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US economic activity up, but Fed worries about bankruptcies; China consumption strong; commodity prices gain; Australian retail sales race higher; UST 10yr at 1.35%; oil down and gold holds; NZ$1 = 72.9 USc; TWI-5 = 74.2

US economic activity up, but Fed worries about bankruptcies; China consumption strong; commodity prices gain; Australian retail sales race higher; UST 10yr at 1.35%; oil down and gold holds; NZ$1 = 72.9 USc; TWI-5 = 74.2
On the Tongariro Crossing.

Here's our summary of key economic events overnight that affect New Zealand, with news our currency is rising sharply today as commodity currencies generally get a boost - just as the reflation trade regathers some new impetus too.

But first, American factories expanded at a healthy rate in the latest update of February activity, and underpinned by rising demand. Their service sector expansion is strong too. The current icy storm is however likely to curtail some of this improvement when the final February data is released.

Risks are remain elevated however. The US Fed says insolvency risks at small and medium-sized firms “remain considerable” even as their economy emerges from the pandemic.

US existing home sales rose more than expected in January when actually a dip was expected. A severe shortage of listings is being attributed to the market perception of demand.

In Canada, data for December retail sales shows they ended on a grim note, far lower than the decline they were expecting. It was their worst retail situation since the start of their pandemic in April.

In China, the spot price of iron ore rose almost +5% yesterday amid renewed demand for the steel making material as Chinese mills got back to work after their holiday. Copper prices have touched a nine year high overnight and are not that far off an all-time high. Aluminium prices are rising too.

And staying in China, the results of their holiday week consumption are now showing up and they have been positive. Online spending, express deliveries, box office revenues and local tours received a strong boost during the Lunar New Year holiday period this year, thanks to the large number of people who shelved travel plans and switched to other forms of celebrating.

A Chinese official says they are looking at relaxing restrictions on outbound investment in a bid to facilitate two-way capital flows as it opens capital markets to more overseas investors. They are to raise the quota on its Qualified Domestic Institutional Investor scheme later this year.

In Japan, business sentiment is improving in February, largely on the back of new export orders in factories. Their factory PMI was back in expansion mode, but their services sector is continuing to struggle, contracting at a faster - and worrying - pace.

EU business activity fell for a fourth consecutive month in February, driven lower by a further slump in their service sector as pandemic restrictions continued to restrict many businesses. The service sector downturn was offset, however, by faster manufacturing growth, led by Germany.

Although it has fallen back a little, the Australian factory PMI for January has stayed at an elevated level, now at 56.6. (NZ = 57.5) and their services PMI is at a similar level. Holding both up are good level of employment. New order levels are good too.

Australian retail turnover was +10.7% higher in January 2021 than January 2020. That makes it its highest gain since 2015.

New York equity markets started today strongly but have now given up all those gains with the S&P500 flat in early afternoon trade. They are heading for a weekly slip but are still near their all-time high set last week. Overnight European markets were generally higher by +0.8%. Yesterday, Hong Kong posted a 0.2% rise and Shanghai was up gaining +0.6% for a second straight day. Tokyo fell -0.7% on the day however. The ASX200 tumbled -1.3% yesterday and wiping out all the earlier weekly gains, and some, while the NZX50 Capital Index was down -0.7% capping a weekly -0.3% dip.

But can these high levels last? The mantra of ‘lower for longer’ is coming under pressure as investors realise the potential damage inflation could inflict on complacent portfolios. Equity prices could be affected if P/E ratios adjust lower and interest rates rise (and private equity firms are making the risk higher), but bond prices face even more risk of a downgrade.

The latest global compilation of COVID-19 data is here. The global tally is still rising at a little-changed pace, now at 110,498,000 and up +433,000 in one day. But tit seems to be easing in some notable places in the first world. Global deaths reported now exceed 2,446,000 and +12,000 since yesterday.

More countries (99) have started their vaccination programs. About 194.4 mln doses have been given so far (+5.9 in the past day). There is clear evidence the vaccines are working to reduce or even eliminate deaths for those who have taken it. And now Pfizer says its vaccine can be stored in normal freezers, rather than the supercold versions they initially insisted on. In China, there is growing hesitation about taking their home-grown vaccine.

The largest number of reported cases globally are still in the US, which rose +78,000 over the past day for their tally to reach 28,537,000. The US remains the global epicentre of the virus although there is clearly some easing. The number of active cases fell again overnight and is now just on 9,325,000 and -32,000 fewer overnight, so less new infections again than recoveries. Their death total is not falling however and is up at 506,000 (+3000) in one day. The US now has a COVID death rate of 1522/mln, and that compares to the disastrous UK level (1761) where deaths are also still rising (120,000 and +1000) but a bit more slowly now their vaccinations are rolling out.

In Australia, their community control remains impressive. Their all-time cases reported is now 28,918 and only +6 more case overnight, but with 3 new cases in the community and the rest new arrivals, and all in managed isolation. 42 of these cases are 'active' (+1). Reported deaths are unchanged at 909.

The UST 10yr yield is up +6 bps at 1.35% today and now its highest in a year. It has risen +15 bps in a week. Their 2-10 rate curve is a lot steeper at 124 bps and it hasn't been this steep since March 2017. Their 1-5 curve is also steeper at +53 bps, while their 3m-10 year curve is steeper as well at +132 bps. The Australian Govt 10 year yield is up +12 bps at 1.52%. The China Govt 10 year yield is back down -2 bps at 3.29%, but the New Zealand Govt 10 year yield is up another +2 bps at just over 1.52%.

Economists are raising their expecations these benchmark rates will rise a lot further. Some have lifted their target for the US 10 year bond rate by end 2021 from 1.5% to 1.8%. In turn the expected rate by end 2022 has been increased from 1.75% to 2.40%.

The price of gold will start today little-changed, but up a relatively minor +US$4 at US$1780/oz.

Oil prices are down about -US$1.50 and are now at just over US$59.50/bbl in the US, while the international price is just under US$62.50/bbl.

And the Kiwi dollar opens a lot firmer than at this time yesterday, back up by almost +1c to 72.9 USc as commodity currencies twist back into favour. Against the Australian dollar we are at 92.8 AUc. Against the euro we are up at 60.2 euro cents. That means our TWI-5 has risen to just over 74.2.

The bitcoin price is now at US$54,597 and +5.1% higher than this time yesterday. In between it reached US$55,828 as a new record high. At no time in the past 48 hours did it fall below US$50,000. Volatility was a relatively high +/- 3.9%. The capitalisation of this market has now it US$1 tln, but remember about 1000 major holders control most of it. 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 ».

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19 Comments

" just as the reflation trade regathers some new impetus too."

Inflation is talked about like it’s some massive monster already rearing its ugly head while in reality, as opposed to conjecture, deflationary forces continue to be truly mind-boggling.

https://alhambrapartners.com/2021/02/18/two-seemingly-opposite-ends-of-t...

The final manifestation of central bankers' insane folly is the promise that endless wealth can be yours if only you join the speculative extremes racing over the cliff.
This madness is now global, so next up: Global Depression.
The story of the past year hasn't changed: that blowing an even bigger speculative asset bubble is the sure cure; the latest "fix" to the pandemic will make it go away forever and ever, and everything that was broken before the pandemic will magically be restored by the magic of ever larger and more precarious speculative asset bubbles.

http://charleshughsmith.blogspot.com/

Forget the SLR “cliff”, why are dealers so reluctant to take on that plus any other liquidity risks in order to renew the desire to do more and better like they used to so easily and readily? Instead, at times like these the closest thing to useful gossip we have is…Treasury bills.
Link

The safer the assets, the lower the applied “risk weighting” the net result being a higher capital ratio rewarding the bank for appearing itself uncontroversial or risky. The issue had been in how the rules allowed for creating “safe” assets out of those otherwise often of extreme risk – employing, mostly, securitization strategies.

Is the RBNZ FLP scheme facilitating banks in their endeavours to further securitise mortgages into Residential Mortgage Backed Securities (RMBS) which are eligible for sale and repurchase for a three year period and effectively leave a greater proportion of the not so secure mortgage assets for unsecured bank creditors to deal with?

“The capitalisation of this market has now it US$1 tln, but remember about 1000 major holders control most of it.”

...Pretty much like most asset classes then, incl fiat.

Big Pharma will be hosed.
"In the fifth sero survey done in the national capital of Delhi, antibodies have been detected in 56.13 per cent of the population. This was the largest survey in any state involving around 28,000 samples conducted from January 15 to 23," Mr Jain said." This data excludes T cell immunity.
https://www.ndtv.com/india-news/coronavirus-over-56-in-delhi-have-develo...
https://www.nature.com/articles/d41586-021-00367-7

I remain to be convinced that there is any inflation on the horizon. Every few years we have this little moment but what is there to support inflation? Wages and productivity remain subdued.

11
up

Yep, the number of constructively employed, taxable wage earners is dismal, hence government bond issuance remains robust.

The new world of climate change, de-globalisation, general inefficiencies from zombification and impacted supply chains - these all could inflat general prices.

19
up

And what is New Zealand doing about it to get us ready?

- Re-establishing businesses that were previously out-sourced (globalised)?
- Reducing the number of imported additional people that we will have to feed, cloth and provide ongoing welfare for as they age?
- Allowing industries in decline (e.g.: tourism) to shrink to the most efficient of operators?

Nope.

We are smarter than that. We are going to ramp up property prices to even more extreme and unstable levels (just what the RBNZ wants!), and that will save us. Not only that, but we are going to load up our people with crushing Personal Debt, on top of the ever larger Public Debt (that's theirs as well) in the hope of what? Inflation, to 'make the debt loads look smaller' in real terms?
As I keep saying - it's madness.

That's my view too. We might have tiny bursts of it, but I think it will generally remain subdued.

The question is what drives inflation. To some extent Reserve Banks can apply some temporary pressure with their "tools". However to produce inflation over any horizon we would need to move investment in productive areas of our economy, that would feed improvements in productivity which in turn would feed through to wages and consequently drive CPI and rates upwards.

The economies of western countries have been neutralised at the first step, public and private investment isn't channeled into productive areas of our economy.

Just for fun on a lazy Saturday morning, and a précis from the comments section of the "Telegraph" in the UK this morning ( so it's 'not just us' that have the same concerns)

Global policy makers are on economic suicide missions.

Bankers make the most money when they are driving your economy into a financial crisis.
They will load your economy up with their debt products until you get a financial crisis. The financial crisis appears to come out of a clear blue sky when you use economics that doesn’t consider debt,

Economists do identify where real wealth creation in the economy occurs, but this is a most inconvenient truth as it reveals many at the top don’t actually create any wealth.
Much of their money comes from wealth extraction rather than wealth creation, and they need to get everyone thoroughly confused, so we don’t realize what they are really up to.
They need to confuse making money and creating wealth.

What is needed is Sustainable growth.
How do you achieve it when you don’t know what real wealth creation is?

Everyone wants economic success, but policy-makers keep trying to drive their economies into Great Depressions.

We thought small state, unregulated capitalism was something that it wasn’t as our ideas came from neoclassical economics, which has little connection with classical economics. On bringing neoclassical economics back again, we had lost everything that had been learned in the 1930s and 1940s.

Mariner Eccles, FED chair 1934 – 48, observed what the capital accumulation of neoclassical economics did to the US economy in the 1920s:

“a giant suction pump had by 1929 to 1930 drawn into a few hands an increasing proportion of currently produced wealth. This served then as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied themselves the kind of effective demand for their products which would justify reinvestment of the capital accumulation in new plants. In consequence as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When the credit ran out, the game stopped”

Now BTC has hit a 1T market cap things get really interesting. Many of the worlds largest investment institutions such as pension funds, are simply not allowed to invest in an asset that sits under this level. Once an financial vehicle passes the Trillion dollar level, the possibility of total failure becomes extremely low. I believe we've now passed the point of no return as a legitimate asset class. Expect to see investment announcements accelerate.

MicroStrategy just completed a $1.05B offering to investors of convertible notes yesterday. All of that is being used to purchase Bitcoin. https://www.microstrategy.com/en/investor-relations/press/microstrategy-...

Now BTC has hit a 1T market cap things get really interesting.

Aggregate data on the use FX swaps and FX forwards can be obtained from the BIS derivatives statistics.2 The BIS OTC derivatives data (OTC data) show that the total amount outstanding at end-June 2019 neared $86 trillion (Graph 2, first panel), with FX swaps accounting for an estimated three quarters of this total. Not surprisingly, the US dollar is almost always one of the two currencies exchanged (89%). Roughly three quarters of outstanding positions had a maturity of less than one year, but turnover data show that the modal swap matures in a week or less.Link- page 3 PDF

"Many of the world's largest investment institutions such as pension funds, are simply not allowed to invest in an asset that sits under ($1T)"
Really?
So they can't invest in ,say, Ford Motor Company, that has a capitalisation of 'only' $50 billion? Maybe Ford shares aren't classified as an asset?

Congress made it more difficult for brokers to process transactions in stocks priced lower than $5 each, the cutoff point below which a stock earns the "penny stock" label. These regulations were put into place following a broad crackdown in the early 1990s.

So they can't invest in,say, Ford Motor Company, that has a capitalisation of 'only' $50 billion? Maybe Ford shares aren't classified as an asset?"

Ford is an individual company that trades on the NYSE, they deal daily with equities worth 23T. Bitcoin is an entirely new asset class. They don't get involved below the 1T level, as there is simply not enough liquidity for the amount of money they deal with. The rules across the world differ by country but they are very heavily restricted.

Some good reading in this world bank document. http://documents1.worldbank.org/curated/en/856261468175789789/pdf/613130...

And the 2020 OECD Pension Fund annual survey.
http://www.oecd.org/daf/fin/private-pensions/2020-Survey-Investment-Regu...

Money printing is inflation. Simply maths

Yes, as long as velocity of money doesn't collapse, and it is pretty sluggish at present.
But my guess is we will see inflation - all this liquidity combined with zombification of the economy will result in increasing desperation to get the supplies of what is left, using bigger and bigger heaps of fiat.