What happened Friday

A review of things you need to know before you go home on Friday; TD rates up, factories running well; hydro lakes not getting worse, swaps soft again, NZD holds, & more

11th Jun 21, 3:59pm by David Chaston

Here are the key things you need to know before you leave work today.

MORTGAGE RATE CHANGES
No changes to report today.

TERM DEPOSIT RATE CHANGES
Rabobank has raised most term deposit rates. Their six month term is now 1.25%, their one year term is now 1.35%. Other than Heartland, no other banks have rates at these levels.

RUNNING FASTER
The May PMI turned in a continuing expansionary result, bolstered by strong production, and strong new order levels - all done with only modest additional hiring. With more outputs than inputs, perhaps business is starting to show some good productivity improvements. Although the pressures from rising input costs and high freight costs probably undermined that. It is possible this strong expansion is not coming with better profitability. Still, it is better that these pressures are happening in a rising market than a flat or falling one. More here. All regions are enjoying this expansion but the Auckland industrial base is leading it.

ENERGY SECURITY UPDATE
Hydro lake inflows over the past week have been enough to keep those lake levels from falling, and were similar to last year's levels (even it those were on the light side). As a consequence wholesale electricity prices have come off a bit over the past week. But they remain historically high. And imported coal is still a very active trade keeping the Huntly power station active to keep the lights on. And Auckland's water storage just isn't recovering, still at about 50% full when it should be 77% full at this time of year.

TOWER DOWNGRADES ANNUAL PROFIT GUIDANCE
Insurer Tower has downgraded its annual profit guidance following the recent Canterbury floods. Tower says it has received 164 claims in relation to the floods. It currently estimates the ultimate cost of the floods to be $2.8 million to $3 million before tax. In late May Tower's guidance for September-year profit was $25 million to $27 million. It now expects $22 million to $24 million, but still expects to pay annual dividends of between 5 cents and 5.5c.

LOWER PROFITS
SkyCity (SKC #15) says its gaming business is back and trading better than expected, but some of its other tourism investments aren't. And it still doesn't know when the Auckland convention center will start operating. Despite all this, it now expects to earn between $84-88 million after tax. That is a major comedown from the $235 mln it earned in 2020. Its shares rose +0.6% today.

HAVOC IN THE WEST
And speaking of the weather, climate and rainfall, spare a thought for the tens of millions of people in the US West. They are gripped by an unprecedented drought and facing extreme high temperatures as summer advances there. It seems doubtful the region can support the existing populations, certainly not the agriculture it was once famous for.

DOES THIS MAKE SENSE?
With the US economy expanding faster again, the US Fed will be considering tapering at its review next week. It's own balance sheet isn't expanding much at all recently. And the US Treasury isn't issuing debt at the fast pace it did last year. Deficits are down. That means that these two very large buyers of debt aren't in the market soaking up the very fast expansions in liquidity building up in the world's largest economy. And in turn that means there is increasing supply of cash chasing the risk-free bonds that are still on offer. That excess demand is actually pushing down yields just at the time inflation is rising fast. It might seem counter-intuitive for both trends to happen at the same time, but they have been over the past ten days or so. Will they change? Who knows. But the Biden infrastructure plans are being blocked by Republicans out of spite, and if they can get some actual progress, this is one way the bond supply could be in better balance with cash demand. Just thinking aloud here, trying to make sense of rising inflation and falling bond yields happening at the same time.

GOLD FIRM
Compared to this time yesterday, the gold price is up +US$13 and now at US$1899/oz in early Asian trading. It closed in New York at this same US$1898/oz and in London at US$1889/oz.

EQUITY MARKETS POSITIVE
Wall Street ended its session firm and the S&P500 ended up +0.5% from the prior day. The Tokyo market has started out up +0.3%, and Hong Kong has opened up +0.4% so far. Shanghai is down -0.3% in early trade. The ASX200 is up +0.2% in early afternoon trade and heading for a weekly rise of about the same, so today's trading decides whether the week is a gainer or loser. The NZX50 Capital Index is heading for a +0.5% gain in its session which will give a weekly result of a +0.5% so it ius the same here.

SWAP & BONDS YIELDS VERY SOFT AGAIN
We don't have today's closing swap rates yet. If there are significant changes again today, we will update this item. They probably fell. The 90 day bank bill rate is unchanged at 0.32%. The Australian Govt ten year benchmark rate is down another -3 bps at 1.42%. The China Govt ten year bond is little-changed at 3.12%. The New Zealand Govt ten year is down a sharp -8 bps at 1.65% and now below the earlier RBNZ fix of 1.67% (-4 bps). And the US Govt ten year has fallen back another -6 bps to 1.43%. This time last week it was at 1.63% to bond prices have been rallying hard with this yield down a net -20 bps.

NZ DOLLAR HOLDS
The Kiwi dollar is holding at 71.9 USc and just marginally below where it was this morning. Against the Aussie we are little-changed at 92.8 AUc. Against the euro we are still at 59 euro cents. That means the TWI-5 is still at 73.5 and very little-changed from where we opened this morning.

BITCOIN SOFTISH
The bitcoin price is now at US$36,230 and down -1.6% from this time yesterday. Volatility in the past 24 hours has been high at +/- 3.7%.

This soil moisture chart is animated here.

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Source: RBNZ

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39 Comments

by Rosenstein | 11th Jun 21, 4:09pm 1623384563

The Fed buying 80 billion in bonds per month doesn't have anything to do with low yields? What if they stopped doing that? Could that be a solution to the inflation/bond paradox?

by realterms | 11th Jun 21, 4:24pm 1623385461

Seems like it. IMO the bond market may no longer give a good gauge of market sentiment on inflation.

by Audaxes | 11th Jun 21, 4:50pm 1623387026

$Trillions of dollars invested by market professionals says otherwise - they all want $million bonuses and things are shaping up nicely since late February.

by realterms | 11th Jun 21, 5:20pm 1623388807

The fed now owns, what, 10t in treasuries? But I'm sure that isn't distorting pricing at all.

by Audaxes | 11th Jun 21, 6:26pm 1623392760

System Open Market Account Holdings of Domestic Securities

But I'm sure that isn't distorting pricing at all.

I believe the Fed goes out of it's way to buy more "off the run" Treasury securities from depositary holders so not to influence the "on the run" liquid Treasury securities which are the main price discovery mechanism.

H6 reserves represent QE related bond purchases, outstanding circulating currency collateral accounts for most of the rest.

by realterms | 11th Jun 21, 7:09pm 1623395349

The whole point of QE is to distort the pricing.

by Audaxes | 11th Jun 21, 7:20pm 1623396026

RBNZ makes these claims

I believe private bank market makers determine the price long before any central bank has any impact - that is my ex - professional opinion.

by David Chaston | 11th Jun 21, 4:43pm 1623386597

Their problem now is that +US$80bln/month is less than +1% per month into a balance sheet that is 'only' 35% of annual US GDP at under US$8 tln. But household net worth rose in the US rose at the rate of +$1.67 tln per month in Q1-2021. Yes trillion. So household net worth rose twenty time faster that the Fed's bond buying! Add in the Treasury bond auction supply and it still comes nowhere near how much US households have as extra to invest. Then add companies. And states who can't really run at a deficit. The 'deductions' their public sector can make to keep this all in balance is currently nowhere near enough. So we get the current distortion.

Only Biden can actually do anything about this with much, much more spending to soak up the fast rising liquidity coming from their fast-improving economy, and the best long term spending is infrastructure investment (way better than welfare or military or ag subsidies). Green infrastructure would be best. but I doubt US congressional luddites will go along with that. In fact, I doubt they have cottoned on to the issue yet.

by Audaxes | 11th Jun 21, 4:42pm 1623386579

In addition large US banks just cannot get enough liquid and safe US government debt securities on board. Latest total is USD 3.033 trillion - updated tomorrow morning our time.

by David Chaston | 11th Jun 21, 4:53pm 1623387232

Sure. But that is their holdings. Households have assets worth US$154 tln, fifty times as much. So even "large US banks" can't move the needle enough. And in a booming economy, other than for regulatory reasons, why apply your assets in such a low yielding way? I get that they need the safety of Govt debt and that with falling yields they can make good gains. But nothing they do can square up the huge imbalances generated by a rising economy in a meaningful way.

The US needs to get on and repair their roof while the sun is shining. Trump showed that ignoring that dictum is just irresponsible. And one of the results is that all those 'household gains' are to the few, with the many missing out. Repairing the roof must involve redistribution.

by Audaxes | 11th Jun 21, 5:17pm 1623388679

Sure. But that is their holdings. Households have assets worth US$154 tln, fifty times as much

Largely not liquid - banks can purchase bonds by creating deposits out of thin air at will.

Banks see no future growth potential for the ailing US economy hence their pursuit of safe liquid assets - they are more concerned with the return of their money than the return on it.

by David Chaston | 11th Jun 21, 5:45pm 1623390339

Your liquidity point is a good one. Thanks.

But I doubt bankers think the US economy is in as bad a shape as you suggest. They like most boardrooms are relatively short-term focused and will want to profit from current opportunities. (I accept there will be a corner of them thinking as you suggest, but I doubt they can move the market with such hunker-down strategies.)

by Audaxes | 11th Jun 21, 6:18pm 1623392339

I disagree. And I have skin in the game, which is working out for me at the moment. I said yesterday, I will be the first to recognise that my current stance is inappropriate if the signals change. Hard opinions are the way to losses.

by custard | 11th Jun 21, 6:03pm 1623391390

https://www.cnbc.com/2021/02/27/warren-buffett-says-never-bet-against-a…

“Despite some severe interruptions, our country’s economic progress has been breathtaking. Our unwavering conclusion: Never bet against America,” Warren Buffett said in his annual letter.

Good luck to those doing otherwise.

by custard | 11th Jun 21, 5:14pm 1623388460

So a potential solution to the “problem” is the mother-load of all government spend ups to soak up the mother-load of liquidity now sloshing around the system – much of it chasing risk free bonds of insufficient supply.

So the price of such bonds rises – even in the face of inflationary headwinds (transitory or otherwise).

Didn’t see that one coming – however if the upshot is the US seriously attending to their years of infrastructure under investment perhaps it’s not a bad thing.

by custard | 11th Jun 21, 5:22pm 1623388953

“with falling yields they can make good gains”

Apart from traders etc - at this point would that really be the driver or just a convenient by-product?

by Rosenstein | 11th Jun 21, 5:18pm 1623388682

Look. Assets are juiced because the USD is collapsing. Household wealth rising in USD terms says more about the diminishing purchasing power of the dollar. And surely that is related to the interventions in the market by the Fed. Zimbabwe household wealth was skyrocketing too, everyone was a billionaire. Wages in the US are at historic lows because the dollar buys less than it ever has. The economic boom is mischaracterizing big systemic imbalances in the macroeconomic environment that herald big change for the majority of people who live and work under these economic regimes. What the heck is going on with used car prices in the US? Suddenly everyone is super hot on a ute? Or.. A ute bought today is worth less than a ute sold tomorrow. The Fed has made the whole thing a GameStop AMC casino. Buy now, sell at higher price.

by David Chaston | 11th Jun 21, 6:04pm 1623391498

I think you are wrong. Look at a DXY chart. Current overall value of the US dollar is the same as in the 1972-1983 period, and 2003-2021 with the 2015-2021 higher than the average.

The USD is only lower than the 1983-2003 period, and over the longer term that looks to be the outloier period.

The USD seems far from 'collapsing'. Certainly not at present. Your examples are selective and only useful in a polemic where you start with a conclusion, and look for some 'evidence'.

by J.C. | 11th Jun 21, 6:25pm 1623392709

The USD seems far from 'collapsing'.

Relative to the DXY index, yes it's not 'collapsing'. But how against gold? Would you argue the same in terms of purchasing power?

by Audaxes | 11th Jun 21, 7:32pm 1623396737

The USD historically remains sought after in the currency markets when global eurodollar banks are not creating enough credit to meet demand, beyond their desire to purchase safe liquid sovereign securities.

As I have pointed out before gold moves upwards as well when US Treasury security yields, including T Bills fall. Something bad is happening.

Purchasing power is another matter. As we have noted before both USD and NZD wages are debased because of banks prolific lending practices in their own domestic asset markets. Residential property markets being the main contender here and in the US.

by Rosenstein | 11th Jun 21, 8:32pm 1623400369

The USD is losing value against investments. Not against other currencies which are also losing value. See price of property in 5 eyes countries for example. It's all tanking. And for good reason. Here's a polemic:
"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” —John Maynard Keynes

by Audaxes | 11th Jun 21, 4:21pm 1623385260

Just thinking aloud here, trying to make sense of rising inflation and falling bond yields happening at the same time.

The hottest inflation in years, by far, the very thing those predicting a BOND ROUT!!!! have been saying for all that time, and bonds do the entire opposite. For both April’s and now May’s price reports.

What is going on here?

Transitory inflation, absolutely, but more so why the market is increasingly confident about this. After all, if the last two months of consumer prices were at all possibly the first of many more to come, the very last place anyone would be is in these particular instruments. Forget the ’94 “massacre”, any rational chance these inflation estimates continue we’d end up remembering the scars of ’21 for a far longer stretch of the future.

This is not happening for several reasons, I believe, a couple of related cross-currents that, if more than short run themselves, absolutely would undermine whatever price momentum in producer as well as consumer prices. And these things all intersect not just in anti-reflation UST’s, but elsewhere around the world.

Beginning with UST’s, though, there’s the combination of Janet Yellen and Jay Powell. No, not in the way inflation proponents most often propose: theirs being “money printing” and the reckless federal government combining forces so as to have unleashed what we are now seeing just as the beginning.

On the contrary, both Yellen and Powell are, in fact rather than theory, contributing negatively to inflationary pressures by (sorry for the dead horse) removing collateral; the latter intentionally, or inadvertently via intentional policy, while the former because of statute. Yellen gave the system bills by accident in ’20, and now takes them back by accident in ’21 (what a world).

Thus, just as a start, the near perfect inverse correlation between the Fed’s reverse repo and LT UST yields remains perfectly intact. In fact, the big drop in yields today corresponded nicely as RRP usage hit a new high of $534.9 billion, up more than $30 billion just from yesterday.

You just cannot account for this in the “too much money” sense, the same which has been incorrectly alleged as a key contributor to the huge inflation numbers. With the Fed buying up a lot of the best collateral, and Treasury issuing fewer of the best of the best, what must be left for a system where now half a trillion seeks out RRP at zero?

If it is collateral concern/scarcity, and it almost certainly is, no wonder the US CPI hasn’t made a dent in the falling yield trend despite two huge reports in a row.

But I don’t think that’s the end of the collateral problem, either. I believe there is a looming other factor that seems to be gaining, too. This might end up being the greater of the three over enough time. Writing elsewhere for tomorrow:

"On top of those, risk aversion has rather quickly crept its way back into the general global marketplace as economic circumstances more and more fail (yet again) to resemble the inflationary narrative; in other words, it isn’t just Treasury yields which are falling since March, nearly every major market around the world has reversed away from reflation with several key places, such as Japan’s JGB’s where their QQE is still ongoing, too, putting in new multi-month lows along with UST’s just this week."

Is this the perfect collateral storm?

Look at the global bond market; multi-month lows all around, especially Japan and Oceania. Even German bunds have turned right around after having been the lone reflationary bright spot over the past three and a half months since the (Fedwire-induced) inflection. Link

by frazz | 11th Jun 21, 4:27pm 1623385630

Mr tired brain did not compute any of the above - "This is not happening for several reasons, I believe, a couple of related cross-currents that, if more than short run themselves, absolutely would undermine whatever price momentum in producer as well as consumer prices. And these things all intersect not just in anti-reflation UST’s, but elsewhere around the world.. "
What does that even mean?

by realterms | 11th Jun 21, 4:27pm 1623385653

I was just going to go with "tl;dr".

by Mountie | 11th Jun 21, 5:31pm 1623389487

I'm with you Frazz.

by MLSmith1 | 11th Jun 21, 10:17pm 1623406650

Reminds me of lyrics from Talking Heads...”your talking a lot but you’re not saying anything”
Or of our esteemed leader... the art of waffle that kind of sounds like your addressing the issue/question but leaves the listener without insightful knowledge.

by JimboJones | 11th Jun 21, 4:24pm 1623385443

Is it just me or is climate change happening here and now but somewhat different to what we expected. We were told Auckland would get more extreme weather, more rain, yet for the past 2 years or so I can't remember any significant rain or storms, it has been very dry, its like the climate has completely changed. It may be a fluke, hard to know.
(In a way though its quite nice!)

by Officebound | 11th Jun 21, 4:49pm 1623386940

"I think we're living in the historic sweet spot of climate change"

- a good friend two years ago

by Henry_Tull | 11th Jun 21, 4:58pm 1623387488

Emerging Reality2

https://www.rnz.co.nz/news/national/444472/new-zealand-s-use-of-coal-fo…

Its really hard for some as they find their imagined reality, um, not happening....

This week Prime Minister Jacinda Ardern said acting on climate change is life and death, and not a choice, but an imperative.

Climate campaigners say it's ridiculous that we're still burning the worst, most-polluting fossil fuel at such scale, and harshly contrast with comments made just this week by the prime minister - that climate action was life or death.

The reality as we are seeing it unfold before our eyes is that Climate Change is Not Life or Death.

#stinky buttrue
#will the moviebe better

by realterms | 11th Jun 21, 5:14pm 1623388441

> that Climate Change is Not Life or Death.

I understand that you would like this to be true. I sincerely hope we don't have to find out.

by Henry_Tull | 11th Jun 21, 5:31pm 1623389485

How do you then reconcile the fact that coal imports are up? - with government blessing.

It may be a problem, is an issue, definitely a terrific commercial opportunity, but so not Life and Death - as demonstrated by Governments here and overseas.

by powerdownkiwi | 11th Jun 21, 5:32pm 1623389553

He's a spinner - and spinning hard. They're scared.

But back to the conversation upthread: David - how much debt increase has there been in the same period? Seems to me we're just looking at a fiat ratio, no?

by Alter Ego | 11th Jun 21, 6:42pm 1623393761

Climate Change can be reduced by barring Idiots from flying around the World "Willy Nilly", reducing unnecessary Shipping, Blocking excessive Road Usage and Policing the System to ensure we all follow the Common Sense aspects of a willing participant to reduce all they can, beyond all measure.

Unfortunately G7 paricipants cannot abide at home, cannot abide without Warships, Planes, Security, Policing, Journalists and a load of other rigmarole, which could and should be replaced by "Staying at Home, using Zoom and doing an economical witter Talking to Themselves"

by Alter Ego | 11th Jun 21, 7:08pm 1623395281

And one other thing.....Their bleedin Cars.....GAS guzzlers ......do not fit in this Day and Age.

https://www.thesun.co.uk/news/15214418/summit-biden-cadillac-beast-corn…

by gnx | 11th Jun 21, 7:34pm 1623396871

I cant agree

Whatever the cost I think its a good thing our G7 leaders meet in person.

Its a chance to reset relationships and Im sure some of them get very strained.The day they won't meet Id be very worried.

by HouseMouse | 11th Jun 21, 6:46pm 1623393986

We have another barrier to housing supply - vandals!!!

https://www.nzherald.co.nz/nz/vandals-destroy-brand-new-house-with-digg…

by pacifica | 11th Jun 21, 7:32pm 1623396733

I saw that and since something very similar happened to a development around my place it reminded me of the event. It might have been upset subcontractor employees, neighbours upset at the development or indeed another outcome of the vastly unequal housing market and crisis. That some people would go out of their way to destroy a development they would never be able to rent or enter while they were under housing stress. But then it could be just kids thinking they are having a lark and doing significant damage to the settlement and housing of a family.

by HouseMouse | 11th Jun 21, 8:22pm 1623399720

I just cynically laughed. If it isn't planning processes or building costs then why not vandalism getting in the way???

by Officebound | 11th Jun 21, 10:01pm 1623405716

Feels like an inside job, extreme amount of effort, no reward. Yeah right.