Here's our summary of key economic events over the weekend that affect New Zealand, with news financial markets, regulators and households worldwide are battling the lurking thief that is inflation. And regulators face a stark choice: inflation or recession?
The last time Stats NZ looked at our consumer inflation level it was as at March and it was running at 6.9% then. It is surely higher now. Our June rate won't be known until July 19. No analysts have yet forecast that level recently. The RBNZ's last MPS picked a 7% June rate (and lower after that) and that will clearly be way out. Our own Grocery Price Monitor, a weekly series, suggests June 2022 quarter prices will be +12% higher than the equivalent level a year ago. However there is more to CPI inflation than just grocery prices.
There are plenty of things to blame, and partisan commentators are choosing them all. But the cost of energy is behind almost all the food, transportation and product price rises, so the most credible culprit, given when this scourge took off, is the 'Putin tax', out-weighing the pandemic effects, or even QE. Everything contributes in its own way but the war shock is the trigger.
How to fix the problem, one that steals from wallets and household budgets? If we can't stop the war on Ukraine, we have to quell demand significantly, so that price hikes don't stick. The problem is that this remedy hurts.
But we see it in action in China.
Chinese consumer prices were up just +2.1% in May from a year ago, but of concern will be that prices actually fell from April, a whiff of deflation there. Food prices fell, and as a part of that, prices for sheep meats actually fell rather a lot, down -1.4% in a month and taking the year-on-year retreat to more than -6%. Pork and vegetable prices fell much faster however, and it is clear that their livestock farmers will be in no position to pay sky-high animal feed prices on the international market.
Chinese producer prices were virtually unchanged in May from April, and that dragged the annual PPI increase down to +6.4% and its lowest in more than a year (February 2021). Raw material price rises are still very high there, but prices for consumer durables at the factory gate actually fell in May from a year ago. It's a squeeze that will hurt.
China may be struggling in the real economy with sinking demand, but they still know how to flood new loans on to companies. New yuan loans rose sharply in May, up by +11%, partly because they are switching out of foreign currency loans. Their banking system now has NZ$49 tln in lending on their books (¥210 tln). That is 183% of Chinese GDP. For perspective, New Zealand's total lending is 154% of our economic activity, and for the US, it is just 70% on the same basis.
Russia cut its policy rate by -1.5% to 9.5% over the weekend. They can see demand retreating fast and, fearful of an over-reaction, are easing up. They last recorded CPI inflation up +17%, but a collapse in economic activity will have it fall as fast as it rose. Also falling and fast is the Russian population. Deaths exceeded births by 311,200 people in the first four months of this year, according to data published by their Federal Statistics Service.
In the US, the 'feared' surprise in American inflation has been recorded for May. Overall the headline rate came in at 8.6%, a new 40 year high. But worse, food price inflation came in at 10.1%, and also a 40 year high. Markets were expecting a headline rate of +8.3% and food prices up about 9%, so the actual results have shocked financial markets into some sizeable reactions. Equity prices fell, bond yields jumped, and the US Dollar gained sharply.
One likely reaction is that the Fed will raise its policy rate by +75 bps on Thursday, June 16 (NZT). Until now, the best estimate has been +50 bps.
With that as backdrop it is hardly surprising that consumer sentiment has dived. There was a survey out on Saturday (NZT) and it recorded its lowest level on record. Sticker shock is pervasive, especially for petrol prices. And this survey suggests that the public is more sceptical the Fed's policy actions are likely to get inflation back down.
However, not all data released over the weekend was negative. The remarkable repair of the US Federal Government finances continues with a greatly improved May deficit. Analysts had expected a deficit of -US$120 bln for the month. But the actual result was just -US$66 bln. Over the past year, this deficit has shrunk more than half to just over -US$1.1 tln from -US$2.8 tln in the prior fiscal year. That is probably the fastest budget repair ever accomplished, all while their economy expands.
Canada released its May employment data and that was generally positive, coming in better than expected. There was a big shift toward full-time employment in May, and a smaller shift away from part-time work. Their jobless rate fell to 5.1%. Canada's consumer price inflation was running at 6.8% in April.
Separately, India reported that its industrial production rose faster in April than was expected. It was up a creditable +7.1% from a year earlier when a +5.1% rise was expected. India's consumer price inflation was running at 7.8% however.
In Argentina, there seems to be some sort of bank run underway. Savers fear the country will default and are pulling money out of inflation-linked savings accounts to protect themselves from the prospect these balances are growing so fast the Government can't possibly pay. On Thursday alone, almost -NZ$400 mln was withdrawn. They risk making it self-fulfilling. Argentina has an inflation rate of 58% and rising fast (+6% per month). It's as toxic there as in Turkey (with a CPI at 73% pa).
In Australia, their CPI rate for March was 5.1% and their June rate won't be known until July 27, 2022. It's going to be very much higher, also for energy reasons.
A key coal-fired power plant is out of action due to a technical failure, and it won't be restarted until late September. This will test an already-brittle eastern-seaboard power system. Certainly it will bump up power prices.
And in Queensland, the national energy market operator has capped electricity wholesale prices in the state for what is thought to be the first time ever after a sustained period of extreme prices.
Meanwhile, the great Australian fintech export, Buy-Now, Pay-Later, seems to be imploding worldwide. Rising bad debts and losses can't seem to be stemmed and investors have lost faith that the idea can be profitable. That idea is cemented with rising interest rates on the debt they must carry to back up their interest-free balances.
The UST 10yr yield will start today up +1 bp from this time Saturday at 3.17%, and that is a +20 bps rise for the week. Rate curves are flattening with shorter maturities rising faster than long. The UST 2-10 rate curve is marginally flatter at +10 bps but their 1-5 curve is unchanged at +74 bps. Their 30 day-10yr curve is also flatter at +204 bps. The Australian ten year bond was sharply at the end of last week, now at 3.77%. The China Govt ten year bond is little-changed at 2.82%. And the New Zealand Govt ten year will start today at 3.91%.
Last week on Wall Street, the S&P500 fell -5.1%. Over the weekend, the S&P500 futures indicated than when they reopen tomorrow, they will start down another -2.8%. Monday trade may open with a rough tone everywhere, starting in New Zealand of course. And markets are now also battling a social phenomenon, where it is suddenly fashionable to be a market bear.
The price of gold was up +US$23 at the close of trade in New York, now at US$1872/oz. A week ago it was at US$1849/oz.
And oil prices are little-changed from this time Saturday, now just under US$118.50/bbl in the US, while the international Brent price is now just over US$120.50/bbl. Both levels represent about a +US$1 gain for the week.
The Kiwi dollar will open today little-changed at just over 63.5 USc. For the week that is a -2.2% devaluation. Against the Australian dollar we are at 90.2 AUc. Against the euro we are at 60.5 euro cents. That all means our TWI-5 starts today at just under 71.3, and down -60 bps for the week as the greenback strengthens, now at a 20 year high.
The bitcoin price has fallen by -3.0% from this time Saturday and is now at US$28,115. It's been volatile and at one point in between it got as low as US$26,878. Volatility over the past 24 hours has been high at +/- 3.5%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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66 Comments
There are plenty of things to blame, and partisan commentators are choosing them all. But the cost of energy is behind almost all the food, transportation and product price rises, so the most credible culprit, given when this scourge took off, is the 'Putin tax', out-weighing the pandemic effects, or even QE. Everything contributes in its own way but the war shock is the trigger. How to fix the problem, one that steals from wallets and household budgets? If we can't stop the war on Ukraine, we have to quell demand significantly, so that price hikes don't stick. The problem is that this remedy hurts.
Hmmmm.... save asset prices and throw the poor under the bus.
The war could have been averted:-
Ukraine: Any Reason why India should abandon Russia and Join the US bandwagon?
PREDICTION: The FED will throw the poor overboard
America’s central bank has a choice – keep hiking rates and kill asset holders, or give up & let the poor starve. Which will it be? I bet on the latter!
We have seen what Govts will do, thanks to Trudeau and Jacinda role playing the dress rehearsal early this year.
They will brand the starving/protesting as right wing neo nazi filth, freeze their bank accounts and send in the Police or Army to put them in their place
Federal Reserve QE unrealised losses of this magnitude are hard to ignore. The central bank is effectively insolvent and is in need of a taxpayer funded capital top up. NZ Treasury is currently undertaking such an operation by other means.
Someone may have already posted this from Saturday:
The short version, settlement accounts at the RBNZ have ballooned from $7b to $46b since QE started, indicating bond buyers have been putting the QE money in the settlement account. The OCR was at 0.25% in March 2020. It is now 2% and predicted to be 4%. This could be a direct wealth transfer of $2b p.a. to the Aussie banks if the OCR gets that high. This happened in the UK too, with bigger numbers.
That's an increase of 39 billion! Or $7,800 per Kiwi. Now answer me this if the banks were never going to inject the money into the economy and instead make a strategic can't lose bet on the bond market, then why didn't we just give the money to Kiwi's directly to spend?
Because so many kiwis are employed by small business with no capital...and many would have been let go and ended up on the dole queue
And so many small businesses use their house as paid up capital
And will we change this....no because no ones to talk to about it.
I don't understand this. Maybe you could explain this to someone who studied science.
I notice that a lot of you like to put the boot into Orr and Robinson. I wonder what would have happened if Joyce had been the minister of finance. Considering they both studied similarly unrelated subjects. Zoology springs to mind. Would he have followed the advice of his experts.
Government issued a massive amount of bonds which were purchased by the banks, giving the govt a ton of cash to spend. The RBNZ bought those bonds from the banks at high prices to force the yield on those bonds down, giving the banks a ton of cash. Those banks largely stored that cash at the RBNZ, who effectively pays those banks the OCR on their account balances. Now the OCR has gone from 0.25% to 2.00% and is going north rapidly, so the RBNZ is paying a lot of interest to those banks on cash that it magicked up out of thin air, and that the banks aren't using for increased lending as it perhaps intended them to. Furthermore, the value of all the bonds the RBNZ purchased at high prices (to push the yield down) has deflated significantly with interest rates on the rise.
That is not quite correct. A bank cannot create credit unless its has a balancing sum in its settlement account. And when the credit is used by the borrower, it leads to interbank transfers between the settlement accounts of individual banks. So the aggregate quantity for all banks does not change but the settlement balance of individual banks does change.
Currently, banks have huge capacity to create credit given the huge amounts sitting 'idle' in the settlement accounts. And those 'idle' funds are earning for the banks at the OCR.
KeithW
So how could the banks drive the economy into such extreme distortion then Keith? where did they get the funds for their 'settlement accounts'? If I understand what you are saying, is that the banks don't operate on a fractional system, but must have a balancing amount sitting somewhere for every dollar they lend out? That makes no sense with the level of lending they have been doing to create the distortion in the economy.
murray86'
They need a balancing amount in their account for every additional dollar that they lend today - otherwise there would be no liquidity for interbank transfers via the settlement accounts - but they don't need balancing settlement dollars for their existing book. - only a small fraction thereof based on the assessed risk profile.
KeithW
Respectfully, that's not right. Banks are required to have adequate capital in reserve in case the economy turns to custard. The amount of capital they need is calculated using risk ratings on assets. The ratio RBNZ require NZ banks to have is 8% - most banks are at around 15%. The balances in settlement accounts are bank assets - but NZ govt bonds are considered equivalent. When banks issue credit they take ownership of an IOU from the debtor. This IOU is an asset that the banks basically buys with the loan (boosting it's assets by an amount that is typically higher than the corresponding liability). The reality is that banks will always lend to a creditworthy borrower and the settlement account balance is borderline irrelevant.
The balance of the institutional settlement accounts simply tell you that Govt has spent $46bn more than it has taxed back, and this surplus Govt spending has not been converted into bonds or taxed back. It took me while to work this out, but here's an example that might help:
- If Govt paid $200 million into your ANZ account tomorrow, the Crown's settlement account at RBNZ would reduce by $200m, ANZ's institutional settlement account balance at RBNZ would increase by $200m, and your ANZ personal account balance would increase by $200m
- The extra $200m in ANZ's setttlement account is an ANZ ASSET, but the $200m in your personal account is an ANZ LIABILITY. Thus Govt paying you $200m does not make ANZ richer or poorer
- Now, if the next day, Govt sold some bonds at auction and ANZ purchased a $200m bond, their settlement account balance would reduce by $200m, but they would have a bond worth $200m so they would be evens
- Similarly, if you had to pay Govt $200m in taxes, your personal account balance at ANZ would reduce by $200m, ANZ's settlement account balance would reduce by $200m, and the Crown's settlement account would increase by $200m
The reason that institutional settlement accounts are inflated (including the Crown Settlement Account) is because RBNZ purchased nearly $60bn of bonds. This increased the balance of the institutional settlement accounts, and this balance has not reduced by Govt selling bonds, or collecting more taxes than it spends. As you note, RBNZ are paying OCR on these balances (as a policy choice btw) - but if they increased their bond sales they would end up paying more interest on the bonds. A windfall tax on bank and corporate profits would be a highly effective way of reducing those balances!
The extra $200m in ANZ's setttlement account is an ANZ ASSET, but the $200m in your personal account is an ANZ LIABILITY. Thus Govt paying you $200m does not make ANZ richer or poorer.
What!!! It's presumably a high quality (return of money guaranteed) bank balance sheet expansion, initially undertaken when NZ Treasury raised government funding via bond syndication and tender events monetised by banks, which is immediately stuffed into the RBNZ Crown settlement account until dispensed into the private bank accounts of qualifying beneficiaries.
How to fix the problem [inflation], one that steals from wallets and household budgets? If we can't stop the war on Ukraine, we have to quell demand significantly, so that price hikes don't stick. The problem is that this remedy hurts
How much would we have to 'quell demand' to stop price rises 'sticking' though? And, let's be clear that this is code for real wage cuts and tens of thousands more people out of work or short of hours. The remedy hurts indeed. But is it the only remedy?
Given that a turbulent global economy is our new normal - particularly in the energy sector - do we really want to rely on 'hurt' as our default response to every episode of price spikes? How about we have an honest conversation with the public about a plan to quickly achieve the energy and food security that would insulate us from the turbulence and help us achieve a balance of trade that does not leave us reliant on destroying our environment and kertowing to China?
Perhaps with a clear destination, people might accept a bit of 'hurt' - and we could use some temporary controls on the way - rent controls, higher fuel prices, a 21st century Ministry of Works, changes to the tax system to protect the most vulnerable etc.
This is on top of the 10% hurt in inflation over the last 18 months, the 12% hurt many KIwis take on student loans in a bid to get ahead and a bunch more hurt they're facing on walking back property prices to the point of possible negative equity'. How much more hurt counts as 'a bit' until we start talking 'a lot'?
As far as the tax system goes, the 'most vulnerable' essentially only pay GST, and those on welfare/WFFTC can have their incomes increased at the stroke of a pen or on 1 April pretty much every year. Those who are doing just a little bit better than that, and who are getting up and doing their best to fit in a job, a commute, childcare payments AND a mortgage on a declining asset have no such certainty. They bear all the responsibility for trying to maintain their real incomes and the government bears none for not keeping inflation under control. At some point, expecting them to keep digging deep to the benefit of everyone else whilst they go faster backwards is taking the Michael.
It is indeed! But, this is all about how we choose to distribute gain and hurt.
Our economy and our tax system are geared towards making rich people richer. If you increase benefits on 1 April, this will increase the quality of life of beneficiaries (and good), but ultimately, it is the pak n save owners and the landlords that will actually get wealthier.
Taxable income in NZ is a bit over $200bn from memory - with income taxes approaching $50bn. Corporate profits are running at around $70bn per year. Our tax system simply needs to do a better job of redistribution - particularly for your 'doing just a little better than that' group. People who work flat out 40 hours per week trying to get by should not be reliant on Govt top-ups to feed their kids.
There's already big chunks of people who pay next to no tax. There's an increasing reliance on a small core group of taxpayers. And there's the basics of 'updating the tax rates more than once a decade' before you get into the ethics of using a tax system to redistribute more and more to the group that takes out more in cash than it pays in', be it pensioners or those on low/no incomes. The outcomes are the same, and a lot harder to stomach for those at the coalface and going backwards.
The whole thing is no longer fit for purpose, but any system will become fit for purpose if people shy away from basic tax administration and politicise something as basic as aligning brackets with inflation as a 'tax cut'.
The problem here is that the Europeans cannot just stop using oil and gas, normally an oil spike like this would see tax cuts for oil exploration in the USA but the dems climate owned here......
I don't see this demand destruction working in the normal way. Energy inputs going to keep climbing due to the Russian sanctions, food and fertiliser prices going to cause starvation in poor food importers, while deep recession is now certain for Europe.
This is a critical week for markets, this is the week that markets realise asset prices need to be marked to market way lower due to higher interest rates to stop food inflation....
S&P500 and Nasdaq look vulnerable to a major move lower.
I suspect a forced/negotiated end to the war in ukraine, or a quiet drop in support for ukraine from the west.
Either way western Governments will quickly try to find an outcome where everyone looks like they won something and go back to buying stuff from Russia and getting the grain moving again.
Not so much idealism as pure CYA. 404 has been the playground for the Bidens '10 for the Big Guy', Western biolabs, the remnant Nazis of the Right Sector and Azov Battalion etc.
404 is a dump for obsolete weaponry so that the MIC can profit from yet another round of selling as replacements are needed. It's cronyism all the way down, and has been hidden in plain sight for a decade or more.
That's over. Narrative busted. Blame Games ahoy.
Logistics are how wars are won. Without them any army will grind to a stop. CNN have an article where Putin addressed a group of young Russian entrepreneurs and fairly clearly identified that he was trying to restore imperial Russia and the Ukraine was the hinge pin for this. He has equated himself to Peter the Great. It is as I and some others have indicated previously, he is on one big power trip, with one or two fairly obvious blinkers. He clearly cares not one jot for the people, but he is also ignoring the fact that it was life under the Tsars that led to the revolution that put Stalin into power. Equally clear is the fact that Ukrainian aspirations don't count. But the thing is imperial Russia was on a program of seizing territory from other countries especially Sweden, thus these aspirations he has expressed make him, and Russia, a clear and significant threat to Europe.
Russia is not a threat to other countries. I have said from the get go all he wants is the part of Ukraine from the existing boarder at the top down to include Crimea, watch it happen.The whole objective is to put more distance from a "Boarder" to Moscow and to make sure the Ukraine never joins NATO.
Oh cool, no big deal then, he just wants a little smidgen of a sovereign nation, just a little invasion, thousands of soldiers and civilians killed and Ukranian cities razed to the ground...no biggie
I mean if China came over and just took Canterbury to secure it's food supplies that's not really unreasonable is it?
1- if you think Putin will stop you are delusional and have learnt nothing on historical lessons of appeasement and tyrants.
2- if you think invading a sovereign country to secure a strategic asset no big deal, you do not understand the norms that govern the international system of nation-states and how erosion of these norms compromises the system and jeopardises international peace
I can find no evidence that the Ukraine-Russia war is a major cause of the inflation experienced to date. Given the lags, most of those effects are still to be felt. The fires for the current inflation were lit back in mid 2020 with excessive QE both in NZ and internationally. That was something I identified at the time here. Unfortunately the excessive QE continued for another year. It was just a case of waiting. It was never going to be a case of 'if' but rather of 'when'.
KeithW
There is ample evidence that inflation is being driven by OPEC fixing the price of oil, companies internationally and in NZ taking excess profits or recouping losses instead of investing in the expansion of productive capacity, and crazy futures prices for oil, wheat and other commodities (the pricing of risk before it eventuates basically eliminates any 'lag'). For example, wheat futures and spot prices leapt up the minute Russia invaded Ukraine - months before there would be any immediate impact on supply.
QE is in my view a pantomime villain. Yes, the low interest rates that QE enabled meant that cheap and easy credit flowed into inflating asset prices (houses, equities etc), but central banks have been trying to use QE to create inflation in the wider economy for many years. It doesn't work.
The oil price is just inflated by financial triggers no less oil is available now than 3 months ago same for gas . There has been a shift in suppliers and customers, interesting to note India's inflation under control by comparison maybe due to buying cheap Russian oil China too .
I'm with you Keith. You cannot, repeat can NOT print billions of extra dollars [of debt] & not expect inflation to take hold at some point. The govt has doubled its expenses since 2017 & doubled its debt at the same time & then told us that this is not responsible for inflation. There's some serious irresponsibility going on in Wellington & the sooner it's gone the better.
Seems like Govt spending increased 36% since 2017, and Govt debt increased by 70%. Not really doubling. For comparison National increased government spending 20% from 2009 to 2017 and Govt debt increased by 600%.
I don't think government spending necessarily creates inflation, as no new money is created. Govt borrowing probably can create inflation I expect however.
I haven't seen any policy announcement by Luxon that would have much effect on inflation. What announcements have given you confidence WJ?
How do I get one of these cushy bludging numbers?
https://crux.org.nz/crux-news/inside-the-cashed-up-world-of-the-queenst…
Alongside the great content on Interest.co.nz, this must be some of the best journalism I've read in a while ... stinks worse than the Chch poo ponds on a warm evening.
Thanks for highlighting this article from Crux. I hadn't heard of them before, and if proven correct in most of its assertions, it will be the high point of NZ print journalism since way back when!
We have become so used to junior journalists just cutting & pasting, err,...what?..... gossip from around parliament, news from the royals, and the antics of wannabe celebrities.
It has become increasingly evident that government service, both local and central, has moved from the modestly remunerated "grey cardies" to increasingly "high rollers" who don't seem to blush at multi $100k salaries for what should be routine mid level administrators.
We should all be very interested in the final outcome of the Crux investigation.
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