What happened Tuesday

Business / news

A review of things you need to know before you go home on Tuesday; some more TD rate rises, OCR eyes higher cycle rise, NZX struggles, eyes on next dairy auction, swap rates shift up, NZD up and down, & more

[updated]

17th May 22, 3:59pm by David Chaston

Here are the key things you need to know before you leave work today.

MORTGAGE RATE CHANGES
No changes here so far today.

TERM DEPOSIT RATE CHANGES
Rabobank has raised its term deposit offers. First Credit Union has as well.

A QUICKER RISE
Economists at Westpac say that RBNZ inflation targeting is facing the biggest challenge in its 30+ year history, and they now see the OCR peaking in this cycle at 3.5% by the end of 2022. The OCR is currently at 1.5% and is due to be reviewed next on Wednesday, May 25, 2022 when another +50 bps hike is widely expected.

NOTABLE FOR ALL THE WRONG REASONS
Last week, the NZX50 ended with its overall capitalisation down more than -10% from a year ago as the local listed market's struggles get worse. The NZX50 fell -3.7% from the prior week, so a third of that annual retreat came in the past ten days. There were substantial weekly falls recorded for newly included Eroad (ERD, #50, -16.5%), Pacific Edge (PEB, #36, -10.2%), Air NZ (AIR, #37, -12.0%), Kathmandu (KMD, #32, -10.6%) and Mainfreight (MFT, #5, -10.0%). Of those 50 icon stocks only Ryman (RYM, #10) rose, but they have subsequently taken a thrashing so far this week now.

MORE WEAKNESS COMING?
There is another dairy auction tomorrow morning. Recall the prior event brought an -8.5% fall in average prices. This time the derivatives market is signaling WMP prices could fall -1% and SMP prices could fall a bit less from the last auction. We will know soon enough. But note that the NZD has fallen -2% in that same period, so prices in local currency might hold, or even rise.

TRIGGER DUE?
The minutes of the RBA's May board meeting were released today showing that they considered and rejected a +40 bps rate hike at that time, but a similar hike seems to be on the cards in June to take their official cash rate to 0.75% ~~0.50%~~. A trigger to get them over the line might be tomorrow's April wage data release, especially if it rises more than the expected +2.5%.

MORE RECORDS
Global wheat prices are still moving up, and are at all-time record highs.

ROLLING FAILURES
ANZ analysts are noting that Chinese property developers face more than US$14 bln of offshore bond debt falling due in the June-July period, compared with less than US$6 bln of monthly operating income of their top developers. Stress is unusually high again and market conditions have worsened recently. Another 'Evergrande' failure could be on the cards, this time possibly Sunac.

SWAP RATES TURN UP
We don't have today's closing swap rates yet but they are probably higher and reversing some of the recent slippage. The 90 day bank bill rate is up +3 bps at 2.16%. The Australian 10 year bond yield is now at 3.40% and up +4 bps from this time yesterday. The China 10 year bond rate is now at 2.84% and down -1 bp. The NZ Government 10 year bond rate is now at 3.62%, up +5 bps from this time yesterday and now above the earlier RBNZ fix for this bond which was down -3 bps at 3.58%. The UST 10 year is now still at 2.90%, little-changed from this time yesterday.

EQUITIES MIXED
Wall Street had a go at climbing into positive territory, but ended the day -0.4% lower as the move fizzled. Tokyo is holding a small +0.2% gain however, Hong Kong is roaring and up 2.2% in early trade, which Shanghai is only managing a small +0.2% gain so far and is still struggling for direction. The ASX200 is also up +0.2% in early afternoon trade, but the NZX50 is down -0.4% near the end if its Tuesday trading.

GOLD UP
In early Asian trade, gold has risen to US$1826/oz and up +US$15 from where we were at this time yesterday.

NZD BACK DOWN (AND UP)
The Kiwi dollar has slipped to 63.2 ~~62.2~~ USc from this time yesterday. We are now down slightly at 90.3 AUc. But we are now firmer at 60.5 euro cents. That all means out TWI-5 is now just on 70.7 and actually up from this time yesterday.

BITCOIN SOFT
Bitcoin is now at US$29,976 and down -1.4% from where we were this time yesterday. Volatility over the past 24 hours has been moderate at +/-2.4%.

Daily exchange rates

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Source: RBNZ

Source: CoinDesk

Daily swap rates

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Source: NZFMA

This soil moisture chart is animated here.

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38 Comments

by Foxglove. | 17th May 22, 4:21pm 1652761275

31.12.2022 OCR predicted at 3.5%. That’s an over 50% increase in 7.5 months. That’s a steep grade by any measure and accompanying momentum unlikely to stop at that point I would wager. Extremes on the way down and extremes on the way up. Not good for business, households and anything else for that matter.

by Trickledown | 17th May 22, 4:29pm 1652761754

Yes. Very hard to try to financially plan a household in these times let alone a business!

by Pa1nter | 17th May 22, 6:03pm 1652767389

Plan nothing. Head down. Reduce debt.

Is about all you can do. Sometimes surviving is a win.

by WellingtonInvestor | 18th May 22, 1:45am 1652795140

But why is everyone using debt to fund things? These were emergency low rates. So people should have factored in that normal rates could be around the 8% rate, if not more. Even banks have been stress testing too low, and have now raised the stress test rates.

by Fitzgerald | 18th May 22, 1:00pm 1652835606

[ personalised insult deleted. OK to criticise policies (with reasons), but not ok to make it personal and vindictive. Ed ]

by J.C. | 17th May 22, 5:25pm 1652765138

3.5% is still financial repression. Interest rates should be higher than "inflation" IMO. But the status quo would not agree.

by Zack Brando | 17th May 22, 4:36pm 1652762175

Shouldn't it be? The Kiwi dollar has slipped to 63.2 USc?

by morepork | 17th May 22, 4:45pm 1652762728

And replace slipped with increased?

by Zack Brando | 17th May 22, 4:54pm 1652763258

I hear milk-powder is popular atm.

by Squishy | 17th May 22, 5:11pm 1652764302

Global wheat prices are still moving up, and are at all-time record highs.

The solution to high prices is high prices.

by Independent_Observer | 17th May 22, 5:22pm 1652764945

'Apocalyptic' food shortage threatens, says Bank of England governor

by profile | 17th May 22, 6:21pm 1652768479

The Governor should do a bit of reading. As for inflation that is in his hands - perhaps farmers focus on food while he focuses on inflation? .

"With almost all crops harvested, FAO’s world cereal production forecast for 2021 has remained unchanged this month at 2 799 million tonnes,

...The forecast for world wheat production in 2022 has been scaled back moderately since the previous month, but standing at 782 million tonnes, FAO still predicts global wheat production to grow this year.

https://www.fao.org/fileadmin/templates/worldfood/images/home-graph_4_m…

by Squishy | 17th May 22, 6:55pm 1652770523

BoE hasn't helped itself though, GBP has taken a real kicking so they are now importing a load of inflation because they won't raise rates. BoE has been one of the most persistent cheerleaders for #TeamTransitory.

by DMC45 | 17th May 22, 8:27pm 1652776063

It's a distribution issue, not a production issue.

by profile | 17th May 22, 8:46pm 1652777183

Yeah, trade is just off the record set last year. Apocalypse. I wonder if we will hit a clickbait record this yea?

"World trade in cereals in 2021/22 is forecast to amount to 473 million tonnes, up 3.7 million tonnes from last month’s forecast but 1.2 percent below the 2020/21 record level."

by Justa comment | 17th May 22, 7:17pm 1652771838

yes and while the wheat crop this year in ukraine is a disaster, they also have not been able to plant for NEXT year.....

by Squishy | 17th May 22, 8:10pm 1652775041

Bit early anyway isn't it?

I'd try to contract a Chinese or Indian merchant vessel to go to Odessa and move product to other markets. If the Russians attack a merchant vessel of China or India it'd cause a diplomatic storm.

by J.C. | 17th May 22, 5:30pm 1652765421

A pair of Goldman Sachs-backed ventures gobbled up an entire rental home community in Florida last month for a cool $45 million...Fundrise Interval Fund and Growth eREIT VII picked up 87 single-family properties in Brevard County.

https://nypost.com/2022/05/11/goldman-sachs-backed-firms-buy-entire-flo…

by HouseMouse | 17th May 22, 6:06pm 1652767603

Re: Chinese developers - when I was known as Fritz, the basis for my 2019 prediction of a property crash in 2022-2023 was a big international event, a financial one (not a pandemic). Although I wasn’t specific, I always had in mind China as the likely catalyst.

it seems to me that China is teetering on the edge, and things could get decidedly worse - with flow on effects to the rest of the world including little ole NZ.

by Audaxes | 17th May 22, 7:06pm 1652771185

China's economy is crumbling because the West, its export customer base, never recovered after 2008. They have been adjusting their economy downward since 2017. Witness the huge record current account deficits NZ and the US record just as simple reference points. Leveraging the house is not an economy, its basically a casino.

by HouseMouse | 17th May 22, 7:03pm 1652770999

Rubbish.

It's crumbling because it has been effectively a two trick pony, and those tricks are being undone:

1. Manufacturing cheap crap for the world, for which there's still been plenty of demand from 'The West' since 2008, but which has been profoundly disrupted by covid

2. A Property ponzi that's 'up there' in global terms, and has been quietly collapsing over the past couple of years

I'll add another factor, and it's self inflicted - an intentional move away from liberalizing their economy and society, under the authoritarian Xi. Over the last 7-8 years, he's done a great job at antagonizing the west, to whom the wellbeing of his nation is still so reliant on.

by Audaxes | 17th May 22, 7:16pm 1652771760

China runs a significant trade surplus - just give it a rest.

by Pa1nter | 17th May 22, 7:42pm 1652773352

Thats not really the be all and end all - they have a worse debt problem than the United States.

They only in the last few years perfected making perfect spheres so they can produce indigenous ball point pens.

I'd be impressed if the CCP makes it to 2030.

by HouseMouse | 17th May 22, 7:38pm 1652773081

Yawn.

I tire of your authoritarian sympathies.

by Audaxes | 17th May 22, 8:34pm 1652776442

I'm tired of this:

Neoliberalism impoverishes. Neoliberalism is a class war against labour by finance, primarily, and a class war against industry. A class war against governments. It’s the financial class really against the whole rest of society seeking to use debt leverage to control companies, countries, families and individuals by debt. And the question is, are they really going to be able to convince people that the way to get rich is to go into debt? Or are other countries going to say, this is a blind alley. And it’s been a blind alley really since Rome that bequeathed all the pro creditor debt laws to western civilization that were utterly different from those of the near east, where civilization took off. Link

Rents are continuing to rise in the US. According to realtor.com, February 2022 was the seventh month in a row with a double digit increase in rent prices from the year prior. Rents in February were 17.1% higher than in February 2021. The median rent in the 50 largest metro areas has risen to $1792 a month.

This is why the United States cannot industrialize as long as the house prices absorb this high a rate of income, and as long as the banking sector is supporting this, and as long as the political parties say we will not tax real estate so that all of the rising land value will be able to be pledged to banks to pay interest instead of to pay taxes. Essentially, it’s the (lack of) taxing of real estate in the United States that has subsidized the increase in housing prices, because housing prices are worth whatever a bank will lend to buy a house. If you have to go to a bank, and if they lend more and more and this money isn’t taxed away, the price is going to go up. So you have the government policy, the bank policy, all trying to promote this high diversion of income into paying land rent. Again, this is the exact opposite of what Adam Smith and John Stuart Mill and classical economics and the whole 19th century had advocated. This has priced American labor and industry out of world markets.

If you have to pay 43 percent of your income for rent, then even if the government were to give you all of your goods and services for nothing, all of your food, all of your clothing, all of your transportation for nothing, you’d still have to pay so much money for rent and for health care that you couldn’t compete with labor in Asia or the Third World or even Europe. And so this is what has essentially excluded the United States from having a successful empire. It’s the greed of the financial sector, basically, and the takeover of the government by the financial sector here as happened under Margaret Thatcher in England and then Tony Blair. You’ve had both countries essentially enter permanent austerity programs, and the only way to cure this is for housing prices to go down. But if the housing prices go down, then the banks will go broke. That’s why Obama said he had to support the banks: because if he’d actually lowered the housing prices to realistic levels, that would enable America to survive, but the banks would go under. Until you’re willing to restructure the banking system, you’re not going to be able to industrialise the American economy. - Link

by HouseMouse | 17th May 22, 8:40pm 1652776829

Me too.

But there are alternatives to authoritarianism on the one hand, and neo-liberalism on the other - right?

by Pa1nter | 17th May 22, 8:42pm 1652776937

Flow of migrants is usually fairly telling.

America is far from a perfect place, but there's no shortage of people wanting to move there from all over.

by HouseMouse | 17th May 22, 8:22pm 1652775726

Why should I 'give it a rest'?

Can I not critique the Chinese economy, or the CCP?

Am I wrong - has it not become beholden to producing cheap crap and a housing ponzi?

If I am wrong, why am I wrong?

by Audaxes | 17th May 22, 8:40pm 1652776834

You need to direct your efforts to the domestic situation you and I both find ourselves enduring - virtue signalling to "look over there" tactics does little to improve NZ's lot.

by singautim | 18th May 22, 5:02am 1652806963

You may be right about housing - I don't know. But China has followed Japan which when I was a kid was famous for its cheap crap but now is rightly famous for its precision engineering. China has overtaken the west in some aspects of software - they seem to pay by waving their phone at things whereas we might have it but do not use it.

by HouseMouse | 18th May 22, 7:32am 1652815962

A big difference between China and Japan is its political economy. Can authoritarian communism foster innovation in the same way a liberal democracy can?

I doubt it very, very much.

by Audaxes | 17th May 22, 7:01pm 1652770871

Six months and 1 year NZ Treasury Bill rates were adjusted down from the previous tender today, six months 2.3125% vs 2.354%, 1 year 2.796% vs 3.02%.

Three months basically unchanged at 1.83% vs 1.82%. The OCR upward trajectory has been toned down in the minds of those bidding.

by Let me be Frank | 17th May 22, 8:16pm 1652775365

NZX50 down ...with around half of kiwisaver contributions in addition....hmmmm.

by HouseMouse | 17th May 22, 8:44pm 1652777069

Very sickly indeed. How far will this descent go? I think quite a way yet.

by Rex Pat | 17th May 22, 9:25pm 1652779557

Looking at the 12 year run from 2,600 in March 2009 to 13,200 In September 2021, it can go a long way before it’s even a modest retracement on a long term basis. I think a new generation will get to feel what 1987 and 2000 were like to previous generations. It’s cleansing for the soul.

by HouseMouse | 17th May 22, 9:49pm 1652780953

I sold in October, and am looking to buy again at some point. When is the million dollar question, but I suspect not for quite some time.

by GV 27 | 18th May 22, 6:23am 1652811822

I feel like we're heading to 1990s Banking Crisis territory all over again - very little spending to support retail, a highly home-bound population and higher unemployment.

by HouseMouse | 18th May 22, 7:33am 1652816029

Yeah I agree