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Commodity prices soft; China PMIs turn from contracting; US PMIs expand but more modestly; EU inflation extreme; NSW floods serious; UST 10yr 2.89%; gold and oil stable; NZ$1 = 62.1 USc; TWI-5 = 70.4

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Commodity prices soft; China PMIs turn from contracting; US PMIs expand but more modestly; EU inflation extreme; NSW floods serious; UST 10yr 2.89%; gold and oil stable; NZ$1 = 62.1 USc; TWI-5 = 70.4

Here's our summary of key economic events overnight that affect New Zealand, with news commodities are on the front line of a global economic shift.

The top ten commodities traded in the world are Brent crude (oil), Steel, WTI crude (oil), Soybeans, Iron, Corn, Gold, Copper, Aluminium and Silver, in that order.

But copper prices fell to US$7,716/tonne at the end of last week, a very long way down from the US$10,000+ level they reached at the start of June.

Aluminium prices fell to US$2,244/tonne, also a far cry from the peak in mid-March over US$3,800/tonne. They are now back to where they were in middle of 2021.

Iron ore prices are not going anywhere, despite all the talk of stimulus and rebounds in China. And that is also in the face of supply difficulties in China. World steel prices are flat-lining despite high energy costs.

Even wheat prices are falling, in this case based on fresh USDA planting data pointed to grain acreage and stock levels that were above market expectations.

Only corn, soybeans and oil are staying high. The rest are in a funk now, a developing fade.

You should note that it is a long weekend holiday in the US, their three day July 4 Independence Day weekend. Markets won't open there again until Wednesday our time.

Investors ended last week in a pessimistic mood, thinking a recession is imminent and acing accordingly. But we should be clear there is no imminent recession, only 'talk' at this stage. Whether investors talk themselves into one is yet to be seen. But one group, equity investors, ended last week questioning this negative herd view. They seem to be reassured that they can't lose - if a recession does come, that may delay or cancel the rate hikes and p/e ratios will stay high, underpinning current valuations. If recession doesn't arrive, those values may hold just based on good trading conditions.

Helping their mood was data out of China.

The private sector factory PMI recorded that manufacturing output rebounded as their pandemic restrictions receded, much like the official PMI reported on Thursday. But this one was actually a stronger result than the official one - not by much, but it is recording a better expansion. It was their best in more than a year. Japan and South Korea are still expanding, but the expansion in Taiwan has evaporated. All countries are reporting strong cost pressures and new order levels that are fading.

Hong Kong may have been on holiday on Friday 'celebrating' China's takeover of the territory and the current Emperor's visit, but before they did, they released some grim retail sales data showing just what a wet blanket the takeover has been for the people of the once-vibrant City.

In India they introduced export duties on petrol, diesel and jet fuel to help maintain domestic supplies, while also imposing a windfall tax on oil producers who have benefited from higher global crude oil prices. They also raised their import taxes on gold.

And not helping investors were reports that US factories were expanding at their slowest pace in two years in June.

The widely-watched local ISM factory PMI came in with a more modest expansion, one that was lower than expected however. New orders contracted for the first time in two years.

The internationally benchmarked Markit PMI came in marginally better than expected, but quite a drop from May. And this one is recording almost the same modest expansion as the ISM one. But it also recorded a fall in new orders. Stretched supply chains and elevated cost inflation have not gone away.

Both are evidence that customers are moving to reduce inventories in their systems. All eyes will be on how far that needs to go, but at this time it looks like a shortish correction. But it won't just affect American factories, it will have worldwide implications. So far that impact hasn't really shown up on the global stage, but it will.

Meanwhile, Eurozone inflation hit yet another record high in June at 8.6% as price pressures broadened, and its peak could still be months away, adding to the case for rapid ECB rate hikes, and probably starting this month at their next review on Friday, July 22, 2022 NZT.

Investors now seem to be racing to exit the Buy Now Pay Later sector. The rush away is highlighted by the crash in valuation of Swedish firm Klarna who once boasted a US$46 bln valuation. The latest update is US$6.5 bln. It is unlikely to rise from there. Similar retreats are underway in the Aussie BNPL sector. The sellers of AfterPay will be pleased with their timing; Jack Dorsey not so much.

BNPL is only the most visible of the retreats from many fintechs. Profitability is what investors are refocusing on, not just 'growth'.

Australia’s housing market is on track for a -15% year-on-year fall by the middle of 2023, the weakest performance in more than fifty years, and that is according to analysts at Deutsche Bank.

The storms gripping Sydney and eastern NSW are getting serious. Their giant Warragamba Dam is spilling, meaning it is no longer constraining downstream flooding. Thousands of homes in parts of Sydney that have never previously flooded were warned they could face significant threats. More than 40 evacuation orders, affecting about 32,000 people face evacuation. It is a big 'wet' that could last for all the rest of 2022, forecasters claim.

The UST 10yr yield starts today another -9 bps lower from this time Friday at 2.89% and it has ended the month in New York almost exactly about where it started, although it did get as high as 3.49% in between. The UST 2-10 rate curve is little-changed at just +5 bps and their 1-5 curve is much flatter at +13 bps. Their 30 day-10yr curve is flatter at +160 bps. The Australian ten year bond is -1 bps lower at 3.47%. The China Govt ten year bond is unchanged at 2.84%. And the New Zealand Govt ten year will start today down at 3.71%. A week ago this rate was 4.01% so a -30 bps retreat in that time.

The price of gold ended last week at US$1813/oz in New York. And as we mentioned earlier, India has raised its import taxes on gold from 7.5% to 12.5% which won't help the yellow metal's price.

And oil prices are little-changed at just over US$107/bbl in the US, while the international Brent price is just over US$111/bbl. A week ago these prices were very similar.

Russia has confiscated (without compensation) the minority shareholdings of the mainly Japanese partners in a large Far East gas project. It will be a long time (and after Putin) before any non-Russian company risks an investment in any Russian project.

The Kiwi dollar will open today softer at 62.1 USc and a -1c fall in a week. Against the Australian dollar we are firmer at 91.1 AUc. Against the euro we are unchanged at 59.6 euro cents. That means our TWI-5 starts today at just on 70.4 but down -70 bps in a week.

The bitcoin price has slipped only marginally since this time Saturday and is now at US$19,148 and down -1.3%. Volatility over the past 24 hours has been modest at +/-1.6%.

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

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48 Comments

Investors ended last week in a pessimistic mood, thinking a recession is imminent and acing accordingly. But we should be clear there is no imminent recession, only 'talk' at this stage. Whether investors talk themselves into one is yet to be seen. But one group, equity investors, ended last week questioning this negative herd view. They seem to be reassured that they can't lose - if a recession does come, that may delay or cancel the rate hikes and p/e ratios will stay high, underpinning current valuations. If recession doesn't arrive, those values may hold just based on good trading conditions.

"If I had to bet, I'd say that this might be one of the worst downturns that we've seen in recent history," Zuckerberg told workers... Yes, and that was markets three months ago. Where is this thing really going? Link

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9

Graphic evidence to date.

Investors are offering their cash ($trillions) to the Fed in return for pristine government debt collateral, not into risk taking business ventures.

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Article suggests that housing ponzi has 3 elements and US is heading towards 3rd. If is true than NZ is already in 3rd element.

ANY DOUBTS

https://fortune.com/2022/07/02/housing-market-hous7ing-bubble-requires-…

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3

We crunched the latest REINZ data last night. One thing that is not getting a lot of mention is the HPI dropped 3.8% for Central Auckland last month alone.

 

Something is definitely going to happen.. We think all the gains made over 2020 and 2021 will be given back by the end of this calendar year. Some people are going to get hurt.  However, we think the giveback is healthy and needed for the general good of society.

 

Disclaimer: We are a home owner in Central Auckland..

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We think all the gains made over 2020 and 2021 will be given back by the end of this calendar year.

-30% by Christmas. Guaranteed?

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Well, the Central Auckland HPI has dropped 13.5% since its peak in November 21.

 

Nothing is guaranteed, however the trajectory suggests a 30% decline from the November 21 peak by the end of this calendar is becoming likely.

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30% is very likely, I agree, possibly a bit more than that. But I seriously doubt that it will be so sudden, as the housing market is not as liquid as other markets. If I had to take a punt, I would tend towards mid next year as  the point of a 30-35% decrease from peak.

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I am picking around 25% and no growth for years, but over probably the 2 years, not by Christmas. In real terms it would be about 40% falls, given inflation. If a "disorderly" correction starts happening both the RBNZ and government will step in with some crazy plan. Hell, they may do it anyway if it earns them votes.

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"Both RBNZ and govt will step in with some crazy plan".

What sort of plan do you think? Honest question. I don't doubt they would try but if we are heading into a global recession with lingering raised global interest rates what could they do?

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Increasing price subsidies to prop up purchase prices? Lengthening mortgage terms? But yes, options seem fewer.

It was remarkable how quickly the RBNZ seemed to leap to protect property from the market in 2020.

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And then as prices explode 30% p.a. claim that 'house prices aren't part of our mandate'. Unbelievable. 

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Government could "temporarily" remove the inflation control mandate and ask RBNZ to drop interest rates. Sure it would be a disaster, but the governments we have are fine with long term pain, they want sugar hit policies that make the voters feel instantly richer now. It's the problem with long term planning in government these days (there is very little of it).

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That would basically be looting society, at that point.

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100%. Doesn't mean they won't do it.  The idiocy of some of their COVID economic decisions should tell you that.

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Makes sense to me. The gains since early 2020 have been an anomaly, a type of madness.

 

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It's almost back to sustainable levels according to Orr & the team...

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Commonly called a "Blow off top" in markets

https://www.investopedia.com/terms/b/blowofftop.asp#:~:text=Key%20Takea….

 

KEY TAKEAWAYS

  • A blow-off top is a chart pattern showing a sudden rise in price and volume, followed by a sharp decline in price also with high volume.
  • The rally into the blow-off could be based on news, or speculation of good news, growth, or higher prices in the future.
  • Blow-off tops can occur in all markets, are volatile, and can be very hard to trade as an ill-timed trade in either direction can mean huge losses.

 

Obviously volumes not so important as price action in real estate...... 

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Jeez, it's a beast with a name and a modus operandi. The experts should have seen it coming, clear as day. What do high paid economists actually do for their money?

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Even if only the value gains of 2021 are wiped out. It is 370 billion dollars of assumed residential property wealth being evaporated. Reverse wealth effect in full effect.

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So a lot of people are saying lets reset interest rates to where they where before covid, so prices should reset to those levels and suddenly find a bid.......    but now we have inflation, looming US recession and equities markets turned bear......  to me if I had to build a base estimate its well below the pre-covid boom times.   where is the value in rents/prices/yields now that nothing is tax deductable?   

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Has anyone done figures on the results of that lose of deductibility. I can't get my head around it as simple figures of switching from deductible to incurring tax means big enough tax bills to put many rental owners in a an extremely precarious position. Even with little debt the cashflow implications are huge.

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Average Investor Mortgage 2021 = $494k (RBNZ C31).  E4 Total Investor Borrowers ÷ A4 Total Investor Lending NZD

At 5% that's $25k p.a. ($475 per week in interest alone).  Assume a 3 bedroom in Flat Bush rented for $660 p/w (tenancy services), $475 interest, $70 insurance, $70 rates, $45 maintenance = $0 no tax.  

Without interest deductions, the landlord shows a $475 per week "profit", 33% is tax so $156 p/w.  Even though the property is not generating a true profit.   

 

 

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Thanks

Trying to remember how it will work for them. Because previously no tax was due they wont be up for paying tax until terminal tax is due which @25% of $156 x52 but at the same time they will get a bill for 50% of the income to be paid for the second year as provisional tax? So presuming they delay as long as possible the "average investor" will be up for a tax bill next year of $18,000 plus and it only goes up from there. The average investor will be praying for a National win and a kept promise.

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If their tax is higher than $5k then they will need to pay provisional tax for the following year.  $156 x 52 @ 25% is only $2k so they will be okay.  

 

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where is the value in rents/prices/yields now that nothing is tax deductable“

Where was it before the deductions were removed….still dire? Half of the investors lose $10k a year per year…on one or two properties and it will only get worse with interest rates rising and rents falling.

It is a long way down until a property can yield 5% after all costs, management and repaying the principal…. I guess if you just used recently imagined equity you might not worry but if you do have to repay debts, can’t sell or rent then it a lot of hours working a second job at the petrol station to make it up.

I think people have lost reality of what the dollars actually represent in terms of labour.

 

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It is a long way down until a property can yield 5% after all costs, management and repaying the principal

I dare say we won't be witnessing yields reaching back to those levels for a while unless there is an extended period of pre-Covid market conditions, i.e., an extended period of low interest rates, high migration levels, coinciding with a decrease construction output.

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Australia has been getting more rain than us this year. Super large highs 4000k.m wide.

Meanwhile northern NZ spent most of june over 4 dgrees above normal average.

 

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Just as well since it was drought until the 20th of May.

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The storms gripping Sydney and eastern NSW are getting serious. Their giant Warragamba Dam is spilling, meaning it is no longer constraining downstream flooding.

Story of water in Australia really, either not enough or too much. Still at least it might help their agricultural output.

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https://www.nzherald.co.nz/nz/snells-beach-cafe-workers-still-waiting-f…

For those who want us to focus our immigration policies on high wealth individuals like Peter Thiel and this guy, careful what you wish for.. 

 

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I've been advising businesses that had Covid fines imposed to use the company structure to avoid them. It is designed to counter risks involved with business & isn't discerning about those risks.

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It seems like a legitimate use of the LLC, however much it must suck for those workers. To change LLC to a slightly limited liability company would have a chilling effect.

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Businesstraveller.com

DEANNA C DEHLSEN

Posted on 25/03/2020

My husband and I have Permanent residency Visa’s and want to return March 30th, 2020 coming from LAX to Auckland. Will you be able to give me any updates and information if flight is cancelled?

Why do multi millionaire Americans want to own a cafe in Snells Beach? 

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Visas for lattes? 

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Meanwhile, Eurozone inflation hit yet another record high in June at 8.6% as price pressures broadened...

Germany’s deStatis put the preliminary June year-over-year CPI gain at 7.6% compared to 7.9% during May. That was the other “shock”, an actual decelerating annual rate which had been widely expected (consensus was 8.0%) to further rise. This despite a god-awful, economy-crushing 38% year-over-year increase and contribution from energy (and 12.7% y/y for food). Meanwhile, Eurozone inflation hit yet another record high in June at 8.6% as price pressures broadened

Volkswagen CEO says German economy needs China - Spiegel

BERLIN (Reuters) - Inflation would spiral even further in Germany if it weren't for business with China, Volkswagen Chief Executive Herbert Diess said in a media interview published on Thursday.

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Germany was closer to China than Japan before the war. Historically there has been a lot of friendship between the two.

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'The top ten commodities traded in the world are Brent crude (oil),'

Oil is NOT a commodity, David. Have a look at the first graphic in my piece:

https://www.interest.co.nz/public-policy/115678/murray-grimwood-outline…

Without energy, nothing happens. So it's Boolean algebra at best, flying blind at worst, to label energy as a tradeable commodity. We should have been valuing our tokens in the underwrite - as Putin and the Brics are about to do. Making the First World, the Third. That's the conversation we need to be having.

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The rest of the world treats oil as a commodity. You have a good point, but it's unlikely if a small financial website at the bottom of the world changes the definition of commodity for its articles anyone else will change.

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I can see NZ searching for oil/gas again under a different leadership

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I can see NZ searching for oil/gas again under a different leadership

We already are, they (the Govt, are just keeping it very quiet).

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The only stopped issuing new exploration permits. They never stopped exploration that is currently going on. In fact, the first major discovery for decades only happened in the past couple of years, IIRC.

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It's not the conversation we need to be having at all. Energy consumption is a consequence of population size, that is the conversation that must happen. Until it does, the planet's population is in denial. they believe they can fiddle with sources or types of energy and solve all our problems. But the problem is, in today's world the culture is one of consumption, and as you repeatedly point out there is not enough energy sources left to sustain the current levels, let alone without poisoning the planet. Even if all the fossil fuels vanished overnight and we went back to living in caves, there is not enough wood for fires to keep all the population warm and cook their meals. 

The slide to the final collapse is underway. The major fossil fuel companies are ramping up their lobbying of Governments around the world to eke the most profits before that collapse. Governments are too afraid of nuclear to start on that path yet, even though it looks to be the best, albeit limited option. But in the end the problem is not oil, it's population size and the consequential energy needs and consumption, whatever it's source.

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Eurozone inflation hit yet another record high in June at 8.6% as price pressures broadened, and its peak could still be months away, adding to the case for rapid ECB rate hikes, and probably starting this month at their next review on Friday, July 22, 2022 NZT.

At what point do we accept that rate hikes and reductions simply inflate and deflate the price of speculative assets? Central banks should just fix the rates forever and focus on controlling the quality and flow of credit - i.e. into productive enterprise.

The financial sector has become a massive drain on the economy - it's a thousand times bigger than it needs to be to provide its core useful function of arranging finance and investment opportunities for enterprise, and the trade in futures (and derivatives etc) is hugely destabilising - meaning prices jump around in response to trader reckons and the news of the day.  

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100%, this is what I have been saying for quite some time to anyone that listens. We should have outlawed derivatives trading, limited futures trading and currency trading with onerous laws that prevent much of the profits from these activities. Why? Because they add nothing of value to our system (probably are more harmful now than anything) and take incredibly smart people out of producing stuff that can actually help humanity/civilisation etc. Unfortunately we have gone the opposite way and decided to hold the people that profit from these activities up as role models. 

I used to work on a currency trading floor as IT support and talk to some of these people.  Many of them were mega millionaires, very smart people. But many lead vacuous lives, without meaning and know it.  Asking them what they feel they add to humanity/civilisation and it's basically "nothing, but I do screw others frequently" both literally and in business, which they consider "winning at life".  We need to urgently flip around our monetary/remuneration systems to reflect actual value given to our civilisation. These guys would be at the bottom, nurses/teachers pay would triple overnight.

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Total agreement.

Trouble is most of them are probably completely useless at anything remotely productive, scheming and gambling are pretty much it.

One of my most enduring memories of John Key is him trying to hit a nail into a hoarding on tv news. He literally couldn't hit it let alone put enough power in to a swing to get it moving, it was pitiful. Unemployable.

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Very true. It's all politics. People are generally selected for positions based on how well they will get on with their bosses rather than how well they can do their job. These people can obviously 'sell' really well, and profit from it. Integrity is lost on these.

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" It will be a long time (and after Putin) before any non-Russian company risks an investment in any Russian project."

Are you including China in this? And if not, what are the implications? 

What's bad for Russia might else end up also being bad for the West.

Vassal state anyone?

 

 

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