A review of things you need to know before you go home on Friday; no rate changes, rising inflation expectations, linker yields up, dairy future bright, swaps firm, NZD holds, & more

A review of things you need to know before you go home on Friday; no rate changes, rising inflation expectations, linker yields up, dairy future bright, swaps firm, NZD holds, & more
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Here are the key things you need to know before you leave work today.

MORTGAGE RATE CHANGES
No changes to report today.

TERM DEPOSIT RATE CHANGES
No changes here either

RISING EXPECTATIONS
The RBNZ survey of expectations shows that inflation expectations are rising. After falling every quarter since December 2018, the two year expectation turned up by +13 bps to 1.93% and close to the RBNZ target. This is the result of a survey by Neilsen commissioned by the RBNZ. And since a house price survey question was included in September 2017, this is now at its highest level ever.

LINKER YIELDS TURN UP
Today Treasury tendered $50 mln of inflation indexed bonds with a maturity of September 2040. The average yield was 0.74% (plus CPI inflation which is currently running at 1.90%). They have had many tenders for this maturity and todays was in fact the 28th. The highest ever yield for these linkers was 2.36% in August 2017 (and today those investors will be getting a 4.26% yield) and the lowest was just 0.49% in September 2019 (a those investors will be getting a yield of 2.39% this quarter).

BANNING CONFLICTED REMUNERATION
Reform of how mortgage brokers operate in Australia took another step with the passing of new law on the area. From July 1, Aussie mortgage brokers must act in the consumer's best interests. It is no longer sufficient to meet responsible lending rules. That means it must prioritise loan recommendations that offer the best outcomes for each customer. And it may not give any weight to commission arrangements or other sales incentives. That will mean that they must offer solutions even when they don't earn commissions. And all conflicts-of-interests must be declared and explained in advance. Further, mortgage brokers must not accept conflicted remuneration, which means any benefit that could reasonably be expected to influence the credit assistance provided. The law allows for conflicted remuneration to be prescribed in regulations. In the end, bank or provider commissions will die out.

A FUTURE WITH RISING PRICES
Global credit rating agency Fitch sees dairy prices rising in the longer term as both supply and demand stay strong, but rising demand in China and India will underpin global demand.

NZX50 CATCHES UP
Wall Street ended up modestly today, up +0.3% and immune from the enthusiasm in Europe overnight and Asia yesterday. Today, Asian markets are giving up a bit of yesterday's gains in early trade, but only about -0.3%. The ASX200 has given up a bit more, down -0.4% in mid-day trade. The NZX50 capital index is doing some catch-up after missing yesterday's strong rally and is up +1.5% so far, but in light trade.

THE RBA SPEAKS
In Australia in testimony before Parliament in Canberra, the RBA governor has called out the Aussie banks for not offering existing customers the same 'specials' they offer new customers. Over there it is called a 'loyalty tax'. But to be fair, it is solely focused on variable mortgage rate agreements, deals that have all sorts of costs and 'discounts'. Fortunately, New Zealand isn't infected with similar opaqueness in our fixed rate mortgage deals. And the RBA also said "negative interest rates in Australia are extraordinary unlikely. This is not a direction we need to go in." Given their policy rate is currently only 0.75% it is a clear signal there is unlikely to be any rate cuts there in the foreseeable future. They say QE won't be implemented before the official cash rate got down to 0.25%. So other tools (like 'special liquidity operations') would be used first.

ABOUT TURN
We have been noting the bush fires and low water levels in Sydney's water reservoirs for some time. Now there has been a very sudden change. Torrential rain is lashing Sydney and much of coastal northern NSW today as an intense trough delivered a reprieve from months of heat and catastrophic fire conditions. Water storage got down to 41.8%, a record low. Now we will see what that rain does.

STILL RISING FAST
There was another large jump in the official tally of coronavirus confirmed victims and deaths today, reaching 31,400 and 638 respectively. We are heading for a doubling in a week. In addition there are reported to be another group at least as large who are suspected of having the disease. For all their vaunted oppressive social controls, the Chinese authorities are not on top of the problem yet. It is likely it is these controls that are part of why they can't get on top of it - social trust has been shattered.

LOCAL SWAP RATES FIRM
Wholesale swap rates have firmed again. They are up +1 bp for the two year tenor, up +3 bps for five years, and up +4 bps for ten years. The 90-day bank bill rate is unchanged at 1.26%. Australian swap rates are down across the board by -3 bps in early trade. The Aussie Govt 10yr is down -3 bps to 1.05%. The China Govt 10yr is now at 2.88% and unchanged. The NZ Govt 10 yr yield is up +3 bps at 1.36%. The UST 10yr yield is down to 1.63% after starting the day at 1.65%..

NZ DOLLAR HOLDS
The Kiwi dollar is marginally softer at 64.5 USc. We are back up against the Aussie and now at 96.1 AUc. Against the euro we holding at 58.7 euro cents. That means the TWI-5 is just under 70.2 and unchanged since this morning.

BITCOIN EVEN HIGHER
Bitcoin is holding higher at US$9,796 and that is up 2.6% from where we opened this morning. The bitcoin price is charted in the currency set below.

This chart is animated here.

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

Our exchange rate chart is here.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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35 Comments

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It’s quite hard to believe that world's financial markets aren’t in some sort of mad liquidity driven denial as regards what’s going in China and its subsequent economic impact on the rest of the world?

Markets remain priced for perfection.

When and if the penny drops the race for the door could be sharp and brutal.

All the stops and safety valves seem to have been put in place and primed for application. These are not normal functioning markets really.

86 confirmed in Japan. The infection rate cat is out of the bag now. More dollars to keep the stock markets up and everyone else pulling their retirement dollars out if they can.

I think the markets still trust CCP's ability to control the situation

The chinese authorities are being responsible to contain the disease and in time there will probably be a vaccine available. Oh no not vaccinations! HORROR OF HORRORS.

AFAIK there was never a viable SARS vaccine.

Regarding trust - does anyone believe anyone any more (politicians of any persuasion, business leaders, etc)?

I stopped believing economists a decade ago

I stopped believing peak oil a decade ago haha.

https://www.nafeezahmed.net/thecuttingedge//2010/11/end-of-cheap-oil-cri...

I prefer dispassionate thinking.

The one thing that article misses, is that energy underwrites money, so we will never see $200/barrel oil. We fall over as a global economy, at half that.

From the venerable Ambrose Evans-Prtichard

As of this week two-thirds of the Chinese economy remains shut. More than 80pc of its manufacturing industry is closed, rising to 90pc for exporters.

The Chinese economy is 17pc of the world economy and deeply integrated into international supply chains. It was just 4.5pc of world GDP during the SARS epidemic 2003, which some like to use as a reassuring template. You cannot shut down China for long these days without shutting down the world....

https://www.telegraph.co.uk/business/2020/02/05/chinas-coronavirus-not-r...

Exactly.

When all’s well the Chinese economy is pivotal to world economic expansion and stability.

When it sneezes and all falls down it’s of no consequence?

Very odd.

The general public doesn't really contemplate these things. Actually, I think govts don't necessarily contemplate them either. I would say on many levels there is woeful ignorance of what's happening economically "outside NZ" by people "within NZ".

86 infected in Japan now.. If feat hits there will be mass buying, maxing their CC's and loaned dollars which a lot of people will not be able to pay back at the end of the month so they will roll ot over and over and over and the houses hold debt that was a concern is then a major. That is the best case that the viruses is contained but that is looking less likely by the day.

Read China's Great Wall of Debt by Dinny McMahon and one will understand what a house of (credit) cards that place is. The coming credit crisis will take a while to unfold but what we are seeing right now could well be the catalyst of it.

Good point. Obviously, the monetary system has the capability to extinguish all that debt. That would seem to suggest that assets like gold would become sought after as a store of value in China (not that it isn't sought after already).

I hate to say it but Bitcoin is looking better in a time when the money system is looking shaky.

Peking University and Chinghua University conducted a business confidence survey recently. 85% of 995 businesses participated the survey said they would be out of the business in next 3 months if the situation of the outbreak remains the same. I think it's a matter of time before we start feeling the impact. It feels it's been a while, but China only locked down Wuhan 16 days ago...

If the deaths on the 06/02 (73) are the same number as on 05/02 (73) does that constitute a "large jump" in deaths? Not trying to cause trouble or anything, just wondering.

China's National Health Commission (NHC) says that:

about 80% of those who died were over the age of 60.
75% had pre-existing conditions such as cardiovascular diseases and diabetes.

It's odd then that the young couple in Paris are now both in intensive care. Does anyone know it there are any cases in people of European descent?

Perhaps your point lost traction with “China's National Health Commission (NHC) says”....

So it is just an assumption that the death rate has jumped? If infections have increased but the number of deaths has stayed the same then the death rate has gone down I would have thought.

Rumour has it this strain was engineered in a laboratory specifically to target those with Uighur blood.

Now no need to be silly although it is not beyond the realm of possibility. No different to asking if fatalities differ by age or sex. All this information would be interesting. For those who want to know a European in Belgium appears to have tested positive however they are still in good health.

From our Chinese consulate, most recent daily update ( those nasty airliners )
http://www.chinaconsulate.org.nz/eng/fyrth/t1741546.htm
From China Daily , do not steal other provinces medical equipment http://www.chinadaily.com.cn/a/202002/07/WS5e3c9eb2a3101282172759a6.html
Surely the virus news of the day is the Diamond Princess and infection rate
https://www.axios.com/coronavirus-ship-quarantined-10-infected-japan-2ec...
The M12 survey, of its respondents, should see the average New Zealand house rise to 781000 NZ pesos in two years, an increase of $67,000 on average. Buy two or indeed three and make a 100K. Although I read it somewhere else, if the virus claims mankind , there will be algo , somewhere, in some cave pushing the Dow, and New Zealand house prices ever higher.
On Monday, it is likely Roger will have difficulty in providing a NZD forecast as it does not want to take part.

The M12 survey, of its respondents, should see the average New Zealand house rise to 781000 NZ pesos in two years, an increase of $67,000 on average. Buy two or indeed three and make a 100K. Although I read it somewhere else, if the virus claims mankind , there will be algo , somewhere, in some cave pushing the Dow, and New Zealand house prices ever higher.

Humankind is wiped out and NZ house prices still on a tear.

The first piece - aren't they full of bullshit!!!

Great news that the world dose not have to worry about the Trump impeachment sarga.
One less issue...
George Gregan was straight on the phone to the Dem's.. 'Four more years'....

Today Treasury tendered $50 mln of inflation indexed bonds with a maturity of September 2040. The average yield was 0.74% (plus CPI inflation which is currently running at 1.90%). They have had many tenders for this maturity and todays was in fact the 28th. The highest ever yield for these linkers was 2.36% in August 2017 (and today those investors will be getting a 4.26% yield) and the lowest was just 0.49% in September 2019 (a those investors will be getting a yield of 2.39% this quarter).

Have you really done the sums using the factors and the price equation (section 6 page 10 of 19) to arrive at your outcomes given the annual coupon of 2.5% is paid quarterly?

Coronavirus cases on the Diamond Princess = 61/3700 people. An infection rate of 1.6% of the population.

Wuhan population alone is roughly 9,000,000.

Xi seems very aloof in this crisis.
Anger seems to be building there.

Revolution!!!!!

Also Xmowing has gone quiet as well?

There's always a downside to authoritarian regimes like PRC. The health officials in Wuhan were too intimidated by "Big Brother" to give a timely warning...they were afraid that they would be blamed or worse!
The Chinese people have got a tremendous desire to materially succeed. It's just a pity they didn't use Denmark as their political model.
By the way, has anybody heard from Xingmowang lately.

Agree. Imagine the damage this could do in North Korea with their substandard health services

He's too busy writing propaganda for the consulate in Wellington

Sometimes he (is there any evidence of which gender?) makes me want to spit but on the other hand sometimes he opens my mind; hopefully on a well deserved holiday and will be back soon.