Weekend briefing: Inflation's trajectories vary widely

Economy / news

US income and spending data in a virtuous zone; Japan starts transition out of ultra-loose monetary policy; China trapped; EU in a tough spot; RBA faces dilemma; UST 10yr 3.96%; gold and oil up; NZ$1 = 61.5 USc; TWI-5 = 69.7

29th Jul 23, 8:28am by David Chaston

The environmentally important Waituna Lagoon, Southland. That is Bluff Hill in the background.

Here's our summary of key economic events overnight that affect New Zealand, with news the unexpected fall in Australian retail sales creates a tough dilemma for the RBA while inflation stays way above their target.

But first, the parallel inflation measure the US Fed prefers shows that inflation is easing there, but also not yet back to its target range. Core PCE prices, which exclude food and energy, went up by +0.2% in June from May and in line with market expectations. The annual rate rose by +4.1%, the lowest since September 2021 and less than market expectations of +4.2%. When including food and energy costs, the PCE price index rose +0.2% from the previous month and +3.0% from June a year ago, the lowest increase in 27 months. The headline rate fell far faster than the core rate because oil prices decreased sharply.

Meanwhile personal income rose +5.5% from year ago levels, and personal spending rose +3.7% on the same basis. Household savings rose. They seem to be in a goldilocks period. Apparently Bidenomics works as advertised.

The Bank of Japan tweaked its monetary policy framework on Friday, providing more flexible bandwidth for government bond yields to fluctuate. Long-term interest rates rose sharply in the bond market ahead of the policy announcement, with the 10-year yield crossing the BOJ's ceiling of 0.5% for the first time in more than four months. The central bank kept the range in which it guides 10-year Japanese government bonds - 50 basis points above or below 0%. In a statement, the central bank added new wording, saying "it will conduct yield curve control with greater flexibility, regarding the upper and lower bounds of the range as references, not as rigid limits, in its market operations." They are clearly transitioning to a less ultra-loose policy place now.

In China, new data released for the June quarter shows that household mortgage balances were lower than in March as borrowers prioritised paying down this debt and took out much less new home loans. That is the first time that has ever happened. Rising household saving and aggressive deleveraging will make it harder for their economy to expand. When households lack confidence to invest and expand, it is then all down to the private, and especially the government sector. Their "dual circulation" strategy is failing. The pressure is on Beijing.

Taiwan said its economic activity (GDP) rose +1.5% in Q2-2023 to be +7.0% higher than a year ago. These results were better than expected, and interestingly outshone the mainland China results.

EU sentiment continued its decline in July, with both consumer and business sentiment easing. Employment expectations are down too.

German economic activity was unchanged in the June quarter after falling -0.1% in the prior quarter. Technically that isn't two consecutive quarters of decline so no 'recession'. But it isn't a great result and Q2-2023 has ended down -0.6% from the same quarter a year ago so no way can you say that is progress.

German inflation slowed to +6.2% year-on-year in July, down from +6.4% in the previous month and in line with market expectations. It was slightly lower in May so that suggests stubborn embedding at these levels. Which is why the ECB needs to keep the pressure on.

In Australia, cost of living pressures are being felt in their retail trade, with retail sales unexpectedly falling in June and by -0.8% which was enough to mean that there was no gain in retail trade in Q2-2023. And they were only up +2.3% from a year ago. This means, because they have inflation at 6.0% there are 'real', volume reductions in retail turnover there.

Australian producer prices rose at just a +2.0% rate in Q2-2023 from Q1. Year on year they were up +3.9%, which is a fast slowing from the +5.2% in Q1 on the same basis. That confirms the recent shift lower.

Staying in Australia, Victoria, which has the highest use of residential gas in Australia, said it will ban all new homes that require a planning consent, from connecting to gas.

The RBA will review its policy rate next week again (Tuesday) in its monthly schedule and analysts are coming to the expectation another +25 bps rise will be announced, taking their policy rate to 4.35% which will be its highest since 2012. But the pressure will be on to avoid another rate rise especially given the retail sales decline.

[And, are we the new "lucky country"?]

The UST 10yr yield will start today at 3.96% and easing -5 bps from this time yesterday after the big run-up then. A week ago it was at 3.84%, Their key 2-10 yield curve inversion has eased marginally to -93 bps. Their 1-5 curve is holding at -119 bps. And their 3 mth-10yr curve is still at -140 bps. The Australian 10 year bond yield is now at 3.99% and down a minor -1 bp from yesterday. The China 10 year bond rate up +1 bp at 2.69%. The NZ Government 10 year bond rate is up +8 bps from yesterday to 4.79%. A week ago it was at 4.69% so a big move up.

On Wall Street, the S&P500 is up +1.0% in Friday trade and up +0.9% for the week. Overnight, European markets were firmer but really little-changed with only minor gains on the day. For the week London rose a modest +0.4%, but Frankfurt was up +2.1% and Paris was up +1.0%. Yesterday Tokyo ended down -0.4% for a modest weekly gain of +0.3%. Hong Kong rose another +1.4% in Friday trade to be a spectacular +5.6% higher in a week. Shanghai ended up +1.8% to be +3.8% up for the week. The ASX200 ended its Friday session back down -0.7% but that booked a +1.2% rise for the week. The NZX50 was unchanged on the day and unchanged for the week in a forgettable run.

The Fear & Greed is still way over in the 'greed' zone.

The price of gold will start today at US$1960/oz and up +US$12 from yesterday, but very similar to levels both one and two weeks ago

And oil prices are up another +50 USc at just over US$80/bbl in the US. The international Brent price is now just over US$84/bbl. But these levels are +US$3 above week ago levels (+3.9%).

The Kiwi dollar starts today almost -½c lower at just on 61.5 USc and very little different to week-ago levels. Against the Aussie we are firmer at 92.5 AUc. Against the euro we are down -½c at 55.9 euro cents. That all means the TWI-5 has slipped -20 bps to 69.7. A week ago it was at 69.5 so +20 bps higher than then.

The bitcoin price has firmed slightly again since this time yesterday, still in its yoyo pattern. It is up +0.3% and now is at US$29,318. A week ago it was at US$30,023. Volatility over the past 24 hours has remained low at just over +/- 0.7%.

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

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32 Comments

by Audaxes | 29th Jul 23, 9:24am 1690579492

Meanwhile GDI diverges from GDP.

by Audaxes | 29th Jul 23, 9:28am 1690579731

"Bidenomics" Is A Fraud Based On Deliberately Misrepresented Stats

by Audaxes | 29th Jul 23, 9:43am 1690580598

..I think the Federal Reserve reports that half the Americans don’t have any net worth at all, zero savings. And I think even for more prosperous Americans, they may have $5,000 in net worth, you go up a little bit to 50,000. There just isn’t enough savings to be able to withdraw. What there is is a whole overhead and avalanche of debt that has built up exponentially since 1945. So much so, that people are actually having to cut back their spending on food, on clothes, on eating out, in order to pay their credit card debt, or their mortgage debt, or their rents, or their medical debt, or their medical insurance. They’re broke. Link

by NoRegrets | 29th Jul 23, 9:41am 1690580469

Finally we are seeing hundreds of duplicated back office roles removed from the Health system. That saving along with the huge fees paid to consultants that support them might actually mean we can pay the front line Health workers more realistically.

by KH | 29th Jul 23, 10:04am 1690581865

Don't fall for the line about the useless managers and the virtuous doctors and nurses. There is no difference, they are the same people.

by Golfer | 29th Jul 23, 10:33am 1690583614

Rubbish. Health NZ suffers from Managerialism. Doctors should be the ones to lead.

by KH | 29th Jul 23, 2:43pm 1690598608

Keep falling for it golfer

Doctors do lead already. As very smart people, they know to deflect the criticism to the 'managers'.

by Occam's Razor | 29th Jul 23, 7:15pm 1690614956

Leads one to assume KH that either you are a manager, or have not required medical care recently or have no idea of the health care system

by agnostium | 29th Jul 23, 4:16pm 1690604213

Nah, doctors should be treating patients, you know the thing they trained to do. Business Managers should manage the organisation.

by Hamish | 29th Jul 23, 6:40pm 1690612852

Need some checks and balances in there though when the consultants have a private practice as well as their public contract.

by Baywatch | 29th Jul 23, 9:49am 1690580998

I thought that comment would trigger Audaxes

by HouseMouse | 29th Jul 23, 9:56am 1690581360

I would love to hear the story of Audaxes one day. Apparently a person who made lots of money in the financial world, yet became a fanboy of authoritarian communism (China) and a harsh critic of capitalism (USA)

by bw | 29th Jul 23, 10:02am 1690581758

If you get to see the inner workings at the upper levels, you'll understand. And at each step up, there's another test to see if you understand how it all works. Ask the wrong question, and you'll find yourself 'promoted' out of harms way.

by HouseMouse | 29th Jul 23, 10:09am 1690582179

Oh yes, I have seen it / experienced it.

But that does not equal communism being better than capitalism.

The same power games apply within communist regimes, probably even worse

by Independent_Observer | 29th Jul 23, 11:14am 1690586089

Perhaps the better way to view it HouseMouse is that crony capitalism is no better than communism (in my opinion - both result in oppressed groups of people and instability).

And we currently live in a system of crony capitalism.

by HouseMouse | 29th Jul 23, 1:19pm 1690593573

Only up to a point.

Despite it’s many flaws I would rather have capitalism any day. But…. A much more moderated form of capitalism.

by Independent_Observer | 29th Jul 23, 8:14pm 1690618480

"Despite it’s many flaws I would rather have capitalism any day"

For sure, and likewise. No disagreement.

I guess one way to shift the argument (by playing devils advocate and taking an extreme position to highlight a point) would be to say or ask, "was fascist capitalism superior to Russian or Chinese communism? Are all forms of capitalism superior to communism?"

And where does the west currently sit in terms of government intervention in free markets to determine good outcomes for the majority of the population? Is our government and the other governments of the west (who are often in bed with large corporations) having too much say in our free markets - while the rich get richer and the poorer find life even harder? Is this a good system of economics and fair distribution of economic opportunity for those who are willing to work hard? Many have got rich the last two decades, not because of what they have done (via goods and services that benefit society), but because of what capital assets they own. A lot that I know have become very wealthy by doing very little in terms of productivity - and yet they have been rewarded 5x or 10x those who work 40 hour weeks (e.g. I know people who have large share and/or property portfolios have done nearly zero labour the last 10 - 15 years and yet they have been creaming it - then I talk to the business cleaners who work 10hr days and they have been going backwards - its an unjust/immoral system we have at present - whether it is called communism or capitalism for those who are marginalised by the economic system probably don't care i.e. are those who are marginalised by communism less or more happy than those marginalised by capitalism? Honest question...I don't know the answer).

by Kate | 29th Jul 23, 11:05pm 1690628707

The choice is really between authoritarianism (where the state, the capitalists and the legal system are all controlled by the party) vs democracy (where the state only controls the state and is supposed to regulate the capitalists, and the judiciary is independent of both).

China will always be authoritarian and Trump would like to make the US authoritarian. The US has made a partisan hack of the much of the judiciary.

I don't think communism - a stateless, classless society - where the workers own the means of production has ever existed.

by Independent_Observer | 30th Jul 23, 5:12pm 1690693952

Yip - look at China, the Chinese Communist Party have been purposefully implementing the good parts of capitalism to benefit is people, while maintaining authoritarian control.

To say that China is bad because it is communist, is missing what is really going on. It is part communist and part capitalist.

It is trying to balance the benefits of both systems (for what purpose? And this is where it gets really interesting!)

Kate - not sure if you've read 'The Changing World Order' by Dalio, but he has some great sections in this book on the topic above - CCP control over a capitalist systsem.

by Audaxes | 29th Jul 23, 10:43am 1690584222

This is hardly capitalism.

And the universal message of almost all of the Wall Street people I worked with, and of academia, was that the way to get rich is to financialize the economy. You’ll get rich by going into debt, and using debt to buy houses, real estate, stocks and bonds and increase their prices. And the whole idea of getting rich was all about not producing more goods and services, but to increase asset prices: real estate, stocks and bonds. And you increase them by going into debt. And the more debt the economy had, the less money it had for profit. Link

I earned enough money to limit my working life to 20 years and no more.

by False economies | 29th Jul 23, 10:49am 1690584551

Which 20 years? 20 to 40 (high paid job/sold soul) or 60 to 80 (on the dole for 40 years then made a killing on property)? :)

by Audaxes | 29th Jul 23, 10:53am 1690584836

I retired at 45 and own a single house.

by False economies | 29th Jul 23, 11:59am 1690588780

Well good for you I guess. If only everyone could do that...

by Cheetahlegs66 | 29th Jul 23, 4:32pm 1690605144

Good stuff. Impressed. Trust you are out riding and running when the roads are quiet?

by Zwifter | 29th Jul 23, 7:27pm 1690615648

Nice you beat me by 3 years.

by meh | 29th Jul 23, 2:02pm 1690596139

Haha yep and guys like this promote it

https://www.youtube.com/shorts/BAUVjZnH34w

https://www.youtube.com/shorts/PvEcg3RfgyY

https://www.youtube.com/shorts/FtzbNYAjUDM

It's reds under the bed again... Here's a question; have the capitalists taken the Propaganda rulebook - written by Edward Bernays and used by the Nazis in WW2 - and morphed into a hybrid form of authoritarian/totalitarian dictators?

"Chapters one through six address the complex relationship between human psychology, democracy, and corporations. Bernays' thesis is that "invisible" people who create knowledge and propaganda rule over the masses, with a monopoly on the power to shape thoughts, values, and citizen response.^[4] "Engineering consent" of the masses would be vital for the survival of democracy.^[5] Bernays explained:^[6]

"The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country. We are governed, our minds are molded, our tastes formed, our ideas suggested, largely by men we have never heard of."

Bernays expands this argument to the economic realm, appreciating the positive impact of propaganda in the service of capitalism.^[7]^[8]

"A single factory, potentially capable of supplying a whole continent with its particular product, cannot afford to wait until the public asks for its product; it must maintain constant touch, through advertising and propaganda, with the vast public in order to assure itself the continuous demand which alone will make its costly plant profitable."

https://en.wikipedia.org/wiki/Propaganda_(book)

by streetwise | 29th Jul 23, 3:41pm 1690602096

If you find time this weekend, watch this video right through. Its a few years old but more relevant than ever today. It's an interview vith American Nobel Prize-winning economist Paul Kruger who gives his honest eye-opening account on the disparity of wealth (capital) in USA and by implication NZ, drawing on the French economist Thomas Piketty's recent expose of inherited wealth in his seminal book: "Capitalism in the 21st Century". Kruger admits that he is in awe of this book.

https://www.youtube.com/watch?v=QzQYA9Qjsi0

by meh | 29th Jul 23, 4:00pm 1690603218

One could say that IS capitalism same as it ever was... The rest of it is the illusion fed to the masses that one day they too can be masters not servants.

The "I get rich via ownership" model is ultimately making the rest of society poorer.

by Kate | 29th Jul 23, 11:14pm 1690629242

That's accumulation by dispossession (neoliberal capitalism).

by Comyn | 29th Jul 23, 4:36pm 1690605377

There a very romantic view of communism on this site. The reality is quite different. It doesn't end up that people suddenly turn into the " let's all share everything "hipster community. There will be people in poverty still. The only difference is the party will tell you there is no poverty and that's what the people's will regurgitate out of fear.

by meh | 29th Jul 23, 4:59pm 1690606792

Capitalism already preaches that one though. "We've lifted billions out of absolute poverty... they now live on $2 a day instead of $1"

by nktokyo | 29th Jul 23, 5:45pm 1690609501

I my experience there aren't many on $1 who don't want their shot