Here's our summary of key economic events over the weekend that affect New Zealand, with news the economic and behavioural impacts of the virus emergency are now starting to show and we start another chaotic week.
China's official PMI revealed a stunning contraction. In January it recorded a stall, but no expansion or contraction (50.0). But in February, it records a precipitous fall nationwide, down to a sharp contraction at only 35.7. And that is having very severe knock-on impacts. Their service sector recorded an even more severe contraction, going from an expanding 54.1 in January to 29.6 in February. That is close to a standstill in most industries. As they noted, "only the monetary and financial services and capital market services business activity indexes remained in the expansion range" with the rest frozen. New order levels were even worse.
And on instructions from Beijing, China's banks are no longer recording loans as 'bad' as a result of coronavirus economic pressures.
The latest compilation of Covid-19 data is here. There are now 7644 cases outside China, a rise of +1713 in one day. A week ago that outside-China number was 2208 so it has more than trebled in a week. South Korea, Italy and Iran have all reported a spike in cases. Of course, we now have one too, from an incoming Kiwi who traveled to Iran. But take caution with this data; China isn't adding those who test positive but are asymptomatic. And Iran's data is likely vastly higher than reported - the disease is raging there across the whole country.
The WHO has still not declared a pandemic, preferring to focus on "positive progress" in China.
However, Wall Street is still running very scared, with investors collectively consumed by a risk-off mood that is throwing up some odd reactions. Stocks were down sharply at the end of last week, benchmark bond yields reached record low levels, there is a general flight to 'safety' - and the gold price has sunk.
Trading on Wall Street was volatile, closing down -0.8% for the day, down -11.5% for the week. It was the largest weekly correction since 2008 and tops a -US$3 tln drop in capitalisation.
In the real world of economic data, the widely-watched Chicago area PMI is still contracting, but less so and also less than analysts were expecting.
The US Fed's preferred measure of inflation came in unchanged at +1.6% pa, and not making the rise that was expected. The same January data showed a surprisingly strong rise personal incomes which should have been market-positive. But consumer spending dipped more than expected, indicating American consumers are fearful of the future. These are measures of actual behaviour.
On the business side, wholesale inventories keep on falling while retail inventories keep on rising. And American trade data shows exports falling marginally in January, while imports fell slightly faster. So there was a small improvement in their merchandise trade deficit even if it wasn't significant for their economy on a year-on-year basis.
North of the border, Canada posted a better-than-expected GDP result for the final quarter of 2019 - but was still only at a tepid +1.9% pa level.
But none of this slew of basically positive data actually means much. It's is all about fear and panic by investors on how consumers are reacting to the Covid-19 virus.
The US Fed is under pressure from the financial markets to cut its policy rate, but most governors are not sympathetic to a bailout cut right now. In fact in most countries, bankers and financial industry analysts are seeking rate cuts and other monetary policy easing measures in response to the pressures - in essence, taxpayer support for their businesses. The US Fed put out a short Statement saying they will use all their tools to act if it becomes necessary.
Elsewhere, eyes are on the vast world of junk bond-financed businesses - investors seem to be fleeing quickly now and this will be existential for many if they can't roll over their debt financing.
The UST 10yr yield is now at 1.16% and lower by a sharp -31 bps for the week. And their rate curves are behaving strangely today. Their 2-10 curve is more positive at +23 bps. Their 1-5 curve is more negative at -7 bps. and their 3m-10yr curve has shifted sharply more negative at -33 bps. These are more like signs of confusion rather than indicators. The Aussie Govt 10yr is down -26 bps for the week at just 0.68%. The China Govt 10yr now at 2.80% and down -13 bps for the week. The NZ Govt 10 yr is down -20 bps for the week at 1.06%. All these are are unprecedented drops.
And gold also made a spectacular retreat at the end of last week, down -US$64 to US$1,586/oz. The expected behaviour in the face of sudden rising risks is that the gold price would jump - but it has done the opposite.
US oil prices are sharply lower at just US$44.50/bbl. The Brent benchmark is also lower at just under US$50.50/bbl. But both represent big -15% falls for the week.
The Kiwi dollar starts this week at 62.5 USc after another -1c fall last week. It is now at its lowest level since 2009. Since the start of 2020 the devaluation is down to -7.5%. On the cross rates we have held at 95.9 AUc. Against the euro we are also down nearly -1c for the week at 56.7 euro cents. That means our TWI-5 is now at 68.2 and also its lowest since 2019.
Bitcoin is now at US$8,514 which is more than an -13% retreat in a week on top of the prior week's -5% fall. The bitcoin rate is charted in the exchange rate set below.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
75 Comments
Here is an interesting link to follow later in the day as Wuhan comes to life:
https://www.tomtom.com/en_gb/traffic-index/wuhan-traffic
Live "congestion"data barely makes it off the bottom of the chart
or try Shenzhen
https://www.tomtom.com/en_gb/traffic-index/shenzhen-traffic
both usually show traffic peak congestion at 8-00am their time on a Monday
Are any of the smug "bank economists"still pushing their ten percent plus house price inflation narrative or has it been quietly dropped?
My invested funds were rinsed last week and I'm postulating that many prospective home buyers out there suddenly don't have available what they thought they had.
Fear, uncertainty and doubt are now in the driver's seat.
4 articles this morning on the herald app..... agents rubbing their hands with glee, see how much your house has gone up in value, are you living in a hotspot etc etc.... Property spruiking on overdrive today. Debt, debt and more debt being called for around the world at a time when debt levels have never been so high.
In fact in most countries, bankers and financial industry analysts are seeking rate cuts and other monetary policy easing measures in response to the pressures - in essence, taxpayer support for their businesses.>
Too true. When will this dependency mentality cease and businesses and asset investors be prepared to stand on their own two feet?
The Government is considering lifting the travel ban for students with input from the tertiary sector to "see what they can do to make sure New Zealanders' public health isn't put at risk".
Our government is putting the fox in-charge of the hen house by allowing the export education sector to bring the problem in large numbers to our shores as long as they have some abstract design of a 'workable' solution.
The UK finally gets it sovereignty back from the EU to only to squander it to the "non-binding" UN Paris Accord and the eco-loons. "It's highly likely that the government will face further legal challenges if it goes ahead with road spending without having properly considered the implications for net zero climate emissions."
Going to be be some interesting contortions by the COL to build 100,000 houses and new roads under the Paris regime.
https://www.bbc.com/news/business-51665682
I stumbled across some data from China that's been sneaked out. A lot of small component factories are back up to 15-30% production capacity, larger electronics manufacturers are up to 35% capacity. There are still travel restrictions so even if factories are up to speed often goods can't be shipped out because there are too few drivers (one factory only has 2 drivers to ship thousands of loads of goods), or there are restrictions that would stop trucks from leaving the area.
Even if the virus issues clear up quickly there's going to be many months of problems.
UK SFO's protracted case against Barclays bank and it's executives for creating it's own bank capital funding out of thin air in the aftermath of the 2008 GFC finally comes to an end without a conviction for the bank or it's staff. - Three former Barclays executives found not guilty of fraud
Since banks invent money as fictitious deposits, it can be readily shown that capital adequacy based bank regulation does not have to restrict bank activity: banks can create money and hence can arrange for money to be made available to purchase newly issued shares that increase their bank capital. In other words, banks could simply invent the money that is then used to increase their capital. This is what Barclays Bank did in 2008, in order to avoid the use of tax money to shore up the bank's capital: Barclays ‘raised’ £5.8 bn in new equity from Gulf sovereign wealth investors — by, it has transpired, lending them the money! As is explained in Werner (2014a), Barclays implemented a standard loan operation, thus inventing the £5.8 bn deposit ‘lent’ to the investor. This deposit was then used to ‘purchase’ the newly issued Barclays shares. Thus in this case the bank liability originating from the bank loan to the Gulf investor transmuted from (1) an accounts payable liability to (2) a customer deposit liability, to finally end up as (3) equity — another category on the liability side of the bank's balance sheet. Effectively, Barclays invented its own capital. This certainly was cheaper for the UK tax payer than using tax money Link- section 4
The US Fed is under pressure from the financial markets to cut its policy rate, but most governors are not sympathetic to a bailout cut right now. In fact in most countries, bankers and financial industry analysts are seeking rate cuts and other monetary policy easing measures in response to the pressures - in essence, taxpayer support for their businesses. The US Fed put out a short Statement saying they will use all their tools to act if it becomes necessary.
Historical perspective is warranted - Priceless: How The Federal Reserve Bought The Economics Profession
The Fed failed to see the housing bubble as it happened, insisting that the rise in housing prices was normal. In 2004, after "flipping" had become a term cops and janitors were using to describe the way to get rich in real estate, then-Federal Reserve Chairman Alan Greenspan said that "a national severe price distortion [is] most unlikely." A year later, current Chairman Ben Bernanke said that the boom "largely reflect strong economic fundamentals."
The Fed also failed to sufficiently regulate major financial institutions, with Greenspan -- and the dominant economists -- believing that the banks would regulate themselves in their own self-interest.
Despite all this, Bernanke has been nominated for a second term by President Obama.
Its a good point, but when you're in a job where you're paid to manage the big picture, how easy is it to understand what the detail really means? Especially when you don't get to see much of the detail. At his level Bernanke will have had multiple levels of advisers and managers to give him 'a' picture, and every one of those is, in their own a right, a filter. They have their own bias's, prejudices, and spectacles on. Bernanke may have never been in a position to see the truth (although he should have been well read, and smart enough to sniff something was amiss). Happens in every organisation, especially Government ones!
I question this -
"The experts are saying there is no risk... of the seven crew members who have been diagnosed with influenza A, apparently they have been quarantined but they do not have COVID-19," Tauranga Mayor Tenby Powell told Newshub on Monday morning"
So why divert a cruise so significantly because of a bit of flu?
Secondly, have they tested for COVID-19?
I doubt it...is someone in the media going to ask about testing I wonder?
I bet they don't. Which just feeds the conspiracy theories.
It's difficult to know, because there is no detail about testing.
Overseas say transfer can be asymptomatic, something MoH has not got its head around (or tell us why they think not asymptomatic).
https://i.stuff.co.nz/travel/news/119932162/seven-ill-on-cruise-ship-in…
The detail here does not sound sound. Kristen!
Any cruise ships docking in Tauranga follow strict health and safety protocols, Bay of Plenty Tourism chief executive Kristin Dunne told SunLive.
"Both Toi Te Ora Public Health Unit and the Ministry of Health have determined that there is no risk of COVID-19 (coronavirus) on board the vessel.
"I would like to reassure the community that the cruise industry has extensive experience and protocols for managing the health and wellbeing of their guests, and the host communities."
She urged Tauranga locals to show manaakitanga for people on what could be the holiday of a lifetime for those on board the ship.
Note for, Bay of Plenty Tourism chief executive Kristin Dunne told SunLive.
https://www.sciencemag.org/news/2020/02/coronavirus-infections-keep-mou…
.
Is this what Kristen means when she says holiday of a lifetime.
won't make much difference if the company you work for closes down due to lack of freezer space, containers or inventory. No job, no way to pay bills.
'The reaction of container lines to the lack of cargo export demand from China due to the coronavirus-induced (COVID-19) economic shutdown is becoming evident in record numbers of blanked sailings and inactive vessels.
Some analysts now believe that prolonged disruption could result in radical changes to supply chain sourcing by manufacturers, although few see any meaningful short-term alternative to China for large-scale manufacturing volumes.
As reported in Lloyd’s Loading List, ongoing factory closures and trucking shortages in China are not only hurting container shipping demand and freight rates, but also posing a threat to 2020 economic growth.
“China’s extended Lunar New Year holidays and the COVID-19 outbreak have seen demand for cargo space out of China reach a record low during February,” noted Alphaliner.
“Over the past three weeks, some 30% to 60% of weekly outbound capacity has been withdrawn from the Asia-Europe and transpacific trade, as well as from intra-regional routes.”
https://www.lloydsloadinglist.com/freight-directory/news/China-demand-s…
The biggest hit to the economy hasn't really been raised yet. Unpaid leave.
1. Most people wont have the required paid leave to isolate for 14 days.
2. If/when they shut schools. Most parents wont have the required paid leave to look after kids - particularly for an indefinite amount of time.
These two combined could see over half the workforce move to unpaid leave should anything major happen here. What impact will that have?
the Waikato district has already put in place school closures when it comes,
can you imagine what it will be like if all the schools close for another month this time of year, people are just rebounding after Xmas and starting to pay off debts or rebuild a cash buffer
reminds me need to go get some cash out
Elsewhere, eyes are on the vast world of junk bond-financed businesses - investors seem to be fleeing quickly now and this will be existential for many if they can't roll over their debt financing.
Everyone knows junk credit (and that includes EM Eurobonds) had/has been way overdone. Ridiculous, the amount of risk taking. Everyone knows that same junk has been used and multiplied throughout the collateral system. It doesn’t take much of a spark, I don’t think, for a real credit event to materialize unlike the dress rehearsal in September. Link
It's the perfect time for Trump to pardon Michael Milken, the Junk Bond King.
https://edition.cnn.com/2020/02/18/investing/michael-milken-pardon/inde…
For those who don't know who he is, I recommend a read of the Predator's Ball by Connie Bruck
I expressed concern on this forum a while back that China could trigger the next Global recession, and that was before Covid -19 , and again last week ( or the week before) that Covid - 19 could prove to be the spark.
And its not just the virus , the world has signs of deflation , debt ( Private, Corporate and Public ), over-capacity in many industries , and weak demand in many sectors .
The EU is a mess , the US is hocked to the hilt , China has been fudging the numbersso much so , that we are unsure what to believe ............ and we are cumulatively dependent on one of more of these for our economic stability
I am now convinced we are staring at a deep global stock market adjustment , possibly leading to a recession
Chief executives of top companies in the U.S. are leaving their posts at a pace not seen in nearly two decades. Challenger, Gray, and Christmas reported that 1,480 CEOs departed in 2019. This caught the attention of some analysts as C-level executives don’t often step aside while both the economy and the stock market are booming.
https://www.ccn.com/ceos-quitting-in-record-numbers-could-signal-total-…
All I can say is that: "I TOLD YOU SO" if you go back over my posts of the past few weeks.
If you're a student of history (do they still teach anything at school other than our 'disgraceful' colonial history) you will see that over the last two thousand years or so China has been on the cusp of becoming a great world power but has always ended up 'shooting itself in the foot'. I'm not going to provide details here...you can google them.
Good luck everybody.
By the way my share portfolio has lost over $20,000; I suspect that will double this week. Us baby boomers aren't immune.
Streetwise, as an investor I've had people saying 'I'M TELLING YOU SO' year after year on this site for the last decade and they have been spectacularly, comprehensively wrong. Finally the time has arrived when the voices crying in aguish from the wilderness, the sandal clad robe wearing sages with eyes fixed on distant visions, get their moment in the sun. They should enjoy it, might not last all that long.
I'm not too worried about my current sharemarket loses as I also own 2 mortgage-free valuable houses and term deposits. Shares recover, especially blue chip ones. Actually, the likes of Fletcher's have come back over the day. The only shares that I have ever permanently lost money from are Sky TV.......about $10,000, but I think that even Sky shares will come back eventually because Spark's foray into sport coverage was such a disaster, Netflix's programme choice is downright pathetic, and the quality of Sky's sport's coverage is world class.
But what does greatly concern me is the potential LOSS OF LIFE caused by this virus; everything concerning money pales into insignificance besides this concern.
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