Melbourne stares at new lockdown risk; US mortgage applications slip, US bond yields fall; China gets tough on LGFA debt risk; eyes on China flooding; UST 10yr slips to 1.58%; gold slips and oil firmer; NZ$1 = 72.8 USc; TWI-5 = 74.4

Here's our summary of key economic events overnight that affect New Zealand with news the bumpy road to recovery is getting stressed in Australia.

In Melbourne, health authorities and Victoria’s cabinet were in crisis meetings last night regarding whether to impose a new lockdown as they raced to contain a ballooning coronavirus outbreak. They are making a decision today, but if they get this wrong, these past two days could be the time a wider spread takes hold. A lot is riding on this delay. A new full lockdown is the likely result, throwing the pandemic recovery there into reverse.

In the US mortgage applications fell again last week, a decrease that was larger than the usual small gains and drops over the past few months.

Bond yields slipped slightly in the US as investors piled in to a big US$72.8 bln 5 year UST bond auction, offering US$152 bln for the US$61 bln that the US Fed didn't take. The median yield was 0.74% which was lower than the 0.80% achieved at the prior equivalent event. Today they also issued a 2 year Floating Rate Note raising US$26 bln.

In China, Beijing seems to be digging in on its effort to clean up their debt market exposures. Defaults of Chinese onshore bonds reached ¥61 bln in the March quarter, up +18% from the same period last year. And now earlier signals that it will allow defaults among China’s heavily indebted local government financing vehicles (LGFVs) for the first time is causing jitters in financial markets. Bond yields are rising except for Beijing's own issues

Over the years, these financing platforms have contributed to a sharp rise in off-budget local government borrowing, which Beijing is now seeking to control. In 2018 it was estimated this “hidden debt” to be worth between ¥30 tln and ¥40 tln and it will be very much more now. Much of the LGFV borrowing is not recorded and transparency about how the funds are used is weak. There is probably more than NZ$10 tln on issue or as much as 50% of Chinese annual GDP.

Basically, China is struggling to suppress its bubbles in an economy awash with money and debt.

Inflation also has the attention of the Beijing senior leadership with more promises of action to stem the rising level of producer prices. There is some impact in the past few days for commodities like iron ore and coal, but prices are only back to where they were a week or month ago. And regulators have stopped efforts by banks to sell commodity-tied derivatives to retail investors. But for food commodities, that impact is yet to be seen for corn, soybean or rice.

Maybe the weather has something to do with that. This time last year, we were reporting major flooding in China, and the damage then was quite significant and certainly more than they are used to in their rainy season. The rains are back this year and early signs suggest they could be in for another extra heavy flood season.

Back in Australia, the negligent actions of a financial adviser have received an unusually sharp dressing-down by a judge who sentenced him to lengthy jail time. But there are wider problems for the Australian financial advice industry. A lack of qualified advisers means that this service is essentially being priced out of access for most, only available for the very wealthy.

On Wall Street, the S&P500 unchanged today in afternoon trade and giving up earlier gains in today's session. Overnight, European markets were mixed but little-changed again. In the US and Europe, investors may not have sold in May, but they do seem to have 'gone away'. Yesterday the very large Tokyo market ended up +0.3%, Hong Kong ended up +0.9%, while Shanghai ended its session up +0.3%. The ASX200 fell -0.3% but the NZX50 ended unchanged.

The latest global compilation of COVID-19 data is here. The global tally is still rising, now 167,972,000 people have been infected at some point, up +518,000 per day. Global deaths reported now exceed 3,489,000 and up +13,000 per day. Vaccinations in the world are still rising but at a slower pace, now up to 1.74 bln. In the US half of their population (50.1%) have had at least one dose. Almost 40% of Americans have been fully vaccinated (132.7 mln people). The number of active cases there has fallen to 5,738,000 with fewer new infections than recoveries recently and steady progress.

The UST 10yr yield starts today +2 bps higher at 1.58%. The US 2-10 rate curve is at +143 bps and little-changed. Their 1-5 curve is at +74 bps, while their 3m-10 year curve is at +157 bps. The Australian Govt ten year benchmark rate is unchanged at 1.60%. The China Govt ten year bond is unchanged at its new lower level of 3.09%. But the New Zealand Govt ten year is up +8 bps at 1.89%.

The price of gold starts today down at US$1893/oz, a dip of -US$6 today.

Oil prices start today marginally firmer at just over US$66/bbl in the US, while the international Brent price is just over US$68.50/bbl.

The Kiwi dollar opens today +½c firmer at 72.8 USc and pushed up after the RBNZ suggested the OCR may be raised sooner than previously indicated. Against the Australian dollar we are up at 94.1 AUc. Against the euro we are up at 59.8 euro cents. That means our TWI-5 starts today at 74.4.

The bitcoin price is now at US$38,905 and +2.6% higher than this time yesterday. However, volatility in the past 24 hours has still been very high at +/- 4.9%.

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