Breakfast briefing; Bond markets bet Fed hikes won't stick

Business / news

American expansion now only modest; China births retreat further; China to raise US$44 bln to complete homes; Germany plans for gas shutoff; UST 10yr 2.81%; gold down and oil flat; NZ$1 = 62.7 USc; TWI-5 = 71.2

26th Jul 22, 7:19am by David Chaston

Here's our summary of key economic events overnight that affect New Zealand, with news investors are now betting that the US Fed will need to cut rates in 2023, and that is twisting the global bond market. The Fed is widely expected to raise rates +75 bps on Thursday, so these signals are confusing as markets struggle to make the transition.

In the US, even though the Chicago Fed's National Activity Index was unchanged in June from May - and still recording a moderate expansion - the Dallas Fed's more current July survey is only expanding with "modest growth" and gives more evidence of an economic slowdown in the US factory sector.

There was another US Treasury bond auction overnight, this one for the 2 year maturity and raising US$49 bln. It was well supported with the median yield achieved at 2.95% and marginally less than the 3.00% at the prior equivalent event.

China said the number of new births in several Chinese provinces hit the lowest in 60 years and their experts now expect the country's population to start to shrink before 2025.

And staying in China, they said they will launch a real estate fund to help property developers resolve their crippling debt crisis, aiming for a war chest of up to US$44 bln in a bid to restore confidence in the industry.

Hong Kong exports sank in June, down -6.4% from the same month a year ago and extending a run of depressing results for them. Hong Kong is now but a shadow of its former vibrant self as all their economic data now seems quite weak.

Taiwanese industrial production went right off the boil in June with only a trivial (for them) +0.7% rise year-on-year. But their retail sales took off, up a quite remarkable +22% year-on-year.

Singapore reported its June CPI inflation rate at 6.7% and well above the 6.2% expected and also well above the 5.6% rate in the March quarter.

In Germany, a closely-watched Business Climate indicator fell in July to its lowest in over two years and below market expectations as higher energy prices and the threat of a gas shortage are weighing on their economy that is on the cusp of a recession. Germany's gas network regulator warned that if gas through the Nord Stream 1 pipeline continued to be pumped at only 20%, the country would need to take additional measures to reach the 90% of storage capacity set as a target to avert winter rationing.

The UST 10yr yield starts today at 2.81% and up +6 bps to start their week. Market attention is squarely on Thursday's US Fed announcements where a +75 bps rate hike is universally expected. The UST 2-10 rate curve is virtually unchanged today, now at -21 bps and their 1-5 curve is slightly less inverted at -15 bps. Their 30 day-10yr curve is now at +69 bps and steeper than this time yesterday. The Australian ten year bond is up +5 bps at 3.37%. The China Govt ten year bond is unchanged at 2.80%. And the New Zealand Govt ten year will start today lower by -9 bps at 3.63%.

Wall Street has opened its Monday session little-changed, down just -0.2% in late afternoon trade and struggling for traction. Overnight, European markets closed mixed with Paris and London up about +0.3% and Frankfurt down -0.3%. Yesterday Tokyo ended its Monday session down -0.8%, Hong Kong fell -0.2% and Shanghai lost -0.6%. The ASX200 ended little-changed while the NZX50 lost -0.6% at the end.

The price of gold will open today at US$1720/oz in New York which is down -US$7 from this time yesterday.

And oil prices are little-changed at just under US$96/bbl in the US, while the international Brent price is now at just over US$100/bbl. These prices are a little less than +US$1 higher than this time yesterday

The Kiwi dollar will open today marginally firmer than this time yesterday at 62.7 USc. Against the Australian dollar we are softer at 90.1 AUc. Against the euro we are little-changed at just over 61.3 euro cents. That all means our TWI-5 starts today at 71.2 and a minor +10 bps above this time yesterday.

The bitcoin price is sharply lower than this time yesterday, down by -4.1% to US$21,859. Volatility over the past 24 hours has been moderate at just under +/-3.0%.

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

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35 Comments

by theglc | 26th Jul 22, 7:55am 1658778900

"American expansion now only modest"

Thats what happens when you turn off the printing press, you cant sustain that growth because it was artificial.

Since the pandemic started the US has printed around $4T which equates to about $17,500 per man woman and child.

Recession is inevitable without that obscene support.

by Baywatch | 26th Jul 22, 8:13am 1658780009

Its not just an American issue - everyone's printing press has been running hot!

by Fossil Lover | 26th Jul 22, 8:36am 1658781379

Which makes you wonder if the globalist agenda is to enslave our governments with unsustainable debt, in order to impoverish and control the masses.

by Baywatch | 26th Jul 22, 8:51am 1658782274

I don't think they need a agenda. Its the system we use boom/bust while debt ever increasing...nothing new.

by Pa1nter | 26th Jul 22, 11:46am 1658792767

There was also, you know, the pandemic.

So it was 17 grand a piece to tide everyone over while economies round the world sat at home for weeks or months on end.

Why people thought that'd be free is beyond me.

by False economies | 26th Jul 22, 10:57am 1658789847

Who are these globalists who can control all of humankind?

Generally history shows that impoverishing the masses leads to the elite getting their comeuppance...so that would kinda be shooting themselves in the foot.

What's that saying about putting things down to malice instead of incompetence...?

by Audaxes | 26th Jul 22, 7:57am 1658779064

Bond markets bet Fed hikes won't stick meanwhile...

Borrowers Face Tens Of Billions In Margin Calls On Swap Positions As Rates Rise

One banker who spoke to IFR, noted that a 200bps increase in the 10-year swap rate puts issuers that hedged fixed to floating about 20% out of the money on that position. That means they would have had to post around a fifth of their original borrowing amount as collateral. “That’s huge,” the banker said. How huge?

by nktokyo | 26th Jul 22, 8:20am 1658780441

A near-term market gap on margin and long term interest rate trend prediction are different things.

by Audaxes | 26th Jul 22, 8:12am 1658779926

Germany's gas network regulator warned that if gas through the Nord Stream 1 pipeline continued to be pumped at only 20%, the country would need to take additional measures to reach the 90% of storage capacity set as a target to avert winter rationing.

With Nord Stream 1 flowing at just 20% of capacity from July 27, Germany will NOT have enough natural gas to make it throughout the whole winter **unless big demand reductions are implemented**. Berlin will need to activate stage 3 of its gas emergency program #ONGT #EnergyCrisis - Link

by Palmtree08 | 26th Jul 22, 8:28am 1658780910

Germany will face a crisis this winter. 20% flow rate is designed to keep the addict on life support. Should reserves appear to build, gas flows would drop. It would probably be better if Germany didn't publically release these reserve figures and intensify their conservation efforts.

by False economies | 26th Jul 22, 11:00am 1658790053

Well that was quick!

https://www.bbc.com/news/business-62291458

by The Person | 26th Jul 22, 11:47am 1658792872

what a surprise, now that they have the turbine back from canada ahead of schedule (it's not needed till Sept - so that was never the reason), they suddenly find another turbine has 'technical issues'. Funny how there are so many 'technical issues' all of a sudden, totally believable that this is nothing to do with the 'special military operation'.

Germany needs to forget about shutting down those two nuclear plants and look at getting a couple of already shutdown plants back up and running ASAP. It's unfathomable to me that they would continue shutting down power plants voluntarily at the same time as getting ready to apply emergency energy rationing.

by theglc | 27th Jul 22, 8:30am 1658867400

This is what happens when you bite the hand that feeds

European leaders are idiots, they should have gone all in on brokering peace talks rather than joining the US proxy war

by nktokyo | 26th Jul 22, 8:19am 1658780359

The markets are sometimes spectacularly wrong but most often they call it right. What people didn't see was the massive investment into risk management after the gfc to minimize the chance of that happening again.

by HouseMouse | 26th Jul 22, 8:30am 1658781041

Yep.

The vast majority of commenters here, as well as almost all NZ economists, are very confident that interest rates won’t be slashed in 2023. I am pretty confident they will be.

Time will tell.

by Markus | 26th Jul 22, 10:15am 1658787307

I agree with you, hopefully you are right. In fact, I think slashing interest rates in 2023 will be too late - the slash would have to occur now. I am beginning to panic a little as I have the impression a 1929-moment is unfolding in New Zealand.

by Independent_Observer | 26th Jul 22, 10:38am 1658788689

We have created the conditions for such an event - especially if you read about the psychology of the people and the environment in the late 1920's.

by Fitzgerald | 26th Jul 22, 12:43pm 1658796220

The psychology of house price falls will be interesting. And brutal.

People who have been looking around their old weatherboard house with satisfaction and thinking "wow, this house is worth more than 1 million bucks" will have a massive psychological adjustment to make when they look around the same old weatherboard house and think "wow, this house is worth $400k and I have a $700k mortgage."

People like my old landlord, a greedy old boomer who was sitting on a rental worth (supposedly) over $1 million, and charging $700/week rent even though the carpets were dirty and old, the kitchen dated, bathrooms mouldering, etc... People like that will have massive psychological adjustments to make as the "value" of their rentals crater.

Everyone who thought they were a real estate investing geniuses, thought they were successful landed gentry, will find themselves suddenly going from hero to zero. 🍿

Many renters have been living in a depression-era style reality for years now. Struggling to get buy on limited resources. If a depression-era style reality hits property owners too it will whack them around the head with force. Could be some huge psychological adjustments ahead.

by taimaiakka0 | 26th Jul 22, 8:31am 1658781070

As is evident that reserve banks are screwed and are now forced to raise interest rate, economist and so called experts are trying to put pressure and influence reserve bank with fear psychology of recession, slowdown.....doomsday scenario.

Experts knows that they cannot influence and stop rate rise in short term, so are preparing the ground work from now for future - lobbying has started.

This economist should know that reserve bank governors too are with them and a slight excuse will be all that they need to ignore fundamentals and inflation to Start supplying cheap and easy money.

by HouseMouse | 26th Jul 22, 8:45am 1658781901

Really? Most economists are not questioning the RBNZ's OCR pathway at all. Apart from Rodney Dickens, with his excellent article the other day, who else is?

People that are questioning this pathway, including myself (and the very rare economist such as Rodney Dickens) are doing so for several key reasons:

- the obvious lag effect of hiking the OCR: the impact of the hikes over the past few months are only really starting to kick in

- the limitations of hiking the OCR to quell inflation

- evidence, locally and internationally, that inflationary pressures have peaked and are subsiding

- the potentially profound economic collateral (severe recession, soaring unemployment) that could come from hiking the OCR above 3%

Holding these views does not imply any particular agenda or bias. It certainly does not in my case.

It also does not imply that the small number of people, including myself, who hold these views did not support the hiking of the OCR up to this point. I certainly did. But I think it's pretty evident that the lagging effects of hiking the OCR to this point are starting to kick in, and will kick in further over coming months.

by Waikatohome | 26th Jul 22, 9:00am 1658782852

I agree. A high proportion of inflation was driven by imports. As we can see from recent Interest.co.nz updates, many global commodity prices (i.e. metals and some fertilisers) are falling rapidly. There are some large stock inventories, built up over the past 12 months, which may be unwound with increasing urgency as prices fall. It is quite a complex picture though. A proportion of the raw material and container rate price falls will be cancelled out by the weaker dollar. It is not an easy market for importers to predict.

by KH | 26th Jul 22, 9:35am 1658784943

And the benefits of much of those commodity price falls will be captured by our owners from overseas.

Just like fuel right now.

A drain of wealth out of New Zealand.

by Advisor | 26th Jul 22, 9:58am 1658786306

And the benefits of much of those commodity price falls will be captured by our owners from overseas

Economist have mistaken dairy to be NZ's resource curse when it was housing all along.

by Markus | 26th Jul 22, 10:22am 1658787754

Yes, House Mouse, you hit the nail on the head. In fact, I was reading somewhere here today that we first have to have rising unemployment before they will consider lowering the OCR.

How mad is this all? First, they lower the OCR too low, keeping at 0.25% for far too long. This leads to a massive house price rise.

Then, they start hiking the OCR aggressively and very fast. This leads to a credit freeze and property price collapse, whilst trapping up those who borrowed at 0.25% in a catch 22 of negative equity and rising interest cost on the massive amount of debt.

Now, they are saying, we need to wait until the economy actually collapses and unemployment rates rise, before they can lower the OCR rates?

How mad is this all? Some conspiracy theorists say they WANT a 1929-style collapse, to make people cry out for even more central control and to practically enslave people. I don't know.

by Independent_Observer | 26th Jul 22, 10:44am 1658789069

I think I was saying to HouseMouse a few weeks ago that low unemployment was bad for house prices in the current environment because central banks will see this as a sign that they can keep raising rates while inflation persists. While mainsteam economists are saying low unemployment is good for house prices....high unemployment will become problematic when recession hits, house prices are falling and interest rates are dropping in response. But the horse may have bolted by then....

We may soon see the limits of control that people think a central bank has over an economy. And if the belief is they have full control, and they try to execute monetary policy with such a mindset, then one needs to be aware of the perverse implications that such intervention will have on asset prices, market function and social stability.

by Markus | 26th Jul 22, 10:59am 1658789952

Yes, aptly put.

by HouseMouse | 26th Jul 22, 11:49am 1658792941

It’s total madness Markus. Both on the way down, and on the way up.

I am convinced they will stuff things up just as badly as they hike, as they did in slashing the OCR.

by The Person | 26th Jul 22, 11:57am 1658793458

rising unemployment != economic collapse, unless you think they are going to wait for 25% unemployment before reacting?

by company of heroes | 26th Jul 22, 9:45am 1658785551

Agreed, apparently our government also wants to intervene how Stats NZ works on its data too.

'Constitutionally Inappropriate': The Fight Over Stats NZ's Future | Newsroom

Very interesting timing as well, just when RBNZ start hiking its OCR.

Before Covid, they created fear of missing out, but now just as central banks hiking interest rates to normal, they start creating this fear psychology of recession and try to bring influence to central banks' decisions.

I kind of understand how they run this system now, they had it worked for many years. But they can not ignore the fundamentals.

by company of heroes | 26th Jul 22, 9:58am 1658786332

Infometrics chief researcher Gareth Kiernan said he believed Wheeler and Wilkinson’s critique was fair, both overall and in particular for its criticism of central bank’s reliance on economic models.

“Central banks and governments have become increasingly scared of any sort of slowdown that might verge on a recession,” Kiernan said.

“A bit of a clean-out from time to time does hurt, but is also good for the economy.”

Former Reserve Bank governor Graeme Wheeler takes swing at central bank 'hubris' | Stuff.co.nz

by Markus | 26th Jul 22, 10:55am 1658789701

This is very good commentary by Graeme Wheeler.

by ngakonui gold | 26th Jul 22, 10:21am 1658787707

175 US companies reporting this week including the big 5 tech companies.Plenty to look forward to imo.

by gnx | 26th Jul 22, 11:36am 1658792205

So I had a look at Peter Goodfellow and sidekicks finance business….zagga

offering investors 10% on some first mortgage backed security peer to peer lending….gee it’s a mouthful

so one of the loans you can invest as little as $1000 in is a $1.9m loan on a supposedly. $3.2 million house in Sandringham. So with fees the borrower will pay probably 12% at least….so that’s like $5000 a week on interest only. That’s like $7000 a week before tax.How many people earning that kind of dosh would want to live in Sandringham… or need a 2nd tier finance loan.

ok they have two sales reps, both Chinese with a title Asian market sector??? So what the hustle? Immigration? Politics? Money laundering?market manipulation?

what is this all about….luring in suckers with the promise of high interest rates.there is scant information. Lordy me but I smell a rat.

and what is the former National party president doing down in the beer, shit and the gutter doing this type of business?

No wonder the housing market is stuffed.

im starting to think we will need a violent struggle to get our society back ,similar to the 70s in Italy where many politicos and corporatists were either shot or bombed.

the FMA need to stop this quick smart. The only reason these houses have these valuations is because naive kiwis keep putting money in to fund them. Ouch when they go down in value.

by Advisor | 26th Jul 22, 11:28am 1658791731

why is the former National party president doing down in the beer, shit and the gutter doing this type of business

Isn't that one of the career pathway for retiring National party leaders? Sir John Key has partnered with former-brothel owners (having now improved to strip clubs only), Chow brothers on a large-scale housing development venture.

by Waikatohome | 26th Jul 22, 1:19pm 1658798382

I can sense your passion on this subject but think you should remove the references to killing politicians. Two UK politicians have been murdered in recent years, we don't want to see that kind of action here. Countless revolutions - from the French Revolution to the Arab Spring show that violent struggle makes a bad situation worse. We need intelligent debate and action at the ballot box if we want to see positive change.