Breakfast briefing: Commodities rise as US debt issues fade

Business / news

US gets debt deal done; US labour market stays strong; US PMIs weaken; China debt in focus; Aussie house price rises gain momentum; UST 10yr 3.61%; gold and oil up; NZ$1 = 60.7 USc; TWI-5 = 69.2

2nd Jun 23, 7:24am by David Chaston

Here's our summary of key economic events overnight that affect New Zealand, with news markets want to move on from the US debt-ceiling debate but there are details to deal with.

In Washington DC, the House of Representative has approved the Biden-McCarthy debt deal compromise. It is unlikely to fail in a Senate vote soon. The Biden Budget is largely intact in the end. All eyes will now turn to the bond markets as the US Treasury races to raise the necessary funds to avoid default. They will come at a higher cost than if these theatrics hadn't played out.

US-based employers announced 80,089 cuts in May, a +20% increase from the 66,995 cuts announced one month prior. This tally is rising; so far this year, companies have announced plans to cut 417,500 jobs, a 315% increase from the 100,694 cuts announced in the same period last year. But these layoffs are tiny compared to both their overall labour force, and even the expansion of those employed.

The pre-cursor ADP jobs report came in way stronger than expected, reporting private payrolls expanded +278,000 in May when +170,000 was expected. But they did report pay growth was slowing. Markets are still expecting tomorrow's non-farm payrolls report to deliver +190,000 extra jobs for May.

American initial jobless claims totaled 208,000 last week, little-changed from the prior week and really no evidence their labour market is tightening. There are still just 1.6 mln people on these benefits.

However on the factory floor, things are tightening. There were two factory PMIs out overnight and both reported a contraction in activity. New orders are slowing and this weaker demand is dragging on performance. The widely-watched ISM Manufacturing PMI retreated further as expected to a seventh consecutive month of contraction. However, production rose, employment rose and at a faster pace, and price pressures eased. The internationally benchmarked Markit PMI for the US reported similar conditions.

In China and in a bit of a surprise, the private Caixin factory PMI actually expanded in May, in contrast to the official version which said the sector contracted further. No analyst picked the Caixin PMI reversal. Certainly, the Beijing stats masters aren't gilding anything this month.

Belt & Road project bad debts are piling up. New analysis shows Chinese overseas loans went sour at a far worse rate in recent years as the pandemic and inflation took a toll on the economies involved in Beijing's signature infrastructure initiative. Almost US$77 bln in debt was renegotiated or written off from 2020 to 2022. This figure is more than four times the US$17 bln in problem debt for the preceding three years. These write-offs and write-downs however tie these countries even tighter to China.

Debt levels are a key focus at home too, especially those owed by local governments. A leading Chinese economist says China could be courting disaster if it permits local governments to default on their debts as part of a strategy to encourage greater fiscal discipline.

The central bank of Sri Lanka caught markets off guard by cutting its key rates by -250 basis points yesterday (Thursday). It said inflation is falling much faster than expected and the price outlook turning more benign. They cut their two benchmark rates to 13% and 14% respectively.

In Europe, consumer inflation retreated somewhat although it remains high. It fell to 6.1% in May, down from 7.0% in the previous month and below market expectations of 6.3%. A year ago, it was 8.1%. Core inflation is now significantly lower, only 5.3% in May 2023.

In Australia, house price rises are gaining momentum. They rose +1.2% in May from April, and annualised rise exceeding +14%. In Sydney that annualised rate is nearer +20%, the city’s highest monthly gain since September 2021.

Global container freight rates slipped yet again last week. Bulk cargo rates fell too.

However, global air passenger travel is in a strong recovery mode, now back to 90% of pre-pandemic levels. But international travel is lagging that.

The UST 10yr yield will start today at 3.61% and down another -2 bps. Their key 2-10 yield curve is little-changed at a -72 bps inversion. Their 1-5 curve is still at -144 bps inverted. And their 3 mth-10yr curve is more inverted at -161 bps. The Australian 10 year bond yield is now at 3.60% and little-changed. The China 10 year bond rate is also little-changed at 2.72%. And the NZ Government 10 year bond rate is at 4.38% and up +3 bps from this time yesterday.

Wall Street opened their Thursday session with the S&P500 up +1.2% in a smallish debt-relief rally. European markets were all higher, bookended by Paris up +0.5% and Frankfurt up +1.2%. Tokyo ended its Thursday session up +0.8% on the day. However Hong Kong slipped -0.1% yesterday and Shanghai was unchanged. The ASX200 ended its Thursday session up +0.3%. But the NZX50 bested that and rose +0.9% yesterday.

The price of gold will start today at US$1977/oz and up +US$10 from yesterday.

And oil prices are up +US$2 today from yesterday at just under US$70.50/bbl in the US. The international Brent price is now just over US$74.50/bbl.

The Kiwi dollar starts today +½c firmer at 60.7 USc. Against the Aussie we are -½c softer 92.2 AUc. Against the euro we are unchanged at 56.4 euro cents. That means the TWI-5 is up +10 bps at 69.2.

The bitcoin price is marginally lower today at US$26,971 which is down a mere -0.3% from this time yesterday. Volatility over the past 24 hours has been modest at just on +/- 1.3%.

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

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53 Comments

by nktokyo | 2nd Jun 23, 7:36am 1685648216

My prediction that governments were going to "use" inflation to get on top of their COVID debt in the long term is looking good 👍

It wasn't a long think; they have no other resource except election-losing austerity or capital-flight-inducing tax hikes.

by Jonny.Foe | 2nd Jun 23, 7:37am 1685648265

No other resource... apart from central banks that can directly finance their spending? You know, like when we fought wars, constructed huge hydro schemes, or built tens of thousands of homes in a few years?

by nktokyo | 2nd Jun 23, 7:55am 1685649326

Ah, you refer to items which once bought contribute to the long term wealth and prosperity of the nation for generations to come?

Look at what the current government has achieved in a few years with massive borrowing... nada. Inflation it is.

by powerdownkiwi | 2nd Jun 23, 8:10am 1685650248

Jfoe - you haven't read, or thought about, anything I've argued over the years?

Nobody 'finances' anything. Or 'funds' anything. What is done, is that a portion of the energy-flow, and of the resource flow, is apportioned to some project; those dams are made using finite fossil energy, and real materials (some finite too). There was a period from WW2 until somewhere in the 70s, when there was enough surplus good-quality energy, enough quality resource, and few enough contending for same, that we could do those things. We struggle now; look at the Dunedin hospital, or its white-elephant stadium.

An example, is all that heart rimu (they ran out of heart kauri) that went into those state houses - we ran the resource out. Now we build with glorified cardboard. The rate we used the rimu can be described in one word: unsustainable.

There is enough quality energy to stagger on for about a decade, but the burning of it is hitting us in other ways, and the resource quality/contention problem will escalate. We need a new approach; no Party is offering one.

Central Banks cannot solve the physical dilemma... they have no 'tools'.

by Sam Bridgman-Smith | 2nd Jun 23, 9:26am 1685654765

“We need a new approach; no Party is offering one.”

In one of Peter Zeihan’s books writing about system flaws re capitalism, the author argues that we need a new ‘ism.

If I remember correctly, he didn’t know what that ‘ism’ would look like.

It wasn’t the feel good book of the year!

by murray86 | 2nd Jun 23, 10:55am 1685660111

That's a point that I've been suggesting for a few years now. i suggest the 'ism' should be going back to democracy. If you consider what all the 'isms' have done is they have consolidated power and privilege into an elite class, while oppress the rest. The oppression's of communism are obvious, capitalism less so as anyone can aspire to being rich, but the reality in a capitalist world of finite resources, wealth only comes from some one else's seat and labour, usually grossly under paid. Thus it is not much different from communism. Democracy is about all the people in a society. Lincoln's words at Gettysburg really states it very well; "For the people, by the people, of the people". Governments have forgotten who they serve and end up worshipping at the altars of wealth and power to the detriment of the people. Thus greed suppresses all else.

by Jonny.Foe | 2nd Jun 23, 9:33am 1685655216

I don't disagree with you on this point (ever). What matters is the real resources - the timber, the energy, the people with the right skills. My point is simply that by focusing on how we 'find the money' we end up with dumb financing arrangements that allow rich people to make more money out of being rich (which is then used for gross over-consumption). Any strategy to achieve a more sustainable NZ (and I share your pessimism) will rely on using money to secure the real resources to do the work.

by rastus1 | 2nd Jun 23, 10:17am 1685657837

Not all rich over consume. Example the lifestyle of Warren Buffet.

They use capital to create technological efficiencies and improvements to our lives. Strip them of wealth and who will do this?

Wellington bureaucrats?

by ChrisOfNoFame | 2nd Jun 23, 11:52am 1685663575

Nice try defending the rich.

If we strip them of wealth but leave them with access to lending & technologies - many will just keep going while many others will rise to fill the gaps left by the wealthy that just give up. Human nature. A good historic example of this are the early communist periods in many countries (before the ruling communists became corrupt and/or power crazed) where people just kept innovating and delivering results even though they weren't actually being remunerated much for it. Many people - quite a lot actually - become exceptional for the fun and/or challenge of it - and in some cases, just to prove the status quo is wrong.

Many of the long-term rich have such low ROEs/ROIs it's money locked up and wasted. ('Nother subject.)

by kiwikidsnz | 2nd Jun 23, 12:22pm 1685665330

"...people just kept innovating and delivering results even though they weren't actually being remunerated much for it. Many people - quite a lot actually - become exceptional for the fun and/or challenge of it - and in some cases, just to prove the status quo is wrong."

In the end all they likely proved is that they got taken for mugs, as usually happens in capitalism as well as always in communism.

"Meet the new boss, same as the old boss".

Everyone owes it to themselves & their families to charge the maximum the market will bear for their contribution.

by agnostium | 2nd Jun 23, 12:25pm 1685665528

Everyone owes it to themselves & their families to charge the maximum the market will bear for their contribution.

Proven to have disastrous consequences for wider society cohesion. No good trying to maximise the amount your family has if it results in societal/ecosystem collapse.

by kiwikidsnz | 2nd Jun 23, 4:09pm 1685678967

The inconvenient truth is that all the so called "societal/ecosystem", socialist welfare policies & the entire public sector are ultimately funded by capitalist profits that are providing all the jobs, wages, salaries, taxes, etc.

by The Person | 2nd Jun 23, 10:36am 1685658970

The grain on Rimu and Kauri is more pleasant to my eye than Pine, but otherwise are they any better than pine from a functional perspective? They are still just softwoods that rot and i'm endlessly treating the Rimu and Matai at my place with chemicals to kill the borer. At least the pine replaces itself in 25 years.

by Zwifter | 2nd Jun 23, 12:19pm 1685665167

Pine is basically a weed. It grows so fast and without massive amounts of treatment it falls to bits. Every bit used in a house should be H3 treated minimum. Piles need to be fully set in concrete, which should be raised to avoid them sitting in water and H5. We only build houses to last 50 years if your lucky.

by The Person | 2nd Jun 23, 3:35pm 1685676922

But is Rimu any better? If you don't treat native wood, it rots just as fast in my experience. All my matai weatherboards, where the ground had built up over the years to touch the wood had rotted away. Softwood just can't handle constant moisture, doesn't matter if it's Pine or Rimu.

by Nzdan | 3rd Jun 23, 7:49am 1685735375

As far as I can see from a quick google search, timber wasn't treated until 1952 in NZ.

Our house was built in 1925, Rimu flooring all throughout with no signs of rotting.

The Rimu heartwood is very durable, being resistant to rot and insect attack.

https://naturallywood.nz/the-wood/

by The Person | 4th Jun 23, 11:42pm 1685878958

flooring wouldn't generally rot as it's dry. My native floorboards only rotted in the bathroom and kitchen. Window frames rotted where the undersides were left unpainted so the moisture could get in. Weatherboards rotted when in contact with the ground. Pine is no different.

Plenty of my Rimu trimwork had borer.

by Eschaton | 2nd Jun 23, 12:07pm 1685664457

The tool needed is sound non inflationary money.

by bw | 2nd Jun 23, 7:42am 1685648565

It could be the opposite? They used Covid to get on top of the deflationary forces that were (and still are, actually) in evidence.

What better way to spur Inflation than to shovel liquidity into a deteriorating Debt based system than to allocate huge globs of it to a pacified, home-bound, non-productive populace? Let's face facts - they spent the previous decade trying to achieve what Covid did, to no avail; 0% Debt rates and all.

by chebbo | 2nd Jun 23, 7:36am 1685648175

In Australia, house price rises are gaining momentum. They rose +1.2% in May from April, and annualised rise exceeding +14%.

Gotta love those annualised statistics:

https://xkcd.com/605/

by nktokyo | 2nd Jun 23, 7:39am 1685648379

Everyone does this to back up their own narrative. I think rents are about to jump looking at recent trends, the counter is "well over 12 months we are....", which ignores omnicron, travel bans, a now collapsed building boom and no immigration.

REINZ does this also with their monthly stats :-)

by HouseMouse | 2nd Jun 23, 7:50am 1685649018

Re: rents - I think it’s going to depend a lot on the economy.

if we avoid recession or only have a mild recession, net migration numbers will remain solid.

If we go into a moderately bad recession, which I still think we will, then net migration levels will be much lower and so will pressure on rents.

Despite lots of horrible indicators the economy is holding up ok so far, which I am a bit perplexed by I must say.

by nktokyo | 2nd Jun 23, 7:51am 1685649106

The slowness of the building crash has me confused. I give it 8-12 weeks, tops.

by HouseMouse | 2nd Jun 23, 7:59am 1685649570

Yep confusing. It’s dropped away much quicker in Aus, with very similar factors at play. Maybe it won’t be nearly as bad as we thought, although I doubt it

With our longer lockdowns did people accumulate more capital?

by HGWR | 2nd Jun 23, 9:37am 1685655451

Outside of Auckland we really didn't spend much time in lockdown - certainly far less than Melbourne!

by KBKIWI | 2nd Jun 23, 11:00am 1685660456

It’s because there isn’t an industry wide building crash: there is definitely a huge decrease in residential, but commercial/industrial/public housing/infrastructure build is still humming with a shortage of skilled staff. So while some housing developers may fail, all the employees have plenty of jobs to walk into, so there wont be a hit to the economy from it. In fact the supply of workers may decrease inflationary pressure on the rest of the building industry (especially as excess demand for building materials for the industry can be alleviated from lower residential build demand)

by blobbles | 2nd Jun 23, 9:53pm 1685699599

Kainga Ora are the chosen government department currently. They get virtually unlimited funds and access to credit cards.

by Flying high | 2nd Jun 23, 8:05am 1685649912

Maybe a few things holding housing up from total callapse... the non resale markit, companies doing new rentals and the gubmint doing social houses

The CC floods should have destroyed demand from housing buyers. Why would a buyer risk their capital and then lose the house in the next floods or cliff fall.

Now vested interests are trying to say the problem is the slash not the rainfall. Just to divert buyers attention. Hahha that won't work 🖕

by HouseMouse | 2nd Jun 23, 8:06am 1685649978

State housing is a tiny share of residential construction so I doubt that’s having much influence.

I have observed that some places have been reluctant to let employees go, knowing how hard it is to get people, even as work is drying up. But that can only be absorbed for so long

by Flying high | 2nd Jun 23, 8:31am 1685651493

Its bigger than you're giving it credit. Along with conpanies doing fantasy ideas of build to rent longterm.

Haha no capital gainz means the rents have to be through the roof, only dumbnuts and KO will pay it

by HouseMouse | 2nd Jun 23, 8:10am 1685650229

Kainga Ora consents have been 5-7% of all Auckland consents over the past couple of years, pretty small.

by Flying high | 2nd Jun 23, 9:08am 1685653699

I think your forgetting KO sponsored builds they pick up on handover, paying mega backs to private devlprs

by bw | 2nd Jun 23, 8:10am 1685650203

"US PMIs weaken". Here we have a long weekend ahead of us. Who wants to go into it Long of anything?

Now that the...economy is totally dependent on trillions of dollars in stimulus and speculative gains reaped from the stimulus, there is no Real Economy left to pick up the pieces when the credit-stimulus-speculation bubbles all pop..... All this "free money" fueled a dependency on speculation for "growth," a dependency that has hollowed out the economy....Debt and stimulus tracing parabolic ascents cannot end well. Eventually they collapse under their own weight.

https://www.oftwominds.com/blogjun23/stimulus-economy6-23.html

by Uninterested | 2nd Jun 23, 8:27am 1685651237

I thought that the debt deal ransom type thing has occurred no matter who is in power. eg From memory Trump wanted more dollars to pay for the wall but that was stymied by the Democrats so he had to use money earmarked for military budget? Presumably Davids comments about the debt to be raised being at a higher price due to the theatrics applied back then too...

by powerdownkiwi | 2nd Jun 23, 8:42am 1685652136

I mentioned yesterday, the thing David omits: This is the first hegemon based on debt. Ever.

Never been done before, and there won't ever be another. Nor can it be reconciled (or it would have been).

Quo vadis?

by The Person | 2nd Jun 23, 3:38pm 1685677095

I can't recall the Democrats ever taking it so far that the markets are worried. The republicans only care about fiscal prudence when the democrats are in charge. Under trump they had no issue making the federal budget ever more unsustainable.

by M0ralHazard | 2nd Jun 23, 8:40am 1685652054

"These write-offs and write-downs however tie these countries even tighter to China."

I thought that was the whole idea in the first place?

by Uninterested | 2nd Jun 23, 8:48am 1685652522

Yep if you do a belt and road project you are forever tied to China.

Unless you just default and don't pay a cent more like Evergrand did to Western "investors"!

by Flying high | 2nd Jun 23, 9:04am 1685653480

Ikea finally on the way: Building begins at Sylvia Park

https://www.nzherald.co.nz/business/ikea-finally-on-the-way-building-be…

LOVE THIS

by IT GUY | 2nd Jun 23, 9:23am 1685654586

This will be a shake up for Briscoes etc Ikea is better value for money then a lot of NZ Retailer offerings, as long as you like flat pack

by Advisor | 2nd Jun 23, 10:36am 1685659010

Briscoe's posted a mindboggling ~29% return on equity in FY22, showing that the non-core retail sector might also fare better for consumers with some more competition.

by J.C. | 2nd Jun 23, 10:56am 1685660184

Ikea finally on the way: Building begins at Sylvia Park

People will go to there just for the cheap subsidized meatballs that Ikea supplies to get people in the door.

by rastus1 | 2nd Jun 23, 9:13am 1685653986

Looks like Greymouth and surrounds might have some properties requiring some of this cyclone bailout stuff....

We are all going to be compulsory insurers of the uninsured and uninsurable.

by ChrisOfNoFame | 2nd Jun 23, 11:56am 1685663812

Something is cooking down there but I've yet to find out what. Or maybe I do know but have discounted it as extremely unlikely?

by The Person | 2nd Jun 23, 10:26am 1685658386

Yesterday David claimed the clean car discount wasn't stopping us buying gas guzzlers.

A deeper dive at the data reveals we have settled back at about 5000 gaz guzzlers a month vs 10000 before the scheme. Or another way of looking at the data through the before-the-tax peak and after-the-tax trough is that we "have bought roughly 48,000 fewer gas guzzlers than normal since 2021."

https://www.stuff.co.nz/national/the-whole-truth/132086902/the-whole-tr…

by KBKIWI | 2nd Jun 23, 11:07am 1685660861

These gas guzzlers are very expensive vehicles (even before the clean car tax). Most people use debt to finance these gas guzzlers, and as such the cost of these vehicles has shot way up over the last 12 months as auto financing has become more expensive, while at the same time everyone’s mortgage payments have also increased substantially. I would say that has had far more impact on sales than the relatively small clean car tax on these.

by The Person | 2nd Jun 23, 3:43pm 1685677421

Yes that's a good point to take into consideration. But not all luxury vehicles are high emitters. Plenty would fall into the medium ban that get neither a rebate nor a fee, and the sales of those is basically unchanged. Only the high emitting vehicles have come down.

If the drop was purely down to finance costs, I would expect that to affect sales at all price points, as finance is not exclusive to luxury vehicles.

by J.C. | 2nd Jun 23, 10:33am 1685658830

Interesting read on a young Aussie investing with a not-too-daring approach and achieving returns that are unlikely to be on offer in Nu Zillun'.

Meet Jackson: the 25-year-old generating over 17% pa in compound returns.

He started off dabbling in managed index portfolios, before moving on to do it himself. While he's modest about his success, I think Livewire readers would agree that generating 17.3% in compounded annual returns over the past five years, while only in his mid-20s, is hardly to be sniffed at.

Simply put, I have a core/satellite strategy, where I hold the majority of my portfolio in broad-market index funds across Australia and the US and the remainder in several direct equities that I have a strong conviction will perform well. Bar a significant life event down the track, such as buying a house, I plan to hold all assets for the long term, with the view to be very slow to sell - if ever.

https://www.livewiremarkets.com/wires/meet-jackson-the-25-year-old-gene…

by KH | 2nd Jun 23, 11:02am 1685660528

The trouble is our most unproductive nest sitter, the civil service, are the ones in charge of challenging the monopolies. And they have no idea there is a problem

https://i.stuff.co.nz/opinion/300894424/josie-pagani-dont-waste-a-good-…

by Wrong John | 2nd Jun 23, 12:05pm 1685664356

The civil service have no idea about anything.

by agnostium | 2nd Jun 23, 12:31pm 1685665882

The civil service runs and manages all the institutions that keep society ticking along. If you want to experience what no/bad civil service looks like head to a failed state and then come back and make that comment.

Without the civil service you'd not survive. Libertarian uniformed claptrap.

by dumbthoughts | 2nd Jun 23, 2:15pm 1685672117

Found the civil servant (I joke, I joke)

Truth is always in the middle. We have to have some civil service, because you can't just have nurses without the people who organise the nurses' payroll, or you can't have teachers without the people who make sure there are enough classrooms and so on.

By the same token, it seems clear as daylight to anyone who isn't knee deep in the civil service sphere that there has been an unyielding growth in the number of nebulous positions that don't seem to add much value while often enjoying superior pay to the frontline workers, and despite this growth the actual results society enjoys seem to be worsening. Think about how many "policy advisors" there are ... when was the last time we got any good policy from anywhere?

by KH | 2nd Jun 23, 3:16pm 1685675785

So you did not read the article then ?