Here's our summary of key economic events overnight that affect New Zealand, with news both superpowers are dicing with unsustainable budget deficits that are posed to explode. The Moody's downgrade was just a teaser. The bond market will make the real judgment.
But first today, the overnight dairy auction brought the expected settling of prices, even though they remain high. They dipped overall by -0.85% on the low volumes offered but with the backdrop that the European season is currently at its peak. WMP and SMP both dipped minorly and as signaled in the derivatives market. The Cheese price sank -9.2% however but it had probably gotten excessively high in prior events, so an unsurprising correction. Chinese buying presence was a feature of this event.
US retail sales rose +5.4% last week from the same week a year ago, but this is clouded by the unknown impact of their new tariff-taxes. It is their slowest rise since late March and the impact of the tariff taxes will be starting to show up now. So it could well be that retail sales volumes are starting to decline now as a consequence.
On Wall Street, there is growing nervousness about how the Federal Government's budget is being planned. If it goes through as the Administration is proposing, the US deficit to balloon sharply. And the bond market will have something sharp to say about that.
In Canada, their inflation rate fell to 1.7% in April, but there was a special on-off factor that helped it. It dropped from 2.3% in March not quite hitting the expected 1.6% April level. A large part was a drop in energy prices not only because the oil price is easing but they also removed the consumer carbon tax. Food prices prices were up +3.8% however, especially the cost of fresh food.
China has cut its key lending rates to record lows at yesterday's May fixing. The one-year loan prime rate, the benchmark for most corporate and household loans, was lowered by 10 basis points to 3.0%, while the five-year LPR, which is the basis for mortgage rates, was cut by the same margin to 3.5%. These changes were what markets were expecting and the first reductions since October. It is another in the string of monetary easing measures announced earlier this month.
That official move was immediately followed by the four largest Chinese state-owned banks who cut deposit rates by between -5 bps and -25 bps. Those four core SOE banks are Bank of China, China Construction Bank, ICBC, (all of whom have New Zealand subsidiaries) and the Agricultural Bank of China. Other banks followed. Money is flowing out of savings accounts now, back to higher earning "wealth products', a move that in the past has been fraught with risk.
The US isn't the only superpower flirting with deficit spending danger. China is too, as its fiscal stimulus pushed its four-month budget deficit to a record high of -¥2.65 tln in 2025 (-NZ$620 bln). And there is no public pushback on the wisdom of that.
Malaysian exports took off in April with a strong +16.4% rise from the same month a year ago. If we look past the pandemic recovery growth, it was near their best export performance since 2018. But also came as imports surged +20% to a new all-time record high.
In Europe, it might have been marginal but it is worth noting all the same - consumer sentiment got less bad in May. This seems to have broken the 2025 run of declines in these survey results, a decline that really started in late 2024.
In Australia, they cut their cash rate target by -25 bps as expected to 3.85% which they say is still at a restrictive level, just less so. Inflation and trade uncertainties are still on their mind - and the risks to their continuing expansion were more so than markets were anticipating. Governor Bullock's press conference comments were more dovish than the rate change statement, and more dovish that many were expecting. The RBA also trimmed its growth forecasts. Markets now expect at least two more -25 bps rate cuts to come through in 2025. Yesterday's Bullock comments opens up the possibility of more.
The UST 10yr yield is at 4.48%, up a mere +1 bp from this time yesterday. The key 2-10 yield curve is now steeper at +52 bps. Their 1-5 curve is now inverted by -5 bps. And their 3 mth-10yr curve is unchanged at +18 bps. The Australian 10 year bond yield starts today at 4.44% and down -15 bps from yesterday after the RBA signals. The China 10 year bond rate is down -1 bp at 1.67%. The NZ Government 10 year bond rate is lower at 4.65% and down -4 bps in a echo from the RBA.
Wall Street is lower again, with the S&P500 down -0.7% in Tuesday trade. Overnight European markets were up about +0.7% overall with another record high in Frankfurt. Yesterday Tokyo ended its Tuesday session up +0.1%, Hong Kong was up +1.5%, and Shanghai was up +0.4%. Singapore ended up +0.2%. The ASX200 rose +0.6% and the NZX50 ended up just +0.1%.
The price of gold will start today at US$3285/oz, and up +US$58 from yesterday.
Oil prices are a tad softer today at just over US$62/bbl in the US but the international Brent price is +50 USc firmer at US$65.50/bbl.
The Kiwi dollar is now at 59.2 USc, up +30 bps from yesterday at this time. Against the Aussie we are up +40 bps at 92.2 AUc. Against the euro we are down -20 bps at 52.5 euro cents. That all means our TWI-5 starts today still just over 67.5 and essentially unchanged from yesterday.
The bitcoin price starts today at US$106,320 and up +0.9% from yesterday. Volatility over the past 24 hours has been modest however at just under +/-1.2%.
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10 Comments
No surprises there
Digital Services Tax Bill scrapped by Revenue Minister Simon Watts after Donald Trump threatens retaliation
https://www.nzherald.co.nz/nz/politics/digital-services-tax-bill-scrapp…
No, no surprises, but it's not right. Those companies are doing business in NZ, why shouldn't they pay tax on that?
during a recent trip overseas I spoke to a couple of people who work internationally, and they both said that these days their companies are actively avoiding going to or through the US, and dealing with them. They both indicated their companies have picked up much more business outside of the US than they were doing with the US, and that the global trend to avoid dealing with the US is ramping up, especially in medium size companies.
Why won't we tax them?
Because Luxon's Three-Ring Circus is all about corporate advantage.
Follow the money...
Why worry about the good of the populace?
"On Wall Street, there is growing nervousness about how the Federal Government's budget is being planned. If it goes through as the Administration is proposing, the US deficit to balloon sharply"
It's only a few months ago people were saying we should accept the rough edges of the Trump administration because his laser focus on the deficit was all that matters and getting debt under control was more important than things like common decency, or civil liberties.
Another example of the TACO trade playing out? Cutting spending is hard, and Trump Always Chickens Out.
Thanks for the report, David.
The cat is really amongst the pigeons now, with the recent revelation that the world's traditional GDP figures and rankings, plus even the revised PPP version are being revealed as residing in cloud cuckoo land.
This is not conspiracy or conjecture, it's straight from the horse's mouth - the IMF's mouth - it appears they have finally decided to jettison their sinophobic narratives and accept a stark reality - back in 2023 the PRODUCTIVE GDP of China was already 300% larger than that of the US, and not very far ahead of India.
With India's spectacular real growth in the last few years and the lack thereof in the US economy, I would hazard a guess that the U$ has already slid back into position number 3.
The figures below suggest to me that for quite some time US growth, in real terms, has been significantly negative.
In US dollars the 2023 figures came in at...
Mainland China $15.979 trillion
USA $5.37 trillion
India $5.017 trillion
Indonesia $2.401 trillion
Japan $2.02 trillion
Russia $1.88 trillion
Germany $1.741 trillion
Turkey $1.404 trillion
South Korea $1.210 trillion
Mexico $1.109 trillion
Brazil $1.097 trillion
As the realisation that healthy (read REAL) GDP profiles are generated by productive economies, not by financial (FIRE) rentier' economies, this must have major repercussions.
The bond markets will be impacted as risk premiums are demanded by buyers of US sovereign debt. When a currency crisis and economic instability occur, sovereign debt prices can skyrocket.
In November 1976 UK 10-year gilt yields peaked at around 17%. The alarming part of that crisis was that the IMF was there to bail out the UK. Given this shocking revelation of meaningful GDP figures, who on earth is going to bail out the US?
Eventually, there is only one course left, buy their own sovereign debt, and fire up the printing presses. This will only further erode what is left of the purchasing power of the US dollar - it's already lost over 98% of its purchasing power anyway. This could morph into a stagflationary event of epic proportions and all accelerated by the Trump admin's trade/tariff war 'policy' declared on the entire planet.
The Moody's downgrade of US debt is farcical too, just as their ratings were leading into the 2008 GFC. What they completely ignore, from the point of view of the buyers of long-dated bonds, is that in a fiat currency crisis, not only will real returns be negative, but the capital redemption value could be worth only pennies on the £ too.
Regards to all at ICNZ
Col
How is "productive" or "REAL" GDP derived as a figure and what does it exclude.
It's a hugely complex puzzle to solve, Pa1nter - I have had this gut feeling for years that China's true GDP is likely to be somewhere between 200-400% higher than that of the US but I could never get to the real numbers, and there were a multitude of vested interests keeping this information out of the public eye.
BIG MISTAKE - if the West had been honest about how financialised it's economy had become much earlier, the situation may have been able to be addressed. That didn't happen for a variety of reasons, and not the least one being that in the US financial lobby system of governance, the legislative branch is seemingly not capable of planning anything outside of their 2-6 year terms - the vast majority of Congress's time and energy goes into being re-elected.
*(Lower House - Congress 2 years/Upper House - the Senate 6 years)
The rescue train left the station long ago - the only course now is an explicit sovereign debt default or massive inflation, which is technical default anyway when a country is living off the rest of the world's wealth.
YOUR QUESTION...
In very simple terms this Productive GDP calculation takes into account the fact that the monetary value of an identical product in one country can be vastly different from that product (in terms of goods and services) from another country.
Sometimes this same product or service in terms of the US dollar can be 3 -10x higher in the U$ and yet that amount is calculated into GDP. In terms of PPP GDP China's economy outgrew the US back in 2016, but this new revelation is an entirely different ball game - it exposes decades of obfuscation regarding the true productive state of the US economy, and by definition, a misplaced faith in the safety of the principal global fiat reserve currency.
PPP in 2023 calculated China's GDP at $33.01 trillion and the US at $26.85 but this also misses a large part of the picture. Other exclusions...
#1 Economic output that is not traded in the market-place, eg, rental of your own property which estimates the rent you would have to pay if you didn't own it. Also, employer-provided health insurance. These imputations alone add up to ~14% of US GDP ~ around $4 trillion in 2023. In China, these are not added if there is no cash flow to count.
#2 How far do the dollars go in the market? Construction, of ports, highways, buildings and some 45,000km of high-speed rail are given close to identical values in terms of GDP rating - China gets multiples more done per dollar spent. This is utter nonsense.
#3 Services - China has 4x the population but has less than half the number of lawyers. The US has more than 5x the number of accountants, and 15x as many investment advisers. The also US has a huge highly paid lobby workforce. In short, all of the services that are unique to the US and highly questionable in terms of contributing to the economy, are removed and they just look at how many products and services are produced.
When calculated in this way, China's productive GDP is more than the next four highest-ranked countries combined. The map of the globe that shows dominant trade partners China versus the US is just as graphic as these numbers - that alone was a massive clue.
For anyone who has studied global geoeconomics to any degree with an open mind, these numbers shouldn't be much of a surprise.
So you're just excluding the service sector or similar industries, and then equalizing product values by excluding massive disparities in labour costs - I.e. if I make a cheap disposable chair in one country for $10, and make an artisan oak one somewhere else for $300, we write the value of the more expensive one down to $10?
Does the massively greater Chinese productivity figure factor in 10s of millions of empty residential dwellings? As in, if a lawyer is producing nothing, negating the value of their revenue, do we do the same for mass scale construction of no use?
What about expansion of Chinese monetary supply over the period?
Do you have an independent source / link to support any of this or are they your reckons?
I had a quick swizz at the IMF and they don't look to use this methodology. So not sure how they're referenced.
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