Weekend briefing: Distortions that will need to be dealt with

Economy / news

US PCE rises; Canada differential 'extreme'; Japanese retail sales rise; EU inflation stays up; Aussie advisers squeal at high cost of compo fund; UST 10yr at 4.51%; gold at new high; oil down; NZ$1 = 56.7 USc; TWI = 67.2

[updated]

1st Feb 25, 8:09am by David Chaston

Waitangi, Northland

Update: President Trump has announced that the US will impose 25% tariffs on Canada and Mexico, and a 10% tariff on China. The news undercuts earlier news from his officials that tariffs would not start until March 1. In the hour after the announcement, the S&P500 fell sharply, the UST10yr yield rose, and the US dollar moved up slightly. Gold didn't seem to react. Bitcoin slumped.

...

Here's our summary of key economic events overnight that affect New Zealand with news of distortions everywhere, especially tariff distortion news in the US, interest rate distortions in Canada, inflation distortions in the EU, and financial advice distortions in Australia.

But first, the alternate US inflation measure, "the one the Fed watches", their personal consumption expenditures price index, rose +0.3% in December from November, the highest gain in eight months, but it was the rise expected. That means their year-on-year PCE inflation came in at 2.6% and its highest in seven months by this measure.

There were no surprises in any of the income, consumption, or savings data.

The January Chicago PMI recovered from the weak December result on the back of better new order inflows and higher production levels. But it remains in deep contraction territory. The outlook responses in this regional survey weren't very bright.

In Canada, they are wrestling with what the 25 year 'extreme' difference means between their policy interest rate, 3.00% and the US Fed's "4.25% to 4.50%". In market terms that is a 140 bps discount the Canadians carry. It has been thought that +/-100 bps is in the comfort zone for financial markets, so we may start to see reactions and implications. These could be lessons for other economies, although Canada may face extra pressures if the US imposes punitive tariffs. Those tariffs were signaled on "day one'. Then they slid to February 1. Now they are being threatened for March 1. Who knows? The Canadians seem to be setting themselves up for a "robust response". And this looks like it includes their policy interest rate settings.

Japanese industrial production rose in December from November and that limited the year-on-year decrease to less than expected.

Japanese retail sales rose +3.7% in December from the same month in 2023, up from a +2.8% gain in November, and better than market expectations of a +3.2% rise. This is the 33rd straight month of expansion in retail sales and the fastest growth since June 2024. Rising pay levels are getting the credit for the expansion.

In Argentina, their central bank cut its policy interest rate by -300 bps to 29% on Friday NZT, as inflation eased again. But annual inflation in Argentina was still at 118% in December, the softest increase since July 2023, down from 166% in November.

EU inflation expectations rose to 2.8% in the ECB's December survey, taking it back to early 2024 levels. In the ECB MPS yesterday, they noted there is still more work to do to quash these expectations. Actual EU inflation ended 2024 at 2.7% and it too is rising.

Aussie producer prices rose +3.7% in December from a year ago, but even if that is high, it was their slowest rise since early 2021.

And staying in Australia, they have a scheme to build a AU$20 mln fund to pay out compensation to victims of bad financial advice. All advisers pay into it. But there have been some huge claims, especially from the Dixon failure and the UGC failure. And the growing losses are threatening to bankrupt the compensation fund and impose large costs directly on the advisory industry to make up the shortfalls. Advisers there are squealing and they have won a delay from the Government. Socialising these losses seems the most likely outcome.

The UST 10yr yield is at 4.51%, down -2 bps from yesterday at this time. It is down -11 bps from this time last week. The key 2-10 yield curve is marginally flatter at +31 bps. Their 1-5 curve is also slightly flatter at +15 bps. And their 3 mth-10yr curve is now at +18 bps and flatter. The Australian 10 year bond yield starts today over 4.45% and little-changed. The China 10 year bond rate is unchanged (while they are on holiday) at 1.64%. The NZ Government 10 year bond rate is now at 4.59%, up +2 bps from yesterday and down -4 bps for the week..

Wall Street is little-changed today with the S&P500 giving up earlier gains in its Friday trade. But it is back touching its all-time high and is up +1.7% for the week. Overnight, European markets were all very slightly higher. Yesterday Tokyo rose +0.1% but was down -1.4% for the week. Hong Kong, Shanghai and Singapore were all closed for CNY. The ASX200 ended up +0.5% yesterday, up +1.8% for the week and also a new record high. And the NZX50 ended up +0.5% in Friday trade, but down -0.2% for the week. The NZX50 is still -4.2% below its record high which was achieved in January 2021.

The Fear & Greed Index ends the week in the middle of the 'neutral' zone, and where it was last week.

The price of gold will start today at US$2810/oz and up +US$22 from yesterday to a new all-time high. And that is up +US$34 from this time last week.

Oil prices are down -50 USc at just under US$72.50/bbl in the US and the international Brent price is now under US$75.50/bbl with a much larger retreat. And they are down from US$74.50/US$78.00 a week ago. Weak demand is getting the blame.

The Kiwi dollar is now at 56.7 USc and up +20 bps from this time yesterday but down -50 bps from this time last week. Against the Aussie we are up +10 bps at 90.8 AUc. Against the euro we are little-changed at just over 54.4 euro cents. That all means our TWI-5 starts today just on 67.2, and up +20 bps from yesterday, but down -20 bps from a week ago.

The bitcoin price starts today at US$104,962 and down -0.7% from this time yesterday. Volatility over the past 24 hours has been moderate at +/- 2.8%.

Daily exchange rates

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Source: RBNZ

Source: CoinDesk

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61 Comments

by Threecents | 1st Feb 25, 8:24am 1738351467

Drama at the LBMA

https://www.zerohedge.com/news/2025-01-30/lbma-cant-deliver-gold-supply-chain-breaks

London's bullion market is under strain. A surge in gold shipments to the U.S. has left traders scrambling to borrow from central banks, with wait times at the Bank of England stretching from days to weeks. The gold supply chain, long considered reliable, is now exposed to cracks that weren’t apparent before.

The free float—gold available for immediate OTC trading—has declined after the wave of shipments to New York. Despite the logistics claims, many have said that this is just a good old fashioned stock-out

by Blackdog | 1st Feb 25, 8:50am 1738353047

Silver next

by J.C. | 1st Feb 25, 7:33pm 1738391601

LBMA silver inventories have experienced significant declines in recent years. The decline in silver inventories is attributed to various factors, including strong demand from industrial and investment sectors, as well as the manipulation of silver prices by systemic banks holding substantial short positions in the market. As the conspiracy theorists understand, the short positions on gold and silver are there for a purpose.

ETFs, such as the iShares Silver Trust, hold a significant portion of the silver in these vaults, and fluctuations in their holdings can impact overall inventory levels. The ongoing decrease in silver reserves raises concerns about the ability to meet future physical demand, especially given the growing demand for silver across different sectors.

by nigelh | 1st Feb 25, 12:18pm 1738365494

In the last ten years I think, Comex was running around like a scalded cat looking for the hard stuff and had to get it from the UK. Just goes to show how much paper trading in gold there is. I'll have to get some hard stuff and keep it under the mattress.

by J.C. | 1st Feb 25, 7:35pm 1738391708

The volume of gold derivatives far exceeds the amount of physical gold traded. This discrepancy highlights the significant leverage in the gold derivatives market compared to the physical gold market. Physical gold represents only a small fraction of the overall gold market activity, which is dominated by derivatives trading.

by J.C. | 1st Feb 25, 8:55pm 1738396525

USA Treasury Secretary Scott Bessant's largest position is gold. Hear it from the horse's mouth (from 50 mins).

https://www.youtube.com/watch?v=wchyQ-XoBlE 

by IT GUY | 1st Feb 25, 9:00pm 1738396816

Thanks for that link

by J.C. | 1st Feb 25, 10:59pm 1738403950

Gold sits on the Fed's balance sheet at USD42 - 1970s prices. Not market prices. The USD gold price is world's gold benchmark price. If US revalues gold to USD4k, the world's price is USD4k.

Gold Held at Fort Knox and Other Depositories:

The U.S. holds 261.5 million troy ounces of gold. At the outdated valuation of USD42, this gold reserve is reported as ~$11 billion on the Federal Reserve's balance sheet. If marked to current market value, the reserves would be worth over $500 billion.

Why Doesn’t the U.S. Update the Gold Price?

The statutory price is a relic of the Bretton Woods system, which ended in 1971 when the U.S. fully transitioned off the gold standard. Adjusting the value would affect monetary policy, Treasury accounting, and international financial agreements.

by powerdownkiwi | 1st Feb 25, 9:09am 1738354170

Stand back a pace or two, DC.

The US is a dying hegemony. At the end of the day, they're just ever-bigger vacuum-cleaners of resources from elsewhere, and the returns always peak, then decline (there is no physical alternative). That is exascerbated by the best-first, worst last trend, and by increasing entropy.

The cracks are showing, the pretenders are in the wings, but they, too, are inserting their tubes into a finite planet, and they've left their run too late to suck as fast as the US topped-out at.

Trump has articulated what the US has been doing for years - financial and political and military thuggery to obtain said resources - just without the sheep's clothing. He (they) will increasingly ostracise those who clustered around since WW2 - Canada, NZ, Australia, Britain, and new alliances will form in the vacuum. I see a middle cluster of the 4 remaining 'eyes', plus Europe, acting as the Eastern Empire split-part of Rome (when it suffered the same predicament).

But can the financial/internet connection stand such a schism? Kiwisaver, anyone? Investments? Good luck to us all if/when that seizes up. Too many rentiers too dependent on that all continuing...

by Brocky | 1st Feb 25, 10:06am 1738357602

February 1st, 2025

Malthus has been dead wrong for 69,431 days and counting.

by Pa1nter | 1st Feb 25, 10:21am 1738358488

Got a chuckle.

Kinda reminds me of Jehovah's Witnesses waiting for rapture, where they'll inherit the earth and a lucky few thousand will ascend to heaven.

"The world has gotten so wicked, Gods gonna turn up any day now and sort things out"

by powerdownkiwi | 1st Feb 25, 10:57am 1738360653

You're better than that, Painter.

The other, isn't...

We are entering the 'final show-down as to who gets the remains of what? There will be back-casters (I was just reading about the psychology of that; essentially a denial of one's guaranteed death) who fiercely disparage - but don't encourage them eh? The sheer rates of current extraction, tell us we're on the cusp.

As I said, you're better than that. This is a serious topic - perhaps the most serious there is. Sure, we can still have fun - I'm loading my gear up for a national champs in my chosen sport as we speak, and I'm past my 70th birthday - but this needs to be dealt with/discussed, not obfuscated.

Go well

by Pa1nter | 1st Feb 25, 11:08am 1738361294

I dunno, I can go pretty low.

I guess I just can't conform to equations attempting to pinpoint exactly when the jig is up.

There's obviously transitioning between states, likely heading in a certain direction, then when and what next, too complex to pre determine.

There's a change in approach required, but it extends much further than energy usage. To the mental desire that's behind that, and a great number of our other follies.

by Let me be Frank | 1st Feb 25, 11:15am 1738361749

"I guess I just can't conform to equations attempting to pinpoint exactly when the jig is up."

Meadows, Randers et al spent quite some expertise and time to model exactly that....their model concluded sometime around 2040.

by Pa1nter | 1st Feb 25, 11:19am 1738361952

People have been doing it for thousands of years.

We've gotten better at measuring things, but not much better at predicting them. Case in point; most professional economists' predictions are wrong, and weather predictions still aren't much better than a coin toss.

by Let me be Frank | 1st Feb 25, 11:42am 1738363322

Excepting that the subsequent reviews have found that the trajectory predicted is pretty much on target...one saying

"In 2020, an analysis by Gaya Herrington, then Director of Sustainability Services of KPMG US,^[54] was published in Yale University's Journal of Industrial Ecology.^[55] The study assessed whether, given key data known in 2020 about factors important for the "Limits to Growth" report, the original report's conclusions are supported. In particular, the 2020 study examined updated quantitative information about ten factors, namely population, fertility rates, mortality rates, industrial output, food production, services, non-renewable resources, persistent pollution, human welfare, and ecological footprint, and concluded that the "Limits to Growth" prediction is essentially correct in that continued economic growth is unsustainable under a "business as usual" model.^[55] The study found that current empirical data is broadly consistent with the 1972 projections and that if major changes to the consumption of resources are not undertaken, economic growth will peak and then rapidly decline by around 2040.^[56]^[57]"

https://en.wikipedia.org/wiki/The_Limits_to_Growth#:~:text=Critics%20de….

In the absence on contrary evidence it is perhaps wise to consider that their work is valid.

by Pa1nter | 1st Feb 25, 12:11pm 1738365091

But it's a future prediction. The future is the evidence.

In 1972 they didn't predict the rapidly falling birth rates that are going to be a catalyst for degrowth. That's largely a social phenomenon relating to urbanisation and changing roles of woman, and little to do with resource usage.

by Let me be Frank | 1st Feb 25, 12:33pm 1738366419

Go and look at the charts....population predicted to decline from mid century in original model (LtG)

It is a systemic model and the causes will be interrelated....you can attribute social phenomenon, but I would ask what is driving that?

by Pa1nter | 1st Feb 25, 12:35pm 1738366555

I outlined it above:

- cities reduce fertility rates

- when you give women more life options than baby makers, they make less babies

by Let me be Frank | 1st Feb 25, 12:49pm 1738367374

So part of a system....that a systemic study covers.

You should remember that the population has not yet begun to decline...the factors that create that decline will be manifold.

by Pa1nter | 1st Feb 25, 1:05pm 1738368309

Feel free to correct me, but limits to growth assumes population decline due to increasing resource scarcity. Not due to societal volition.

by Let me be Frank | 1st Feb 25, 2:45pm 1738374350

Again, what is driving that societal volition?...you attribute cities and options for women...not sure that they are a recent phenomenon. However we do know that factored into the decision to delay/deny having children are resources and future prospects....and birth rates are one end of a population decline, I note the US life expectancy has been in decline the past few years.

Systemic?

by Pa1nter | 1st Feb 25, 3:10pm 1738375806

you attribute cities and options for women...not sure that they are a recent phenomenon.

Urbanisation increased 4-fold in 100 years, and will increase by approx 50% again in the next 25.

Female labour force participation has been ramping for half that period.

Generational trends take decades to observe.

The above factors are felt independent of resources, particularly energy.

by Let me be Frank | 1st Feb 25, 4:07pm 1738379252

You say independent and I say in collaboration with.

The research I am reading indicates we have plateaued in energy (and therefore output) and will decline thereafter which aligns with the LtG model and consequently (with lag) we can expect to see the decline in production....that will include the necessaries of life and all that implies.

by Palmtree08 | 1st Feb 25, 5:10pm 1738383054

I know declining fertility is attributed to "choice" in the the same way peak oil is spun as "peak demand". It gives the illusion humans know WTF they are doing to the planet and themselves, and are in control, but

https://www.who.int/news/item/04-04-2023-1-in-6-people-globally-affecte…

"Sperm count is declining at an accelerated pace globally. since 1972, researchers found sperm concentrations declined by 1.16% per year. However, when they looked only at data collected since the year 2000, the decline was 2.64% per year."

https://academic.oup.com/humupd/article/29/2/157/6824414?login=false#go…

Homo sapiens are steralising themselves with cleverness! "If you follow the curve from the 2017 sperm-decline meta-analysis, it predicts that by 2045 we will have a median sperm count of zero."

https://www.theguardian.com/society/2021/mar/28/shanna-swan-fertility-r…

by Let me be Frank | 1st Feb 25, 6:10pm 1738386632

And sperm count could well be a result of environmental factors...pollution is part of the LtG model.

by Palmtree08 | 2nd Feb 25, 11:31am 1738449106

Exactly! My references point to environmental toxins being closely linked to declining fertility, and not just human incidentally. Population and pollution lines on the ltg graph are closely related. The greater the population the greater the fertility suppression due to increasing pollution.

by solardb | 2nd Feb 25, 3:06pm 1738462013

And our artificial world means nature's selection of survival of the fittest no longer applies.

by M0ralHazard | 1st Feb 25, 12:21pm 1738365719

I like the old quote;

"Its Difficult To Make Predictions, Especially About the Future'

by Pa1nter | 1st Feb 25, 12:33pm 1738366380

Nice, I like it.

Most of us haven't even worked out the present.

by kiwikidsnz | 1st Feb 25, 12:27pm 1738366033

Over millenia historical civilisations have always come up against their contemporary "limits to growth" & energy constraints etc.

Until they overcome them & found innovative solutions because some bright spark (!) refused to take no for an answer. Some of us are more optimistic in our ability to similarly progress in future.

"The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man." — George Bernard Shaw

by ThoughtsAndTorts | 1st Feb 25, 10:53am 1738360429

There's also an often unacknowledged arrogance to the position that WE have seen the peak and it is all downhill from here. Nothing will ever get better from what we had, so we're not missing out on anything amazing in the future when time's inevitable toll comes for us.

by powerdownkiwi | 1st Feb 25, 10:59am 1738360755

You conflate physical consumption with intellectual growth.

The former is limited - always was.

The latter, not.

by Gummy Bear Hero | 1st Feb 25, 12:10pm 1738365019

Malthus wrote the original version of " Essays of Principles of Population " in 1798 ... he prophesied the human population doubling geometrically every 25 years , but agricultural output only increasing at a low lineal rate ...

... the truth has been very nearly the complete opposite of his prognostications ... 227 years of being utterly wrong ...

And yet , to this day , if you hear a crowd chanting " this is our year " you can't be sure if it's supporters of the Warriors rugby league team , or PDK and his Malthusiastic acolytes ... either/or ... losers !

by powerdownkiwi | 1st Feb 25, 12:30pm 1738366209

Lightweight acolytic bombast aside...

Every Trump move is to physically displace another cohort, or to annex a physical space.

Why do you want Greenland if you have unlimited resources at home? You don't. Why do you send Mexicans out of the US, if there are unlimited opportunities within? You don't.

This is unfolding now, whether some folk have a vested-interest need in obfuscation discussion, or not.

by agnostium | 1st Feb 25, 4:29pm 1738380542

Why do you want Greenland if you have unlimited resources at home? You don't. Why do you send Mexicans out of the US, if there are unlimited opportunities within? You don't.

This ^^^^^

by profile | 1st Feb 25, 1:39pm 1738370347

Malthus lived before Mendel, Borlaug and Rutherford etc. so was never going to be remotely correct.

by Palmtree08 | 1st Feb 25, 5:22pm 1738383727

You are grasping at straws if you believe Borlag had the same yeasty alternative reality view as yourself.

"Borlaug believed that science should serve humanity, but realized there was a planetary limit on population. He thought everyone born had a right to food, but was very concerned that human reproduction would outstrip our capacity to feed ourselves. He often referred to the exponential human birth rate as ‘The Population Monster.’"

"He believed deeply in education and that education should be a global priority, especially the education of women. He was also concerned about pollution, the preservation of wild areas and maintaining genetic diversity of plant species. His messages to the world were a balance of enthusiasm and caution."

I'm guessing it's fair to say Borlag wasn't a tear the Earth to pieces chasing the last dollar type?

https://borlaug.cfans.umn.edu/about-borlaug/significance#:~:text=Borlau….

Did either Rutherford , or Mendel express a view that exponential growth in a finite space was possible, or desirable?

by powerdownkiwi | 1st Feb 25, 9:34am 1738355670

https://scheerpost.com/2025/01/28/yanis-varoufakis-on-cloud-capital-vs-…

He got squashed out by the blob, was a student of Steve Keen's - no slug.

by Pa1nter | 1st Feb 25, 10:24am 1738358691

And in Automotive tech news from Russia: While decadent West collapses under its own wokeness, glorious heterosexual workers of the motherland install cutting edge LED headlights to the pinnacle of Russian automotive engineering. A Lada that first rolled off the production lines 50 years ago.

https://www.drive.com.au/news/2024-lada-niva-scores-futuristic-2004-tec…

She gets 3 hectares to a quart of kerosine.

by AdamJay1990 | 1st Feb 25, 10:45am 1738359941

Put it in "H"!

by profile | 1st Feb 25, 1:40pm 1738370417

Gold

by Gummy Bear Hero | 1st Feb 25, 12:17pm 1738365420

... Lada ? ... damn , I put in an order for a Trabant ... military green ... the most recent 1976 model ... comes with a vodka bottle opener ...

by solardb | 1st Feb 25, 12:24pm 1738365883

I doubt many are sober getting into a trabant.

by Foxglove. | 1st Feb 25, 12:28pm 1738366094

Mother had a Lada. Came out of that deal the Dairy Board was coerced into with Russia. In Wellington in one flying downhill sweep she wrote off three other cars parked on the other side of the road. It just decided it would go right she explained to the attending officers. Sure enough on inspection the steering linkage had failed. Whether before or after the collisions could not be known. Apart from that the Lada was largely unaffected and so too was mother.

by powerdownkiwi | 1st Feb 25, 12:31pm 1738366267

Assume it was well-stocked?

by kiwikidsnz | 1st Feb 25, 12:29pm 1738366176

IIRC several decades ago Russia paid for NZ butter trade with Ladas?

by Pa1nter | 1st Feb 25, 12:38pm 1738366706

Yep. And then the dairy board (or whoever) had to operate a side gig marketing and servicing poorly made cars based of already poor 1970 era Italian technology.

by Beanie | 1st Feb 25, 1:10pm 1738368619

I remember in the 80's the NZ lawn bowling title had a first prize of a brand new Lada. I knew the guy that won it. He joked he was relieved he won because he had heard 2nd prize was 2 Ladas.

by He Kahukura | 1st Feb 25, 3:10pm 1738375819

by He Kahukura | 1st Feb 25, 3:09pm 1738375753

The Italian governments of the late70's laughed all the way to the bank as they sold the production line for the Fiat 124 several times over to eastern European Warsaw pact countries plus the Russians and also into Sth America.

Of all the variants the Russian Lada was the best with a beefed up body. It had good suspension, passable steering but the Russian SOHC engine was a nightmare. If they had kept the original Fiat 124 pushrod engine it would have been fine as a performer. A better option would have been to insert the French derived Simca 1501 engine which was a update based on the Fiat lump. Interior finish was laughable. However with a Fiat 125 twin cam transplant and gearbox it went like a scaulded cat. The transplant wasn't straightforward but after I'd done a couple it could be done in a weekend.

by Snow | 1st Feb 25, 3:29pm 1738376957

Ended up with a Lada Niva on the farm in the 90's (good wee 4wds when running) and a Belarus tractor to replace an old Leyland.

by Palmtree08 | 1st Feb 25, 5:32pm 1738384375

Yeah, the old Leylands used to leak a bit of oil. The Belarus was in a league of its own though.

by Palmtree08 | 1st Feb 25, 5:29pm 1738384178

Still got the wind up windows? The best option for escaping from submersion in a flooded pothole I understand?

by Foxglove. | 1st Feb 25, 5:45pm 1738385115

A while back our little grand children twins, put in the back of their aunt’s old but serviceable Honda Civic asked, what are these for, pointing at the window winders on the door. Still better than the old family Model A with the raised little rectangle of glass that you used to pull the windows up and down.

by nktokyo | 1st Feb 25, 12:48pm 1738367303

I just spent 3 weeks in Japan. There is the mother of all tourism booms that has been going on for a year now.

by Squishy | 1st Feb 25, 1:03pm 1738368220

As JPY has collapsed Japan has become very affordable. Probably not so great if you are paid in JPY though as it impoverishes you.

by J.C. | 1st Feb 25, 5:31pm 1738384281

According to Credit Suisse, Japan’s median citizen has a higher net worth than America’s median citizen, because their wealth is more dispersed while America’s wealth is more concentrated. It is approx 40% higher.

by Colin Cameron | 1st Feb 25, 3:01pm 1738375283

Great heading there in March

by Squishy | 1st Feb 25, 12:59pm 1738367987

Let's see if Trump can make Brexit work.

by J.C. | 1st Feb 25, 8:52pm 1738396332

Here is what you not being told. The Treasury is printing money like mad and announced $241b new money will be printed on February 3rd via auction.

QE is beginning and Jerome wont tell you until its too late to enter low. Don't believe me, then go and look for yourself.

https://www.treasurydirect.gov/auctions/upcoming/