Weekend briefing; The end of 'Disneyland markets'?

Business / news

US consumer mood improves but investor mood darkens; China data improves except for housing; Germany seizes Rosneft assets; lithium cost at record high; UST 10yr 3.46%; gold up and oil stable; NZ$1 = 59.8 USc; TWI-5 = 69.5

17th Sep 22, 8:48am by David Chaston

Okahu / Jackson Bay, South Westland

Here's our summary of key economic events overnight that affect New Zealand, with news yesterday's global recession warning from the World Bank is focusing minds.

All equity market indexes have ended the week sharply lower as investor fears grow.

But consumers seem to have had enough of the 'fear' mood - they already did that. Now they seem to be feeling better about life.

In the US the University of Michigan consumer sentiment survey rose to a five-month high, driven by a sharp, recent fall in petrol price inflation. Will it last? Who knows. Will the investor fear mood last? That seems equally uncertain but they are having to swallow increasing losses. Along with their bond investor brothers, financial market losses are piling up and portfolios are shrinking in value now. The negative mood might become self-fulfilling trend in the back half of 2022.

Not helping was package and freight giant FedEx who told shareholders they expect their 2023 earnings results to be a massive -20% lower than their 2022 results on expected weak global volumes. The US won't be able to avoid blowback impacts of an international economic slowing in 2023.

In Canada, bosses at two of their largest supermarket chains say the impetus of food price rises has peaked, and it will be down from here.

China reported some key data yesterday, and some of it was unexpectedly positive. Retail sales were up +5.4% in August from a year ago, an expansion at twice the July rate. Industrial production was up +4.2% on the same basis, also beating expectations. In fact, electricity production surged in August, up almost +10% from year-ago levels. But this is still a bit of a puzzle because these 'power' rises recently are far more than can be explained by industrial activity or consumer behaviour.

The Chinese central bank fixed the value of the yuan (CNY) at 6.93 to the US dollar yesterday. But in freely-traded offshore markets, the CNH is trading over 7. If you can get CNYs out of China, there is a good arbitrage trade available now with an "easy" 1% gain on each transaction.

Chinese citizens are as heavily 'invested' in residential real estate as Kiwis, maybe even more so. But data out yesterday shows that in 50 or their 70 largest cities the prices of new housing fell in August from July. That is the most in more than seven years. More broadly, for housing resales, 56 of these 70 cities posted price retreats. The 'wealth effect' impact on vast numbers of Chinese households will be negative, and for many, disturbingly so. There may be building social disquiet.

The central bank of Argentina raised its policy rate yesterday by +550 bps in their Quixotic quest against local inflation. That takes their new policy rate to 75%. Their inflation rate is running at 78.5% however, so perhaps understandable. This is what happens when you let inflation get away.

The Russian central bank is facing "11% to 13% inflation", but it cut its policy rate by -50 bps on the basis that deflationary impacts are about to hit them hard over the next year or so. Their new policy rate is now 7.5%. Recall just six months ago it was at 20%. Fighting inflation is probably the least of their worries at present. Weak consumer demand is, they say.

In The UK, they recently announced (a very expensive) capping of energy costs for households, but left businesses to shoulder the new burdens which are expected to grow as winter develops. But now, their government is moving to bring businesses into the same subsidy regime - raising the costs to taxpayers substantially.

Meanwhile, Germany has seized control of Russian-owned energy assets in the country to shore up its energy security concerns. Russia has turned off its gas and oil taps and Germany needs the local infrastructure to operate on alternate supplies, which are starting to flow in volume, including from the US. The price of oil and gas is not rising, nor is futures pricing.

We should also note that yesterday, the price of lithium carbonate, key for EV battery manufacture, topped ¥½mln/tonne for the first time (NZ$120,000/tonne). While that may not be a record in USD, it is a notable level that has been breached. Demand is quickly exceeding supply, even though supply is ramping up quickly. EVs are only going to be for the well-off unless alternate materials can be found. An average EV requites about 10 kgs of lithium for its batteries. To supply that, you need about 55 kgs of lithium carbonate, currently costing the carmaker about NZ$6,500 per vehicle.

The UST 10yr yield starts today at 3.46% and unchanged from this time yesterday. The UST 2-10 rate curve is unchanged at -41 bps. Their 1-5 curve is little-changed at -33 bps. And their 30 day-10yr curve has fallen back to +79 bps. The Australian ten year bond is up +1 bp at 3.71%. The China Govt ten year bond is also up +1 bp at 2.69%. But the New Zealand Govt ten year will start today at 4.08%, and up +9 bps. We should also note the sharp rises in wholesale swap rates in New Zealand yesterday. Overnight they pushed up again. Our one year swap rate is now its highest since 2008, our two year. Out two year reached that benchmark in June, fell away, and is now almost back there again now.

Wall Street in its Friday session is down another -1.0% on the S&P500 in late trade which will take it to a -5.4% sink for the week. Overnight, European markets were all lower by between -0.6% in London to -1.7% in Frankfurt. Yesterday Tokyo ended down -1.1% to book a weekly loss of -3.2%. Hong Kong was down -0.9% but Shanghai closed down -2.3% booking a -3.5% weekly drop. The ASX200 ended its Friday session down -1.5% to be -2.3% lower for the week while the NZX50 ended down a lesser -0.7% to be -2.0% lower for the week.

The price of gold will open today at US$1676/oz and an +US$11 rise from this time yesterday and off its 2 year low.

And oil prices start today little-changed at just on US$85/bbl in the US while the international Brent price is still just on US$90.50/bbl.

The Kiwi dollar will open today at just on 59.8 USc and unchanged this time yesterday. For the week it has been a -1.2% devaluation. Since the start of the month a -2½% devaluation. And since the start of 2022 the devaluation has been -12½%. Against the Australian dollar we are marginally higher than yesterday at 89.2 AUc. Against the euro we are also at 59.8 euro cents. That all means our TWI-5 starts today at 69.5 and unchanged of course but still a two year low.

The bitcoin price is now at US$19,606 and another -1.1% fall from this time yesterday. Volatility over the past 24 hours has been modest at just over +/- 1.4%.

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

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19 Comments

by Audaxes | 17th Sep 22, 8:54am 1663361688

Not helping was package and freight giant FedEx who told shareholders they expect their 2023 earnings results to be a massive -20% lower than their 2022 results on expected weak global volumes.

FedEx's Troubles A Stark Symptom Of Tight Global Liquidity

The Planet Has a Eurodollar Problem, Not a Dollar Problem

by Audaxes | 17th Sep 22, 9:05am 1663362331

"No Bailout Coming" - US Energy Producers Send Ominous Warning To Europe

"It's not like the US can pump a bunch more. Our production is what it is," Wil VanLoh, head of private equity group Quantum Energy Partners, one of the shale's most prominent investors, told Financial Times.

"There's no bailout coming," VanLoh added.

"Not on the oil side, not on the gas side.

by Audaxes | 17th Sep 22, 9:23am 1663363433

Qatar cannot replace Russia as energy source to Europe: Qatari Emir

Russian LNG exports to Japan skyrocket

by swingtrader | 17th Sep 22, 9:09am 1663362562

My brother in laws power bill for his business in the UK used to be £8k mth, now it’s £25k mth. Can imagine there’ll either be mothballing businesses and a lot of furloughed staff over winter until prices improve or businesses will go bust. After surviving Covid it’ll be the last straw for many across Europe.

by speckles | 17th Sep 22, 11:04am 1663369488

So many hospitality business closing in the UK..power bills just multiple times too high..

by Foxglove. | 17th Sep 22, 11:19am 1663370376

The northern hemisphere winter is dawning & with it I suggest one of the most critical & perilous periods in European history, at least since WW2. Firstly there is the winter war, where the West would have us believe the Russians are on the run as opposed to the Kremlin proposing that all is going to plan. But if it is the former, then what extreme measures will Mr Putin be obliged to pull out of the hat to firstly avoid a humiliating defeat and secondly save his own skin. For the rest of Europe, divorce from Russian fuel inescapably signals cold winter households and unhappy citizens by the millions and getting poorer by the day for whatever energy they can purchase. Hence Germany embarking on a nationalisation, a feature scarcely contemplated since the 1930s. Adolf, a man of that time and at his peak, on securing the non aggression pact with Russia, remarked concerning, France, Britain et al, something like “now I’m going to cook them a stew that they will choke on.” Well nearly a 100 years on, another large stew appears to be simmering, well and truly.

by Audaxes | 17th Sep 22, 9:53am 1663365212

Who will run out of resources first?

by Foxglove. | 17th Sep 22, 11:18am 1663370299

Aye that is the salient point, but not only the actual resources, but industrial prowess equally. History proves it. For instance the Confederacy in the US Civil war lacked both. So too did Japan, and to a degree not really recognised Germany, in WW2. To be honest, I didn’t have that much of a handle on the scope of it myself, until I read V D Hanson’s the Second World Wars.

by powerdownkiwi | 17th Sep 22, 12:39pm 1663375163

Great post. All else being equal, the more-energised combatant will beat the lesser-energised. That is the American Civil War in a nutshell, as it is every colonisation by cannon. All are bluffing but only one side will remain standing; none if someone hits the button.

by Foxglove. | 17th Sep 22, 1:56pm 1663379764

Indeed. And there are lessons to be learnt by those so inclined. For instance in the late 19th century China was coerced by various nations of the West into the opium wars. China was known to be hopelessly equipped militarily & got done over well and truly. Later the West ushered in the horrendous genocidal invasion by Japan in 1931. Does anybody seriously need to wonder why the CCP has made damn sure nothing like that will ever recur.

by Zachary Smith | 17th Sep 22, 6:55pm 1663397743

It's all rather more complicated than that.

by middleman1 | 18th Sep 22, 9:10am 1663449034

It's a stretch to claim the west 'ushered in' the 1931 Manchurian invasion. Certainly Japans fear of being subsumed into the western pacific imperialist empire was one motivator for its expansionist campaigns but any implication that the yanks might have moral accountability for the genocidal horrors that followed, is debatable.

by Foxglove. | 18th Sep 22, 12:50pm 1663462238

The British enticed Japan into WW1 for assistance to invade & claim the German enclave Tsingtao on the Chinese mainland. The Japanese did the dirty work and the Germans put up a stout defence. So much so that after their surrender during the victory parade, when the British troops marched past the assembled war prisoners, the Germans as one, turned their backs to them. Japan was then awarded that territory, along with others such as Truk throughout the Pacific, that they fortified and cost the allies thousands of lives to subsequently claim in WW2. But if Japan had not had the foothold, by exaggeration a gifted beachhead if you like, in Tsingtao they would not have had a hard border with China from which to launch their invasion. Might have taken a while but the the earlier decisions by the Western allies certainly fall under the category of ushering, in my book at least. If the Brits had left Japan out of WW1, then WW2 would have looked a whole lot different, in the Pacific at least. Agree entirely though the architects of the atrocities that were subsequently inflicted on the Chinese population were solely the Japanese.

by middleman1 | 18th Sep 22, 1:00pm 1663462853

Tks for further insight into your reasoning. The attitude of the Japanese about that era towards the Chinese and Koreans, is interesting to observe at first hand. One quickly learns to tread carefully when the subject arises. On a recent visit I was intrigued at this inscription below an exhibit in a Japanese war museum in Hiroshima; ..... ' many Japanese soldiers died on the mainland China battlefields.... however in the incident known as the "Nanjing Massacre" the Chinese sacrifice included soldiers civilians and even children'. So, noble sacrifices to a great cause and not brutal summary executions in the scores of thousands, apparently.

by Foxglove. | 18th Sep 22, 1:46pm 1663465610

Where you been of late? Good to have you back! Yep what a boiling pot of convoluted history at that time. Some final justice in that eventually the Japanese got their comeuppance in 1939 when they were routed by the Russians under Zhukov in the region of Mongolia. The Japanese 6th army was totally destroyed. As an ironic aside, Zhukov here perfected his great encircling manoeuvres used subsequently devastatingly against the Germans, commencing at Stalingrad. The Wehrmacht hierarchy were well aware of that potential and even more so the frontline soldiers. So when Pearl Harbour resulted in the release and availability of these battle hardened Siberian forces, fear had already been sewn. Wheels of history, a series of interconnecting cogs, time over time.

by middleman1 | 18th Sep 22, 2:55pm 1663469702

Was carved up a bit by the moderators on this site, have been plying my trade elsewhere. On Zhukov, yes he became proficient in encirclement but not convinced Stalingrad is a good exemplar. Paulus was already greatly weakened and over extended, Zhukov had an overwhelming superiority of fresh troop numbers and equipment. Given an equal complement of logistics and troops I posit that a German general such as Von Manstein would have outfought him. Ditto against Monty, Eisenhower et al.

by Foxglove. | 18th Sep 22, 3:59pm 1663473588

I have here a 13 Dec 1948 Life magazine. In depth interview with Eisenhower, accounts of large personalities he had encountered including Zhukov. Understandably somewhat restrained but obvious disdain for the mass squandering of Russian troops lives, the clearing of mine fields, by forcing nearby prisoners, hospital patients & villagers through them. If I recall correctly the Germans fighting on all fronts had the least casualty rate pro rata and the Russians the worst by a country mile. Believe we would agree that elements of this have resurfaced now in Ukraine.

by powerdownkiwi | 17th Sep 22, 12:40pm 1663375244

by agnostium | 17th Sep 22, 10:28pm 1663410534

"Demand is quickly exceeding supply, even though supply is ramping up quickly. EVs are only going to be for the well-off unless alternate materials can be found. An average EV requites about 10 kgs of lithium for its batteries. To supply that, you need about 55 kgs of lithium carbonate, currently costing the carmaker about NZ$6,500 per vehicle."

Massive implications for our transport policy which is currently predicated on replacing ICE cars with EVs. Never going to happen. We need to start adapting now, cut the investment in road expansion, start reallocating road space to more sustainable modes like public transport, walking, cycling and micromobility and make sure the EVs we do get are used for car share not hogged by the rich.