Here's our summary of key economic events over the weekend that affect New Zealand, with news economic conditions in China are in focus today.
But first looking ahead, this week we get second tier American data around trade and PMIs (especially for services). It is the same in many other countries including China and Australia. Chinese CPI and PPI data is due this week. Canadian labour market data and EU retail sales data are coming too. Australia (tomorrow) and India (late Thursday) will have interest rate decisions. And StatsNZ will release our labour market data for Q4 on Wednesday which will be closely watched.
First up today we can report that the IMF has been reviewing China's economic prospects and it sees growth slowing relentlessly. GDP will slip to +4.6% in 2024 they say and keep retreating to 3.4% by 2028. The IMF sees them stuck paying the price for low quality development in the past, and now demographics limits their ability to up their game in a meaningful way. The seeds for this growth retreat were planted years ago.
And China’s real estate market is having a rough start to the year, with January new property sales plunging to a monthly low not seen in five years, despite government measures to boost the ailing sector as it grapples with a liquidity crisis. New property sales were down -34% in January from a year ago and down -48% from December.
Last week, Chinese stock markets fell sharply, with Shanghai down a startling -6.2% for the week. And this is presumably after 'home team' intervention. Investors are unhappy. Authorities are nervous. Voices for major emergency stimulus are growing. It isn't helping that the pessimistic mood is spreading just as millions disperse to their villages for Chinese New Year, potentially spreading uncertainty across the country quickly. It also isn't helping that authorities are claiming all is well, nor that the Ministry of State Security has made it a crime to say things aren't going well in the economy.
Separately in Wellington, the Chinese embassy has rebuked our newly elected government for flirting with the AUKUS security group. It issued a none-too-subtle warning that further steps toward our joining could undermine trade with our largest export market. The rebuke has been distributed widely in the Chinese media, globally.
Across the Pacific, the US economy added many more jobs in January than expected. Equity markets rose on the news, the US dollar strengthened, and bond yields rose on the view that the Fed may not cut rates as soon as they expected if the US economy is in a stimulatory phase.
At the headline level, American payroll employment rose +355,000 in January and that is almost double the expected +180,000 rise the market was expecting. It is the second consecutive very strong result.
Behind this result we see that on an actual basis employer payrolls are +2.9 mln higher than a year ago at 155.6 mln at the end of January, maintaining the "about +2%" annual growth pace they have had since July, which is an eased pace from the "about 2½%+" pace earlier.
Looking more broadly, the household survey increase isn't as fast. There are now just under 160 mln people employed, the difference from the payrolls report being the unincorporated self-employed. It is quite clear more people are transitioning into company payrolls now, so the overall growth isn't quite as strong as the payrolls data suggests.
Average weekly earnings, which had been rising at about a +4% pace in 2023, slipped to +3% from a year ago in January. However markets focused on average hourly earnings which rose more than they expected, up +4.5% in a year. But they are looking at the wrong data - the broader average weekly data is what they should be looking at because that encompasses working hours.
After a strong rise in November, American factory orders rose only modestly in December from a month ago to be +1.4% higher than year ago levels. There is nothing encouraging about that although the January PMIs suggested the pace picked up in the next month.
Consumers in this market are clearly feeling better however. The University of Michigan sentiment survey reported a big improvement and its highest level in 2½ years. They called the change a "surge".
The American earnings season for Q4 results is in full swing now and the news is 'good'. Investors are responding to better-than-expected results and have pushed the S&P500 up to an all-time record high. Wall Street is about halfway through the expected corporate reports and so far earnings growth is +7.8% reported. If that is maintained that would be the best of any 2023 quarter. However we should note that is "above expectations" - and expectations weren't high. Sure, cost control and productivity drives are helping - and effective - but in mid 2023 expectations were higher and have been scaled back considerably since. It is against this scaled-back version that things look good. And most companies are not signaling forward momentum from here. They are cautious, saying if they can hold the line they will count that as a success. So be wary about "better-than-expected results".
In Australia, mortgage approvals rose almost +12% over all of 2023 but ended the year on an unexpectedly soft note with a -4% monthly fall. And that December month data ties into housing market figures on prices and turnover that shows their residential real estate market momentum has slowed and that affordability pressures are starting to bite.
And staying in Australia, the port dispute between Dubai-owned port operator DP World and the MUA union has resulted in a big win for port workers. They won a +23% rise over four years (with background help from the Canberra government), ending a dispute that has tied up some of their largest ports for months. Port charges are expected to rise significantly as a result.
The FAO World Food Price Index fell for a sixth consecutive month in January, a fresh three year low, since February 2021. Prices of cereals were down notably as global wheat export prices declined amid strong competition among exporters and the arrival of recently harvested supplies in Australia and South America both a which have had excellent growing conditions. Also, meat prices fell and dairy prices were stable. Overall global food prices are back to levels that held between 2007 and 2014. Food is 'cheap' in inflation-adjusted terms, worldwide.
The UST 10yr yield starts today at 4.02% and down -2 bps from Saturday. The key 2-10 yield curve inversion is unchanged at -35 bps. Their 1-5 curve inversion is also little-changed at -84 bps. And their 3 mth-10yr curve inversion is stable at -136 bps. The Australian 10 year bond yield is now at 4.09% and unchanged from Saturday. The China 10 year bond rate is down -2 bps at 2.42% and again near a new twenty year low. The NZ Government 10 year bond rate is unchanged at 4.62%. A week ago it was at 4.75% so a -13 bps retreat from then.
The price of gold will start today up +US$4/oz from Saturday at just on US$2040/oz.
However oil prices are little-changed at just under US$72.50/bbl in the US while the international Brent price is now just under US$77.50/bbl.
The Kiwi dollar starts today at just on 60.6 USc and holding its lower Saturday level as the greenback rose. It is -¼c lower than a week ago. Against the Aussie we are still at 93.2 AUc. Against the euro we open at 56.2 euro cents. That all means our TWI-5 starts today at just on 69.9 and down -10 bps from Saturday.
The bitcoin price starts the week slightly lower, now at US$42,893 and down -0.7% from this time Saturday. Volatility over the past 24 hours has been low at just on +/- 0.6%.
Tomorrow is Waitangi Day in New Zealand, a public holiday. This update will not be produced tomorrow.
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36 Comments
Despite anti-farming globalists best efforts - "world cereal production in 2023 has been revised upward by 13.2 million tonnes (0.5 percent) this month and is set to reach a record high of 2 836 million tonnes."
Demand concerns and a likely record-breaking Brazilian harvest pushed soybeans down another 1.25%,
“Farmers in Mato Grosso are planting earlier to try to improve the safrinha corn opportunity. This worked perfectly last year with farmers setting record yields in both beans and corn.”
A new USDA-FAS report slightly raised the agency’s estimates for Argentina’s 2023/24 corn production, with a new projection of 2.244 billion bushels. Crop conditions are “very good” so far, and weather forecasts are favorable for production moving forward. Argentina is the world’s No. 3 corn exporter.
https://www.farmprogress.com/markets-and-quotes/afternoon-market-recap
If the GDP numbers coming from China are linked to the CCP in any way, I don’t trust them. The bureau of censorship and propaganda wouldn’t want any negative light to be shone upon the regime.
It’s almost like the CCP read Orwell’s 1984 and said, “Let’s see if we can make this work.”
China publicly supported Russia in the Special Military Operation for the first time - Le Figaro. The new Minister of Defense of the People's Republic of China, Dong Jun, said this during a meeting with his Russian counterpart Sergey Shoigu, which became the first open manifestation of support for the Russian Federation in the issue of the conflict. “We will support you on the Ukrainian issue, even if the US and Europe continue to put pressure on China, even if military cooperation between China and the EU suffers,” Le Figaro reports Dong Jun as saying. The material also noted that Beijing had not previously demonstrated public support.-FRWL reports Link
I would suggest it is about as bad as it can get. China is clearly preparing for a conflict; building ties with Russia and other autocratic nations and hacking the US infrastructure network in preparation to disrupt it. What we don't know is what is the threshold they need to initiate a conflict or are they going to continue trying to provoke someone else into firing first? China is doing the ground work now to cause second tier and third tier nations to pause and not want to pick a side. (It could be worse in this where they could be saying your either on our side or against us). And we, thanks to prior generations of politicians, are standing in our underwear, with no means of defense and bugger all capacity to contribute, when sooner or later we must inevitably choose a side.
Which side would we choose - an autocratic dictatorship who will doubtless send their SS apparatus to police us or a country which at least superficially purports to be a democracy with all the benefits that go with it? Will we choose for the power of the people or the somewhat diluted power and wealth of just a few, while the rest bow and scrape to jackboots? The world has been here before.
China in history has never sought to rule worldwide via military means. Notably different to the USA in that respect.
That said they are completely dangerous to us. They are quite capable of cutting themselves from us completely if it suits them.
That is no trade, no imports, no exports. No gadgets, no communication. Zilch. Disaster for New Zealand.
That's the sort of aggression we need to think hard about and more importantly actually structure ourselves to deal with.
The US doesn’t have an empire anymore than China does. It exerts influence via trade and alliances. It’s tried to engineer/prop up friendly regimes. Certainly the US has resorted to force since WWII. But so has China. They obviously fought in Korea, contributed in Vietnam (not sure of the details) and then fought a war with Vietnam in the interests of the Khmer Rouge. And let’s not forget the invasion of Tibet. If China continues to grow as a super power, they will inevitably get involved in conflicts on a similar basis to the US.
There’s also some territory annexation of Bhutan and the ongoing border stouches with India. Dont forget that.
China’s game is to say we don’t have an empire, the places we take/are taking/claim are just adjacent territories are that historically part of China. It’s like the Munro doctrine but Asia.
There are reports of “cultural influence” being exerted on Mongolia. Stalin moved in there in the 1930s and the Red Army put paid to the Japanese expeditionary army there in 1939. Mongolia of course was the genesis of the Yuan dynasty and has only been independent for a century or so. Now that Russia is occupied in the west and dependent on China as a market for fuel for just one thing, a “reclaim” of Mongolia given its isolation and unlikelihood of international intervention, would be a logical starting point for the CCP and its predominantly land geared military. The old ploy, if there’s trouble at home, then start something away from home.
I think China's has missed their chance. With their demographic problems, an invasion of Taiwan would now be a fatal mistake. It would be a sure fire way to quickly deplete their already dwindling number of younger people, that are already not wanting to have children. Even if they *win* and take Taiwan, the cost of doing so would mean their days will be numbered as a global superpower.
China now has a multitude of serious problems - economic, demographic, political, geopolitical etc. And i just dont see how the CCP will ever be equipped to deal with these challenges whilst their number one concern remains trying to control their population and protect themselves.
Of course Taiwan would be fatal. It would consign China to an awful future, one that probably looks quite similar to the North Korea of today. Closed off, ultra autocratic, and permanently second world status (at best). And the loss of life for China, let alone Taiwan, would be significant.
Of course none of that is likely to get in the way of their imperial impulse, of ‘righting historic wrongs’.
In partnership with Russia? No. China are about to be part of a consortium which is going to say to Putin “Back that horse up cowboy” and if he doesn’t rein it in, the consortium is going to push back. As part of the push back, China is going to obtain a big chunk of Russia up north. Booyah! China’s energy issues sorted.
I don’t think China has an interest in Russia reining it in. Russia’s invasion of Ukraine is important for drawing US assets away from the pacific. If anything they are probably annoyed Russia is ballsing it up so badly. The ideal for them would be Ukraine capitulating and Russia reconstituting their forces closer to NATO. This would require the US to increase its investment in defending Europe at the expense of Asia.
China also wants the US occupied in the Middle East. So the Israel/gaza/hezbollah/iran thing is pretty useful. But the Houthi shipping interdiction is not. So they will want Iran to do that other stuff but not anything that impacts their lucrative trade with Europe.
The American earnings season for Q4 results is in full swing now and the news is 'good'. Investors are responding to better-than-expected results and have pushed the S&P500 up to an all-time record high.
Good for a tiny minority of stocks and yet every share outstanding is owned by someone.
To put things into perspective: Assuming Nvidia meets estimates, the Mag 7 generated $523bn in sales during 4Q, +14%YoY. Revenue growth for remaining 493 S&P 500 stocks was a comparatively paltry 2%. Margins for the mag 7 expanded by ~750 bp YoY to 23% vs. a 110 bp contraction to 9% for remaining 493 stocks in the S&P 500, Goldman has calculated. Link
Enough is enough. This is getting out of control. It isn't just HH Survey vs. Est Survey any longer, these are from the same damn series. Both of are CES, yet they are saying the exact opposite thing about the labor market situation. Link and video detail
Indeed. An example of casino economics in action.
Meta Platforms' (META) stock rocketed higher on Friday, climbing more than 20% after the company posted better-than-expected earnings and guidance and announced new shareholder return initiatives.
With Friday's rally, the company added nearly $200 billion to its market cap, a stock market record according to Bloomberg data. Meta shares were trading around $475 on Friday; at its lows in 2022, the stock fell to as low as $90. Link
Let's review our trade relationship with say, UK, Europe and the USA. Our friends and family, right? Of course, we will do anything for them. Because, no matter what, they have our back, right?
So our FTA with those countries and trade blocks are a model of fairness. True?
Or do they ride roughshod over us, and, when it suits them, give us a break? Specifically, how are they different from China?
It suits China to buy our agricultural exports. It is just that simple.
Don't bite the hand that feeds. Don't conflate the spin from the warriors on either patch. We don't need to buy into that. Support a rules based system that applies to all.
So taxing residential property investors.
With all the debates about the equity of what Labour put in place, why don’t we replace it with the same arrangements that we use for US based equity investment?
You only pay tax if your assets go up, the tax you pay cannot be more than 2% of asset value - but could be less, you can offset any tax you pay on income from the asset, and it’s designed to manage tax for assets that earn primarily through capital gains.
It would treat the different residential investors fairly - the high versus low leverage investors. It would also be equitable in terms of applying the same rules to people who own stocks and those who own investment property.
Why would we not do this?
I think in general, the FiF tax is paid regardless of whether your assets have gone up in value. There is an option to pay tax on the change in value (meaning no tax if no profit) but this would generally be less favourable over time than the deemed rate of return/fair dividend rate, and you can't pick and choose year-to-year.
That said - I think it's a very sensible idea and have thought the same. Every second+ home pays tax on a deemed rate of return, say 5% of the value of the asset is counted as income and taxed accordingly meaning a 1.5-2% tax rate. No deductions, your property tax return gets boiled down to one calculation (asset value x deemed rate of return = income). As you say, a useful disincentive against heavy leverage, much simpler, applies also to inefficient use of scarce housing resources like second homes, holiday homes.
Very admittedly not an expert on this. But the guide I’m reading says - “if the value has increased, 85% of this increase is the maximum amount that would be taxable.”
One challenge would be the lack of certainty as to the change in value year to year. You could solve that by (A) ignoring that part like you say (B) forcing government valuation of all properties every year.
Given the importance of valuation, you could argue this would give rise to people seeking a downward assessment of valuation until it’s time to sell.
IMO, President Xi to the People's Republic is like General secretary Brezhnev to the Soviet Union. They both inherited a powerful nation from their predecessor. Brezhnev's 18 years brought the USSR to its knee, Gorbachev couldn't do anything to stop the collapse....
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