Here's our summary of key economic events over the weekend that affect New Zealand with news the move towards bear market conditions seems relentless, even if Wall Street pulled back slightly on Friday.
But first, the Australian election seems to have not only delivered a change of governing party - the traditional switch between the Coalition LNP and the Australian Labor Party - but voters behaved in an unusual way, cutting their support for both. The LNP suffered a huge loss of support, but the ALP also suffered a loss, even if quite small.
The gainers were the blue/green independents (the 'teals'), and to a much lesser extent the red/green Greens (the 'purples'). Teal independents have won seven more seats so far, as many extra as the ALP. The Greens won two more. Some seats are still to be decided. The swing to the ALP was less than +4%, the swing away from the LNP was almost -6%. Almost all the difference was the 'teal' independents. They were motivated by climate-change and anti-corruption policies.
In hindsight, it seems clear that the LNP was perceived as driving fringe agendas and culture-war policies out of step with a modern mainstream society, and it was tainted with indications it was untrustworthy. Poor pandemic policies and denials didn't seem to help. Those attributes were punished by voters.
The changes to their Senate are still quite unclear, and the results there are delivered by a very opaque system that can see minor forces (like the Greens) elevated.
The implications for New Zealand are still murky, but they are probably better than if the LNP had retained power.
In other news, the Chinese central bank held steady its key rates for corporate and household loans at its May fixing, but cut the mortgage reference rate for the second time this year, amid a slowdown in the Chinese economy due to the resurgent pandemic outbreak, a property crisis, and weak loan demand. The one-year LPR was kept unchanged at 3.70% after cuts of 5 and 10 bps in December and January, while the five-year LPR was trimmed by -15 bps, the most since a revamp of the rate in 2019, to 4.45%.
The sharply rising risk of default by many Chinese companies has forced their authorities to offer 'default insurance' to investors to induce them to supply funding. Bond investors have become increasingly wary of buying corporate debt amid slowing economic growth, disruption caused by Covid-19 lockdowns, and those rising default risks. Even in China, they privatise the benefits, and socialise the risks.
Taiwanese export orders have taken a very sudden and unexpected dive. After being hugely positive for more than two years, these export orders slumped by -5.5% from a year earlier to just US$52 bln in April. That follows a +17% jump in March and smashes market forecasts of an +8.3% rise. Particularly hard hit were ICT product orders. Among key trade partners, orders decreased from China (-16.9%), Europe (-17%), the US (-0.2%) and Japan (-11.3%), but increased from ASEAN countries (+22.7%).
Japan is in the news again with another rare data item - they got inflation in April of +2.5%. It wasn't unexpected and the actual level came in at about the forecasted level. They haven't had price inflation at this level in more than seven years. In the prior seven months they have also recorded CPI inflation, but usually at tiny year-on-year levels. Now it is significant from a policy perspective. Food prices rose +4.0%. It could be worth watching how the Bank of Japan reacts now.
In their Friday session, Wall Street started with sharp losses, pushing towards the start of a bear market. But in late trading those losses were pared back and they ended the day virtually unchanged. But the fear of bear market conditions hasn't really receded.
The recent inflation surge, war induced, along with the return to more normal monetary policy settings, will hurt company profits as investors transition back to more sensible price/earnings benchmarks. Many will be caught out as the cleanout begins. It could get messy, but it is undoubtedly necessary that we have a proper correction.
The early report of the May sentiment readings for EU consumers shows they remain very weak, but little-changed from April.
German factories are being hit very hard with cost increases as a consequence of Russia's invasion of Ukraine. Producer prices are up more than +33% in the year to April, most of it energy related. But non-energy prices are up more than +16% so the downstream impacts are huge for them.
The UST 10yr yield will start today unchanged at 2.79%. The UST 2-10 rate curve has stayed flatter at +20 bps but their 1-5 curve is steeper at +75 bps. Their 30 day-10yr curve is also unchanged at +214 bps. The Australian ten year bond is now at 3.24% and up +1 bp. The China Govt ten year bond is little-changed at 2.83%. And the New Zealand Govt ten year is also unchanged at its sharply lower 3.49%.
The price of gold is a little firmer today, up +US$4 since this time Saturday at US$1847/oz. A week ago it was at US$1810/oz.
And oil prices are little-changed today and now just on US$110/bbl in the US, while the international Brent price is still just under US$111/bbl. The convergence of the two benchmarks is quite unusual.
The Kiwi dollar will open today back up more than +¼c against the US dollar, now at 64.1 USc. Against the Australian dollar we are firmish at 91 AUc. Against the euro we are also firmsih at 60.7 euro cents. That all means our TWI-5 starts today at 71.3 which is up +30 bps from this time Saturday.
The bitcoin price has risen 3.7% from this time Saturday and is now at US$29,907. Volatility over the past 24 hours has been modest at +/- 1.8%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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52 Comments
Australian electorate indicates that governments that fail to demonstrate stability in their own right are not wanted. The only government in recent times to retain one leader throughout several terms is that of John Howard. Infighting is self defeating quite obviously then. In fact over here National, even though only in opposition, demonstrated that rather ably leading up to the 2021 election.
The Australian election seems to indicate as much that bumbling incumbency doesn't mean anything, especially if all you have to pitch is that you're the 'least worst' option. Eventually people get tired of watching the opposition infighting and start to wonder whether the the government is even managing to do what they said they would.
... one third of the primary vote went to independents ... an astonishing proportion , and a " plague on both your houses " rebuttal of the Liberals & Labour ...
This demonstrates the superiority of Australia's STV system , over our MMP ... every single MP in the Ozzie lower house is accountable to an electorate .... a bully boy like Trevor Mallard would be unlikely to survive for long under their system ...
Exactly, let's see how it pans out though. In other jurisdictions you sometimes end up with paralysis on particularly divisive issues where ends of the spectrum have a "my way or the highway" views. It will be up to the politicians to change their mindset to try to work together and compromise instead of trying to have everything their way, else nothing will ever be passed.
Very much so. Their true characters will soon be exposed as they need to negotiate compromises. The trap here is for the public to blame the minorities rather than incumbent party, lose faith and go back to just voting for the main parties. Transparency is required. The media's role becomes much more important too, not just communicating what is happening to the public, but independently investigating each side's arguments and perspectives. This could get very interesting.
This is the advice I am trying to follow - do you have any recommendations to look into? I'm very new to the share market, so I'm looking at these times as a great opportunity to get a solid foundation going.
I figure the super huge companies like Apple, Nike,Coca-cola are a good place to start for me (I already have some US $ squirreled away to get going)
As far as market dynamics, I think Apple are too entrenched in China, and will be too slow/expensive to relocate manufacturing out of there. China is on the way to a nationwide lock down, with a vaccine that doesn't work against Omicron, relying on food & energy imports, they really are going to be up the creek now/later this year?
Apples earnings will have to take a massive hit if they can't make stuff to sell. They can manipulate their stock for a while but the fundamentals will start to shine through. They'll have to onshore to the Americas with Mexican labor (already getting sparse) in 6 months if they want to keep earnings up. I don't see that happening, and Apple are just a (large) portion of an overall global Chinese manufacturing issue.
If Apple earnings tank over the next few quarters then they'll take a big chunk of the market with it.
Why is it so hard to accept that speculative bubbles can burst? Interest rates were driven to zero for a decade. Yield-starved investors chased stocks to valuations beyond the 1929 and 2000 extremes. That speculation front-loaded more than a decade of future market gains into the present. Those gains are now behind us, embedded in breathtaking multiples. If history is any guide, a collapse in valuations is likely to return those gains to the future.
The process of losing speculative gains and recovering them over time is what I’ve often called a “long, interesting trip to nowhere.” It bears repeating that the S&P 500 lagged Treasury bills from 1929-1947, 1966-1985, and 2000-2013. 50 years out of an 84-year period. When the investment horizon begins at extreme valuations, and doesn’t end at the same extremes, the retreat in valuations acts as a headwind that consumes the return that would otherwise be provided by dividends and growth in fundamentals.
There is no birthright to ever-rising valuations, particularly given that market internals, fiscal subsidies, and the Federal Reserve’s latitude for recklessness have all turned against this speculative bubble. The record stock prices that investors observe here are the product of a) record valuation multiples that have been inflated by a decade of zero interest rate policy and resulting speculation by yield-starved investors, times; b) record earnings that embed distorted profit margins inflated by trillions of dollars of temporary deficit spending.
Investors are paying top dollar for top dollar. Link
Now is too soon. When a bubble pops it's usually at least 18m until the bottom is reached.
2020 crash and one-month turnaround into a raging bull market was an absolute outlier, and only possible because of the biggest fiscal and monetary stimulus ever devised. I don't think they can pull that trick again.
Yes agree - dollar cost averaging for the next 12-24 months might be a good strategy....
As you point out, I think a lot of people are still stuck in the mindset/paradigm that asset prices only go up so 'buy the dip' and be rewarded. And given central bank behaviour 2008 until now, i.e. 14 years of mental conditioning, its understandable why people assume this is a good strategy. But we might be in a proper bear market now and given just how high the peak was of this market cycle, and just how much of the 'wealth effect' that central banks attempted to drain out of the market as they possibly could, and the overall level of FOMO/hysteria about investing (and crypto etc), there is a possibility that we are in for a long bear market.....and it could be years or even decades before the heights of 2021 are reached once more.
If you purchased shares in 1929 in the US, it might have been 20-30 years before you could recover your investment. Could be the same here.....no return of initial investment until 2040....but who knows of course! But you have to ask yourself, if central banks push interest rates back towards zero...are people going to be rushing to throw their money at the market, especially if many just lost big time via tech/growth stocks and crypto (i.e. those investing not based upon fundamentals or cash flows but more based upon the speculation of prices or 'adoption' of technology).
https://www.economicgreenfield.com/wp-content/uploads/2020/08/EconomicG…
Did anyone the read the piece in the herald where a Fisher Funds analyst was complying about interest rates rising….how unfair.
Gee it must be pretty hard when the govt sets up the business and subsidises it….not so easy now. What do they do?
How many businesses have had their share price underwritten by the retirement savings industry irrespective of their results. Quite a few I would expect.
The UST 2-10 rate curve has stayed flatter at +20 bp
That the pogrom has now ensnared a high official at the central bank can only lead to one rational conclusion: China’s economic course is set and rather than try to change it – which Xi knows he can’t, not really, since from Day One (Euro$ #2) it has been out of his hands – the Communist Party will instead “manage” the “decline” by whatever means necessary.
State security, not government stimulus. The consequences aren’t, nor will they be, limited to China. Link
Taiwan export orders taking a dive is matching a similar drop in chip exports as reported elsewhere. I think the post covid stim splurge has gone well into reverse now with people not going out to buy new TVs etc now, it's all going into core costs like food and energy. Export economies of high end products are about to take a massive hit methinks, which should certainly be recessionary for almost all.
Yeah but we are high value commodities which our customers, because they are going through a period of less income, may not be able to afford, buy less of, or negotiate lower prices. Let's hope the OPEC countries start grabbing some of our exports instead as they will be the major winners at the moment... but likely they will just buy bigger boats and more ferraris.
"Yet on Budget Day yesterday, Treasury released its inflation forecasts which are HIGHER than 3% for 2022, HIGHER than 3% for 2023 and HIGHER THAN 3% for 2024. It was also over 3% this past year, 2001. Yes this inflation is not temporary, it is not "transitory". New Zealand will NOT be achieving its agreed inflation target, not even remotely, over the "medium term". My question is: since when can a Finance Minister and a Reserve Bank Governor put their signatures to an "agreed" course of action, then willfully ignore it? In monetary economics, we call it a loss of credibility."
https://www.downtoearth.kiwi/post/budget-2022-robertson-agreed-there-wo…
How can I get a job that pays hundreds of thousands a year and then just give the entire country a heads-up that I plan on just totally missing the most relevant and visible target that I'm required to observe?
I'm starting to legit think I would make a great RBNZ governor, things would get a lot worse than they are now under my watch, but, you know, this *waves hands and gesticulates wildly*.
Wrongthink.
“Climate change is not a financial risk that we need to worry about,” Stuart Kirk said Thursday in a 15-minute presentation at a Financial Times conference. “There’s always some nut job telling me about the end of the world.”
Kirk, whose role means he is responsible for integrating ESG risks and opportunities across asset classes at HSBC Asset Management, also took aim at former Bank of England Governor Mark Carney and other policy makers for talking up the risk from climate change.
“I completely get that at the end of your central bank career there are still many, many years to fill in,” he said. “You’ve got to say something, you’ve got to fly around the world to conferences, you’ve got to out-hyperbole the next guy. But I feel like it is getting a little bit out of hand.”
https://www.bloomberg.com/news/articles/2022-05-20/hsbc-s-head-of-respo…
"Abstract
Climate change is real and its impacts are mostly negative, but common portrayals of devastation are unfounded. Scenarios set out under the UN Climate Panel (IPCC) show human welfare will likely increase to 450% of today's welfare over the 21st century. Climate damages will reduce this welfare increase to 434%.
Arguments for devastation typically claim that extreme weather (like droughts, floods, wildfires, and hurricanes) is already worsening because of climate change. This is mostly misleading and inconsistent with the IPCC literature."
https://www.sciencedirect.com/science/article/pii/S0040162520304157
"So what does this SSP 2 world feel like? It depends, O’Neill told me, on who you are. One thing he wants to make very clear is that all the paths, even the hottest ones, show improvements in human well-being on average. IPCC scientists expect that average life expectancy will continue to rise, that poverty and hunger rates will continue to decline, and that average incomes will go up in every single plausible future, simply because they always have. “There isn’t, you know, like a Mad Max scenario among the SSPs,” O’Neill said. Climate change will ruin individual lives and kill individual people, and it may even drag down rates of improvement in human well-being, but on average, he said, “we’re generally in the climate-change field not talking about futures that are worse than today.”
https://www.theatlantic.com/science/archive/2021/11/how-bad-will-climat…
"IPCC scientists expect that average life expectancy will continue to rise, that poverty and hunger rates will continue to decline, and that average incomes will go up in every single plausible future, simply because they always have"
Lol. Simply because they always have. No worries about resources or anything like that, just magic.
It's not magic mate. Just hard work and innovation. They sort of hard work that has seen proven oil reserves go from 300 billion barrels at the writing of the Club of Rome prophesy to 1.7 trillion today. Or maize yeilds rise sixfold since WW2. Is the IPCC not doomy enough for you?
"Brian O’Neill, the director of the Joint Global Change Research Institute, a partnership between the U.S. Department of Energy and the University of Maryland at College Park, has a clearer view of this question than most of us. He was one of the lead architects of the five different futures—called “shared socioeconomic pathways,” or SSPs—developed for the latest IPCC report."
HSBC is famous for doing rather well financially over the last 150 years or so. Opium financing and moneyhandling at first, Then all or any drug dealers money has been laundered over the years as well. All for a commission, of course. Frankly what Stuart said makes great financial sense. Absolutely zero moral sense. But that is not what moneymaking is about. Just about anything Stuart's bosses say will make investors money. The only way to stop them is to make a law against what they do, and have horrible punishments for the decisionmakers involved if those laws are broken.
HSBC is famous for doing rather well financially over the last 150 years or so.
They are also famous for doing quite badly over the last 30.
The share price has picked up a bit lately, but it's still only back to where it was in 1997.
Once you adjust for inflation, todays 491 close, in 1994 was 288, which is about what's is worth then, so 30 years of treading water.
The aquisition of the money launders turned out to be just one of many poor investments.
Club of Rome Limits to Growth did include a 'current reserves * 5' track. 300b * 5 = 1.5trillion, not far off your 1.7
Not far off - if you ignore consumption since 1972. In reality reserves have increase faster than consumption. So you by your * 5 track there are now 8.5 trillion current reserves. At 100 million barrels a day consumption that would work out to 272 years at current rate assuming no new discovery/innovation.
The green agenda rollback?
Biden Admin Blames Math Error On Massive Oil & Gas Permitting Delays
The tone of bank economists around future OCR hikes is starting to get a bit more bearish. Funny, that:
https://www.nzherald.co.nz/business/a-done-deal-rbnz-expected-to-hike-o…
Most western economies will fall into deep recession, and cut their cash rates. This will cancel out any exchange rate impact of NZ cutting rates.
do people REALLY think central banks will keep hiking interest rates in a deep recession, with plunging house prices and stocks, and rising unemployment?
Really????
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