A record US trade deficit; US business commitment hesitates; Americans optimistic long-term; South Korea struggles; global food prices at 6yr high; UST 10yr at 0.93%; oil holds and gold up; NZ$1 = 72.1 USc; TWI-5 = 73.3

A record US trade deficit; US business commitment hesitates; Americans optimistic long-term; South Korea struggles; global food prices at 6yr high; UST 10yr at 0.93%; oil holds and gold up; NZ$1 = 72.1 USc; TWI-5 = 73.3

Here's our summary of key economic events over the Christmas-New Year holiday break that affect New Zealand, with news of records, some welcome, some very unwelcome.

The failure of American trade policy is in evidence again with a huge -US$85.1 bln merchandise trade deficit in November, their largest ever. Exports fell -7.5% compared with the same month in 2019 while imports rose +6.5% in that time. And all this happened despite a USD devaluation.

One thing that might help their domestic economy is a build in wholesale inventories, signaling confidence in the future. But this is not happening. Markets had expected a +1% build after October's +1.2% build. But the November data recorded a fall and signaling that confidence hasn't yet arrived.

But the Chicago PMI did rise marginally and is still expanding at a fast clip. However new orders fell, reinforcing the reluctance to build inventories.

Ignoring today's reality, when Americans look further ahead they remain positive. A new Gallup Poll shows expectations remain relatively buoyant amid the pandemic. When they were asked to rate their future lives in five years time on a scale from 0 to 10, where 0 is the worst possible life and 10 is the best possible life, the average rating was 7.9 in 2020. This average is unchanged from those over the past several years. Their mood did sour at the end of 2020 however.

South Korea is starting to struggle at the end of 2020. Business sentiment sagged in November, and both retail sales and industrial production both came in lower than expected in their latest updates.

In China, it is not only coal and iron ore prices that are rising quickly. Corn prices have jumped as well, hitting a new record high yesterday, partly driven by the demands of their recovering pig herd, and partly by flagging supplies as their food security issues come to the fore again. Chinese demand is putting severe strain on global food prices, and these hit their highest level in six years in November.

China is saying that foreign direct investment in the country will hit a record +US$140 bln in calendar 2020 and maybe more than 10% of global FDI in 2020. Meanwhile, the EU and China have agreed on a new investment pact, one opposed by the US (including the incoming Biden Administration) and one that expands access to the Chinese market for EU investors in industries ranging from cars to telecommunications. The Chinese are celebrating this deal, but the Europeans are wary because it could stumble on a range of political issues including human rights abuses in China.

France has ended its delay in imposing its digital services tax on the tech giants. They have resumed collecting it, while the US is set to impose US$1.3 bln in tariffs on French imports, including cosmetics and handbags from January 7. Tariff penalties however didn't work on China and are unlikely to work on France, something the French seem to understand.

On Wall Street, the S&P500 is up +0.3% in afternoon trade today in the hope Congress will sort out what it wants to do with the stimulus level. Overnight European markets all fell about -0.3% although London was down double that. Yesterday the very large Tokyo market fell back -0.5% after the prior day's very strong +2.7% gain. Hong Kong played catchup, rising +2.2%, and Shanghai rose +1.1%. The ASX200 was open with light trading and posted a -0.3% slip, while the NZX50 posted a -0.2% slip in light trade.

For the year, the NZX50 Capital Index is heading for a +13% rise, the ASX200 for a -1.5% fall. They compare with the S&P500 which is headed for an annual gain of +15%, Shanghai will be up +11% and Tokyo up +16%. In Europe, the Frankfurt market will post a +4% gain for the year, Paris will post a -6% loss, and London a -13% loss in 2020.

The latest global compilation of COVID-19 data is here. The global tally just keeps on rising, now at 82,282,000 and up +696,000 in one day. We are heading for 100 mln before the end of January. Many countries are getting a surge from Christmas gatherings where social distancing was abandoned, and with New Year approaching, that surge is likely to be compounded.. It is still very grim in Russia, the UK, South Africa and Indonesia. It does seem to be easing in Europe, although not in the UK or Sweden. Global deaths reported now exceed 1,797,000 and surging +28,000 since this time yesterday as death rates rise everywhere. The UK variant strain is now spreading worldwide, although only small numbers of cases are being reported so far.

But the largest number of reported cases globally is still in the US, which rose a massive +200,000 overnight for their tally to reach 20,009,000. The US remains the global epicenter of the virus. The number of active cases is still rising and now at 7,793,000 and that level is up +20,000 in one day, so many more new cases more than recoveries. Their death total is up to 347,000 (+3,000). The US now has a COVID death rate of 1046/mln and approaching the disastrous UK level (1066).

In Australia, their Sydney-based community resurgence seems to be stretching out further with yet another hotspot. That takes their all-time cases reported to 28,381, and +31 more cases overnight. Now 204 of these cases are 'active' (+15 overnight). Reported deaths are unchanged at 909.

The UST 10yr yield will start today at just on 0.93%, unchanged overnight. This is down from 1.92% at the start of 2020. Their 2-10 rate curve is flatter at +80 bps, their 1-5 curve is unchanged at +27 bps, while their 3m-10 year curve is also unchanged at +85 bps. The Australian Govt 10 year yield is up +2 bps at 0.98%. The China Govt 10 year yield is down another -2 bps at 3.20%, while the New Zealand Govt 10 year yield is down -1 bp at 0.99%. It started 2020 at 1.65%.

The price of gold is up another +US$12 in New York today to be now at US$1,890/oz. It is ending the year up +25% from where it started.

Oil prices are unchanged today at US$48/bbl in the US, while the international price is at US$51/bbl. At the start of 2020 the oil price was US$66, so we have had a huge -30% cost saving here, and embellished by a rising Kiwi dollar.

And the Kiwi dollar is up another +½c today at 72.1 USc. It started the year at 67.4 USc so that makes it a +7% annual appreciation against the USD - or more realistically a -7% devaluation of the greenback. Against the Australian dollar we have dipped very slightly to 93.9 AUc. For the whole of 2020, that is a -2.4% devaluation. Against the euro we are firmer at 58.7 euro cents. That has pushed our TWI-5 up to 73.3, a twenty-one month high and an annual +1.6% appreciation.

The bitcoin price has surged +US$1834 or +6.9% today and is now at US$28,258. This crypto started the year at US$7,251 so it has risen by almost 3x over the year, up +56% in December alone. The background for the recent jump is here. The bitcoin rate is charted in the exchange rate set below.

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22 Comments

Here's a question for interest.co.nz commentators: Ms GV27 and myself are expecting a GV27 V2 sometime in 2021. Other than buying some stocks as a curiosity/keepsake, is there any go-to for newborns? No govt contributions for Kiwisaver obviously, so that's out, but is there anything you would be doing from day one for a newborn from a financial planning point of view?

Also, thanks to the Interest team (particularly David and Jenee) this year and have enjoyed very much the contributions from Brendan, Peter Dunne and Chris Trotter; even though I may find little to agree with in some pieces, the discussion is still entertaining :)

Well at least you can’t buy bonus bonds anymore. I was given $20 worth a very very long time ago when I was born, and they are still worth that now!

Congratulations! I don't know the specifics of doing so on behalf of a child, but I'd be looking at setting up a recurring purchase of index funds via InvestNow, Sharesies, Smartshares, Superlife or similar. A small amount every week/month/year as your finances allow should build up to a useful chunk when they need it, and with a small amount of work you can automate and forget about it.

You could even do it in your own name but earmark it for a child, but that might be worse from a tax point of view.

Kiwisaver is still a good option even without the $1000 kickstart and without the Govt contribution.
You could choose Growth, & it becomes a vehicle for gifts from grandparents etc, is permanent, can be used for first home purchase, and before you know it your kids will have an after school job with auto contributions.

Money into kiwisaver is effectively under government control for at least the next 70 years+.

In hindsight one of the best things I did for my kids was to provide them with a shed and tools that will last their lifetime. Kids being kids they soon start building things, which attracted the "right sort of friends" that are fun, resilient and actually get out and do things. The ability to fix anything yourself is a valuable skill, I suspect it will even more so in the future.

A shed & tools is a great idea!
Building practical skills and resilience will stay with them for a lifetime.

Agree re Kiwisaver. We joined up our children (now adults) as soon as it started. We topped their fund up each year in order to achieve the max Govt contribution until they were both working full-time.

Artwork GV, perhaps? Bought a numbered Gordon Walters print for first grandchild in 1984 for $200.00 now worth over $4,000.00. Problem is doesn’t look likely to be sold anyway. Alongside wishes to the base team and columnists, appreciate all the debates yourself, Hook & contemporary grey beards Middleman & Murray, and info kings Aj , Yankiwi, Audaxes, wisdom ex Kate and Belle, energy ex GBH and the factual quirks compliments of Waymad. NY salutations to all and sundry.

I think the best investment in children is time and energy - reading and art and sport and family activities. Mum or Dad at home as long as possible. Move to the country. Get a dog. Buy an apartment in a University city and rent it out.

My sister told me that for many centuries the single best investment for a new born child to mature when aged 21 has been to lay down vintage wines and port. It helps if like me the child is born in the year of a good vintage. The only downside the temptation on the part of parents to drink the investment. Doing the research is more fun than stocks and shares.

Well congratulations, life will never be the same. Kids just need lots of love and time, confidence and emotional security makes great people.

I got all my children learning music, helped them concentrate and they all love music now, it's a great place to go when you need to relax and chill. It's expensive, lessons are not cheap, took a while to find a decent teacher, had to find an old piano but they are cheap these days. After a few years they ventured into other instruments. The dog had a breakdown when they took up the Violin.

All the best for 2021.

I always figured it was best to have my own finances sorted so I can help them out when needed. In the past it was a no brainer, funnel everything into paying off the mortgage. These days with rates being so low it isn’t so straightforward, we are probably better off with more debt rather than less.

2020 was the year I became a believer in crypto. And not because I like crypto. I just like central bank manipulated fiat currency less.

How about shares, real estate, commodities? Your options are not just fiat vs crypto, there are real assets out there you can buy with them.

All overpriced thanks to a tsunami of printed money looking for a home

But you're happy that Bitcoin isn't? Interesting. Putting any more than 10-20% of your portfolio into crypto would be pretty risky, but each to their own. I like some diversity as I unfortunately can't predict the future.

One thing that might help their domestic economy is a build in wholesale inventories, signaling confidence in the future. But this is not happening. Markets had expected a +1% build after October's +1.2% build. But the November data recorded a fall and signaling that confidence hasn't yet arrived.

In other words, what if the recovery isn’t a surefire outcome? What if unit roots, meaning permanent shocks on the macro side, are very real after all? Could it be that what had unleashed the deflationary depressions of old, monetary panics, might not have been historical relics after all? Especially when the currency which goes inelastic in order to trigger one isn’t a currency any policymaker has ever had their eyes on.

And then it happens again.
Link

I'm interested to see what Labour has planned to solve housing inequity next year.

I expect some form of back-end support system like, FHB low interest/subsidized deposits, Rent to Own, Rent for Life, more public housing, etc. All programs that are effectively rebates off the back end and are meant to be a counter to whatever the out of control housing pricing is increasing by.

Which of course will only exacerbate the problem as it is increasing demand without increasing supply relatively.

And gives the impression that 'house prices only go up', and 'that is what people expect,' but are really hiding the big problem that more and more taxpayer money is needed to support what will one day (soon) become unsupportable.

I wonder if it should be a similar system to roads where fuel tax goes directly to the land transport fund: we could have a landlord tax that pays for the accommodation supplement. Not sure why my tax money should be paying it while landlords get tax free capital gains!

Farewell 2020, year of worldwide spectacular pandemic event, a health crisis which being handled as economic subsidy upon subsidy & QEs to prepare the nation to be ready for it, but instead business as usual for many like nothing ever happened, bustling, jostling for shopping, traveling & RE purchase. Truly amazing subsidy & LSAP amount for NZ compare to other OECD larger countries size, truly world beater. Five mil teams.