Weekend briefing; A reset lower on the way

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US inventories up as sales growth struggles; Canadian jobs shrink unexpectedly; China loan growth distorted; China inflation vanishes again; UST 10yr 3.32%; gold and oil up; NZ$1 = 61 USc; TWI-5 = 70.5

10th Sep 22, 8:09am by David Chaston

Image sourced from Shutterstock.com

Here's our summary of key economic events overnight that affect New Zealand, with news rising interest rates aimed at dampening inflation are already shrinking household budget spending and altering household behaviour. The impact may not be in the household stats yet, but businesses are noticing the change.

US wholesale inventories rose slightly in July from June, but that just adds to a long string of increases. Year on year they are up a disturbing +25%. That is more than inflation can account for. Supply-chain pressure is also part of the reason. But wholesale sales slipped in July from June. So the inventory-to-sales ratio jumped, and although it is not yet back to pre-pandemic levels, companies will notice the pressure now and the risk of a de-stocking period is high - which is always a corrosive sign.

This year American online sales will rise just +9.4% to US$1 tln, the first time the growth rate has slipped into the single digits, and given inflation's surge, an unusually modest rise. Bloomberg is reporting that sellers on the giant Amazon platform are bracing for a weak upcoming holiday season and the worry that they will need to discount heavily to shift inventories.

The impact of lower order levels is being noticed particularly hard in China. In what should be their peak-season of export shipments, in fact it now looks like an off-season period. It is another key reason why containerised shipping costs are diving.

But none of this is deterring the US Fed from its focus on battling inflation, no matter what the impact on demand. Another board member called for an outsized hike in September in a speech overnight.

Canada delivered a surprisingly disappointing jobs report for August. The number of full-time jobs fell sharply in a way that wasn't expected. A small gain was expected. The move was substantial, enough to raise its jobless rate sharply too, up to 5.4% from 4.9% in July. It was a sharp fall in public sector jobs that drove the change, rather than an impact of interest rates on the private sector where employment was unchanged.

In China, new yuan loans expanded more on August than July, but then the July level was very depressed, and the August 'recovery' was less than expected. It was driven by stronger 'corporate demand' including forced financing on Beijing's orders. Household demand remained very weak. Their money supply is now growing (+12.2%pa) at three times the rate of economic activity - maybe much more in recent months.

In staying in China, after effusive official start-up claims, their carbon market trading is grinding to a halt. The need to be carbon-efficient is no longer a priority there it seems.

This weekend is Moon Festival (Mid-Autumn Festival) in China, usually a time of much travel including return to home villages (or a late holiday break). But this year authorities have issued warnings about unnecessary travel as pandemic cases grow relentlessly, across many provinces.

The inflation impetus has leaked away almost completely in China. The annualised CPI rate over the past 4 months is just +0.6%, even though they are reporting annual CPI inflation of 2.5% to August and down from 2.7% to July. Most of those gains happened in the early part of the year. Food prices are stable now. But lamb prices are rising again in August even though they fell in the last 12 months. Beef prices are hardly rising.

Producer price inflation has vanished in China, replaced by deflation now. Its been a sharp retreat and prices are falling at a rate exceeding -14% pa now. For the full year to August they are up +2.3%, and that is far below the annual +9.5% in August 2021. Current rates are 18 month lows. This sort of data makes sense of the sinking yuan exchange rate.

The UST 10yr yield starts today at 3.32% and up another +3 bps from this time yesterday and a +13 bps rise from this time a week ago. The UST 2-10 rate curve is a bit more inverted at -25 bps. Their 1-5 curve is unchanged at -22 bps. And their 30 day-10yr curve has flattened, now at +76 bps. The Australian ten year bond is -4 bps lower at 3.57%. The China Govt ten year bond is marginally firmer at 2.66%. And the New Zealand Govt ten year will start today unchanged at 3.95%, but down -6 bps from this time last week.

Wall Street will end its Friday trade with a +1.6% flourish in the S&P500 and a weekly gain of +1.9%. Overnight, European markets were positive, all up +1.4% on average which means Frankfurt ended the week up +2.0%, Paris up +1.4% and London up +1.0%. Yesterday Tokyo ended up +0.5% in its Friday session to cap a +2.4% weekly rise. Hong Kong recovered +2.7% yesterday to end their week up a mere +0.3%. And Shanghai rose +0.8% yesterday to cap a +2.5% weekly gain. The ASX200 ended up +0.7% yesterday and +1.0% for the week. The NZX50 also ended up +0.7% on Friday for a weekly rise of +1.1%.

The price of gold will open today at US$1716/oz and up +US$6 from this time yesterday but only up +US$2 over the whole week. These are almost exactly the same levers we were at a week ago.

And oil prices start today +US$3 higher at just under US$86.50/bbl in the US while the international Brent price is now just under US$92.50/bbl.

The Kiwi dollar will open today just over 61 USc and up +½c since this time yesterday. That puts it back close to last week's level. Against the Australian dollar we are down -½c at 89.2 AUc and a similar fall for the week. Against the euro we are little-changed at 60.8 euro cents. That all means our TWI-5 starts today at 70.5 and down a minor -20 bps for the week.

The bitcoin price is now at US$21,169 and a 10.2% jump from this time yesterday. That makes it a +6% weekly gain. Volatility over the past 24 hours has been extreme at just on +/- 5.8%.

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

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Source: RBNZ

Source: CoinDesk

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49 Comments

by Audaxes | 10th Sep 22, 8:26am 1662755204

US Household Net Worth Crashed By Most Ever In Q2

In the US, The Fed's Flow of Funds data issued today shows that US Households lost a shocking $6.1 trillion in Q2 - the largest quarterly loss ever (bigger than the aggregate loss reported in Q1 2020 during the peak of COVID lockdown policies around the world)...

by Kinga | 10th Sep 22, 10:27am 1662762450

Makes sense realy as i suspect its all paper wealth related to the circa 25% drop in equity prices following the extreme excess increase in H2 2021.

People definitely won't feel as wealthy even if their disposable income is little changed. That's the points for central banks though.

by Jonny.Foe | 10th Sep 22, 8:36am 1662755797

I am guessing the monetarists are getting pretty confused now that the countries cutting or holding rates seem to be taming inflation more quickly than those hiking them. I wonder if they will conclude that increased interest rates are feeding directly into prices (cost of credit) and creating wage pressures (crippling mortgage increases). Might that explain why upper quartile earnings are increasing in NZ whilst low earners have seen no earnings growth for 7 months?

Will the bank economists look at the extra $1.25bn of cash per year being paid on their bank reserves because OCR has been pumped up to 3% and ponder whether that (apparent) fiscal stimulus might actually be inflationary?

When global prices come down as the supply shock bullwhip effect fades and commodity speculators unwind their positions, and inflation starts to drop in NZ, will they question their broken models or... claim victory?!?

by Audaxes | 10th Sep 22, 9:41am 1662759712

Bank reserves lodged at the RBNZ as a balance sheet offset to the quota of government bonds purchased from said banks during QE operations are paid OCR to stabilise the official policy rate settings. Banks selling their reserves to each other at a falling interest rate towards the zero boundary is not part of stable policy outcomes.

Moreover, the current 3.0% OCR setting is still below the average 3.63% rate paid on outstanding public bond issuance. Hence financial repression.

Financial Repression is Knocking at the Door, Again

by Jonny.Foe | 10th Sep 22, 11:52am 1662767567

Yes I appreciate the LSAP / QE impact on reserves, but disagree that paying OCR on the full amount is necessary. Pretty sure the US limit payments to a max level - and why would any banks sell reserves to each other when they are swimming in them?

by Kinga | 10th Sep 22, 11:57am 1662767835

I maybe mistaken butI don't think they do sell to each other anymore, that's why in 2018 the Fed creates a new Repo market with itself and the banks.

by Audaxes | 10th Sep 22, 7:02pm 1662793341

Interest on US bank reserves is 10 bps higher than RRP cash.

by Audaxes | 10th Sep 22, 6:38pm 1662791901

US Interest on Reserve Balances

Banks that can successfully sell reserves to another eligible bank can invest in higher return assets.

by JimboJones | 10th Sep 22, 9:33am 1662759208

There will be a time lag before interest rates rises take effect, hence why the RBNZ is meant to be predicting the future not just reacting to the current situation. Rising interest rates will lower demand and hence prices eventually, probably by too much knowing the past history of the RBNZ.

by JimboJones | 10th Sep 22, 9:51am 1662760278

Realistically the central banks have very little influence on supply but they can reduce demand by taking money out of peoples pockets. Whether interest rates are the best way to do that is debatable, I wonder if some kind of variable tax rate would work better although it’s maybe difficult logistically. I take your point that they may be increasing costs to suppliers and hence causing inflation, but that should be a one off effect whereas untamed inflation will compound forever.

by Let me be Frank | 10th Sep 22, 10:06am 1662761181

The money 'taken out of peoples pockets' dosnt disappear unless it leads to defaults.

Interest is a function of growth and if the the future is zero growth or contraction there must be defaults (in aggregate).....we can delay the event through low interest rates (in the forlorn hope of a return of growth) but I would suggest that is what we have done post GFC.

False growth (or credit expansion) simply inflates asset prices to the point where all confidence and ability to delude ourselves disappears....the point we are entering.

Consider....in a no/negative growth world where does the interest payment come from?

by Jonny.Foe | 10th Sep 22, 12:19pm 1662769164

You can do without the defaults if govt spends more than it taxes (creating private sector assets). But the fundamental issue we have is one of distribution not quantum.

by Let me be Frank | 10th Sep 22, 7:35pm 1662795336

Yes distribution is ONE problem...however again the problem of differential inflation occurs...unless you are a closed economy.

by Kinga | 10th Sep 22, 12:29pm 1662769760

The interest payment comes from the use of your money to lend to somebody else. You don't need growth for this. Otherwise why would you lend your money. You want to be compensated for your risk

by scarfie | 10th Sep 22, 6:22pm 1662790972

Really quite fascinating that you believe this. But then it seems most of the population believe (incorrectly) that interest can be magicked out of thin air.

Money is a proxy for real goods. LMBF has this right, interest sets up the need for infinite growth. Low interest rates mean trouble.

by Kinga | 10th Sep 22, 9:59pm 1662803999

I understand both yours and LMBF point and don't necessarily disagree at a macro level. Can interest though not come from the transfer of wealth in a zero growth environment. Which may lead to default and inequality. I don't see that they are mutually inclusive

Maybe the point is in the end it fails?

by Kinga | 10th Sep 22, 10:31am 1662762682

Tax would be a much more targeted solution but way to political and therefore unreliable for stable policy.

It's the main context of MMT. Stimulate then Tax back the excess.

by Let me be Frank | 10th Sep 22, 10:37am 1662763070

The problem with that is it it assumes a closed and self reliant economy....how many of those exist?

by Kinga | 10th Sep 22, 12:41pm 1662770510

I don't see it as one (CB policy) or the other (tax) and disagree it requires a closed economy.

The best would be a combination of both. But politically the tax system, governments and democracy is too unreliable and constrained by short term thinking in western economies for anything like this to work.

That's why MMT can be justified on paper but in reality doesn't fit with capitalism and free market economies.

by Let me be Frank | 10th Sep 22, 7:38pm 1662795508

MMT ignores (or is ignorant of) the role of international bank credit in a global trading economy

by JimboJones | 10th Sep 22, 9:59am 1662760765

Also can you give me examples of countries taming inflation by not raising their cash rate? Forget about dodgy countries, they have got so many other factors at play. But look at say the UK that have a cash rate lower than ours and potentially 18% inflation this year. Maybe it’s completely out of their central banks control due to energy supply, but it’s hard to know when they haven’t even tried their mandated response to inflation.

by GV 27 | 10th Sep 22, 1:00pm 1662771648

There aren't any. I'm starting to wonder if this is the rainy day that might justify dipping into hitherto off-limits unmined resources under conservation land. I can't see any other realistic path to growth that doesn't involve more cows or more people - but there's a high chance that's exactly what we'll get.

by Kinga | 10th Sep 22, 1:09pm 1662772154

I agree that probably is what we will do. A change of government, which I think is likely, will no doubt improve those odds.

It would be good to find an alternative system to the consumer credit growth model we have now.

Any thoughts?

by Lanthanide | 10th Sep 22, 4:42pm 1662784937

Last time National proposed mining the conversation lands there was a massive protest and they backed down in record time.

Then again there was also a referendum that told National not to sell state assets, which they did anyway. The government has now foregone more in total dividends than the sale price that National got for the assets - another example of their amazing 'economic wizardry'.

by Rex Pat | 10th Sep 22, 7:27pm 1662794869

Are you paid by the word? Double time for Saturdays?

by Fitzgerald | 12th Sep 22, 7:21am 1662924097

Ad hominem when you have no other response?

Still got 4 likes for it though <shrug>.

by Gummy Bear Hero | 11th Sep 22, 4:17pm 1662869823

... the " conversation lands " ... ? ... Freudian slip , or the site of Labour's endless talkfests before doing nothing ?

by nightstalker | 11th Sep 22, 2:04pm 1662861847

The thinking you need to extract more of the earths resources to create growth is quite backwards.

Sure, most real world products depend on some natural resources but the exponential growth we've achieved is mainly due to technological breakthroughs which makes products better and often cheaper by a magnitude, each time they occur.

Consider e.g how much raw materials were used in a computer chip in the 80s vs what's used now.

How much resources did we need prior to microchips when everything was a bulky huge power hungry circuit?

Innovation is deflationary as the price for products is greatly reduced.

Consider how expensive the first mobile phones or mobile phone plans had been vs how cheap smartphones are now.

by the Joneses | 12th Sep 22, 7:32am 1662924755

Have you seen any charts that show resource extraction slowing? Per capita/ per unit of gdp or otherwise? Otherwise your point is quite academic.

by HouseMouse | 10th Sep 22, 1:14pm 1662772477

There are examples of countries not hiking interest rates and, while not taming inflation, not seeing inflation any worse than NZ.

Japan is the obvious example.

by MLSmith1 | 10th Sep 22, 6:39pm 1662791981

Japan a nation coming from a pre-Covid base of zero growth (for decades)… wow!

by Fitzgerald | 12th Sep 22, 7:16am 1662923800

because OCR has been pumped up to 3%

Is the OCR really being pumped up? Or is it rising to chase the market rates up?

A philosophical question perhaps. It seems to me that with swaps rising so far and so fast, and with all the banks hiking their mortgage rates anyway, that the RBNZ has no choice but to raise the OCR or lose all credibility.

What else could the RBNZ do? It would seem that they don't have the ability to keep the OCR at super low levels when the market is saying loud and clear that rates must rise.

by Audaxes | 10th Sep 22, 8:46am 1662756393

Emerging Markets Burn Through Currency Reserves as Crisis Risks Grow

It's not rate hikes: "Emerging-market central banks have also been raising interest rates aggressively over the past year, but that hasn’t stopped the exodus of foreign cash and pressure on their currencies." Global $ shortage, but no one will say it. Link

Collateral Chains Are the Real Tightening

Europe’s Central Bank Rules Out Liquidity Support For Energy Firms

India's China Syndrome

by Let me be Frank | 10th Sep 22, 9:02am 1662757347

Not 'money' but the willingness to take risk....aka credit.

Ultimately Central banks have no control over that.

by lonewolfnz | 10th Sep 22, 8:56am 1662757013

"The bitcoin price is now at US$21,169 and a 10.2% jump from this time yesterday. That makes it a +6% weekly gain. Volatility over the past 24 hours has been extreme at just on +/- 5.8%." - surely the volatility is +/- 10.2% at least if it is up that much in 24 hours?

by JimboJones | 10th Sep 22, 9:25am 1662758722

Can anyone tell me why US oil is so much cheaper than Brent these days? I’m sure there only used to be a dollar or two difference. Why would US oil producers sell locally at $86 when they could sell international at $92? Shipping costs?

by Audaxes | 10th Sep 22, 9:28am 1662758881

The record-high release of crude oil from the U.S. Strategic Petroleum Reserve will end as scheduled this fall, the White House's Special Presidential Coordinator for International Energy Affairs Amos Hochstein told Yahoo Finance. Link

by Kinga | 10th Sep 22, 10:36am 1662763019

With the US government moving more and more to a command economy maybe they know they will forced not sell overseas if they don't behave just like the tech sector

by bw | 10th Sep 22, 11:52am 1662767526

A reprieve of sorts.

The Bank of England has delayed a decision on whether to sharply increase interest rates and begin offloading its £838bn pile of government debt as the fight against inflation is put on hold following the death of Queen Elizabeth II. Threadneedle Street said it would postpone the next announcement on rates by a week to mark a period of national mourning. Economists are braced for an increase of as much as 0.75 percentage points to counter surging prices, the biggest rise since **Black Wednesday in 1992.

** As a reminder of back then:

"John Major talked about the possibility of interest rate rises beyond the already sky-high 10%. At 11am they agreed to push up interest rates to 12%. Major then insisted interest rates should rise further to 15%."

by Wrong John | 10th Sep 22, 12:10pm 1662768606

North American oil rig counts are high (relatively speaking) & as posted, America's oil reserves are being used. This is a play by the Biden Administration to lower the price of ''gas'' to coincide with the mid-term elections, of which some early voting has already begun. The behind-the-scene Democrats are the puppet masters with Biden the chief puppet (as in POTUS). Powerful people like Gates & Soros & co are the ones really pulling the strings, backed up by the big media players right across the land. Americans relying on their MSM for news are only told what the puppet masters will allow them to hear. A similar story is playing out here in NZ. Democracy has been hijacked by powerful socialists amongst us with the problem compounded by the weak right-of-centre choices available. We must remember this has been 70 years in the making from the universities to the media to the state, who by & large, are now in total control. Democracy as we knew it, has entered its end game, or a zombie state if you prefer some drama. This doesn't end well.

by linklater01 | 11th Sep 22, 9:40am 1662846020

Wrong John-Yes!

"Powerful people like Gates & Soros & co are the ones really pulling the strings", This sounds like the New World Order-again. Explain please just what power Soros is meant to have?

by interesting1234 | 11th Sep 22, 2:06pm 1662861996

The best we can do now is talk about this to our peers and help everyone understand the reasoning behind the eradication of democracy we are seeing, in the hopes that they will vote pragmatically in the next election away from the standard blue and red pendulum we have seen for decades and make a meaningful and historic change in this country for the better. Education is the most valuable asset there is, the more we have as a general population, the more we will prosper.

by Gummy Bear Hero | 11th Sep 22, 4:07pm 1662869227

Just heard on New Stalk ZB , Dr Robert Patman talking with Tim Beveridge about Ukraine : to date , 10 Russian generals & 50 000 troops have been killed ... Russia is a laughing stock in China , since Putin has been begging North Korea for military arms ... Putin's days are numbered , this cannot end well for him ...

by tim52 | 11th Sep 22, 6:04pm 1662876281

"Putin has been begging North Korea for military arms"

Not quite sure of your stance here but it does show what hacks the experts and Media are. No one should believe that.

Did he even know that Ukraine has broken the Russian front near Kharkov? (So far this a real Ukraine win)

by Gummy Bear Hero | 11th Sep 22, 7:05pm 1662879935

.. my " stance here " is repeating ( probably badly ) the words of Prof. Robert Patman from Otago University ... I'd believe his assessment of the current situation ...

by tim52 | 11th Sep 22, 9:40pm 1662889259

Why would Russia ever need arms from NK? The rest of the stuff does not make sense either but this one is so absurd everyone should question it.

No NK arms have shown up in Russia, NK got all most of its good stuff from the USSR, as poor as the MSM want to make Russia look NK is much poorer yet somehow it can develop relevant weapons ... NK has heaps of spare weapons, right?

The NK connection is they want some NK builders to help rebuild the Donbas.

by stefanblaise | 11th Sep 22, 4:10pm 1662869454

Word is that in middle of the market vendors and purchasers are trying to get people up and down the chain to agree to similar reductions so everyone can move on. Good for fhbs and bad for top of the chain sellers who aren't buying, but they probably don't need the cash as badly at the fhbs, and paper wealth is abstract anyway once you get above about $10m. Looks like the recent wealth redistribution is being re-redistributed.

by Kate | 11th Sep 22, 6:48pm 1662878929

Yes, I'd recommend that if you make an offer these days conditional on selling a home - go with the same agent as the vendor of the place you want to purchase. And, if upsizing - pay no more than the difference between your RV and the vendors RV. That way you know you aren't going backwards in making the transition upwards in the market - and you can sell at the same margin above RV that you paid.

In a downwards market you want to be ruled by relativity (head) - not heart.

by Fitzgerald | 12th Sep 22, 8:04am 1662926683

Someone genuinely ruled by head, not heart, would rent for a while.