Weekend briefing: High interest rates, excess supply and low confidence threaten some commodities

Economy / news

China house prices fall; China foreign direct investment slumps again; EU inflation expectations stick high; some commodity prices at tipping point; UST 10yr 4.26%; gold up and oil down; NZ$1 = 62 USc; TWI-5 = 71.3

24th Feb 24, 8:47am by David Chaston

Rafting on the Rangatata River

Here's our summary of key economic events overnight that affect New Zealand, with news the prices for some commodities - and that includes real estate (both residential and commercial) - are on the edge in the face of low confidence, high interest rates, and excess supply.

China's new house prices fell the most in almost a year in January with prices in 60 of their 70 largest cities retreating. For resales, this official data only showed two of the 70 cities in their survey with a month-on-month gain, none with year-on-year gains. For such pervasive declining prices to show up in official data probably means the situation is much worse, and it is now quite difficult to sell a house. Buyers have vanished, unwilling to buy a depreciating property.

Recall that in February, the Chinese central bank chopped its 5 year MLF rate by a record -25 bps to its lowest ever. This is the rate on which home loans are based. They also cut the reserve ratio earlier in the month, another easing that might help their property sector.

Also falling sharply in official data was foreign direct investment in January, down more than -11% from the same month a year ago. That is their biggest retreat since the GFC. And the more recent data is even worse, falling more than -20% from December.

EU inflation expectations are essentially holding at 3.3% for the next twelve months. The ECB would have been disappointed at that, and the fact that the "last mile" is proving very sticky. However, it is not a problem that they have alone.

The German economy slipped into recession in the second half of 2023 if you buy into the "two negative quarters" rule on GDP changes. The retreat is minor however and was as expected.

In Australia, Rio Tinto has given the go-ahead for a big new iron ore mine. It is in West Africa. The iron ore price has held relatively high, encouraging miners, and Rio Tinto's decision is just one of many. But the cumulation worries some. Iron ore prices are not factoring in the wave of new supply, leaving it vulnerable to the same collapse that smashed battery metals like nickel, some say. If that were to happen, that would rock Australia.

A few weeks ago we noted the cocoa price and its stunning rises. Well it has only risen from then. It is up +8.5% just overnight, up +14% in a week and since the start of the year this core chocolate ingredient has risen a massive +57%. (Bitcoin is only up +21% in the same time.) This soaring has far exceeded its previous frenzy in 1977 (although perhaps not on an inflation-adjusted basis). Adverse weather in Côte d'Ivoire and Ghana, the two main producers, is the root cause.

Most food commodity prices are not rising. Going the other way is the soybean price, falling sharply and nearing a four year low. Good growing conditions in South America, high inventories, and falling Chinese demand for it as animal feed are all conspiring to drive the price lower. Although not as dramatic, global wheat prices are trending lower as well.

The UST 10yr yield starts today at 4.26% and down -7 bps from this time yesterday, down -5 bps from a week ago. The key 2-10 yield curve inversion is deeper at -43 bps. And their 1-5 curve inversion is also more at -72 bps. And their 3 mth-10yr curve inversion has deepened sharply to -115 bps. The Australian 10 year bond yield is now at 4.13% and down -6 bps. The China 10 year bond rate is now 2.41% and a new all-time low. The NZ Government 10 year bond rate is up +1 bp at 4.92%. A week ago it was also 4.92%.

On Wall Street, the the S&P500 hit a fresh record high and is up +0.3% in their Friday trade and looks like it will finish the week up +1.4%. European markets ended up +0.3% except Paris which was up +0.7%. Yesterday Tokyo was closed for a holiday and ended their week up +1.5%. Hong Kong dipped -0.1% after a strong opening, to finish its week up +1.4%. Shanghai rose +0.6% yesterday to finish the week up +4.1%. Singapore had a tough day yesterday, down -1.2%. The ASX200 was up +0.4% in Friday trade but ended down -0.2%, while the NZX50 booked a +0.3% gain yesterday allowing it to finish the week unchanged.

The Fear & Greed index is still at the "extreme greed" level where it was a week ago and two weeks ago.

The price of gold will start today up +US$19/oz from yesterday at US$2038/oz and up +US$28 from a week ago.

Oil prices are a sharpish -US$2 lower at just over US$76.50/bbl in the US while the international Brent price is up to just under US$81/bbl. Both levels are -US$2 lower than a week ago.

The Kiwi dollar starts today at just under 62 USc and little-changed from yesterday. But it up more than +¾c from a week ago. Against the Aussie we have settled back to 94.4 AUc. Against the euro we are unchanged at 57.2 euro cents. That all means our TWI-5 starts today still just over 71.3 but that is +60 bps higher than a week ago.

The bitcoin price starts today at US$51,019 and down a minor -0.8% from this time yesterday. But it is down -1.9% from a week ago. Volatility over the past 24 hours has remained modest at +/- 1.4%.

Daily exchange rates

Select chart tabs

Source: RBNZ

Source: CoinDesk

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

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

43 Comments

by Audaxes | 24th Feb 24, 9:06am 1708718763

House prices adjusted for inflation since 1975. The charts for Canada, Australia, New Zealand, and the UK look like a s**tcoin during a pump. The Japanese real estate bubble of the 1990s is barely visible as a comparison. Looks very sustainable... Link

by Audaxes | 24th Feb 24, 9:15am 1708719352

The distinguishing feature of the paper money you have in your pockets that’s different from bank credit is the paper money doesn’t have to be repaid. Nobody is going to somehow repay your currency and say, I’m going to cash it in. You cash in a $10 bill, you get two $5 bills. But bank credit does have to be paid and comes with interest.

The Treasury credit does not have to entail this huge increasing debt overhead that banks create. That’s basically it. It’s this debt overhead that actually, as we will discuss later, deflates the economy instead of inflates it. Bank credit inflates prices for assets, for houses, for stocks and bonds. But it deflates the economy by making people spend more and more of their income on debt service to buy the higher-priced houses or to buy the higher-priced retirement income that the banks bid up. Link

by JimboJones | 24th Feb 24, 10:39am 1708724384

Yes that makes sense. Interest rates can be used for short term stimulus or demand reduction, but if left at those levels they become the norm and then they just affect asset prices. We’d be better off leaving the OCR at current levels and weathering this storm IMO.

by JimboJones | 24th Feb 24, 10:20am 1708723208

Would be interesting to see the average mortgage rate on the same chart. I guarantee that wouldn’t have happened had interest rates remained at 1975 levels.

by Nellbell | 24th Feb 24, 10:42am 1708724573

not sure, interest rates shyrocketed during the 1980s and house prices boomed, I think because of the shift from single incomes servicing the mortgage to double income servicing it, even though interest rates were above 20%. And then as has been said on this forum before people just purchase to the maximum they have available to borrow. The stuff post GFC seems to be related to lower interest rates but also to the (misguided) belief that house prices would only ever go upwards.

by J.C. | 24th Feb 24, 10:57am 1708725478

Our residential bubble - and that of the broader Anglosphere - far outstrips that of Japan. It's always explained away to me at the neighborhood BBQ by something related to their ageing population. If the illustration weren't so visually amusing, it would be terrifying.

by JimboJones | 24th Feb 24, 2:41pm 1708738871

I don’t buy that. My understanding was that Japan’s property was bonkers expensive. Here a couple can buy a house for 35% of the average household income, not exactly bonkers.

by Flying high | 24th Feb 24, 3:29pm 1708741758

by J.C. | 24th Feb 24, 3:48pm 1708742907

I don’t buy that. My understanding was that Japan’s property was bonkers expensive. Here a couple can buy a house for 35% of the average household income, not exactly bonkers.

The aggregate value of Japanese residential property reached a multiple of 3x GDP. Ours has been close to 5x. Furthermore, Japanese h'hold debt never surpassed 70% of GDP, even at the height of their bubble.

Japanese commercial property and prime land was far more overpriced than residential housing.

by Pa1nter | 24th Feb 24, 4:11pm 1708744264

At the neighbors BBQ did they tell you that outside the demographics, Japan had a bubble that burst due to over extending on growth and severe malinvestment that couldn't be sustained?

They did in 30 years what took the West centuries. They weren't able to develop a healthy enough consumer economy before they started becoming uncompetitive as manufacturing exporters.

China is currently doing the same, 20 years of high growth, and another 10-15 years trying to sustain that growth, and instead have over invested in real estate and infrastructure to juice higher than normal GDP figures.

That's not to say countries like NZ can't fall over, just that is fairly problematic using such binary comparisons without first tracing all the cords back to the wall.

by J.C. | 24th Feb 24, 4:25pm 1708745107

At the neighbors BBQ did they tell you that outside the demographics, Japan had a bubble that burst due to over extending on growth and severe malinvestment that couldn't be sustained?

Japan's demographic issues were known in the 70s and 80s. They did not appear overnight.

At the time of Japan's peak economic might and the bubble, the neighborhood BBQ-ites would only talk about $10 coffees in Tokyo. They had no idea about demogs. It's just something thrown at them from Ashley Church-type influencers.

F'more, Japan had massive migration from the 60s. Not foreign migrants. But rural to urban migration.

Japan's issues started with the Plaza Accord, thereby devaluing USD / JPY.

by Pa1nter | 24th Feb 24, 5:12pm 1708747927

Japan's issues started when they forced isolation in the Edo period, locking themselves in a feudal state while much of the world advanced.

Then they had to play catch-up in the mid 1800s, and outgrew their ability to resource themselves, whilst too quickly upending their traditional culture.

Then they embarked on a fairly brutal conquest in East and South-East Asia, everyone knows how that ended.

But that's an aside. Demographics are against them as your BBQ mates have said, but there's also something fairly precarious about rapid economic expansion - they grew too fast using means that could easily be done elsewhere. Ditto China.

In the anglosphere, we have low levels of growth (even negative growth, depending on how you want to slice it), but also more mature markets less reliant on manufacturing exports. That's not to say that doesn't come with issues, just that making comparisons between newer, fast growing economies and those more established is fairly problematic. It's like comparing a company like wework to Coca-Cola.

by J.C. | 24th Feb 24, 6:06pm 1708751208

This is a neighborhood BBQ narrative chockful of half-baked understanding. Most of which is best not addressed. For ex

Japan's issues started when they forced isolation in the Edo period, locking themselves in a feudal state while much of the world advanced.

Then they had to play catch-up in the mid 1800s, and outgrew their ability to resource themselves, whilst too quickly upending their traditional culture.

Japan has always been influenced from the outside. Far before the Edo period and industrialization, Japan was importing ideas and knowledge from countries like Korea and China during the Nara Period (710-794).

Regardless, Japan is now reached a level of industrialization and has better infrastructure than the Anglosphere nations.

by Pa1nter | 24th Feb 24, 7:22pm 1708755762

The current people known as Japanese are actually largely of Korean extraction, marginalizing the indigenous Ainu people. Not that that, or pre Edo activity bares much relevance to the experience of post industrial Japan.

You can pass me off as BBQ speak, but I've got a knowledge and education of Japan that is significantly more extensive than yours. You're actually my own water cooler.

Japan has nice stuff, which you'd expect from a highly organized, homogenized culture that had to rebuild from scratch. But they hit a ceiling decades ago, they'll never get back.

Interesting insight, from actual Japanese people:

https://youtu.be/C0FSpSe50m0?si=3wrJlJ-4RH3E5emp

by J.C. | 24th Feb 24, 8:26pm 1708759574

You're welcome to challenge me on any of the comments I wrote about Japan. And I will point what what I see to be half-baked understanding.

I do not deny Japan's demographic issues. But it is nothing new. Nor did it prevent from popping or lead to pop Japan's economic bubble, including property. Furthermore it could very well be that the Anglosphere bubble is 'sustainable', however you want to define 'sustainable.' All I'm pointing out is that the Anglosphere housing bubble is far bigger than the Japan housing bubble.

by Pa1nter | 24th Feb 24, 10:52pm 1708768329

You're welcome to challenge me on any of the comments I wrote about Japan. And I will point what what I see to be half-baked understanding.

When we're both doing that, there's no common ground.

You're pinning the woes (or at least the origin of them) on the Plaza Accord. Which would seem logical, on the surface, because their bubble burst shortly after and they've not recovered.

I'm claiming the roots of their prosperity malaise were there well before then. Really large exponential growth in short periods is rarely sustainable.

China look to be going down an errilly similar path. On the surface, they seem to have been holding steady, but much of their GDP growth of the past decade or so has come from speculating in more property than there is people to live in them, and super marginal infrastructure that'll become a dead weight for them. And no Plaza Accord necessary (sounds like they've actively been choosing to suppress the value of their currency, on their own).

Most headlines are usually end results of much longer chains.

by HouseMouse | 24th Feb 24, 9:08pm 1708762099

That is an ultra- simplistic and reductionist take on the origins of Japanese ethnicity. The leading theories suggest far more complexity than what you have just alluded to.

So I don’t buy your so-called expertise on the matter.

by HouseMouse | 24th Feb 24, 9:38pm 1708763903

I don’t know where to start with your nonsense.

Non-Ainu Japanese, the Yamato are just as indigenous as the Ainu. The ainu were the indigenous people of Hokkaido and northern Honshu.

The theories suggest the Yamato and Ainu share common Jomon people ancestry. The Jomon theories suggest that they arrived on the Japanese archipelago a very long time ago (thousands and thousands of years before Christ), and were a people that pre-dated the split between north-east and south-east Asian people. Theories diverge significantly on the potential origins within Asia.

Influences from Korea were much later.

by J.C. | 24th Feb 24, 9:49pm 1708764588

Influences from Korea were much later.

The Nara Period. The capital of Nara was built by Koreans.

by J.C. | 24th Feb 24, 9:47pm 1708764456

Incidentally, Japan was quite arrogant about their economic success and thought the bubble (stocks/land/property) was based on how superior they were. They did believe that this was related to Japanese culture based on "half-baked" ideas on cultural superiority. But remember, at the time, Westerners were actively studying Japanese management culture and economic structures because they were extremely successful industrially (that is still very much the case today). Few actually predicted that Japan was in a bubble. Eammon Fingleton being an exception.

Our superiority basis is more shallow. We generally like to explain why we do not have a property bubble. It might just be a defense mechanism.

by Pa1nter | 24th Feb 24, 10:32pm 1708767176

There isn't much of a superiority basis other than history, and ability to have slower falls in birth rate, and a better ability to absorb migrants.

Well, that and while our agriculture is boring and relatively finite, it's less portable as an industry than manufacturing. You can make things almost anywhere, but you can't grow squash everywhere economically around the end of the year.

by Pa1nter | 24th Feb 24, 10:26pm 1708766791

That is an ultra- simplistic and reductionist take on the origins of Japanese ethnicity

Are you expecting a 1000 page thesis from one point in one post.

The Ainu pre date the Yamato by 10-20,000 years, and ranged through Honshu. Dispossessed up north by the Yamato in the middle ages.

by J.C. | 24th Feb 24, 10:48pm 1708768116

The Ainu pre date the Yamato by 10-20,000 years, and ranged through Honshu. Dispossessed up north by the Yamato in the middle ages.

Ainu have always been an ethnic minority who populated Northern Japan and islands such as Sakhalin. Their influence on the development of Japanese society through the ages is non-existent.

Hunter gatherers have populated Japan for 15,000 years. And they're not Ainu.

by HouseMouse | 25th Feb 24, 2:18pm 1708823896

Oh dear….

by ChrisOfNoFame | 25th Feb 24, 2:30pm 1708824635

"You can pass me off as BBQ speak, but I've got a knowledge and education of Japan that is significantly more extensive than yours. "

Lol. Yeah. Sure you do. (lol, lol, lol) ... The Edo period was between 1603 and 1868. And that's somehow relevant to understanding Japan's economy post WWII? (lol, lol, lol)

by J.C. | 25th Feb 24, 2:39pm 1708825163

Let alone relevant to the housing bubble. It seems to rankle people that our bubble is bigger than Japan's bubble. That's why the desperate scramble to defend ours vs theirs.

by Pa1nter | 25th Feb 24, 6:34pm 1708839259

Being an expert here is some sort of arbitrarily derived self title. You've never really laid out how one gets qualified above pub level knowledge and expertise (super handy). So potentially my education and experience doesn't account for much.

Not every bubble gets popped at the same point on an axis, nor does every economy recover in the same way. The why and how of that usually has a long tale and the story of post industrial Japan defines how they've inherited their present, while others have something else.

Possibly the fastest evolving and changing civilisation known. From feudalism to coloniser to nothing and then world leading manufacturing and infrastructure in a century and a half.

by J.C. | 25th Feb 24, 6:58pm 1708840720

Not every bubble gets popped at the same point on an axis, nor does every economy recover in the same way.

You haven't done a great job of explaining

1. Why the Japan bubble is worse than our current bubble

2. Why our bubble is not actually a bubble (of course it may not be)

by ChrisOfNoFame | 26th Feb 24, 8:01am 1708887706

"Possibly the fastest evolving and changing civilisation known."

And China? South Korea? Singapore?

by HouseMouse | 24th Feb 24, 9:29pm 1708763396

Total nonsense.

Residential prices went a bit bonkers in more central parts of Tokyo, but were never that crazy in most areas of the bigger cities.

Commercial property is where things went bonkers, again especially in central Tokyo

by kiwikidsnz | 24th Feb 24, 9:27am 1708720057

The unforeseen hazards of working from home.

Husband 'made over a million' by eavesdropping on BP wife - BBC News

BP demonstrated it's unethical corporate culture clearly in it's extremely shabby treatment of this principled woman who whistleblew on her own husband.

by Hamish | 24th Feb 24, 11:20am 1708726834

If he lived here would he be a candidate for the tough on crime crowd?

by Flying high | 24th Feb 24, 11:43am 1708728205

Road to hell, paved with good intentions. Now potentially divorced, that's ridiculous

by JimboJones | 24th Feb 24, 2:01pm 1708736517

“he wanted to make enough money so that she did not have to work long hours anymore” - his wife was an acquisitions manager for BP, surely on good coin. Greedy.

by Flying high | 24th Feb 24, 3:29pm 1708741797

They weren't on the bones of their arses beforehand. He made 1.4 million Gbp which was 70 percent gain, means 2 million pound (4 million nzd) investment

by Audaxes | 24th Feb 24, 9:47am 1708721267

The German economy slipped into recession in the second half of 2023 if you buy into the "two negative quarters" rule on GDP changes. The retreat is minor however and was as expected.

Good Morning from #Germany where fewer & fewer companies seem to want to invest. GDP was dragged down by a slump in investment in Q4 — putting Europe’s biggest economy on course for 1st recession since pandemic. Investment in machinery plunged by a whopping 3.5% QoQ. https://bloomberg.com/news/articles/2024-02-23/german-economy-suffered-investment-slump-at-end-of-last-year?utm_source=website&utm_medium=share&utm_campaign=twitter?sref=R17xFhjo Link

by ChrisOfNoFame | 24th Feb 24, 11:19am 1708726747

If deflation becomes entrenched in real estate markets - especially residential markets - then the GFC will look like a minor sniffle. That said, central banks will just do what they always do ... Overreact!

by JimboJones | 24th Feb 24, 1:58pm 1708736336

There will be a few happy DGMs from here lining up in the dole queue.

by Pa1nter | 24th Feb 24, 4:14pm 1708744446

LOL.

"I knew it, I knew it would all come crashing down. I'm a genius for not just shutting up and building myself up a solid foundation to weather a storm

The system is SO unfair!"

by Flying high | 24th Feb 24, 1:59pm 1708736385

Has "H" been declined a US green card

https://www.nzherald.co.nz/lifestyle/prince-harrys-us-visa-at-centre-of…

🤣🤣🤣🤣😍

by Blackdog | 24th Feb 24, 9:35pm 1708763701

It’d make more sense with a corresponding population growth graph.

by Flying high | 25th Feb 24, 10:44am 1708811083

https://www.nzherald.co.nz/nz/gang-crackdown-government-to-introduce-le…

NOW WE'RE TALKING.... GO HARD PAUL AND MARK

by ChrisOfNoFame | 25th Feb 24, 2:39pm 1708825198

LOL. The poor Police. Recruitment just became a major issue again.

In practice I expect the police to largely ignore such laws as being far too difficult to enforce and simply not worth the risk. But NACTF supporters are easily fooled by window dressing.