Here's our summary of key economic events overnight that affect New Zealand, with news that with the oil price up over US$120/bbl and the benchmark UST 10yr yield above 3%, the risks that global stagflation poses have risen sharply.
But first, the fall away in US mortgage applications picked up speed again last week - and are now at more than a 20 year low - as did the rise in their mortgage interest rates.
And American wholesale inventories rose +21% in April from a year ago, but that rise was less than in March. Part of that rise includes inflation of course. But as a ratio to sales, the new levels are still relatively low in an historical context. As we noted yesterday however, some large retailers are feeling high-inventory pain.
There was another well supported US Treasury bond auction earlier today, this one for the 10 year benchmark bond. The median yield rise to 2.95%, up from 2.85% at the previous equivalent event a month ago.
In China, parts of Shanghai are back in strict lockdown as pandemic cases are recorded.
Taiwanese exports grew less in May than in April, but at about what was expected. Their trade surplus was marginally smaller too as imports rose faster.
The Reserve Bank of India raised its key repo rate by +50 bps to 4.9% during its June meeting, after May's surprise +40 bps off-cycle hike. Yesterday's rise was more than the repeat +40 bps markets had expected. These moves up are to battle "steep" inflationary pressures, running now at 7.8% and rising.
Russia said its inflation rate in May was 17.1%, marginally less than for April. Turkey reported a May inflation rate of +73%, another rise.
In Australia, their Treasury Secretary said in a post-election speech said spending pressures from social programs that were freely promised in the election campaign need to be controlled to manage the inflation risks they pose. And he called for a major crackdown on tax breaks worth billions of dollars for both wealthy individuals and companies. He said 'growth' will not be enough on its own to tackle their AUS$1 tln debt levels or build back buffers for the next economic downturn.
The OECD has a positive view of Australia's economy and prospects, but it says tax reform to reduce their heavy reliance on taxation of personal incomes would help decrease the vulnerability of public finances to an ageing population.
But the war in Ukraine has made the global growth outlook far bleaker even though the world should avoid a bout of 1970s-style stagflation, the OECD said mirroring the World Bank. It slashed its growth forecasts and jacked up its inflation estimates. About New Zealand, they said growth here will ease to +3% this year and +2% next year, both results regarded by them as 'solid'. Inflation will decline in 2023 but remain high they report, as firms pass on global commodity price inflation and workers demand higher wages.
Demand and capacity for air cargo fell in April. It was down about -10% year-on-year and is lower still that the equivalent 2019 comparison. The retreat in the Asia/Pacific region is greater.
The UST 10yr yield will start today up +6 bps at 3.02%. The UST 2-10 rate curve is little-changed at +26 bps and their 1-5 curve is also little-changed at +76 bps. Their 30 day-10yr curve is steeper at +215 bps. The Australian ten year bond is now at 3.56% and up +6 bps. The China Govt ten year bond is unchanged at 2.83%. And the New Zealand Govt ten year will start today up +5 bps at 3.78%.
On Wall Street, the S&P500 has started their Wednesday session down -1.0%. Overnight, European markets were all down another -0.7% although London was again down less. Yesterday Tokyo closed up a full +1.0%, Hong Kong rose a strong +2.2%, and Shanghai was up +0.7% with a late rally. The ASX200 ended up +0.4%, and the NZX50 ended unchanged.
The price of gold is up +US$2 today from this time yesterday, now at US$1854/oz.
And oil prices are up +US$3.50/bbl from this time yesterday, now just under US$121/bbl in the US, while the international Brent price is now just under US$123/bbl.
The Kiwi dollar will open today lower at just on 64.5 USc. Against the Australian dollar we are marginally lower at 89.6 AUc, again our lowest against the Aussie dollar in nearly four years. Against the euro we are also lower at 60.2 euro cents. That all means our TWI-5 starts today at just under 71.5 and held up by strength against the yen and the English pound.
The bitcoin price has risen by +1.5% and is now at US$30,360. Volatility over the past 24 hours has been moderate at +/- 2.8%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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And oil prices are up +US$3.50/bbl from this time yesterday, now just under US$121/bbl in the US, while the international Brent price is now just under US$123/bbl.
The most intriguing and potentially alarming trends are visible in the oil market. In December 2019, before Covid, global oil consumption was about 100 million barrels per day, and the price of West Texas Intermediate (WTI) crude hovered around $50-$60 per barrel. At that time, the US operating rig count was around 800 (around 2,000 globally), according to Baker Hughes. After the pandemic hit, in 2020, global oil demand fell to about 90 million barrels per day, prices collapsed and briefly went negative, and the US rig count hit a low of around 250. Oil demand recovered about half the lost ground in 2021 and is expected to return to 2019 levels of 100 million barrels per day this year. In December of 2021, WTI spot prices were around $75, rose significantly after the Russian invasion of Ukraine, and currently sit around $110. Yet the US rig count is still around 700 (of 1,600 globally). The last time oil prices were above $100, before the crash of 2014, the rig count was over 1,800 (3,600 globally). Link
Note that your humble blogger was early to identify corporate disinvestment in The Incredible Shrinking Corporation in the Conference Board’s magazine. But I didn’t recognize how strong a role it was playing in our current economic tsuris.
The US oil companies are very open that they are not opening rigs quickly as their shareholders / investors want to recoup the losses they suffered when they funded an expansion and then lost billions when oil prices dropped below $70 (breakeven price for a lot of the rigs). Their business model is changing - higher prices driving higher profits rather than expansion. We may as well get used to it - investing in new fossil fuel infrastructure looks increasingly risky.
There are hundreds of stories like this one - maybe listen to a few of the industry experts and oil traders on any number of podcasts too. I would recommend Oddlots.
https://www.kmbc.com/article/gas-prices-oil-ceos-not-drilling-more/3952…
Murray - I often have respect for your offerings. But whenever the US, belligerence thereof, gets a mention, you remonstrate (legacy of a military mindset, perchance?).
This is another time we differ: economic activity is 100% dependent on energy. If energy availability is waning - or even has just plateaued - then forward bets on growth, are moot. The problem is that as a whole, global activity has not the energy required to underwrite its collection of forward bets. For more than a decade, we've been issuing debt, while ignoring it and lauding GDP, but it is taking 3.5 of the former, to 'produce' 1 of the latter (and that's already a count which chooses to avoid real acounting). In energy terms, WE CAN NO LONGER AFFORD OURSELVES. Entropy (everything from 3-waters to hospitals to climate change) is beginning to take more of the energy than we can 'afford'.
This was always going to show up as negative returns for energy extractors (current and future, of course; historical only when the field approaches the dregs), as fracking has amply demonstrated. Nobody is going to go there, whether they understand the EROEI imperative, or not. The numbers simply don't stack up. So they won't. Governments are only able to intrude via debt-issuance, meaning a transfer of 'wealth' from public to private, but under a sinking overall lid. But still the inexorable depletion, still the inexorable quality-reduction. So no panacea.
Putin gets this - he's played the game with full energy-understanding. The EU (west, global north, first world, choose your metaphor) is down to bluffing (there is NO energy plan-B). This northern winter, is where the pigeons come home to roost. They're facing a physics/overshoot problem, which is insurmountable ex suffering. When it gets down to that level, war is the way we decide who will do the suffering. Whether the west can win that war - ex Chinese supply and ex-Russian energy, is an interesting question. Perhaps THE question. The west - via everything from opium, to IMF/ World Bank loans, to military intrusion, to the installation of corrupt(ible) despots, to torture/lies - has had it its own way for 200 years. A lot of folk harbour resentment; some of them aren't stupid. Be very concerned......
I agree with most of what you say PDK but I think you're being somewhat disingenuous re Putin. I don't think he gets anything at all other than being on a power trip for his own ego. If he really did understand, he would have been sinking Russia's wealth in to finding and developing alternative sources of energy and restricting population growth, not invading other countries (or is that part of a plan to reduce Russia's population? - it's working a little!) As the US, for all it's faults, and there are many, it remains the largest of the defenders of individual freedoms and democracy (even if it doesn't seem to understand what that means at Government level).
I note in recent reporting and comments that people don't mention population size much, but this is the biggest issue as i see it. Populations will not be reduced unless Governments start doing something about it. It starts with regulation. 'Free market' policies are not regulation, or even a way to manage scarce and reducing resources. They are just a way for the big players to get richer at others expense. some very difficult decisions need to be made in the world that will have a lot of impact. Making them in NZ will not have one jot of impact on the world. they need to be made in the US, China, Europe to have any real effect.
“Inflation” Not Inflation, Through The Eyes of Inventory
World Bank Tries Reconciling Rapidly Rising Recession Risk
The organization’s leader, David Malpass, simply admitted that while it isn’t the current set of projections, “Many countries will have a hard time avoiding a recession.” No kidding. Eurodollar futures already said as much six months ago.
They blame Russia. But they really blame inflation.
...Ukraine has made the global growth outlook far bleaker...
I'd say Russia is predominantly at fault but that's just my view.
I notice there is a flurry of articles this week about the Chinese population having likely peaked. Ferility is probably under 1.15 children per woman now. It's important to New Zealand in terms of trade, we've long been beneficiaries of Chinese growth. Now we must look further afield.
It was an observation, not a diagnosis.
There are many potential paths to the endgame of humanity.
Malthusian trap, demographic trap, nuclear war or other apocalypse could all do the job. Who knows which gets in first?
But I believe one way or another the people will be gone before the resources.
The "no-one to support the elderly" has other and more important causes than just greater lifespan and fewer children.
Firstly there is the nuclear family and the physical dispersing of families. My parents were living in the north of Scotland when they died but none of their children or grandchildren were living within 500km.
Secondly women are in full time paid employment so are not available to support their elderly.
Thirdly there is the welfare state - it is a great idea but it does mean most of us decide our parents & grandparents will not starve on the streets because the state will step in. It is easy for that mindset to dominate.
If you are elderly and in need of support just hope you are part of a large 3rd world family who are living nearby.
A really serious issue that is getting progressively worse. A developing problem that our governments sweep under the carpet. But it would not be solved by young couples having more sprogs.
My mother was in hospital for a month then 12 days at home looked after by my father, myself (flying in from NZ) and my son (unemployed from France) and luckily by the MacMillan nurses for 12 days 10pm to 7am.
My father a year later spent time in hospital and then 2 days in a Hospice - I flew direct from Auckland (40 hours) and he died about an hour after my arrival.
The population has to decline very very rapidly for no available able-bodied people. Assume 80 years life and 6 months requiring care as an average; excluding young children and you have roughly 100 able bodied for each decrepit old person.
Of course it depends on what you call care - I used to cut the lawns and now my son in law does it - is that the beginning of care? Certainly the MacMillan nurses in Scotland provided attentive care to a troubled bedbound woman. They will always have my praise - just doing their job really doesn't describe my feelings.
Not so quick. Keynesians will flog a dead horse for all it is worth. They will not stop until their fiat currencies implode. Government meddling in the money supply will continue. Hunker down if you are a saver or wage earner, government does not care about you. Did Ardern really visit Blackrock?
TUrkish Lira is getting hammered again. Wiht inflation well over 73% as reported, their currency is back to its all time low against the USD. So far no further emergency measures...
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