Breakfast briefing: A series of unexpected outcomes

Economy / news

Dairy prices rise as other commodities retreat; US data more positive than expected; Modi loses majority; focus turns to EU elections; UST 10yr 4.33%; gold and oil drops further; NZ$1 = 61.8 USc; TWI-5 = 70.9

5th Jun 24, 7:31am by David Chaston

Here's our summary of key economic events over night that affect New Zealand, with news of some unexpected outcomes.

The overnight dairy auction belied the futures market again somewhat, delivering modest rises across the board, probably because European production is sagging a bit more than expected. Demand from China was not strong, but other regions picked up the slack. Overall prices were up another +1.7% on top of the last auction's +3.3%. SMP rise +3.0% and WMP rose +1.7%. However with the NZD on the rise at the same time, the change in local currency was negligible (+0.3%). Still, overall price levels are back to where they were in October 2023.

This is all a bit of an outlier because commodity prices are generally retreating, both food and metals. The copper price is one making a rather fast reversal.

In the US, their Redbook index tracking retail sales on a same-store basis was up +5.8% last week from the same week a year ago.

Also up were US factory orders and by a bit more than was expected to be +3.4% more than year-ago levels in April. You may recall that the two US PMIs reported quite different tangents yesterday. Well this seems to suggest that the S&P Global/Markit version which indicated rising orders and an expanding sector is more confirmed than the negative ISM one.

The more up-beat mood was bolstered by a rise in the Logistics Managers Index. It jumped in May on the back of stronger shipments activity. This indicator has now expanded in 9 of the last 10 months and for the last six months in a row.

Meanwhile the April US JOLTS survey reported the number of job openings declined by -296,000 from the previous month to just under 8.1 mln, the lowest level since February 2021. So the upcoming weekend release of the US non-farms payrolls for May will have an edge to it.

Unexpectedly, it seems that Modi magic has faded for Indian voters. The ruling BJP isn't getting the landslide election result exit polls suggested. They will still be able to form a government but it will be a coalition with a somewhat chastened result that saw them lose their majority.

Elections are about to start in the EU next, and all eyes are on an expected swing to populists and far-right parties.

The UST 10yr yield is now at 4.33% and down another -7 bps from yesterday. The key 2-10 yield curve inversion is la little more at -44 bps. Their 1-5 curve is also deeper at -78 bps. And their 3 mth-10yr curve inversion is also deeper at -104 bps. The Australian 10 year bond yield is now at 4.27% and down -6 bps from yesterday. The China 10 year bond rate is unchanged at 2.32%. The NZ Government 10 year bond rate is now at 4.80% and down -8 bps from this time yesterday.

Wall Street is up +0.2% in Tuesday trade on the S&P500. European markets are all quite negative with London down -0.4%, Paris down -1.1% and Frankfurt down -0.8% in overnight trade. Tokyo ended its Tuesday trade down -0.2%. Hong Kong was up +0.2% and Shanghai up +0.1%. Singapore fell -0.3%. The ASX200 ended its Tuesday trade down -0.3% and the NZX50 ended up a minor +0.1%.

The price of gold will start today down -US$18 from yesterday at US$2330/oz.

Oil prices are down -50 USc at just on US$73.50/bbl in the US while the international Brent price is now just over US$77.50/bbl and a new four month low.

The Kiwi dollar starts today unchanged from yesterday at just under 61.8 USc. Against the Aussie we are another +¼c firmer at 92.9 AUc. Against the euro we are marginally firmer at 56.8 euro cents. That all means our TWI-5 starts today at just on 70.9, unchanged from yesterday.

The bitcoin price starts today at US$70,644 and up almost +2.0% from this time yesterday. Volatility over the past 24 hours has been modest however at just on +/- 1.8%.

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Source: RBNZ

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35 Comments

by Audaxes | 5th Jun 24, 8:20am 1717532436

U.S. Q2 GDP growth 4.2% (est) now 1.8%, based on consumption drop. China Q2 GDP growth 4.6% (est) now 5%, upgraded by IMF. Link

by Audaxes | 5th Jun 24, 8:28am 1717532933

Open questions | Has a ‘Thucydides’ Trap’ been set? Political scientist Graham Allison gauges risks that could send US-China tensions into armed conflict

•Amid numerous risk factors, China’s ascension and America’s predominance appear destined for conflict
•But Allison says recent ‘trend lines’ could change trajectories towards a more ‘constructive relationship’

by IT GUY | 5th Jun 24, 9:06am 1717535161

China will need to move fast, they are facing a major demographic issue, I am not sure they can afford war losses to young

by OldSkoolEconomics | 5th Jun 24, 9:14am 1717535683

Survival of the dictator and his buddies always seems to be the priority tho. War is a great distraction from their other issues.

by kiwikidsnz | 5th Jun 24, 9:25am 1717536351

cf. Russia

by Foxglove. | 5th Jun 24, 9:25am 1717536326

Any fighting obviously would not involve boots on the ground invaders on either of the homelands. They are too vast and built up to even contemplate. Both Ukraine & Palestine currently demonstrate the difficulties involved.

by murray86 | 5th Jun 24, 10:13am 1717539222

Not really any point to it if there is no actual invasion then is there? Neither Russia nor China needs the land. Russia has other options that are less vulnerable for a naval base, so really it just comes down to dictators egos after all. If they can't possess them, they will ensure no one else can!

by Foxglove. | 5th Jun 24, 11:38am 1717544333

It would be ironic wouldn’t it if China escalated another border conflict with Vietnam and the USA came to the aid of the latter. Then there is the old battleground of the Korean Peninsular. Technically still at war, only separated by a truce. The vassal in the North could be “persuaded” to provoke an outbreak of hostilities.

by murray86 | 5th Jun 24, 11:50am 1717545034

Yes. Both Russia and China have opportunities to start multi border conflicts, but they would need the resources to sustain them.

I have always felt that historically we run our conflicts the wrong way. A politician starts a war somewhere and 10s of thousand ordinary soldiers get thrown into battlefields somewhere to sacrifice themselves in the name of someone else's ego. The cost to countries and people is both tragic and huge. I suggest the most effective solution to politicians starting wars is to target the politicians. Hunt them down and out and drop smart munitions on them and their leadership cabals. Make them the first sacrifices in their war. When they are gone talk to their armies and get them to stand down and back off. I wonder what the motivation to avoid a war would be if that was the standard approach? Would Russia and Putin persist if the US provided Ukraine with the means to hunt him down and squash him, and they did so? A nuke threat is countered with one, any escalation would be met in kind, but the target will be the leadership, not cities and ordinary people, or troops on a battlefield.

by Foxglove. | 5th Jun 24, 12:16pm 1717546617

It is probable that the very large fleet of American nuclear powered subs, whereabouts unknown but strategically positioned nevertheless, would have that range for plentiful precision strikes of that nature. It is probable too that the Russian political hierarchy has become abundantly aware of such capabilities.

by redcows1 | 5th Jun 24, 12:26pm 1717547186

That's crossing some unwritten rules. Targeting politicians as a matter of course would leave all politicians vulnerable and most really aren't in to that sort of sacrifice.

by kiwikidsnz | 5th Jun 24, 12:43pm 1717548222

You're right about those long standing self serving unwritten rules that benefit our lords & masters however whether you believe in them depends on whether you value the lives of a handful of (usually male, corrupt & undemocratically elected / appointed by their god/s) warmongering politicians more than the millions of innocents. Remembering also that typically 10x the number of civilians will be killed or maimed than official combatants in such conflicts.

by murray86 | 5th Jun 24, 1:23pm 1717550637

Bugger the "unwritten rules"! If it makes politicians think twice about their self serving policies then that's just the sort of outcome we need. The trick is to avoid wars.

by kiwikidsnz | 5th Jun 24, 9:46am 1717537601

This may have been previously reported however I just noticed it

Cassandra: "On a central track, where the OCR is averaging 5.65 per cent in the December quarter, that is consistent with a high probability of an OCR increase later this year."

Underwhelming | croaking cassandra

by nigelh | 5th Jun 24, 6:49pm 1717570148

CC always a good read

by Baywatch | 5th Jun 24, 9:53am 1717538019

Bitcoin Indicator Flips Bullish As Potential US Banking Crisis Looms, According to Analyst Jamie Coutts

The Federal Deposit Insurance Corporation (FDIC) has reported that 63 US banks are on the brink of insolvent collapse. This is due to banks sitting on $517 billion in unrealized losses. Meanwhile, after some nice coiling pricing action since March, my boring Bitcoin Trend model triggers. DXY down, Yields and Corp Spreads lower. Can you smell that, son? That’s the smell of central bank liquidity in the air.”

by murray86 | 5th Jun 24, 10:11am 1717539071

That script writer for the movie Apocalypse Now has a lot to answer for!

Robert Duvall said it so well.

by J.C. | 5th Jun 24, 11:01am 1717542082

Not trying to steal the crypto analyst's thunder, but a few points:

-- While 63 banks sounds like a lot, the FDIC considers this "normal".

The number of banks on the Problem Bank List, those with a CAMELS composite rating of “4” or “5,” increased from 52 in fourth quarter 2023 to 63 in first quarter 2024. The number of problem banks represented 1.4 percent of total banks, which was within the normal range for non-crisis periods of one to two percent of all banks.

-- About the unrealized losses, this is where it gets more concerning.

Higher unrealized losses on residential mortgage-backed securities, resulting from higher mortgage rates in the first quarter, drove the overall increase. This is the ninth straight quarter of unusually high unrealized losses since the Federal Reserve began to raise interest rates in first quarter 2022.

https://www.fdic.gov/news/speeches/fdic-quarterly-banking-profile-first…

by Baywatch | 5th Jun 24, 11:50am 1717545022

It only take one to fail to move the dial...

by MikeM | 5th Jun 24, 10:32am 1717540365

Boomers are doing just in these tough times. Plus the price setters.

https://www.rnz.co.nz/news/business/518662/boomers-farmers-who-s-doing-…

by J.C. | 5th Jun 24, 11:07am 1717542435

I think you missed 'fine' after 'just'.

"Boomers are doing fine," Zollner said. "They are more likely to have term deposits and be really pleased that term deposit rates are high."

Zollner is duplicitous. Term deposits are dreadful if you factor in the loss in purchasing power of the capital. She is trying to convince people that term deposits are somehow preserving people's savings. That is hogwash. These people possibly need to return between 10-12% pa from their savings to break even.

by murray86 | 5th Jun 24, 11:42am 1717544554

But the point of this really is that most if not all Boomers should have paid off their mortgages and be able to have saved somewhat before they retired. Reduced expenses makes a downturn survivable. The younger set though could well be struggling. I'm a Boomer and my experience from when i was made redundant (18 years ago) in a regional town, looking for work and it was tough. There will be many going through that now. They have my sympathies having been there and done that.

Farming is a business and farmers must run their farm as such. If they don't, then just like other business owners, they will suffer somewhat. Nature of the beast.

by J.C. | 5th Jun 24, 11:55am 1717545327

But the point of this really is that most if not all Boomers should have paid off their mortgages and be able to have saved somewhat before they retired.

Fair enough. But if the boomers have saved enough that it doesn't matter to them if their savings are losing purchasing power, that suggests they have quite a bit stashed away. The data doesn't really support that. It seems that cash balances over $100K are still a relatively small proportion of total balances.

I'm of the belief that the boomers still want / need the housing market to do its magic. Remember that house price appreciation has been greater than many of the boomers' ability to save and has encouraged them to spend today rather than save for tomorrow.

by murray86 | 5th Jun 24, 1:30pm 1717551011

I wouldn't go so far as to say it wouldn't matter to them that their savings are losing value. There is a degree of relativity here and most middle and older generations will remember interest rates in the 20% range.

Some Boomers might need the housing market to rise, but I fell that most would prefer it to collapse. Everyone I know is quite concerned about the effect on the younger generations. They also struggle to understand why the politicians won't regulate the market. They tend to think what the pollies actually do is BS. I agree with them.

by J.C. | 5th Jun 24, 3:28pm 1717558085

If you compare expansion of the money supply between now and the 70s, you would understand this much better.

Anyway, the gold price 20+ x'd in the 1970s as it ranged from USD35-850.

by murray86 | 6th Jun 24, 7:21am 1717615266

Somewhat disrespectful JC. What makes you think I don't understand what is going on? We are discussing peoples perception of it, not your opinion of what is actually happening.

by J.C. | 5th Jun 24, 11:17am 1717543020

Housing Australia Future Fund splashed $30 million on executive salaries and consultants, but hasn't actually built any houses.

The highest paid executive with the agency is CEO Nathan Da Bon who is sitting on a total package of $557,000 - about $30,000 less than Prime Minister Anthony Albanese.

https://www.skynews.com.au/australia-news/politics/hard-to-defend-feder…

by profile | 5th Jun 24, 11:40am 1717544436

How much bang did we get for our corporate slush buck?

@CranmerWrites

Interesting example of corporate welfare under Labour - FY 2021 grants from Te Puni Kōkiri for Māori cadets to some of NZ’s biggest corporates (apparently the only businesses ineligible were those that are directly funded by the Crown).

BNZ - $180,000

Downer - $2,860,000

Fletcher Building - $243,200

Kiwirail - $800,000 NZ Post - $202,710

2022/23 TPK cadetship grants:

BNZ - $210,000

Downer - $3,106,000

Fletcher Building - $320,000

Indigenous Growth - $3,599,000

Māori Television - $1,700,000

Te Rūnanga o Toa Rangatira - $1,900,000

https://t.co/t2rBQXGE99

by Pa1nter | 5th Jun 24, 11:47am 1717544879

How much bang did we get for our corporate slush buck?

Not much. The only difference between how poorly Australia is run, and how poorly NZ is run, is Australia can go dig some more money out of the ground to smooth over it.

by E46 | 5th Jun 24, 11:57am 1717545423

The lucky country.

by kiwikidsnz | 5th Jun 24, 12:15pm 1717546547

I occasionally have harsh words to say about some NZ politicians however I've also said a few times before that on balance they are still better than Oz ones.

I think that NZ in some ways benefits from it's village mentality, theres not that many degrees of separation between us. I worked with & in Oz for many years, all my Oz colleagues had given up on & simply ignored their politicians, accepting their endemic corrupt rorts & porkbarrelling as par for the course. My colleagues were surprised to hear us Kiwis with strong political opinions from the factory floor to the boardroom.

by Greeneggsandham | 5th Jun 24, 3:06pm 1717556795

The sad part is it’s actually true.

by Baywatch | 5th Jun 24, 12:38pm 1717547935

Tiwai Smelter $30 Million (JK)

by tis i | 5th Jun 24, 1:32pm 1717551125

Didn’t Labour give the steel mill a whole bunch?

by profile | 5th Jun 24, 3:10pm 1717557034

Which makes you wonder how Indigenous Growth Ltd managed to wrangle - $3,599,000! Transpower would have bilked the $30 million back in transmission "fees" inside of six months so pretty good bang for the buck.