Here's our summary of key economic events overnight that affect New Zealand, with news global trade is losing altitude, with the geopolitical pressures starting to take their toll.
But first, US mortgage applications fell yet again last week, continuing the long string of declines and are -23% lower than year-ago levels. Mortgage interest rates rose to 5.94% in this survey.
The US reported its July trade balance data earlier today which showed a smaller overall deficit by -US$10 bln to a 9-month low of -US$71 bln, broadly in line with market forecasts. Total exports were up a mere +0.2% to a new all-time high of US$259 bln as a rise in exports of services offset a decline in goods shipments. Meanwhile, imports went down by -2.9% to US$330 bln as a decline in imports of consumer goods and industrial supplies offset a rise in shipments of cars. Given their moderately expanding economy, its a good result. That takes their trade deficit to just under 4% of GDP for the first time in a very long time.
The US Fed's Beige Book summaries of regional surveys painted a modest picture of their economic expansion in August. Economic activity was unchanged since July, with five Districts reporting slight to modest growth in activity and five others reporting slight to modest softening. Most Districts reported steady consumer spending as households continued to trade down and to shift spending away from discretionary goods and toward food and other essential items. Car sales remained lackluster across the country, reflecting limited inventories and elevated prices. It is not a very upbeat assessment.
The US may be transitioning to a period of lower growth, but the Fed signaled it will stay targeting inflation until the effort is successful, no matter what the economy does. A top official said they will need to see “several months” of low monthly inflation data to be convinced that rapid price growth is finally cooling, raising the odds that they will again raise interest rates by +75 bps when they meet later this month.
The Bank of Canada raised its policy by +75 bps to 3.25% overnight in a well signaled change. It is the fifth consecutive rate hike, pushing borrowing costs to the highest since 2008. They also said this rate will need to rise further given the outlook for inflation. In addition they will continue their quantitative tightening by selling off their bond holdings. The widely-watched local PMI series reported a sharp expansion in August, after the unexpected drop in July, so there is still strong growth pressure in their economy.
China released its August export data late yesterday and they were weak, even weaker than expected. Their import data was weak as well. Their trade surplus dipped and that was even after their trade surplus with the US rose in August from July.
China's FX reserves fell more than expected in August, taking them down to US$3.05 tln and a drop of -US$50 bln and to their lowest level since October 2018.
Taiwanese exports struggled in August, but by the political and military squeeze put on them from China. Although they remain at an historically high level, the growth impetus disappeared in the latest month.
Global air cargo markets faltered in July, interrupting the expansion track they had been on. The Asia/Pacific region reported almost a -10% reduction year-on-year.
In Australia, economic activity rose in Q2-2022 by about what was expected to be +3.6% more (real) than a year ago. In Q1-2022 the growth rate was +3.3%. Consumer spending was the bright spot in the June quarter. Exports also performed well, however, elsewhere conditions were pretty mixed. These Aussie results are far better than what most countries are reporting for the June quarter.
The UST 10yr yield starts today at 3.27% and retracing -6 bps after deciding some of the earlier rise was overdone. The UST 2-10 rate curve is more inverted at -19 bps. Their 1-5 curve is a lot more inverted at -25 bps. But their 30 day-10yr curve has steepened further, now at +103 bps. The Australian ten year bond is -8 bps lower at 3.64%. The China Govt ten year bond is unchanged at 2.64%. And the New Zealand Govt ten year will start today at 4.10%, and up +7 bps.
Wall Street has opened its Wednesday trading with a +1.6% rise in the S&P500. But the tech-heavy indexes are recovering too. Overnight, European markets were generally positive, up +0.2% on average except London which was down -0.9%. Yesterday Tokyo ended down -0.8%, Hong Kong rose +0.1%. And Shanghai rose another +0.4%. The ASX200 ended down -1.4% and the NZX50 ended down -0.4%.
The price of gold will open today at US$1717/oz and up +US$15 from this time yesterday.
And oil prices start today -US$4.50 lower at just over US$82/bbl in the US while the international Brent price is now just over US$88/bbl. At these levels they are back to price levels in effect at the beginning of 2022 - and in fact prices pre-pandemic. The weak Chinese trade data undermines these prices today.
The Kiwi dollar will open today just over 60.6 USc and little-changed since this time yesterday. Against the Australian dollar we are unchanged at 89.7 AUc. Against the euro we are a bit softer at 60.7 euro cents. (Notice the parity with the greenback.) That all means our TWI-5 starts today at 70.4 and unchanged since this time yesterday.
The bitcoin price is now at US$$19,001 and a tiny -0.6% lower than this time yesterday. It got down to US$18,559 in between. Volatility over the past 24 hours has been modest at just on +/- 1.5%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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50 Comments
The end of the greatest concrete pour in history - doesn't bode well for NZ log exports just as we plant our productive farmland in pines.
"The vision of the country’s cement sector — the one it’s now promising the government it will deliver — is far different. Today’s real estate weakness is a sign that a once-in-history construction boom has come to an end. The future promises only stasis, and decline."
--David Fickling, Bloomberg Opinion
If we were smart as a nation we would be investing in new technology and industry involving pine based products, make the most of all the additional trees we are planting.
By the time todays saplings are mature there's no guarantee that shipping logs half way across the world will be a viable proposition.
You can make a whole lot of toilet paper from a single tree. I'm sure plenty of that will be required in future.
The likely added value would be with the resin.
And with the waste, which instead of clogging up rivers in a storm, should be used for biofuels.
Pa1nter - Why invest in high value clearwood when you can bludge more carbon lucre from framing regimes? The incentive for pulp/framing regimes are up front - you don't have to wait 25 years. The government is rewarding the exact opposite of value add.
I must confess to being naive with all the ins and outs of carbon farming, but I thought these new pine forests need to get to 20 years old or more?
You sequester carbon from the moment the trees start growing until they are chopped down (you earn units), when the carbon is then "released" (and you have to surrender the units).
There are changes coming where this process is averaged out, but this is effectively why a move to forestry land use is effectively permanent (if you want to be able to sell or use those units).
We could ship it to Europe as fire wood
As GMO wrote 10 days ago, and perhaps worth rereading:
One of those features is the Bear Market Rally after the initial derating stage of the decline but before the economy has clearly begun to deteriorate, as it always has when superbubbles burst.These long-term negative issues that I have kept at the back of my mind (and hopefully yours) for years – climate, human fertility, food, and other resources – are now becoming relevant short-term issues that bear on both inflation (upwards) and growth (downwards). Indeed, collectively, they pose a potential risk to our long-term viability.
https://www.gmo.com/americas/research-library/entering-the-superbubbles…
Not necessarily. Concrete and steel emit too much CO2 in their production. Building out of wood is a useful carbon store. Multi-story wooden buildings are now a reality.
China may well be asking itself why does it need FX reserves of $3 trillion
KeithW
If you lack various vital resources and have a billion mouths to feed, maybe you need 3 trillion as a rainy day fund.
The key issue for China is indeed national security and that includes security of vital resources. If that point was better understood, then the behaviours of the Chinese Government would also be better understood.
KeithW
Same for India
India’s energy diplomacy blossoms, finally
Now, if India and China do not align with G7 — and Japan is exempt — what is left of the Biden Administration’s dream to isolate Russia and dry up its income from oil exports with this hare-brained scheme by the US Treasury to impose a price cap on Russian oil? (See my blog OPEC+agrees on oil output cut.)
Good to see Putin working on his comedy act. Lining himself up for a second career in case this one doesn't work out?
"I would like to emphasize once again that we have not started anything in terms of military operations. We are only trying to end the hostilities."
"I believe that we have lost nothing and will lose nothing."
The only issue for China is the security of the position of the CCP. Nothing else. Everything revolves around that. A combination of rewarding and threatening and punishing their population is all it takes. In various proportions as the CCP sees fit.
$3000 per person isn't that much of a rainy day fund.
It's not a rainy day fund if the US can seize it with a penstroke. Done it elsewere and will again.
China needs to be nervous about that.
And it was printed out of thin air
You are right if they are at risk of being seized by the West - but there is little choice while the PBOC is forced to place USD etc trade surpluses into pristine US collateral repositories or their European equivalent. China financing US etc import/export deficits was and is still part of the game. As China diversifies trade away from the West this will diminish.
Michael Hudson discusses the perils of compound interest.
I modeled this effect in 2013 by including interest in the "Quantity Theory of Money". M.V=P.Q becomes (M.V)+i=P.Q
On a financial new site I'd hoped to find a good degree of literacy about this. Disappointing it hasn't. You'd think so when every asset price depends on it, seems people only like to hear the good news and count the money. Like a gambler on horses, they only ever shout drinks when they have wins.
Thing is Hudson is correct. I was just saying to Andrew yesterday that the disparity between real growth and the money supply has been exponentially increasing since GFC 2008. Actually the trend was in place well before that, but it is the nature of the compounding that sees the two plotted lines diverge. Sooner or later the two have to be reconciled.
Good link. Hudson lays it out simply.
Einstein said that compound interest is the 8th wonder of the world. But we don't have to be brain surgeons to work that out.
If you are going to add interest into the left side of the equation, are you not then factoring additional money than the money supply (M)? Surely M = ALL the available money, so where would the interest payments come from? And that interest is also taken from the other side by reducing what can happen, thus cancelling each other out?
That equation can only be a snapshot in time as nowhere in it is the capacity to measure across time (a Delta component if you will)?
Did you watch Hudson's video that Audaxes linked to - it answers that question The point is it's a house of cards, and the banks will be left holding the assets when it all falls down.
Of course they will. Have you read a mortgage document lately? Banks hold all the power. Governments have systematically abrogated their responsibilities with respect to managing economies ever since Nixon abolished the gold standard at Bretton Woods, and sold Milton Friedman's 'free market' theory to the world. It was all BS but no one could see that. I suspect that not even Friedman knew or understood that the theory did not factor in human psychology and its lust for wealth and power, and consequently no market operated by humans could ever be free. Governments role is to regulate those markets and when they don't someone will be manipulating them!
Great you are asking. Keep asking, and keep pondering.
One of my gifts is moments of great clarity, where I see things that seem complex in the most simple terms. Hudson has the same ability. My problem is translating what is in my head to other people (perhaps the tin foil hat obstructs things). Write to DC and ask him for a copy of my rework of the Quantity Theory of Money. Even Bernard Hickey has a copy as I sent it about back in 2013. I put it in simple terms after initially writing it in a pretty pompous form, and I have to give thanks to the late Iconoclast for the critique.
Key is really that you have to keep adding to "M" simple to pay "i" just like Hudson says. But the new M doesn't add capacity to Q, in fact it really subtracts. That subtraction is one way wealth extraction happens, production surplus to affordability. Luxury goods or services.
It probably needs a time function, but there is a certain elegance in the simplicity of it. It is understandable as it it. Think of it perhaps as being unbalanced by the interest, but the reconciliation happens at the start of the next year when old interest is paid and new interest is brought (borrowed) into circulation for that function. The time function balances it, although it is a while since I have thought about it at depth so don't take that as gospel.
Without a 'time' component the equation remains unbalanced and indeterminate. Even just adding to 'M' introduces a timed variable. As M changes so would the potential of P.T although there logically would be a lag (the equation assumes a level of equilibrium which in reality doesn't exist). So the rate of change becomes critical, but then the time to respond (the lag) needs to be considered too.
As to your original comment with respect to the disparity between 'real growth' and the money supply diverging. Isn't that logical as economic and finance theory come up against real world limits of a finite universe? Or perhaps it is not the theory that is at fault but rather those individuals in charge of central banks who persist in holding onto perpetual growth paradigms in the face of ever obvious evidence that they cannot continue?
In addition to the above it seems to me that you and Hudson are equating interest (i) to a loss in an efficient system. If that is the case then i suggest you are mistaken, or otherwise are failing to include all losses. When a reserve bank dumps a wad of money into an economy (left had side of the equation), the equation seems to assume that there is an exact correlation to the effect of that action on the right hand side of the equation. But in reality that is not the case. There are many losses. Charges and fees are removed from M all through an economy and interest (i) is just one of them. Interest is the charge or fee for having a party put money to use that is not theirs. It is the same as a rental charge on a house or car or some other leased item. banks charge fees exorbitantly at all levels. If a debate is to be had on stopping or reducing interest charges, then that debate must also include stopping or reducing all fees and charges.
Money, once it is introduced, has to exist somewhere.
If it was introduced as debt, it attracts interest. Always. Mostly it is introduced as debt, even if a government bond.
Yes it does have an effect on the right side of the equation. Depending on how the money was introduced. If for productive means it goes to Q, if non-productive it goes to P. Our current spate of inflation is likely because Covid money was thrown out into circulation without any corresponding increase in production so it has gone to P. In fact there was a decrease in production. So with a bit of a time lag it has finally shown up in the economy.
All the charges you equate to M are in fact V. Same applies, with lots of velocity and no increase in production it will create inflation.
Clear as mud eh? :-P
I haven't equated them to M, I have identified them as losses in the system and agree that they would in fact be a part of V. And with the requirement for the equation to be balanced then those same charges must be allocated to P. But you originally introduced M.V (+i) = P.Q which you simmply cannot do. You should have said M.V (+i) = P(+i).Q.
But your comment here raises a good point that many miss, which I totally agree with; "Covid money was thrown out into circulation without any corresponding increase in production so it has gone to P. In fact there was a decrease in production." This points to the importance of Governments with ALL their spending to be entirely aware of all the consequences of dumping money into the economy without clear, structured purpose (legislated and regulated). in other words there MUST be clear economic or strategic benefit gained for every tax payer dollar spent. This seldom seems to be the case.
The general idea is that interest is compounding and parasitic. It detracts from the right side of the equation and forces a need for an increase in P. Technically you are sort of right, but it is automaticallically included. If you read the theory notes it is doing what you say, automatically pushing price up so that less can be afforded, which keeps the equation balanced. That you have got to this point shows you have got your head around it :-)
Interest makes the system dynamic rather than static. It forces a change each year in one direction.
The time function is in the predictive power.
The predictions I made were that interest rates must come down over time. This helps keep the system going, affordable if you like but failure will still happen once interest rates get low enough. So it is my long standing prediction that interest rates over time will drop. Also if interest rates rise it will cause failure in the system as debt becomes unaffordable. We're about to find out how accurate this prediction is, but so far the dropping interest rates has proven accurate.
The process of thinking on this allowed me to later formulate Scarfie's law of maximum extractive value. Interest, and in general any form of unearned income, will always find it's maximum ability to be extracted from the system. By the very nature of compounding debt the trend will be (when money is reset) that interest rates will rise over time (probably decades) to find that maximum point. At that point you have maximum affordability of the economy to sustain it and interest rates must trend down from that point. There is no way out of this except for debt destruction, and eventual failure. The reason for this is continuation of the system is only possible with infinite increases in production, which we both know is impossible.
I also predicted that velocity will drop over time. This has also be correct since I made it. It is all about affordability. When you tie up money in asset prices it lowers velocity. I've since found out that Keynes also recognised that velocity wasn't static. He describe it as having two components, static and dynamic.
I've also predicted that the money supply must increase over time by the quantity of interest added. It compounds. You could say hyperinflation occurs. Price can actually rise without an increase in production.
It is all logical once you break it down.
We are at an interesting juncture with the Fed raising rates as they try to stave off hyperinflation. Two choices really, hyperinflation or collapse asset values to contain the money supply. This is what lurks underneath the talk of the FED pivoting.
The real story that interest on a money supply doesn't work in the long run. It sets up exponential growth for a start. Even a gold standard doesn't work, but it does slow things down. Only when you have periodic debt forgiveness would it come close to being manageable. Ultimately production and money have to reconcile.
As Aristotle stated, the making of money from money is immoral.
Oh, once you realise the nature of interest then it makes the term "opportunity cost" complete nonsense.
I understand the point you'e making re interest compounding. but that is a narrow view. If you consider interest as the fee for using the funds, and that ordinarily it would be paid directly to the lender, but instead of that it just becomes a part of the pool or original funds which then means to all intents that pool can then achieve more by virtue of that interest paid. So it is not really parasitic it just increases what can be achieved.
i suggest that you are conflating interest with inflation. To me interest remains a fee for the use of the money and if it is paid into the original pool of money (compounding) then it too incurs a fee for its use, and this is not parasitic. But if you consider inflation which erodes the value of money which is parasitic. I have questioned why economists believe there must always be inflation. I consider that when all else is equal prices should remain stable, neither increasing nor decreasing. I agree that money supply must increase over time, but not because of interest, but rather population growth and demand for resources. Indeed if you consider history that must have routinely occurred.
Don't look at money supply and interest as being connected. Interest remains a fee for the use of money. But a Government could release money into an economy to achieve a specific outcome without charging interest. Not sure the banks would roll with that though?
I thought you were there, but not quite. Inflation is always a monetary phenomenon. Inflation is the increase in the money supply. Interest forces the need for that increase. This is the whole point of the Quantity Theory of Money, to show the link between the supply and prices, but everyone thinks interest is magicked from nothing and has no effect on the supply or prices.
Where does the interest come from? No it doesn't magically appear, it has to come from somewhere.
I went through this in a debate with Don Brash and he didn't get it either. So if you can grasp it you will put yourself ahead of him. Forget it is money and run a trade scenario with real goods in the place of money. Just two parties first, a straight trade. Then put a third party in the mix that is lending money but produces nothing. Hopefully you'll see it. Putting yourself in the scenario as a player might help, a producer of some good. That is how I demonstrated it to Don so the matter was beyond dispute. Actually the point I proved to him is that interest always causes a wealth transfer and someone always goes hungry. When I put the scenario to him he walked right into the trap with what he thought was a clever answer, but it was easy with simple math to show him who goes hungry.
Ultimately it is a bounded system, not an infinite one, which is what people forget.
Are you suggesting that if there is a commensurate increase in the right side of the equation, with an increase in the money supply (left side) but V remaining static then inflation will occur? On what basis? I would suggest that inflation would only result if the increase in money supply is more than that defined by the right side of the equation. One of the basic assumptions of the theory is that this is an efficient system, where as the reality is quite different. Losses abound. But as I have indicated interest is in effect a fee, defined within Q as you wrote the equation. Setting aside inflation, the case you are making is one the banks would love to make where they would not have to pay a fee for the use of money that is in effect not theirs (depositors funds), but we both know that the banks would expect to be able to continue charging a fee for their customers to use the credit they issue based on the fractional use of their depositors funds. As a fee, interest is not, and cannot be argued to be "magicked from nothing" any more than a lawyer or a plumber would expect their fees to be magicked from nothing. Just as a plumber and lawyer charge a fee for the use of their services, or a rental company charges a fee for the use of its products so is interest charged for the use of money that is not the property of the user. This is all defined as P.Q, being the average price and all the goods and services. If you can separate out interest as NOT a fee and therefore parasitic, then it becomes possible to redefine other charges as parasitic too, and that is a very slippery slope!
As to being part of a trade, this is really no different. If someone wanted to borrow some produce from a farmer to trade with someone else for some product that they had, would not the farmer be able to expect some payment for the use of his produce? Interest is the fee charged to someone for the use of money they didn't have, and had to borrow from someone else to achieve some goal they set for themselves, and which they expected to produce the return needed to repay the money and more. Interst is no more parasitic than any other fee or charge for services.
TLDR: The banks are taking over the US, and the US is hell, with corrupt police, courts, judges, politicians, and a financial sector that raids workers' pension funds to create more loans. They don't lend to make more goods, services or profits, they lend to make financial gains.
Scary and pessimistic, but probably true.
Sounds a lot like NZ housing.
...oil prices start today -US$4.50...
Looks like OPEC will need to trim production a lot further if they want to fight the FED.
Yes, it appears one side really has the leverage here.
I would be interested to know where the actual price floor is for various OPEC members, the Saudi's have a significant population to support on the back of that price so there must be a floor in their somewhere.
Bitcoin is teetering the next level of support is $12K if it takes a dive.
Expert analysis from Carlos..., BTC going to zero some time in the future (much like house prices).
@Baywatch .......the amount of people in NZ who think BTC will "go to zero" never ceases to amaze me. This world, with its current economic, political and energy issues, the only thing I can see "at least" keeping its value, is physical gold, silver & precious metals ....and BTC with some ETH, ADA, SOL and a couple of others.
FIAT currency is on it's way to ZERO and has been (since 1971) when the US went off the gold standard, while BTC is a FIXED supply of 21,000,000
FIXED supply that can be inflated. Bitcoin is just another fiat currency that has no value as are other crypto's. Tough to eat or trade with gold and silver. What keeps its value will be bare land and everyones favorite - Fossil Fuels.
"FIXED supply that can be inflated"..by whom ..no ones own BTC??
Value will be in productive land (not all land) and energy (not just fossil fuels)
Everything is energy. Food is energy, human lives and workforce output is energy. Physics innit.
Heard the other day it now costs in energy around USD 13K to mine 1 BTC - so if it went to 12k what would happen .....would the miners keep mining and take the dollar loss (to be recouped in the future) or just stop mining until the price went up again ?
Anyway, I would be "all in" at 13k
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