Here's our summary of key economic events overnight that affect New Zealand with news Wall Street has taken sudden fright on the growing realisation of what Trump has wrought for them. It's risk-off in a big way with equities falling sharply and bond yields retreating. Normally on a risk-off phase the USD rises, but this time it's actually softer. Putin's puppet isn't good for business.
Probably not helping is that one-year US inflation expectations are rising, the first rise in four months, and to its highest since May 2024. The broader survey reported rising pessimism. Fear of job loss jumped sharply. The worries about missing a debt payment over the next three months jumped to 14.6%, the highest level since April 2020. The increase was driven by those without a college degree and largest for those under age 40, the demographic that drove the election result.
And its not just consumers. American farmers are recoiling at the impact on them and their markets. It is likely that farm spending and investment decisions will take a long holiday until most USDA and USAID programs are restored. Reports and data from those agencies are likely to become very unreliable now that DOGE-aligned managers are now in charge. Farmers are voting with their checkbooks and it is going to be tough for the wider agribusiness sector.
And it is probably worth noting the the Tesla share price is down another -13% so far today. That is a now a -53% drop since the US election.
Across the Pacific, there were a set of indicators out for Japan overnight. Their leading economic indicators index, which gauges the economic outlook for the coming months based on data such as job offers and consumer sentiment, edged up to its highest reading since October. However, that was slightly less than expected. On the other hand, annual household spending rose for the first time in five months, its fastest growth since August 2022. However consumer sentiment slipped.
China said it will impose a 100% tariff on imports of certain Canadian agricultural products, along with a 25% levy on seafood and pork. They will come into effect in ten days in response to Ottawa's trade measures. Canada had previously imposed a 100% tariff on Chinese-made electric vehicles starting October 1 last year, aligning with similar actions by the US and EU over concerns of unfair competition. Additionally, Canada implemented a 25% tariff on Chinese steel and aluminium imports, effective since October 15 last year. They are trying not to be gamed in the maneuvering between the US and China.
And you may be interested to know that Beijing authorities have launched a trial of street patrols by robot dogs. Given their pervasive 'social security' system tied into the extensive facial recognition systems, this seems a particularly dystopian development.
In Europe, German industrial production rose in January from December and by more than expected. That has helped them eat into their year-on-year decline, taking it to its smallest level since mid-2023.
The UST 10yr yield is now at 4.23%, down -7 bps from yesterday at this time. The key 2-10 yield curve is holding at +31 bps. Their 1-5 curve inversion is now -3 bps. And their 3 mth-10yr curve inversion is back out to -8 bps. The Australian 10 year bond yield starts today at 4.44% and up +3 bps from yesterday. The China 10 year bond rate is now at 1.84% and back up +9 bps. The NZ Government 10 year bond rate is now at 4.64%, unchanged from yesterday.
Wall Street is sharply lower to start its week, on the realisation of what Trump has wrought, down -2.7% on the S&P500. Overnight, European markets were all down about -1%. Yesterday, Tokyo ended its Monday session up +0.4%. Hong Kong was down -1.8%, and Shanghai was down -0.2%. Singapore was down -0.4%. The ASX ended its Monday trade up +0.2% while the NZX50 ended up +0.9% and by far the strongest of the equity markets we follow.
The price of gold will start today at just over US$2898/oz and down -US$12 from yesterday.
Oil prices are down -50 USc at just on US$66.50/bbl in the US and the international Brent price is down -US$1 at just over US$69.50/bbl. (Russian oil is down to US$65/bbl and near its largest discount.)
The Kiwi dollar is now at 57.2 USc and up +10 bps from yesterday. Against the Aussie however we are up +30 bps at 90.8 AUc. Against the euro we are up +10 bps at 52.8 euro cents. That all means our TWI-5 starts today just over 66.5, and up +10 bps from yesterday.
The bitcoin price started today at US$78,624 and down another large net -4.8% from this time yesterday. That means it is given up all its gains after the US election in November, and more. Trump seems to have 'lost' the crypto tech-bros too. Volatility over the past 24 hours has been high at +/- 3.4%.
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36 Comments
Up, up, up go the yields on Japanese bonds. Down, down, down go US equities. Up, down, turnaround, clap your hands, touch the ground, that's how the yen carry trade unwinds.
According to one George Soros - “markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.” Well at least that explains why I am not in the billionaire club.
But the swap rates you have repeatedly cautioned will rise, are dropping.
Long end of the yield curve is still up from inflation fears.
But the NZ swap rates, even at 5y, which is the longest mortgage term you can easily find in NZ aren't.. they have been going sideways all year. Actually since August last year really. And 10y is the same, not going up.
What’s the scenario where NZ mortgage rates drop further? US goes into recession, equities rotate into bonds, yields drop. Recession leads to lower demand for oil. Inflation comes down due to less spending and lack of demand. More room for rates to come down.
But if inflation stays an issue despite recession, you get stagflation. Long end can’t come down because it has to price in inflation.
US and UK inflation has ticked up since central banks started cutting around Aug-Sep last year. Both at 3% with BoE forecasting 3.7% for Q3. Their 10y has rejected those cuts and moved in the opposite direction, bond market saying inflation’s still a problem. Japan’s inflation is at 4% with their entire yield curve selling off. Germany’s inflation has ticked up since September from 1.6% to 2.3%, their 10y spiking to Oct 2023 highs on news of infrastructure spending. Many other European countries seeing their 10y spiking near Oct 2023 levels.
How’s little old NZ going to offer lower rates while the rest of the world battles inflation and deficits?
OCR drops as the RBNZ projects, swap rates drop (mostly at the short end), mortgage rates go down further.
Your deflection is transparent and boring.
My understanding is that RBNZ follows the NZ2Y rate to set the OCR. It would be worth going back to 1999 when the OCR was first introduced to see how much the OCR deviates from the 2y. Also, we've had low inflation below 2% over the last 25 years until recently, so the 2y will need to factor in current inflation.
What? You are saying the RBNZ just follows what the market says?
Oh lordy.
I think so, unless someone can correct me. The bond market prices in inflation because you want your return to beat inflation, you wouldn't lend to the government otherwise. If inflation is below target (2%), central banks can cut rates below the 2y to stimulate. If inflation is above target (2%) they need to front run the 2y to stay ahead of inflation moving higher. Usually, when the short end sells off, they let it go for a while, hoping it will come down on its own before having to hike rates further.
The 2% target is nonsense in my opinion, it should be zero. But that's another discussion.
And in the periods where there was no (meaningful) trading of 2 y govt bonds, like Nov 2019 to Nov 2020 or Oct 2013 to Nov 2014?
US, UK, and NZ cash rates follow their 2y. They can cut below the 2y when inflation’s low, but if inflation’s above target, they have to hike near or above the 2y.
Trump says a transition period for the economy is likely: 'You can’t really watch the stock market'
Treasury secretary warns U.S. could enter 'detox period'
Expect US to enter recession while Japan has more positive growth news as their bonds sell off and BoJ hikes rates. Big question is how much of US equities will roll over into the US bond market to bring yields down?
Just think of the millions made by insiders to Trump's on again off again, all over the place policy announcements.
As Soros said - bet on the unexpected, but if you are one of Trump's billionaire cabinet members you have the knowledge to know it's a sure bet.
Cash is king during a recession and they'll all have excess cash to take advantage of the mayhem.
Oligarchs in charge and creaming it.
Money buys power and power makes money. As basic as that.
Just like Pelosis then Kate? Made millions in stock market picks that tended to always end up being right (like she knew something the general public didn’t know yet). You can even buy a Nancy Pelosis exchange traded fund from the stock exchange now given how she has managed to outperform the general stock market - she’s like Warren Buffet but without having any finance or econ education only a BA. Impressive huh - almost too good to be true.
And if you dislike Musk for his influence over political outcomes then you should seriously hate Soros. Unless of course your belief is that the political left can do no wrong (ever).
Fellow Democrat Joseph Kennedy hugely augmented his fortune while serving as US ambassador in London before and during WW2. Straight out insider trading. President Roosevelt detested the man and had him recalled as soon as possible.
Yes I read ‘The Kennedy Curse’ by James Patterson and The detailed book on the life of JFK by Fredrick Logevall (a great read - definitely recommend) a few years ago to better understand the history of the Kennedy family.
My conclusions were that Joseph Kennedy was insanely wealthy but incredibly flawed as a person.
Pelosi also #2 on the charts for war stocks. Dems have done quite well out of misery.
Unless of course your belief is that the political left can do no wrong (ever).
Nah, they're all on the take somehow - it's a hallmark of American democracy to widen the gap between rich and poor.
Imagine where they'd be if Bernie had got the Dem nomination when Hilary won it.
Mind you, the SS would have had a real job keeping him safe, but he'd have gone for it. Would be a totally different place.
Stocks could be dropping because of Trump or they could be just be dropping because they have been seriously overinflated for quite sometime (on any fundamental analysis) - or a combination or both.
Good observation. I'm 70 and have held a position in my head for some years now that asset $ values have been disconnected from earnings, or the underlying purpose of the asset. Ponzi is used to describe the housing market here, I reckon that has also applied to share markets.
Tesla drop in share value is intriguing from the perspective of how that will impact the productive capacity of the company. Will it result in increased risk premium for operational borrowing? Will it slow down technology development - AI for example? Will it drive economising short cuts that were apparent in Boeing? Passing increased or different risk to the consumer?
Interesting times....
The goal of the political left now appears to be to try to destroy Musk and Tesla, despite Musk starting Tesla for what used to be considered politically left reasons/ambitions (green energy, anti fossil fuel etc).
Pretty bizarre times we live in.
Elon Musk categorically did not start Tesla.
He bought into it, bought out the founders and spent up large to have himself listed as a founder of Tesla.
Here are a couple of links:
Who Really Founded Tesla? The EV Company’s Origin Story, Explained
History of Tesla, Inc. - Wikipedia
Yes I’ve read a few book about Musks involvement about the initial years of Tesla. Without his investment and work it would have almost certainly (in my opinion) been another failed startup and we wouldn’t even know who or what the Tesla company is - nor would there been anything for the political left to attack now that they’ve decided Musk is on the hate list of the extreme-left because of his involvement with Trump (but we also need to simultaneously remember the political left are the party of compassion, inclusiveness and tolerance while they violently attack and damage other people’s property because they disagree with them).
It's not that bizarre. Over the last few years Musk has quite clearly veered dramatically to the right, perhaps as a reaction to the extremes of the left in terms of what he might call wokeness. It's quite rational for those on the left to reevaluate him given that change.
The question is, was he really a leftie back in the day or was he more like Zuckerberg, who suppressed his political opinions for years because he saw the way the political winds were blowing and pragmatically trimmed his sails to match?
Feels like both sides have become more polarized - Trump's policies toward Russia, or the pardoning of rioters, posturing against their allies, or grifting via his own crypto currency would have been completely unthinkable to the conservatives of a decade ago.
Perhaps that's more of a cult of personality than a political drift, or a little of both?
Cult of personality, for sure.
Losing favor among the faithful now though, but too late.
Can't wait to see if the administration ignores the Supreme Court ruling about having to start USAID back up and pay all the contractors their overdue invoices.
If they do ignore the SC - it will be the biggest test of the rule of law yet. Deadline Friday US time.
Tesla drop in share value is intriguing from the perspective of how that will impact the productive capacity of the company.
Yeah, but it has really only come back to where it was about 6 months ago - it had a massive spike on the elevation of Elon Musk to "Guy who will save the USA" but it's come back down as his methods and successes since then have been put into question.
Here's a link to a graph: TSLA $222.15 (▼15.43%) Tesla Inc | Google Finance
If NZ manages to stay out of the tariff wars, and we have little control over this, then we will actually benefit from the multiple tariffs other countries impose on each other, as our products will be cheaper than those from tariffed countries.
Farmers are voting with their checkbooks and it is going to be tough for the wider agribusiness sector.
Farmers have only been able to financially survive due to government subsidies for decades now, so much so they are reliant on them to function while corporate America screws them for every penny. Documentaries such as Food Inc and others highlight this as the farmers make peanuts while having to take on greater and greater debt for new equipment etc to keep large scale contacts to corporates. Perhaps we will see a more localised model develop in the USA with communities banding together to function as opposed to relying on large corporations, or on the flipside we could see higher debt defaults and the rich swooping in to scoop up the distressed farms.
A friend mentioned recently that some NZ produce growers haven't made profits in 5 years - blaming inflation, workforce constraints, supermarket duopoly price setting, difficulty to access international markets
makechange, welcome to the world of food production.
There's plenty of digital marketplace and ecommerce tools that farmers could band together to use to make offers directly to domestic customers, but that requires different skillsets to traditional running of farms. Another consideration is that supply chains must be coordinated for raw produce to be processed to value added products e.g. grains to flours to customers.
Then you add the level of regulation involved and the profit isn’t there suddenly XD
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