Chinese data mixed although helped by a weak base; US service sector ok but factories weaker; India exports not growing; Suez Canal being avoided; UST 10yr 3.92%; gold and oil unchanged; NZ$1 = 62.1 USc; TWI-5 = 70.4

Govt taxes y/y increase 10.2%. Economy is cool but govt continued strict tax collections. Tax policy clearly not helping the macro monetary policy. (稅收政策顯然沒有和宏觀貨幣政策一起發力反而對著幹）Link

Interestingly, almost all of the growth comes from VAT. Other taxes from corporate tax, consumption tax, & income tax are down from 2022. On the same time, social security spending increased from 13.7% in 2021 to 15% in 2023 Jan-Nov. It seems Lou Jiwei's projection coming true. Link

The UST 10yr yield has fallen slightly today as things settle down in the new levels, now at 3.92% and little-changed from Saturday

Bond yields and benchmarks

In my view, the expectations for coming rate cuts rely heavily on the expectation that core inflation will continue to retreat without interruption. That may turn out to be true, but by our estimates, the markets have more than priced in that outcome already.

Consider the 10-year Treasury yield. Historically, the entire total return of Treasury bonds, over-and-above Treasury bill returns, has accrued when the 10-year Treasury yield has exceeded the weighted average of core CPI inflation (0.25), nominal GDP growth (0.25), and the 3-month T-bill yield (0.5). The chart below shows the yield of the 10-year Treasury bond compared with this and a slightly broader benchmark. When bond yields have been below one or both of these benchmarks, bonds have lagged T-bills, on average. At present, the yield has dropped back to levels that I’d characterize as acceptable but moderately inadequate. The recent decline in bond yields has already priced a further retreat of over 1% in core inflation, nominal GDP growth, and short-term interest rates. While we may in fact see that improvement, the bond market, in my view, already relies on it.

The same is true for expectations regarding the Federal funds rate. By our estimates, the broad data are consistent with a relatively unchanged Fed funds rate in the coming year, in contrast to expectations of multiple rate cuts. There’s enough uncertainty in the economic outlook that we wouldn’t rule out Fed easing, particularly in response to emerging recession. Still, our baseline expectation is more muted than the enthusiasm we observe across Wall Street.

Reflecting a combination of steep equity market valuations and inadequate bond yields, we currently estimate negative prospective 12-year total returns for a conventional passive portfolio mix invested 60% in the S&P 500, 30% in Treasury bonds, and 10% in Treasury bills. As usual, investment outcomes over shorter segments of the market cycle will largely depend on the uniformity or divergence of market internals, but from present valuations, investors should not be surprised if conventional, passive investment portfolios continue on a long, interesting trip to nowhere.

Merry Christmas to Mr Chaston and the team.  Interest.co is the best.

I suspect the band of common taters make DC's eyes roll about much of the time.  But you provide an excellent forum for us, and thanks.  And thanks to the other common taters, well mostly.  I learn heaps.

I wonder which Kiwisaver fund had the best returns for 2023? Would be a good story to close the end of year with..

"Meanwhile, foreign patent holders are finding that Chinese courts side with local companies and will chop royalties agreed in existing deals that they subsequently don't like."

Those big corporations who exported jobs and manufacturing to make bigger profits are learning that the quality of Government is crucial where they send their technology. Cheaper in the long term to keep the technology, jobs and manufacturing capability at home. Better than building your own competition.

Could be an interesting start to next year. CPI is due Jan 24, if that were down to 0.75% for the quarter or lower, it’s within the RBNZ target when annualised. It would be very hard to justify causing a recession and unemployment with CPI within target and falling. A rate cut could be on the cards just a few months after the RBNZ saying they won’t cut in 2024! If they don’t cut and people lose their jobs when inflation is within target or even deflation, the RBNZ could look very stupid, and so could the National party for removing the employment mandate. 

Merry Christmas all,

China in focus this morning, 

• IP - The rest of the world knows that any licensing arrangement with China is on their terms, want to play? pay.
• Graft - we cannot not throw any stones.  Tried to get any infrastructure built?  "Koha" for Cultral Impact Assessments is VERY much part of the NZ story, and it is for exactly the same reasons and at a similar scale.
• Pollution - honestly, hearing people talk about NZ "doing it's part", it's just beyond comprehension how dim these people must be.  Pakistan is seeding clouds to get drizzle so they can BREATHE, it's a sad indictment.

US, not much comment in regards to how important it will be to reduce rates in 24.  Essential maybe.  "In the fiscal year ending on September 30th 2023, interest payments on America’s debt totalled some $660bn, up from $475bn the previous year."

Given that, the housing market looks like it will have a strong late 24 but we are now at a servicing ceiling I think so not much growth.

Strange selection for the rotating quote at the bottom of the page just now:

 

As prime minister I want to see urgent progress in this area [child poverty]. That is why we will be introducing measures and targets to ensure our policies across government are making a difference to the lives of children.

~ Jacinda Ardern

A policy statement rather than a witticism/something to ponder? Cf. the one I got for this page:

It’s a recession when your neighbor loses his job; it’s a depression when you lose your own.

~ Harry S. Truman

https://www.nzherald.co.nz/nz/prime-minister-christopher-luxon-under-fi…

This month, Luxon confirmed his Government would axe payments to te reo-speaking public servants, criticising those who took the bonuses.

”People are completely free to learn for themselves,” he said.”That’s what happens out there in the real world, in corporate life, or any other community life across New Zealand.

”I’ve got a number of MPs, for example, that have made a big effort to learn te reo ... they’ve driven that learning themselves because they want to do it.

”In the real world outside of Wellington and outside the bubble of MPs, people who want to learn te reo or want to learn any other education actually pay for it themselves.”

However, Luxon did not follow his own advice. After repeated requests, the Prime Minister’s office confirmed taxpayers paid for Luxon’s own classes using a budget offered to the leader of the Opposition.

”As leader of the Opposition and a potential prime minister at the time, developing better skills in te reo was highly relevant to his role,” the spokesman said.