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All eyes on the US Fed; US PPI stays high; BofJ eyes direction change; Chinese FDI inflows wither; Australian business sentiment stays strong; UST 10yr 3.50%; gold and oil lower; NZ$1 = 62.1 USc; TWI-5 = 70.3

Business / news
All eyes on the US Fed; US PPI stays high; BofJ eyes direction change; Chinese FDI inflows wither; Australian business sentiment stays strong; UST 10yr 3.50%; gold and oil lower; NZ$1 = 62.1 USc; TWI-5 = 70.3

Here's our summary of key economic events overnight that affect New Zealand, with news the reasons your mortgage payments are rising sharply are all in today's global news roundup here.

The US equity markets are lower today, but by less than yesterday. That leaves them well in bear-market territory. And American bond markets are still hemorrhaging losses. Both are waiting for tomorrow's US Fed rate decisions. Markets have priced in a +75 bps rise to 1.75%.

The Fed seems sharply focused on fighting inflation, prepared to take the risks of triggering a recession.

Meanwhile, American producer prices rose sharply again in May, but the rate of annual increase was unchanged from April at just over +10%. But as high as that is, it is actually its least acceleration of 2022. And the underlying rate rose its least since October 2021. So perhaps some sting is going out of the inflationary impulse in business activity. But that doesn't hide the fact that a +10% increase rate is damagingly fast.

Still holding up however are American retail sales gains. Last week's survey shows them little-changed from the year-on-year rise of about 11%. Much of this will be inflation however.

In Japan, an unexpected remark by the Bank of Japan Governor has made waves, as some consider it a subtle message that the central bank may be starting to explore an eventual end to its large-scale monetary easing.

Japanese industrial production fell -4.9% in April, data that had pretty much been signaled in an earlier 'flash' release.

Hong Kong industrial production also fell, but they are now reporting Q1-2022 changes.

Chinese foreign direct investment inflows are slowing, and slowing fast. They revealed that for the five months to May, +US$87.8 bln flowed in. But if that is correct, that means they had only +$13.3 bln arrive in May, the lowest month flow since October 2021, and almost -20% less than in May 2021. This is probably neither a reduction they want given their slowing economy. Not is it a signal they want widely known which is why they only focus on the year-to-date numbers.

Indian producer prices rose faster in May, up +15.9% from a year ago.

German investor sentiment as measured in their ZEW survey remains very low in June, although it wasn't as low as in any of the prior three months. The Russian invasion of Ukraine is a severe depressant for them.

In Australia, the widely-watched NAB Business Confidence report was "strong", but not quite as positive as for April. Cost rises eased back in what they hope is an early signal. That overall sentiment is this good despite high inflation, rising interest rates and cost pressures is somewhat remarkable, especially in the face of global expectations of recession.

And in an interesting Catch-22 situation, their electricity regulator has been forcing power companies to increase generation in the current crisis because electricity prices weren't high enough to allow them to operate without making losses. The goal was to keep the lights on and reduce prices with more supply. But it turns out the power generators can claim the additional costs of operating unprofitably - by adding those costs to the power bills they charge consumers. Go figure.

The UST 10yr yield will start today up another +9 bps from this time yesterday at 3.50%. Rate curves are flattening almost solely because the 10yr isn't rising as fast as almost all other maturities. The UST 2-10 rate curve is flatter at +4 bps and their 1-5 curve is much flatter at +50 bps. Their 30 day-10yr curve is actually steeper again at +230 bps. The Australian ten year bond is up sharply at 4.07% and another +14 bps jump. The China Govt ten year bond is little-changed at 2.83%. And the New Zealand Govt ten year will start today at 4.23%, a rise of +19 bps from this time yesterday. This is a 7-year high.

On Wall Street, the S&P500 is down -0.3% in Tuesday afternoon trade, locking in the Monday retreat. Overnight, European markets fell about -1%, except London which was down -0.3%. Tokyo ended yesterday down -1.3%, Hong Kong ended unchanged, and Shanghai actually ended up +1.0%. The ASX200 ended down -3.6% with the NZX50 ending down -2.6%.

The price of gold is down another -US$18 in New York, now at US$1811/oz, still knocked around by the strong US dollar.

And oil prices are falling too, from this time yesterday, now down -US$1.50 at just under US$117/bbl in the US, while the international Brent price is now just on US$119.50/bbl. 

The Kiwi dollar will open today sharply lower again at just on 62.1 USc and another -¾c fall from this time yesterday. Since the start of June that is now a -4.9% devaluation. Since the start of the year it is now an -9.1% devaluation. Against the Australian dollar we are unchanged at 90.4 AUc. Against the euro we are down -½c at 59.6 euro cents. That all means our TWI-5 starts today at just under 70.3, and down another -50 bps since this time yesterday. 

The bitcoin price has fallen again from this time yesterday and is now at US$22,393 and down another -3.3%. Volatility over the past 24 hours has been extreme again at +/- 7%. Below US$30,000 there is no technical support. If it goes below US$20,000 the speed of the fall could be sudden.

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

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64 Comments

A bit of a blow for El Salvador having bitcoin slump so badly.

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Is anyone still mining it at this price?

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Is there a point at which mining would become loss making? What happens then?

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Theoretically the price would go up as supply was reduced if demand remained constant. But usually there's a widget or a service involved.

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if demand remained constant

That's the fun part. Will the demand remain constant when it's no longer perceived as a get-rich-quick "investment"?

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Yesterday was the 3rd highest daily volume candle in Bitcoin's history of the BTC/ USDT pair on the Binance exchange. Plenty of demand as it changes hands from weak to strong hands. 

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Check back in a few months to determine whether those hands are indeed strong.. or if the falling knife took a few fingers with it.

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Willl do. All the on-chain data suggests that the whales and long-term owners are not selling. But things might change.   

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Lots of weak hands on this site...

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Can't be a weak hand if you never bought into the nonsense in the first place.

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Supply remains the same due to the difficulty adjustment built in to the Bitcoin protocol. Sure, there's a short lag until the next difficulty adjustment...

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El Salvador’s GDP grew 10.3% in 2021 … El Salvador never had a double digit GDP growth before 2021.

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Looking forward to their 2022 GDP growth stats.

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Fortunately the other official currency used there is the USD, so differing fortunes depending on what basket you put your eggs into

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Fortunately I don't think very many actual Salvadoreans, rather than expat bitcoin bros, have actually used it at all.

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Based on what? a guess?

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I have travelled in Central America. Genrally any savings the middle to rich have , they put in USD. The poor just get poorer with the local currency during high inflation times. like a  wad of notes to buy a loaf of bread. 

 

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But in March, a survey released by the Chamber of Commerce and Industry of El Salvador reported that 86% of the businesses contacted said they had never conducted a transaction using Bitcoin. The survey found that only 3.6% of business owners said Bitcoin had helped with their sales.

 

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Yes, indeed! I've been thinking about this for for several weeks now since I noticed (about 7- 8 weeks ago) the Bitcoin 5 year chart looking particularly negative, with clear implications for drops to the mid-twenties and then to the US$12-10k mark.

I wrote about this in comments on this site when BTC appeared to be stuck around US$37K for a longish time, lacking any momentum (which spurred me to check the chart).

Allowing big investment banks to create ETFs in crypto is inviting them to use their power (who knows, on behalf of "the club") to short it into oblivion and destabilize a country. Obviously, US influence in El Salvador was waning if they were refusing to stay part of traditional monetary network, and what better way to consolidate that and other aims, by crushing all the assets with just a keystroke at the Federal Reserve!

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To be fair they were up the Creek before bitcoin. Something of a hail Mary pass. 

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Unsure what Japan basically giving up on easing would mean. Might spur risk-on currency investment and the NZD is one of their favourites. God knows we could use a decent run against the Yen. 

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Yes it seems strange, as an export-led economy they need their currency a) stable and b) lower than competitors.  Perhaps the Princes of the Yen are trying out a new idea?  

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Interesting article in the mainstream...

It's the interest rates, stupid - house prices and interest rates create political pain

Prime Minister Jacinda Ardern’s political fate may well lie in RBNZ Governor Adrian Orr’s hands.

https://i.stuff.co.nz/opinion/128954010/its-the-interest-rates-stupid--…

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The author puts it rather nicely as “the housing market has swallowed the economy.” Well now best get that regurgitated then. A good dose of salts, get the bottle labelled “Wealth Tax” down off the shelf.

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Ah yes, a reverse bailout. Instead of the government letting people keep more of their own inflation-driven earnings to deal with the inflation the government mandates into existence and then allows RBNZ to overshoot with impunity, they're going to slug those with non-investment property-related accumulated savings because they wouldn't set tax policy settings or a funding program that didn't result in huge sums of money flowing into residential property investment. Sounds like a good gig if you can get it.

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Use the Aussie New Liberals Monetary Reset approach. Doesn't unnecessarily bail out speculators again, as approaches to date have.

  • Give every Australian adult an identical sum of government-created money;
  • Require those who had debt to use that money to pay down their debt;
  • Sell Treasury Bonds to banks, precisely as is currently done in deficit financing; and
  • Require those with less debt than the amount issued to purchase Treasury Bonds from banks, from which they will earn interest income;

This would not create any additional money and put inflationary pressure on the economy, but rather, it would change the asset backing the money from private debt, to reserves and government bonds;

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Rick I am not sure why you in favour of this approach?

Those that have debt will get relief, as you know those that have debt are already advantaged through exceptional asset price gains in recent years, those that do not have debt will get cash.  To spend on managing their way through this inflationary price environment.

How do you see that being "progressive"?  In essence those that have made outrageous gains due to being able to originally service the debt and then by leveraging the increased asset value get debt relief but those who are unable to service debt just use it to get by? 

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I think it's time we draw a line between owner occupiers who have only ever owned one house and only ever will for their family's accommodations, and people who have absolutely stonking portfolios of three, four, five houses they were until recently able to finance with the taxpayer bearing a third of the interest costs.

The fallout from the crisis caused by the latter should not be able to ruin the lives of the former. 

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No one will bail them out. Only bank level bailouts have occurred historically, but that's after individuals have been allowed to fail.

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Not sure what you are talking about here.  The tax breaks were there as they are part of the common accounting standard.  Costs of operating a business are taken from the revenue of the business and the remainder is taxed at corporate rates.  Interest costs are/were a legitimate cost of operating an investment business.  Now this has been removed.

This crisis was caused by over easy credit availability, a restraint on supply, a boost in stupidly high immigration rates and a lack of other easy (or trusted) investment options.  Don't blame the player blame the game.

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Perhaps a dumb question, but when is housing investment a 'business'?

I'm guessing running multiple rentals?

Because I was of the understanding (feel free to enlighten me) that if > 80% of your 'business' revenue was from a sole income source, the IRD were meant to start asking some interesting questions about tax evasion.

So if you are a landlord with a single rental, that 'revenue' is really your income, and the business is a front to avoid paying tax?

How many 'businesses' do we have around the country offsetting their owner's tax so they can make capital gains off the back of their tenants?

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I think this was where your 80% thing came from.. Attribution rule for income from personal services (ird.govt.nz)

This is a rule to prevent people dodging tax by employing related parties (spouses and children mostly) in your business because they are on a lower tax rate.  Ie, director, partner and two kids all get paid $69,900 pa as employees instead of the director being taxed on $279,000 of income.

Nothing at all to do with income from unrelated parties, such as tenants/rental properties.

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Thank you, gentlemen.

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Not dumb questions at all but others have already answered regarding the "related party" ruling.  This is not a new one, ever seen a corner diary or fish and chip shop?  Everyone in the family works and shares the income spread.

Most single property investors use what is called a "look through property". https://www.ird.govt.nz/roles/look-through-company

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Tax policy is of course a problem too. Very little taxation on property compared to income from productive work, and an easy way to pretend for decades that one did not buy and sell for capital gains in order to simply evade the applicable tax on such activity.

Don't blame the player blame the game.

Feel free to blame them for influencing the rules of the game too, where applicable.

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It seems a more equitable approach to relief than the likely alternative as we've seen over recent years - bailing out those with the most debt, and saddling ever greater debt upon the young. It also helps those who have no debt and will struggle the most to get by in a recession or depression. Yet it looks to tackle the problem of too much debt.

Because the amount is a fixed amount per adult - not per property - it does not seem to disproportionately reward those who have speculated the most, as have approaches to date. 

In a free market of course property would crash and banks possibly collapse. Is that going to deliver better or more progressive outcomes for more people? (And is it likely to be allowed, or are we in actuality simply going to see another bailout of those who have speculated the most?)

Other ideas? A tapered down amount where renters get the most, owner-occupiers a smaller amount per adult, and those with interests in multiple properties the least per adult?

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Noobie question sorry: If there was a Wealth tax and property owners had locked in valuations end 21 then they'd be up for a tax credit end 22? 

Due to their 50% losses on the perceived value of their assets?

If so can we get this bill passed asap and all claim massive $100k tax credits? 

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Wouldn't work like that, like most asset classes, you can't claim losses back. And you only claim gains if you sell. 

If the government was crazy enough (wouldn't put it past them) to be able to claim losses back and giving people tax credits, you would need to sell the asset to realise the loss first. You can't claim back paper losses.

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Except in the Green’s manifesto prior to 2020 election the target was all  property plus other assets, for instance vehicles, boats, artwork, jewellery, heirlooms, shares and other equities all on an annual basis. That meant having to return to IRD a paper valuation of each along with an explanation of alterations to that ledger  both in content and value. So guess that would encompass drops in values as relative. Extraordinary amount of bureaucracy needed to be created to do all that, maintain a dossier on all of us, and pursue the powers of audit that would need to accompany.

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That was TOP , not the Greens.

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Greens was similar, except they exempted assets under $50k.    I wonder how many classic cars, artworks etc would have suddenly been appraised at $49,900 if that tax got passed, how do you truly determine the value a classic car without actually putting it up for sale and seeing what the market pays on the day?  Ditto with a business. 

Yes, the greens were going to tax the business on its income, the owner on their salary/drawings, and then tax the owner annually on the value of the business.

Compliance nightmare, almost as bad as TOPs original plan, but at least TOP saw the light and narrowed it down to real estate.

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Best you read the Green’s Wealth Tax policy paper then. Came out about June 2020 I recall. You may enjoy especially the segment where the IRD  will be given power of right of entry to your home to check and audit all your assets. The precedent for that justified as the government already as right of entry to investigate benefit fraud.

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Even if this was the case, you can't really have negative wealth? You can't have a boat that's worth a negative amount (I guess unless you are using depreciation rules?).

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But the intent is to tax paper gains? 

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No, the wealth taxes i've seen proposed aren't a capital gains tax,

Capital gains tax = Tax levied/credited(?) on the change in value.  House goes up you pay (and usually only payable on sale of asset)

Wealth tax = Tax on absolute value of assets.  Value goes up, you pay more each year, value goes down, you pay a bit less, but you still pay (if above the minimum threshold)

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Seems silly and unnecessary. Much could be achieved with a simple LVT on unimproved value of land, coupled with lower company income taxes.

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The article Underplays the corrosive damage inflation plays. If the OCR was to be kept ultra low inflation would be through the roof and that effects 100% of the population.

OCR rises effect a small proportion of the population in comparison.

The one thing is correct about the statement "Its the interest rates stupid" is that the RBNZ dropped it too low in response to covid and didnt start correcting its mistake early enough, but  instead let house prices leap by 40%.

Stability is what we should be seeking, but the fools keep looking for golden eggs everywhere which leads to peaks and troughs. 

 

 

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Yep down way too fast and low and up way too late and slow.

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Given increasingly serious threats and harrassment, it might be time to take that UN position.

https://www.theguardian.com/world/2022/jun/13/threats-against-jacinda-a…

Might also be the reason for health officials' resignations.  What is NZ becoming?

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I suspect that is why Mallard wants out of the country asap.

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Except think Ireland has one of the longer duck shooting seasons?

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Both Labour and National have been pro-housing. Neither can prevent market revaluation. If anything Prime Minister Ardern has a slight edge because she's publicly commented on high house prices a few times, even if her government had no executable policy to actually take heat out of the market.

However I don't think the next election will be fought on house prices or inflation.

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Oh certainly true. How could  it ever be forgotten that she was adamant she knew all about fast rising house prices because she had noticed the house across the road from hers, had recently sold.

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ANZ mortgage stress test for borrowers now up to 7.65%        Meanwhile ANZ share price dropped to $21.56 at the lows yesterday,   some serious asset allocation trades going through on all four major banks yesterday.     

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Its interesting that this is not a more watched measure.  The idea of the stress test is to ascertain whether a house mortgagee(s) can meet their repayments at that increased level but the impacts of external factors, say inflation on all other costs, is not taken into account.  The current budget is not inflation adjusted, just the mortgage repayments.  A flaw in the method?

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This is what happens when people, incl. President Phillips, are led to believe this is inflation. White House claims consumer prices are happening during this "historic economic boom." What boom? https://dailymail.co.uk/news/article-1

Link

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"Going to Hell in a Handcart" springs to mind

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Quite.  As this has been an extreme, generational asset inflationary period, we are in uncharted waters with regards how those prices deflate and what that level of loss will do to the wider economy.  A depression is a certainty but will we avoid a repeat of the 30's? 

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Oz 10 yr breaches 4%.............

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Hows that Soft landing going for you Grant....I guess you have a bit more cushioning than others.

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The economic collapse will give him plenty of time to walk off that padding in 2024. What a mess. 

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Mmmm beer

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