Breakfast briefing; Norwegian loss makes NZ look small

Business / news

The US Fed wants to see the evidence; US retail sales disappoint; heat & drought bite China harder; Norway loses NZ's GDP & more; UK inflation over 10%; UST 10yr 2.89%; gold down and oil up; NZ$1 = 62.7 USc; TWI-5 = 71.3

18th Aug 22, 7:20am by David Chaston

Here's our summary of key economic events overnight that affect New Zealand, with news the drought in China is compounding their problems, and making their summer holiday break a very uncomfortable one for Beijing officials.

But first, the US Fed minutes were released today showing a maintained hawkish view, committed to getting inflation back to its 2% target. They said that for the central bank to scale back its rate hikes, inflation reports due to be released on September 14 would need to confirm that the pace of price growth was cooling. They meet next on September 22, 2022 (NZT).

American retail sales disappointed in July, held back by lower petrol sales, and car sales. But online sales rose, kicked along by Amazon's Prime Day, and other non-vehicle sales did ok too. Overall, despite the weakish car sales, they still posted a +8.6% year-on-year gain. But there was no month-on-month rise, so this will go down as an underwhelming event.

Also disappointing is the rise and rise of business inventories, up +1.4% in June from May to be almost +19% higher than year ago levels. This was as expected. Their inventory-to-sales ratio isn't out of whack yet, but it is rising, and relentlessly.

US mortgage applications fell last week, so the prior week's gain has proven to be the anomaly.

In China, the heat and drought are biting harder with industry shutdowns extending, now to steel mills. Beijing's worry levels are growing. The weather situation is worsening an economy that was already underperforming.

As you are probably aware, Norway saved much of its oil riches, building the world's largest sovereign wealth fund. But recent market turmoil has hit it hard and they lost -US$174 bln (NZ$278 bln) in the first half of 2022. After that loss their fund is worth US$1.3 tln, the largest drop in the funds history. To put that loss into perspective, in half a year the New Zealand GDP is NZ$185 bln. Norway has a population of 5.5 mln people, so the Fund is worth about NZ$375,000 per citizen.

In the UK, inflation rose to 10.1% in July from 9.4% in the previous period and above market forecasts of 9.8%. It was their highest level since February 1982.

The UST 10yr yield starts today at 2.89% and up +7 bps from this time yesterday. The UST 2-10 rate curve is little-changed today, still at -42 bps. However their 1-5 curve is also noticeably less inverted at -24 bps. Their 30 day-10yr curve is now at +76 bps and very much steeper from this time yesterday. The Australian ten year bond is up +9 bps at 3.37%. The China Govt ten year bond is unchanged at 2.65%. And the New Zealand Govt ten year will start today up at 3.41% and up +2 bps from yesterday's levels.

Wall Street is lower today, with the S&P500 giving up -0.4% in late Wednesday trade. Overnight European markets all fell, but in a wide range. London was down -0.3% but at the other end Frankfurt shed -2.0%. Yesterday, Tokyo ended up +1.2%. Hong Kong rose +0.5%, and Shanghai closed with a similar rise. The ASX200 ended its Tuesday session up another +0.3% and the NZX50 managed a tiny +0.1% rise.

The price of gold will open today at US$1765/oz which is down -US$11/oz from this time yesterday.

And oil prices start today up +US$1.50 at just over US$87.50/bbl in the US, while the international Brent price is now just under US$93/bbl.

The Kiwi dollar will open today at 62.7 USc which is -¾c lower than this time yesterday. Against the Australian dollar we are a bit firmer at 90.5 AUc. Against the euro we have fallen to 61.7 euro cents. That all means our TWI-5 starts today at 71.3, and down -60 bps.

The bitcoin price is down -1.9% from this time yesterday at US$23,440. Volatility over the past 24 hours has been moderate at just over +/-2.4%.

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

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58 Comments

by powerdownkiwi | 18th Aug 22, 7:48am 1660765680

Norway had real energy.

They turned that into digits, which they were told, you need to grow.

But without energy, those digits have become worth less.

Ultimately; worthless.

They should have been hoarding the oil - it's the real gold.

by Hamish | 18th Aug 22, 7:53am 1660766037

I can't even begin to imagine what a government of any flavour in this country would do with such a fund.

by DDH | 18th Aug 22, 8:12am 1660767123

National would stop paying into it and reduce taxes saying the market will take care of the aging population in the future.

Labour would shut down the oil fields and bring in consultants to work out what to do next. The 10 year plan will take 10 years to write.

The board would be swapped out every 3 to 6 years with cronies of the two main parties and a smattering of coalition support parties.

by scarfie | 18th Aug 22, 8:22am 1660767778

We just spent almost the entire value of kiwisaver of lockdowns. Poof, gone. Oh the kiwisaver is still there, but it is matched on the books by government debt. So the value in the fund is fictitious.

by Jonny.Foe | 18th Aug 22, 8:36am 1660768618

Hmmm. In Feb 20, Crown net worth (assets - liabilities) was a positive $143bn (note 15 in financial statements). In May 22, Crown net worth was a positive $148bn (note 15 in financial statements). The same papers also show the changes in financial assets (shares, equities, investments etc - see note 11). It is very difficult to construct a narrative that says the books are in worse shape now. For example, the gains on financial assets are running well above the interest payments on debts.

by Hamish | 18th Aug 22, 9:02am 1660770137

https://www.stuff.co.nz/business/128607232/how-far-has-grant-robertson-…

Before, "It also does not include the assets or liabilities of Crown entities or state-owned enterprises or the value of ‘advances’ made by the Government."

Now, "

The biggest change is that will count the value of investments made by the NZ Super Fund ($57b) as an asset.

It will also count the value of advances, such as the money owed to the Government in student loans (book value of about $10b) and the value of loans made by the Reserve Bank under its Funding for Lending programme (also about $10b).

Those changes will make the government debt seem smaller than before."

by Jonny.Foe | 18th Aug 22, 9:09am 1660770587

Those rule changes to how debt are calculated do not impact on the figures I've quoted. I always use raw figures from the balance sheet.

by theglc | 18th Aug 22, 8:41am 1660768898

It was worth it to keep some boomers alive an extra couple of years

by Palmtree08 | 18th Aug 22, 9:27am 1660771656

I guess people are expendable? Except for your good self, of course.

by Carlos67 | 18th Aug 22, 12:10pm 1660781408

Personally I don't know where all the money went, I literally never received a single cent until 2nd August when the first winter payment installment arrived. Somehow billions of dollars just disappeared.

by redcows1 | 18th Aug 22, 9:58am 1660773491

And yet still the majority vote for them and scream blue murder if any toys are removed. Must be what we deserve.

by Markus | 18th Aug 22, 9:16am 1660771013

The Labour government would have distributed the funds to their favorite pets, with kindness.

by murray86 | 18th Aug 22, 7:57am 1660766235

You're obfuscating PDK. Not accurate at all. Norway saved surplus income from it's oil wealth and invested it in other areas. The impacts of the pandemic, which drove a lot of simmering issues to a head has meant that the manipulations of markets by the major players are more exposed and fell flat. A small country like NZ, Norway doesn't have a lot of clout. But the markets are recovering so will their wealth fund. But many are now much more cautious as to where they will invest. There will be less rampant speculation for a while. The energy is still there, Norway is still exporting oil and gas. If they are smart a lot of their investment will be going into alternative energy sources, and building their national resilience.

by Hardly | 18th Aug 22, 8:04am 1660766657

Norway also has free energy that falls from the sky called hydro electric power.

by powerdownkiwi | 18th Aug 22, 8:13am 1660767203

Murray - Markets are recovering? If you reduce the energy-input (Russian gas, Rhine-transported all three, oil down and in contention) how can they 'recover'? Injection of virtual digits? I think that ploy has run it's course.

Hardly - yes they do, as do we, Iceland, BC, and not many others. But hydro is electricity, a different animal to oil.

https://www.nordicenergy.org/figure/energy-mix-norway/

by Hardly | 18th Aug 22, 8:50am 1660769412

I’d be interested in some recent trend data on this - this seems to be as of 2018 or even 2015.

Norway is rapidly weaning themselves off oil so I expect that to have dropped.

by bender | 18th Aug 22, 9:31am 1660771887

But it's not free when it falls here.

by scarfie | 18th Aug 22, 8:21am 1660767688

I suggest you read the book "The Kingdom" Murray, written by an author that lived in Saudi Arabia. from 76-80 and wrote a history of the nation.

By the late 1960's Saudi Arabia realised it was producing twice as much revenue that it needed to run it's economy. They had been investing their surpluses up until that time back into the Western world, mostly the USA. The rule was they'd never own more than 5% of any one company.

They had so much invested by this time that it dwarfed one years profits. However the princes realised that if they cut back on the oil it would crash the value of their investments.

The oil crisis they caused sort of helped. Ultimately they kicked the can down the road though, they didn't want to deal with the problem.

Norway has just followed the same playbook, someone there didn't learn their history. Now the chickens come home to roost as oil production starts to decline not because of voluntary decisions but because it has peaked.

Btw it was British money they allowed a bunch of tribes in the desert to be united under one rule. Centralisation of power takes money and resources. They'll return back to a bunch of warring tribes in the desert once the oil is gone in another 20 years.

by Hardly | 18th Aug 22, 8:26am 1660767990

What chickens are these exactly. There was always going to be market corrections over the life of the fund. They just need to ride it out. I would have thought everyone on here knew we we’re overdue for a correction and probably still are.

by scarfie | 18th Aug 22, 8:37am 1660768658

It it called the Seneca Effect, or in business terms the Sigmoid curve. Trouble is there isn't another sigmoid curve to lay over the first. Well at least the time to take action is well past, which is the whole point the sigmoid curve was conceived. ie: you act at the inflection point on the way up, not the one at the top.

I suggest you read the book too. But then I have learned that not everyone reads with the same eye for detail.

by Hardly | 18th Aug 22, 8:46am 1660769164

I have learned that a lot of people learn a bunch of false ideas from books/you tube videos and then when challenged to explain that logic they suggest people read said book in an attempt to absolve themselves from presenting a logical argument. Generally it’s a sign they either didn’t understand what they were reading or it was a bunch of baloney.

Norway is a long term investor. Like any long term investor their assets will go up and down. Sure, they made a recent loss, but most of that will just be giving up past gains, not loss on money originally invested. They’ve probably already recovered a chunk of it in the last month. Nothing about these events is surprising or compromises their strategy.

by scarfie | 18th Aug 22, 11:50am 1660780247

I've learned the Dunning Kruger effect applies to even to moderately intelligent people.

by Hardly | 18th Aug 22, 12:04pm 1660781065

Apparently.

by BadRobot | 18th Aug 22, 1:22pm 1660785777

I put is this way - people don't understand that they don't understand. We have a keyhole view of the world yet think we know everything.

by murray86 | 18th Aug 22, 2:16pm 1660789007

I don't think there is any doubt that we have outgrown the planet Scarfie. If you've monitored my posts you will be aware that I am arguing for the need to reduce our population. The problem is this cannot be done on a country basis, but must be global. That will never happen because human nature's basic lust for power will ensure someone will cheat and use the resulting power imbalance to take control. Population size has been at the root of many things throughout history, few of them good. So yes as I have indicated before we are the authors of our own demise, and we have done this before, several times.

by Fossil Lover | 18th Aug 22, 3:27pm 1660793258

Sound like Bill Gates or do you work in 'Gain of Function research'? I think I read on this website we are a country of 5 million, yet produce enough food for 40 million. If my math is correct we could use another 35 million.

by powerdownkiwi | 18th Aug 22, 5:17pm 1660799857

Your math is incorrect.

We may produce stuff which brushes past 40 million mouths - we do not 'feed 40 million'.

Secondly, we're eating our way through fossil fuels - I can count 30 calories of oil, to one of food.

Only a fool who thinks there are unlimited supplies of fossil energy, would - etc.

by Hans Brink | 18th Aug 22, 7:01pm 1660806103

We can't even grow enough grain for 5m people so with another 35m what would we sell to buy food. Meat & wine, yum.

by murray86 | 18th Aug 22, 2:22pm 1660789354

I don't need to read the book Scarfie, I understand the point you are trying to make. But you're ignoring the main one - that is Norway is living in the current world. They can only do so much. And like us, their contributions to the problems that the world is facing are so small as to to be irrelevant. If they became 100% carbon neutral it would not make one jot of difference to the world because Norway is not the problem. Norway is already doing this on a scale that suits them, but the rest of the world needs to be developing alternate energy sources in a bloody great hurry, but even that will not be enough. What I suggest nobody is doing is discussing how to reduce their population, so everyone is still on the perpetual growth cycle within the finite system.

by Fossil Lover | 18th Aug 22, 3:21pm 1660792917

I have heard the oil has peaked theory for 50 years. Yet known reserves continue to grow.

by Whatwillhappen | 18th Aug 22, 8:17am 1660767450

I'm halfway with you PDK - sold less and hoarded more, but not all - there may come a day where countries with oil may not be able to use it even if they wanted it. I doubt it, but it's possible

by Baywatch | 18th Aug 22, 8:19am 1660767565

Disagree .digits and code now run the world in tandem with energy - both are worthless with each other.

by stacking_cheddar | 18th Aug 22, 8:33am 1660768396

Norwegian electricity is 99% renewable with terawatts of spare hydro storage, and they built integrated public transport (train, light rail, bus and ferry) that runs from Oslo Airport right up to the Arctic Circle. Even the boatsheds are tripple glazed. I can't name a country that made better use of their natural resources, maybe you can?

by Foxglove. | 18th Aug 22, 9:02am 1660770129

And for good measure had the wisdom to remain outside of the bureaucratic quagmire of the EU.

by powerdownkiwi | 18th Aug 22, 9:07am 1660770475

Re their infrastructure, I entirely agree.

But what we're discussing here is extracting some of their finite energy resource, which they turned into digits; said digits being worthless ex-energy, and presumably worth progressively less as energy-supply reduces. Sure, you can fudge the parcel-passing (for example valuing existing things higher, in expectation) but when we go to buy real stuff, no energy = no stuff.

by murray86 | 18th Aug 22, 10:33am 1660775639

You're talking in absolutes PDK, and the world is not like that. Yes oil will run out (although some argue it won't), and the easy source of energy it was will need to be replaced with something not so easy. But there will always be sources of energy as long as the sun shines. Yes consumerism has to roll back, a lot, but as long as there are people on the planet consumption will continue, just as animals and plants consume, but the end need and goal MUST be to do it in balance. You persist in talking about energy from an oil basis, but oil or the lack of it is not the real problem.

And all Norway is doing is working within the world it exists in, and doing a pretty good job at it too, in comparison to most others. But yes it's sovereign wealth fund has taken a hit from the markets, but those markets are coming back.

by Plutocracy | 18th Aug 22, 10:36am 1660775788

It really boils down to whether their 'investments' are truly more valuable than a tangible and valuable physical resource.

by murray86 | 18th Aug 22, 11:03am 1660777429

Is it reasonable to say that a 'resource' is not a resource unless one is prepared to put it to use? Has Norway squandered theirs? It hasn't run out yet, so I would suggest not. What they have done is used it to the benefit of the country. If they had sat on it until all the oil in the ME and other places of the world had gone, would it still be the resource it is today when the world has transitioned away from fossil fuels? Or would Putin, or his like, have invaded them to steal it from them?

by rastus1 | 18th Aug 22, 10:40am 1660776031

The digits just represent how they swapped out oil for other assets - i.e they diversified their asset base, they didn't buy digits.. Or have I missed something?

by B-Rocker | 18th Aug 22, 12:20pm 1660782003

No you are not missing anything, and I find it strange for PDK to advocate for Norway to invest 100% in oil, rather than exchange some of it while the world is still using it now, for shares in other real assets.

by huttman | 18th Aug 22, 9:26am 1660771588

oil does not have any value until it's used.

by Whatwillhappen | 18th Aug 22, 8:11am 1660767073

A ferocious post from Down to Earth Kiwi about the MPC decision yesterday:

The Summary Record says at the end "inflation is expected to return to the Committee’s 1-3 percent target range by the middle of 2024, but this will require a better balance between supply and demand". That line says it all. It should trigger the firing of the whole lot of them. There was no need for NZ to ever be in this position. We were once better than the rest .. now we are "the rest".

by bw | 18th Aug 22, 8:23am 1660767799

(Central Banks have) failed to appreciate a more fundamental risk of inflation taking off in the domestic economy underneath the global swings in prices and the fearsome jumps in energy bills. They are not really properly understanding the causes of the current inflation, and therefore continue being surprised it does not conform to their forecasts. They are still looking at this through the lens of a temporary blip. We are moving into possibly a more serious inflationary era which is going to need a tougher monetary response. They do not like that idea, it makes their job very uncomfortable.

https://www.msn.com/en-gb/money/other/the-charts-that-show-andrew-baile…

by Beanie | 18th Aug 22, 8:25am 1660767927

If the central banks fail to reign back the inflation they started how will history remember them...not very kindly. So I believe they will do whatever it takes and to hell with the collateral damage.

by linklater01 | 18th Aug 22, 8:52am 1660769561

Beanie,

"reign" should be rein-monarchs reign. Just trying to be helpful.

by powerdownkiwi | 18th Aug 22, 9:09am 1660770561

You halter, you...

by Beanie | 18th Aug 22, 10:09am 1660774197

raining on my parade

by Jonny.Foe | 18th Aug 22, 8:27am 1660768064

Worth noting on sovereign wealth funds, that NZ Crown's financial assets (shares, investments etc) totalled around $159bn in May 2019. Latest figures (May 22) show they are now worth around $225bn.

Savings these bits of paper for a (very) rainy day is so dumb - as Norway have just demonstrated. The real assets we need in the future will not magically appear when we open our chequebook, they will take decades of planning and development - warm, liveable houses, climate-resilient infrastructure, excess renewable energy, trained nurses and care workers, good quality care and health facilities, water we can drink, etc.

by Whatwillhappen | 18th Aug 22, 8:30am 1660768235

I guess that's why National stopped putting money into the super fund?

by Baywatch | 18th Aug 22, 8:38am 1660768682

yes as Jofoe pointed out National stopped contributing to the fund to concetrate on core Government work such as warm, liveable houses, climate-resilient infrastructure, excess renewable energy, trained nurses and care workers, good quality care and health facilities, water we can drink, etc. ....hang on?

by Advisor | 18th Aug 22, 9:46am 1660772772

NZ National leadership lacks creativity and mindlessly imitates the policy stances of other conservative governments around the world.

In 2013, John Key made an Americanesque move by trying to kill off investments in public transport and pushed NZ further towards road-building. Never mind the fact that, unlike the US, NZ imports 100% of its vehicles and refined fuel from overseas, so all he did was increase our dependence on those imports at the expense of lower-income households.

Since then, every Nat leader has maintained the stance that putting more cars on roads is somehow better for the economy, despite all research and actual outcomes suggesting otherwise.

by nigelh | 18th Aug 22, 8:43am 1660768987

"In the UK, inflation rose to 10.1% in July"

5% of UK's inflation due to the Russo-Ukraine war? Similarly for Europe?

by bw | 18th Aug 22, 9:11am 1660770688

Which isn't going to dissipate any time soon?

"The Second Chechen War took place in Chechnya between the Russian Federation and the Chechen Republic from August 1999 to April 2009."

by mfd | 18th Aug 22, 9:34am 1660772086

If it took 10 years to subdue Chechnya, what on Earth were they thinking taking on a country 35 times larger with 30 times as many residents?

by BadRobot | 18th Aug 22, 1:25pm 1660785955

Russia believed it's own bullsh*t.

by Fox E | 18th Aug 22, 10:28am 1660775304

NZ$1 = 2.7 USc (Article headline). Eeekkkk! Nevermind Norway!

Update: Fixed now.

by kiwikidsnz | 18th Aug 22, 10:59am 1660777182

https://i.stuff.co.nz/business/129610289/electricity-authority-makes-ur…

An interesting move from the Regulator

by Whatwillhappen | 18th Aug 22, 11:35am 1660779324

I'm ok with that. I'd be happy for the EA to replace the condition with another to somehow ensure the clean up of the site is done before the smelter leaves.