, 12:40pm 1649292003

haha yes, and the guaranteed coupon rate on bitcoin is?

by Independent_Observer | 7th Apr 22, 10:55am 1649285713

In the mid-1980's up until recently!

Interest rates go down....bond prices go up...

Conversely interest rates go up....bond price goes down....

If you think you can pick when interest rates might fall once more....then that might be a good time to buy....but that assumes that you are smarter than the market which is a bold prediction.

But as Martin Hawes points out in the other article, consider the real return of the bond, not just the nominal return. A lot of bonds are giving very negative returns when adjusted for inflation so unless you assume that property and sharemarkets are going to tank completely, bonds may not be that attractive investment in the current market conditions.

by Tee | 7th Apr 22, 8:39am 1649277596

US stock indices closed in the red again.

by Advisor | 7th Apr 22, 9:04am 1649279072

Crude oil prices are within 10% of where they were pre-invasion but significantly higher at the pumps, despite the 30 cents cut in excise!

While Megan Woods is still getting advice on the whole refiner situation, the consortium has begun pouring concrete down the pipes on site. Let's see if MBIE can at least get a refund on the advisory fees.

by Squishy | 7th Apr 22, 8:49am 1649278163

Fed janitor spots sleepless powell staring up at Volcker portrait:

“Are you there Paul? It’s me, Jay. This is going to be a tough year.”

by Audaxes | 7th Apr 22, 9:14am 1649279671

The S&P500 is down another -0.9% in Wednesday afternoon trade.

Last week, the ISM reported more sobering numbers for the manufacturing sector. The real issue over here is inventory, a historical flood of which risks taking down the lone outlier for the entire global system. Early last year, Uncle Sam juiced up demand for online shopping, then, bam, the entire supply chain was overburdened.

This was mistaken for a real, robust recovery particularly how it, like a classic supply shock case, showed up in the CPI.

We’re only since last October really starting to see by how much, and by how insane wholesalers and retailers had gone crazed with government mania. According to the ISM’s estimates for March 2022, the headline index on manufacturing fell to 57.1 from 58.6 in February.

Even if you don’t fall for the Russia blame, these numbers just don’t sound bad whatsoever. Near 60? That’s pretty good, seems like the US is weathering whatever alarm-of-the-day rather well.

Or is it? Link

by kiwikidsnz | 7th Apr 22, 9:37am 1649281038

https://www.roymorgan.com/findings/8912-nz-national-voting-intention-fe…

National/Act NZ (49.5%) now leads Labour/Greens (43%) by 6.5% points

by RickStrauss | 7th Apr 22, 10:12am 1649283128

Whoot. Younger generations of Kiwis get ready to be shafted in yet more ways.

by Independent_Observer | 7th Apr 22, 10:59am 1649285993

Hopefully market forces act before political intent does from a National/Act government...but then again despite Labour having good initial intentions, they've been just as much of a flop on many policies as National were in terms of making NZ a better place for younger people.....hence why many that I talk to that don't have commitments here, are either planning to, or considering leaving to greener pastures.

by powerdownkiwi | 7th Apr 22, 11:09am 1649286566

Greener pastures? Yet another stolen analogy.

https://www.resilience.org/stories/2022-04-06/ukraine-putins-lebensraum/

pastures, indeed.

by Independent_Observer | 7th Apr 22, 11:16am 1649287019

Thanks PDK.....your links are always uplifing for the spirit and the hopes of future human prosperity! (sarc)

But I get your point...

by Squishy | 7th Apr 22, 11:32am 1649287962

In terms of 'bread on the table' action I see little difference. Neither really dealt with housing affordability, public transport, built a new harbour bridge, solved child poverty or made meaningful inroads into energy transition. There is no desire in New Zealand politics to advance the country or appetite to take risks.

I find it difficult to articulate my thoughts coherently but it appears our democracy in a spot of bother if I am correct. We have arrived at what is effectively a defacto multi party, single ideology system. You can vote for any party you want but get the same outcome.

by Independent_Observer | 7th Apr 22, 11:34am 1649288047

Democracy has been hijacked by the financial economy, and the financial economy is detached from the real economy.

That state can only survive for so long as in the end, the politicians have to protect the real economy (the people they serve), not the financial economy (the wealthy), otherwise there will be revolts/revolutions/anarchy in time.....the question always is...how much time and how bad do things have to get before a tipping point is reached?

by RickStrauss | 7th Apr 22, 2:23pm 1649298219

That's the problem, really. Because of that, Labour and National both seem to subscribe to the idea that house prices are only ever allowed to go up. That prevents any real fundamental change.

The biggest difference between the two will be National absolving property investors of most tax and leaving working Kiwis to fund most society. Despite the fact working Kiwis also subsidise investment property rents and prices. It's a marvelously entitled policy position, perhaps the zenith of generational entitlement?

Younger Kiwis are probably best off voting outside the two major parties, at this point.

by The Person | 7th Apr 22, 1:33pm 1649295222

you can vote for any party you want, but you get the outcome that everyone else voted for, that's democracy.

If everyone voted TOP, we'd have TOP. They are certainly not just a centre running National/Labour clone.

by gnx | 7th Apr 22, 2:22pm 1649298139

Yes indeed Squishy!

by Whatwillhappen | 7th Apr 22, 11:42am 1649288565

This link is a month old

by Jesse1 | 7th Apr 22, 12:12pm 1649290369

If national get property will rocket higher as many of their policies are around reversing things labour have done to slow the property market. It will usher a new round or young people leaving as all they will do is look after asset holders.

by Baywatch | 7th Apr 22, 10:31am 1649284293

Bitcoin 2022 Conference has kicked off in Miami - speakers list

https://b.tc/conference/speakers

by JustAnOpinion | 7th Apr 22, 1:20pm 1649294419

I guess I was the only one to miss my invite. Figures.

by Wrong John | 7th Apr 22, 3:10pm 1649301022

As the blood red tide recedes we will all get the chance to see the flotsam & jetsam left over by the worst children's government ever witnessed in this part of the world. Don't go over there, don't go outside, don't forget your masks, don't go to work, don't take the plane, don't send your kids to school, & don't forget your RAT tests. She is the best 'don't' prime minister of all time, especially when you consider she flew in singing ''Let's do this.''

I wonder what she'll be singing when she flies out?

by JustAnOpinion | 7th Apr 22, 3:24pm 1649301872

https://www.youtube.com/watch?v=79DijItQXMM

by waymad | 7th Apr 22, 3:56pm 1649303808

Dylan, 'things have changed'.

"People are crazy and times are strange

I'm locked in tight, I'm out of range

I used to care, but things have changed"

by agnostium | 7th Apr 22, 7:13pm 1649315592

Man, what is it with these liberal woke snowflakes that can't handle a little inconvenience for the greater good. It's all about me, me, me, don't tell me what to do, it's not fair on me, I know best, I've done my research, I don't want to be inconvenienced by any rules that stop me doing whatever I want to do whenever I want to do it, my rights are more important than everybody else's, me, me, me. Harden up snowflake.