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US inflation leaps; US budget deficit stabilises; commodity prices rise further; China debt growth less than expected; EU data lackluster; Wall Street slips; UST 10yr at 1.68%; oil rises and gold dips; NZ$1 = 71.6 USc; TWI-5 = 73.4

US inflation leaps; US budget deficit stabilises; commodity prices rise further; China debt growth less than expected; EU data lackluster; Wall Street slips; UST 10yr at 1.68%; oil rises and gold dips; NZ$1 = 71.6 USc; TWI-5 = 73.4

Here's our summary of key economic events overnight that affect New Zealand with news the reflation trade is back.

We start today with a major surprise. Inflation is rising much faster in the US than observers had anticipated. In March it rose at the +2.6% rate and nicely above the US Fed's target. Analysts had expected it to rise further to +3.6% in April. But in fact it has come in at a +4.2% rise from a year ago, a very much faster rise than almost anyone anticipated (except the hindsight analysts). It's their biggest jump since 2009 and the highest since 2008. Energy and transportation costs did the damage in April. Interestingly medical care, food, and rents all only rose a bit over 2% and all restrained the jump.

Bond yields jumped. Equity markets fell. The US dollar strengthened.

The US Treasury released its monthly budget update for April overnight. After a huge -US$660 bln deficit in March, the April -US$226 bln shortfall looks positively tame. Over the past twelve months this deficit is -US$3.6 tln (-16.2% of GDP) but that is lower than the full year to March deficit of -US$4.1 tln (-18.6% of GDP). At least they now have things going in a positive direction.

The US Treasury auctioned US$63 bln of 10yr notes today. They got US$123 bln in bids. US$23 bln was reserved for the Fed. The median yield was 1.63% pa at this event, up from 1.47% pa at the same (but smaller) auction a month ago.

The monthly US WASDE report was released overnight as well, assessing the global agricultural trade. The points of interest to us are that world grain production looks like it will hit another record high this year, but rising demand will keep prices elevated. The US is expecting their dairy output to rise as prices stay high. They also see beef imports softening from here.

The rise and rise of commodity prices just keeps extending, with iron ore prices now over US$230/tonne. A year ago they were at US$89/tonne. Two years ago and well before any pandemic they were at US$95/tonne. Copper is rising faster too, and now up over its 2011 record high.

In China, the April data for "new yuan loans" - their measure of bank debt growth - came in lower than expected and sharply less than in March. But year-on-year it still keeps loan growth above +12%. Debt there is rising much faster than economic activity, so the idea that things are "cooling" is probably overstating it.

And there is growing criticism of the reliability of that Chinese census - even within the CCP and Government.

And the Government is dampening down fears that Chinese CPI inflation is at risk of sharp rises. It says it is able to control "imported inflation".

And German inflation did not rise like the American data. It was up the expected +2.0% - unusually high for them, but not excessive.

And underperforming, EU industrial production was lackluster in March.

On Wall Street, the S&P500 is down another -1.7% in afternoon trade building on yesterday's big decline as their selloff broadens. Rising interest rates undermine asset valuations. Overnight in European markets rose +0.2% although London rose -0.8% is a small recovery of the big loss on the day before. European markets all traded before the US CPI data was released. Yesterday, the very large Tokyo market fell by another -1.6%, but Hong Kong was up +.08% for the day, and Shanghai was up +0.6%. The ASX200 ended down another -0.7% while the NZX50 Capital Index fell another -0.6%.

The latest global compilation of COVID-19 data is here. The global tally is still rising, now 159,845,000 people have been infected at some point, up +718,000 in one day, still largely driven by rises in India and Brazil. Global deaths reported now exceed 3,321,000 and up +13,000 in one day. Vaccinations in the world are also rising fast, now up to 1.345 bln (+15 mln per day), and in the US almost half of their population (46.7%) have had at least one dose as they keep up their fast rollout. Now more than one third have been fully vaccinated (118.1 mln people). The number of active cases there has fallen to 6,401,000 (-14,000) with fewer new infections than recoveries recently and steadily improving progress.

The UST 10yr yield starts today at 1.68% and up +6 bps from this time yesterday. The US 2-10 rate curve is sharply steeper at +153 bps. Their 1-5 curve is also steeper at +80 bps, while their 3m-10 year curve marginally steeper +168 bps. The Australian Govt ten year benchmark rate is up +3 bps at 1.76%. The China Govt ten year bond is down -1 bp at 3.15%. And the New Zealand Govt ten year is up +6 bps at 1.85%.

The price of gold starts today at US$1822/oz and that is down -US$13 since this time yesterday. It is an odd move lower given the inflationary backdrop.

Oil prices start today up almost +US$1.50 at just under US$66.50/bbl in the US, while the international Brent price is just under US$69.50/bbl. This is a big move, made larger by the sudden strengthening of the US dollar.

The Kiwi dollar opens today sharply lower at 71.6 USc and more than -1c lower overnight. Against the Australian dollar we are little-changed at 92.6 AUc. Against the euro we are -½c lower at 59.3 euro cents. That means our TWI-5 starts today at 73.4.

The bitcoin price is now at US$54,929 and -2.7% lower than this time yesterday. Volatility in the past 24 hours has been a high +/- 3.3%. 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 ».

Daily exchange rates

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Source: CoinDesk

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50 Comments

Surprise inflation eh?
Not to anyone independent with a brain
Now for the transitory see through bill
Tell it to the debt holders and wage earners

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When you mail everyone a cheque what do you expect.

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This would make a great chorus to a song

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Looks like another housing boom is on the horizon. There is no better hedge against rising inflation than hard assets like properties.

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Haha good one

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HAHAHAHA the comedy in this guy though.......

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Yep, take out some historically cheap mortgages and go to town. Don't think too hard about what happens to interest rates when inflation rises, or what happens to property prices when interest rates rise.

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Been through double digit interest rates many times, each time it turns out properties' are still grand winners.

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My bet is you'll stop commenting on here once the crash happens.

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At this point I would put my money on an inflationary blow out rather than a crash. In the event of an inflationary blow out you want to be long debt & short fiat. With the way they calculate CPI (hedonic regression/substitution) there is no real way for CPI to raise above the 3% band for an extended period of time. Even if prices are increasing at 10+%. This means that interest rates won't need to be raised.

But each to there own I guess. One thing we can all agree on is that current monetary policy has turned our country into a casino.

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Casino yes, where literally the "house" wins.

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Unless you raise interest rates, there is no way to turn the credit tap down. It's like a bath that has filled up and is now overflowing. But the message always seems to be "interest rates won't go up".

So we are just supposed to sit at these interest rates forever are we? Really? With ongoing QE too I suppose? Until when? When do we go back to 'normal'? Is that what central banks were hoping for when they took us down the road?

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Like I said it ends in an inflationary blow out & a complete loss in trust in our currency by the average Kiwi. What happens after that? Likely we just have an inflationary currency like a lot of the 2nd/3rd world. If inflation gets to bad you may currency reset resulting in the creation of the Aotearoa dollar. Maybe people just move on to digital currencies.

It's not the end of the world. Our real wealth is tied up in "real industries" & "real assets", a currency is just a means of exchange. People shouldn't hold value in a fiat currency in the first.place. They are a silly billy if they do.

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Ludwig von Mises can tell you what happens Tom - https://www.investopedia.com/terms/c/crackup-boom.asp

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I can't see how that is possible this time. Who could afford a very average million dollar house in Otara if mortgage rates were at say 7% and repayments at $6600 a month? Would need some very big pay rises / rent rises...

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If you started investing in the 80s or 90s during double digit rates, all you've known is a downward trend in interest rates supporting property prices. There's not much road left for that to happen unless we go negative.

I own a couple of houses so not totally down on the asset class, but it's pretty clear to me there are big risks there right now and I wouldn't be leveraging to the hilt.

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[ Benny Hill theme song plays ]

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How sad. Rising rents are typically more painful for DGMs.

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Don't be sad chief - keep buying houses and we'll drink your tears when s**t hits the fan.

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We can't all live rent free at the circus.

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Your trolling score is reaching 8/10.

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Couple of links for this morning. The first is a reasonable rant, the second a warning that the Elite, even the legal-profession ones, look after their own. In a time needing truth(s), this is a worrying stifling.

Anyone getting to see Ben Elton will smile at his razor-sharp appraisal of RadioNZ. They thoroughly deserve it, but I doubt they have what it takes to raise their game.

https://kunstler.com/clusterfuck-nation/the-raptures-of-hyper-complexit…

https://dissenter.substack.com/p/craig-murray-8-months-prison-sentence

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Kunstlers final phrase, “ we just got to roll with it, until it stops rolling.” My is that not a succinct summary of the genesis and conclusion of how our globe’s humanity goes about producing and nurturing its great catastrophes.

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Let's call it what it is

Today Craig Murray was found guilty of being Julian Assange's friend Link

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Inflation jumping but not to worry as reserve bank will move their inflation target higher to calm and potray that they are still in control.

Reserve bank acted and acted fast in panademic to print and distribute money removing all barriers, providing stimulus and introducing policies to support and promote anyone and anything opting for debt - turning into debt economy - bigger the debt bigger the gain.

And Now

When economy were doing reasonably well and emergency had passed long ago and asset class were touching all time be it stock ( now facing the tune) or housing ( housing could be better manipulated than stock, which has resulted in the biggest ponzi in recent time) still reserve bank wants to continue with their fetish, which was fun for short period but now even they are loosing control, if not already.

They failed not because they adopted least regret policy earlier when had fear of meltdown but because they ignored and continued with their generousity therby killing the economy fundamental as anything in extreme is bad. Now too was the time to act fast with least regret policy when knew ( not feeling) that things are getting out of control and inflation moving fast much above their target but are hooked to their fantasy.

Whenever they act market will react, it doesn't matter when, so should not be scared as is inevitable but will be good for long term.

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By way, if as expected CB do not raise rates due to inflation, then current real rates will be increasingly negative

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Reserve bank have put themselves in a situation where they have allowed themselves to be blackmailed as even a slight correction will be a disaster. Now they have no choice but to keep digging the hole deeper and deeper.

May be they are enjoying digging the hole and do not mind been blackmailed and have done it on purpose to support ........

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They've dug their own grave by continuously lowering the OCR and pushing retail banks to lend, lend, lend. And retail banks have never pushed back, they've just gone along with everything and lent eye-watering amounts on residential property. We've been betrayed by gormless idiots who have wrecked our future.

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There's little justification for such a low OCR. Its caused an asset bubble, businesses have not borrowed up large and unemployment is at a very low level.

The govt is pumping it further by raising the minimum wage and welfare payments.

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Go inflation, go!!
I love seeing the short term thinkers that infest the ranks of economists, financial journalists, and central bankers get it do wrong. It wasn't so long ago that Sharon Zollner was on breakfast TV saying that the consensus is that you can just print money without any impact on general price inflation......next minute, inflation starts rearing its ugly head.

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She's godawful. Mind you, they all are.

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Link please to Zoller's statement printing money will not result in inflation.

She appears to be saying the opposite here:

https://www.stuff.co.nz/business/124438249/gale-force-economic-warning-…

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NZ banks' balance sheets contracted between Mar 20 to Mar 21 from $631.371bn to $630.135bn. Link

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Do you know what consensus means sir? It means that the eggheads out there had - in her opinion - reached a consensus. Whether she personally agreed with the consensus is another matter.

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Attaching a link to her statement would resolve any ambiguity and potential misinterpretation by yourself.

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On Wall Street, the S&P500 is down another -1.7% in afternoon trade building on yesterday's big decline as their selloff broadens. Rising interest rates undermine asset valuations.
Hmmmm,,, Daily Treasury Bill Rates Data

The biggest businesses thrived, borrowed freely, and then paid shareholders in the form of gross buybacks (a liquidity preference of their own). Underneath them, even lesser corporates, it was never so good therefore never real recovery for which inflation might have been possible.

Insanely spiraling commodity prices can be the start, but by themselves are not inflation. In fact, it was – and is – the situation described above which had previously thwarted the one becoming the other. An economic system fully greased by monetary excesses (nowadays credit being a huge money-like component) can lead to the bid in commodities then raising input costs for firms of all scales easily passed on to consumers (who, as workers, likewise demand increased wages).

If, however, material inputs get more expensive but companies can’t find credit and don’t see their revenues rising anywhere close to enough, they aren’t going to be bidding high for additional labor (instead overmanaging their whole cost structure) and sure won’t be able to pass along (and continue passing along) higher end prices to their customers whose bigger impact on business fortunes comes in the form of their absence. This is exactly what happened up to 2018-19.

I’ve never seen a three-faced vise, yet that’s what we’re describing here; can’t get credit, revenue stays down and then along comes a supply shock in commodities to make it all the more miserable for the commercial interests already run out of options. Inflation doesn’t follow; its opposite does, more readily appreciated once the commodity impact fades.This is all the more the case given a situation when, as today, the government has previously provided the only other possible outlet (PPP) preventing the vise from more completely completing its duty. While last year’s huge “rescue” is coming to an end, and commodity prices are definitely on fire (because of sticky shortages), for small and medium businesses both are potentially huge trouble. Link

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Don’t discount the deflationary effects of ageing populations in many advanced nations. The older you get, the less you need to buy. Only the poor have lots of kids these days. Modern middle class women have better things to do than spend their best years breeding. And AI? Rise of the roboshop, robodoc etc. I believe one of our major media outlets is already investigating AI to write its content. Interesting world on the way. The frog in the saucepan.

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Thing with AI is that CCP are the ones happy to really use it. - maybe news to our foreign affairs :(

Here is Peter Thiel calling out Big Tech, & especially Apple for being enabling... using a combo of magical thinking, useful idiots and having been bought-off (some think sound policy settings).

- remember Thiel is a director of Facebook & has NZ passport. Palantir did offer help re NZ covid response.

https://youtu.be/SJcKWtiFzIY
At the Nixon Institute.

Palantir
https://en.m.wikipedia.org/wiki/Palantir_Technologies

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"except the hindsight analysts"
Ah no.
Plenty of finance podcasters have been calling this out for many months. It's the msm talking heads that have been in denial.

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Why should it just have been for months though? That is like seeing the iceberg the instant before your ship smashes into it. Cognitive dissonance isn't the exception, it's the rule. Unless something happens, people can't believe it will happen. The short term thinking is chronic.
Then after the crashes happen, we get these tomes telling us that people in high places ignored danger signs or looked the other way. We don't need these 'in hindsight' weighty tomes explaining to us what happened like we are dumb - we can see it all playing out before our eyes!!

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This govt is happy enough to make the right noises, create working groups and tinker on the margins. Doing nothing is easier.

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The price of gold starts today at US$1822/oz and that is down -US$13 since this time yesterday. It is an odd move lower given the inflationary backdrop.

Gold collateral is being sold to meet margin calls in the stock market. Even not so pristine US Treasuries' prices are slightly under pressure for the same reason. But always 'on the run' (OTR) US Tbills are in huge demand. Also witness today's activity at the FED reverse repo window - $209.257bn of dealer cash at 0.0% being exchanged for 'off the run' US Treasury securities collateral to bolster margin calls on not so safe or liquid securities currently purchased under collaterlised repurchase agreements.

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I seem to remember something like that. 2007? 8?

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In 2008, for example, collateral gold was unleashed in the immediate aftermath of Bear Stearns – which makes sense given what Bear taught the marketplace about illiquid securities and the need for repo reserves. Gold was down sharply as collateral became very hard to source.

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.... The majority of bitcoin is mined in China, with Xinjiang a major center for mining that is also fueled largely by coal, according to previous reports....

Thing is all others (cryto) are centralised so easily subject to a coin freeze. - check out the Peter Thiel link above for more on China Coin.

Spend lunch with Max, Stacey & Tim Pool.
https://youtu.be/8QwDxS8ekgo

P.S. pollution you see is not climate change.

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Has anyone told Elon that Bitcoin Mining rigs run on electricity just like Teslas, and that 64% of electricity generation in the US comes from coal and gas? This is virtue signalling at it's very best. https://www.epa.gov/energy/about-us-electricity-system-and-its-impact-e…

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[ Childish rant removed. Ed ]

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Right, so we have had Central Banks pursuing criminally reckless policies of ultra-cheap money.
And now they are surprised that inflation is potentially rearing its ugly head, which will force them (including the RBNZ) to raise rates sooner and higher than they would have wanted ???
I really wonder if they are incompetent or disingenuous. Anybody with an IQ higher than that of a rock would have easily predicted the effect of these stupidly loose policies.

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