Here's our summary of key economic events overnight that affect New Zealand with news there is a growing sense that the stellar global economic V recovery may be waning.
The US non-farm payroll report for June is due out on Saturday (NZT) and today the precursor ADP Employment Report came in with a +692,000 rise which was better than expected (+600,000). But this June gain actually represents a slowdown from the (downwardly-revised) +886,000 increase in May. Analysts are expecting a non-farm payroll rise of +700,000. So payrolls are only growing modestly at this time.
The Chicago PMI slipped from its unusually high level in May, but the June level is still very high. However, prices paid at the factory gate surged by their biggest jump in 42 years
US grain stocks for corn, soy and wheat fell by almost -50% in June from their March levels, a decline that was more than the one expected. When they are released in a few days, world food prices are expected to have risen sharply again.
It's a public holiday in Hong Kong today, Establishment Day, celebrating the transition from British to Chinese ownership when it was agreed to be as a Special Administrative Region (SAR).
In China, their official PMIs weren't so flash. The latest surveys suggest that growth softened in June. A slower improvement in services activity was mostly to blame. But supply shortages also continued to hold back output in the manufacturing sector. On a more positive note, the surveys point to an abrupt easing in price pressures recently.
Concerns about the quality of Chinese bonds just aren't going away. Rising investor worries over shaky finances in at least six "fragile" provinces have prompted a sell-off in state-run group bonds. Analysts warn of a surge in defaults in the country’s US$17 tln credit markets.
In Japan, consumer confidence rose in June quite noticeably. It is not quite back to its pre-pandemic level but close. But it is well above mid 2019 levels.
However Japanese industrial production was reported for May as well overnight, and that data sagged, falling almost -6% from April when only a -2.4% fall was expected. The May 2021 level is -11% lower than for May 2019, a huge decline.
South Korean industrial production also fell in May, compounding an April fall. This is just another set of soft data for them.
In Australia, home loan balances grew by the fastest monthly pace in four years, largely by topped-up borrowing by owner-occupiers.
Wall Street is meandering to its month-end close with the S&P500 up an insignificant +0.1%. It will end its month up a net +2.1%. Overnight European markets closed down -0.9% on average and giving up most of the prior day's gains. Yesterday both Tokyo closed down -0.1%. Hong Kong was down -0.6% and Shanghai both closed up +0.5%. The ASX200 closed up a minor +0.2% and the NZX50 Capital Index was up +0.1% in the end. The ASX200 ended with a monthly gain of +2.4% while the NZX50 Capital Index was up +1.5% in June.
The UST 10yr yield starts today at 1.45% and down -3 bps. The US 2-10 rate curve is flatter at +1.20 bps. Their 1-5 curve is also flatter at +80 bps, while their 3m-10 year curve is down at +140 bps. The Australian Govt ten year benchmark rate starts today at 1.49% and unchanged. The China Govt ten year bond is down -1 bp at 3.10%. And the New Zealand Govt ten year is now at 1.78% and also down -1 bp.
The price of gold ended June at US$1769/oz which is up +US$7/oz from this time yesterday. For the month, gold sank -6.9% after starting at just on US$1900/oz. Silver sank -5.8% in the month.
Oil prices are up nearly +US$1 today. In the US they are now at just under US$73.50/bbl, while the international Brent price is still just over US$74.50/bbl.
The Kiwi dollar opens today just under 70 USc and that is a -4.1% devaluation in a month. Against the Australian dollar we are unchanged from yesterday at 93.1 AUc. Against the euro we are little-changed too at 58.9 euro cents. That means our TWI-5 starts today at 72.6 and a net -2.3% devaluation in a month.
The bitcoin price is now at US$34,730 and down -4.4% from this time yesterday. Over the past month the bitcoin price has fallen a net -6%. Volatility in the past 24 hours has remained high at +/- 3.6%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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59 Comments
Delta variant update. According to Public Health England, the death rate among vaccinated is 6 times higher than unvaccinated. That's the bad news. The good news is Delta has a death rate of 0.006% in vaccinated vs 0.0009% in unvaccinated. It's going to be ok.
https://www.lifesitenews.com/news/death-rate-from-variant-covid-virus-s…
I don't know where those numbers come from because they aren't consistent with the technical briefing quoted in the article. Case fatality of the Delta variant is 0.1% versus Alpha at 1.9%.
OK worked it out, the correspondent has divided cases by deaths in Table 4. But, most vaccinated people don't even realise that they have been exposed to the virus so don't get tested and don't get counted in the stats.
You'll find the 17th technical briefing here:
https://www.gov.uk/government/publications/investigation-of-novel-sars-…
Lifesite is definitely a less than reliable source. I too have gone back to the Public Health England official report on which the Lifesite article was based and it tells a very different story to how Lifesite reports it. Lifesite is essentially an American anti-abortion and associated 'family values' lobby group. What we are seeing in the UK is very high transmission of the Delta variant. The evidence to date is that the vaccines are still very effective against this variant - something over 90 percent. However, the infectivity of the Delta variant is so high that despite high vaccination rates in the UK, the UK new case numbers are up by a factor of around 10 from where they were four to six weeks ago. This has big ramifications for herd immunity. In essence it means that once Delta gets a foothold then if you are not vaccinated you can expect to get COVID.
KeithW
As a starting point, there is a need to recognise that the first vaccinated people in the UK were the high risk people. Just like us, they had a staggered roll out. So what you are seeing is a greatly confounded sample. What the vaccine does is to pre-warn the immune system so it subsequently attacks the invading COVIDS much more quickly. But there will still be a proportion of high-risk people whose immune systems are sufficiently weak that they will die if they are exposed to the virus. The vaccine itself does not actually kill the virus; it simply primes the immune system to mount a counter attack much more quickly. In contrast, the non vaccinated people are the lower risk and younger people who have an excellent chance of fighting off the virus without it killing them, based on their much stronger immune systems.
KeithW
It's good you highlight the relative immune strength of the young. Have you read this article in the Journal of Vaccine Theory Practice and Research?
No, I had not read that article but I now have.
However, I was already aware of the key arguments put forward by that paper.
I agree that ADE issues are important and I have taken a prior interest in those issues linked to my having often worked in countries where dengue fever is endemic. (For clarification, dengue fever is a disease where prior infections make you more susceptible to subsequent severe infections.)
I also note that the one of the two authors of this paper is a naturopath and that he promotes naturopathic remedies in this article. Also that the journal is a very new journal and I cannot find who the publishers are. But the focus of the journal is very clearly towards caution in relation to vaccines.
I agree that there is still a lot more to learn about mRNA vaccines but I will still be lining up to get my shots. I am also of the perspective that mRNA technology is going to transform not only many aspects of human health but also the health of domesticated animals. And as a specialist in agrifood systems that is of great interest to me. It is something I touch on in a number of my speaking engagements.
In relation to human health, mRNA technology has the potential (we are not there yet) to treat many genetic and autoimmune diseases.
KeithW
Keith, regarding dengue, you might be interested in the following news. I was dining with people from the program the week this news was announced.
https://metro.co.uk/2021/06/10/mosquito-bacteria-hack-stops-dengue-feve…
The Malaria example. DDT was the god send in the Pontine Marshes, used by the US.
- would have save Mr Gates alot of time and got him to equitable maths sooner.
https://en.m.wikipedia.org/wiki/Pontine_Marshes
The flooding was an act of biological warfare[31] and was opposed by former Italian colleagues of the Germans in malariology, but someone on Kesselring's staff - unknown to this day - issued the order.[32]
The Battle of Anzio left the marsh in state of devastation; nearly everything Mussolini had accomplished was reversed. The cities were in ruins, the houses blown up, the marshes full of brackish water, the channels filled in, the plain depopulated, the mosquitos flourishing, and malaria on the rise. The major structures for water control survived, and in a few years, the Agro Pontino was restored. In 1947, the province of Littoria, created by Mussolini, was renamed to Latina. The last of the malaria was conquered in the 1950s, with the aid of DDT.
All very nice looking at graphs. The one I have save on my desktop is direct from the US CDC, it shows overall mortality in the USA is now below where it was before Covid. Mortality displacement was predicted and the prediction panned out. Those who prove correct in their predictions (when prediction is backed up by reasoning, not simply a guess) are the ones with the most credibility, in this instance my friend that is a Professor of Applied Statistics in the USA. He expects the displacement to be in place for 2-3 years, well at least for all other causes of death.
Be fair, this is an objective view of outcomes, not an emotive or ideological argument to what could or should have been done.
In the early days I, tongue in cheek, suggested that the young should have been vaccinated first based on the rationale that they struggle to obey the rules, so would then thoroughly test these experimental vaccines. Looking back on that now, I am not so sure I was wrong in that theory, and that action may have severely restricted the spread of COVID, and ultimately saved more lives.
Health Economics does use terms like QALYs (quality adjusted life years) to decide on whether to fund certain interventions. A life that doesn't have many years left, or has a lower quality of life, is explicitly worth less than one with many quality years remaining. Maybe tough to process emotionally, but I think it's reasonable for a healthcare system (and society in general) to prioritise saving young lives over those who don't have much time left. We do this already. Those lives are absolutely not worthless, but they are worth less.
Pharmac essentially puts a value on life.
The great and wise Gareth Morgan covered this in his book, written in 2009. Pity we just slang him about cats (which he is also correct on).
"The book explores the consequences of ongoing avoidance of the tough calls on rationing and prioritisation. It considers how many New Zealanders are already suffering or missing out from health care because of ad-hoc interventions in response to pressure groups. Written in Morgan’s frank style, this book takes no prisoners as it explores which patients and treatments need to be given priority".
https://morganfoundation.org.nz/health-cheque-the-truth-about-nzs-healt…
Sort of worrying that first bit isn't Scarfie? Humans are essentially a social animal, and that very fact makes us highly vulnerable to all kinds of nasties that are going to kill some of us.
Putting the brakes on our social interactions has meant that a few people will live longer than normal.
Yep, that's why the wealthy are buying farmland:
https://www.theguardian.com/commentisfree/2021/apr/05/bill-gates-climat…
A lot of the most productive farmland on earth is running out of water, that means the price of the rest will be driven upwards.
Disappointed to not see it measured here: 10 Year Anniversary of the Great Kohimaramara Earthquake - a shallow quake five kms or so deep, halfway between Mission Bay and Kohi Beach, a few hundred metres offshore.
Unfortunately, the repairs required mean that the city has not been able to deploy the kind of bus lanes, separate cycle lanes or light rail that you would find in any beach-side suburbs in a half-decent global city. But I'm sure many are thankful to have their health after such a traumatic event.
Sorry to be a DGM but I just don't see a recovery in sight. You cannot paint a bright picture on here just a few days ago and then say its all gone to the weeds again days later. Its not just Covid now its the Climate that is going to reek havoc. Just the other day much warmer than normal winds for 5 days took out the entire rice crop in one country, I didn't even know that was possible for something sitting in water. The weather is going to become more extreme by the year.
Power consumption in the US and Canada usually peaks in winter months but this heatwave is catching many generation companies off-guard with consumers turning their air conditioners to full blast.
Burning all that extra coal and gas to cool homes and offices will only worsen the situation.
Actually as the planet warms the weather will become less extreme.
Storms & cyclones are caused by the difference between cold and warm airflows, as the amount of cold air reduces the ripe conditions for creating storms reduces.
What will increase is the amount of rainfall as the warmer climate produces more evaporation from the oceans.
Disagree, but I don't think this is proven either way. I suggest that 'global warming' is all about the energy, measured as temperature, in the atmosphere (trapped by GHG, water vapour etc). while it is true some of it will be used up in the evaporation cycle, but only a limited amount. This energy will be evident in the number and severity of storms. But these storms and atmospheric flows will also cause over swings at both ends of the scale. So we will see very high, and very low temperatures. The very low temperatures will be associated with severe storms, and in places we don't normally see them. So until the energy levels in the atmosphere decline, the severity of storms, and incidents of extreme temperatures will continue.
The Bank of England Chief Economist warns of inflation dangers this year:
https://www.bloomberg.com/news/articles/2021-06-30/haldane-says-u-k-at-…
After 2009 they moved to a measure called CPIH which includes house prices inflation. They wanted to avoid another financial crisis:
https://www.ons.gov.uk/datasets/cpih01/editions/time-series/versions/10
Reverse Repo hits $991B last night, no end in sight. Graph is pretty much vertical. Is there a limit to how much the fed can supply here? At this rate we'll get to see if their systems store 32 bit integers in a couple of weeks.
You'd be surprised to learn how much banking IT infrastructure was built decades ago and is essentially on life support now as it relies on technology that is so outdated there is a dearth of specialists with those skills - most of them have retired. Unanticipated integer overflow is a relatively common cause of software problems, it's entirely possible that the designers of some systems thought there was no way the Fed could ever need to issue that much reverse repo.
https://stackoverflow.blog/2020/04/20/brush-up-your-cobol-why-is-a-60-y…
Great article linked to this by David Haggith talking about excess cash and inflation expectations driving this https://seekingalpha.com/article/4431607-inflation-flying-in-hotter-ever.
Im trying to keep an open mind on the situation but US and NZ definitely have huge inflationary pressures building. I think the level of home building in auckland coupled with supply chain challenges is putting inflationary pressures in many sectors. I hadnt thought about it before but construction (especially homes) has links to soo many industries and probably why its loved by goverments for stimulous. The number of services, material firms, fittings, electronics, firms that benefit from each house built.
Increasing consents, lack of immigration, supply chain shortages, there is only one way for prices to go unless a something changes. More supply? More immigration (which will drive more demand); lower consents through increased interest rates? Increased building efficiency?
Maybe time to hedge for inflation? What asset types are recommended?
Lacy Hunt, Raoul Pal, Steve Keen, Jeff Snider are all deflationists and smart macro guys. I've listened to a number of view points from both those in the inflation and deflation camps and I'm still undecided. If QE is deflationary (as they suggest) and with the large amount of debt I can understand the deflation argument. Maybe some of the commentators here could add something to this debate?
I am in no way as qualified as those you have referenced but it seems as though old measures are not revealing the true state of the economy. We have high employment but there is no real wage increases as there is no unified bargaining and technology now makes knowledge work high transportable. There are record high valuations on all asset classes, this is not the concern as any inflation regularly puts us at record high valuations but it is the recent pace of valuation increase that concerns me. Debt has become disconnected from wages due to incredibly low interest rates. Therefore interest rate rises will lead slowly but surely to default and default cascades exponentially.
From http://moneymovesmarkets.com/ (June 16th)
'The current stock of G7 broad money is 20% higher than at end-2019. G7 gross wealth – i.e. the aggregate value of equities, bonds and stocks – is also up by about 20% since then, while real bond yields, on the measure calculated here, are little changed. According to the model, the rise in wealth will have boosted broad money demand by 10%. So markets may have “absorbed” about half of the additional liquidity created since end-2019, implying a smaller excess to be reflected in goods and services prices.
The implication of the model that buoyant asset prices are disinflationary is controversial '
At least half the increased nominal money supply has gone into the speculative economy. Instead of the price of a broad range of goods and services rising due to wage pressures it is house prices, lumber prices and building material prices along with bitcoin and share prices that have risen. Bank lending to businesses has actually decreased in New Zealand. Inflation is being caused by blockages in materials supplies and lack of skilled labour. So inflation continuing depends on transport difficulties continuing and immigration not restarting.
From the same website
'G7 broad money growth remains elevated relative to the 2010s but E7 growth is at the bottom of its range, with Chinese weakness a key driver.
Secondly, G7 bank loans to the private sector have contracted following a brief spurt last spring, contrary to forecasts that government guarantee programmes and central bank incentives would spark a lending boom
Medium-term inflation expectations in markets are correlated with swings in global industrial momentum – chart 3. The forecast here that the global manufacturing PMI new orders index will decline through late 2021 suggests that expectations will stabilise or moderate near term.'
It seems that the Chinese are still restricting credit and that this is translating into a lagged weakening of their economic growth. Biden won't get his large infrastructure bill through but maybe a small bill followed by another bill by reconciliation. So the outlook is short term growth in Europe and the US weakening, weakening growth in China, growth impacted in Covid hit developing countries.
Biden needs to be able to continue with the fiscal/infrastructure spending for there to be any chance of long term general inflation.
Banks are buying higher grade bonds for safety because they fear that the economic revival is not being sustained, not because of inflation fears.
Debt becomes deflationary when interest rates rise but incomes don't rise.
From the Money Moves Markets website 'Sustained high inflation in the 1970s reflected strong broad money growth driven by bank lending. Last year’s money surge, by contrast, was due to monetary financing of ballooning fiscal deficits and additional QE.'
Left unsaid here is the fact that bank lending in the 1970's was in turn driven by a broad based economic expansion driven by post war spending on infrastructure followed by spending unleashed by the post war baby boom. New houses, new services new schools, new roads, new everything.
If the Reserve Banks push rates higher without there being a sustained economic rally then general spending falls. If govts like China or the EU move to restrict credit before economic growth is self-sustaining then there will be no more inflation from those countries, those areas will be exporting deflation.
World population demographics are not as favorable for general spending as they were in the 1970's. For govts to act like it's 1974 is to misread the situation.
'
This is the part I can't really get my head around - are all these institutions borrowing treasuries overnight because 0.05% is the best return they can find for their cash? Or are they doing it because they need to, in order to keep from breaching some regulation requiring them to hold a certain amount of treasuries.
They are finding it difficult to lend cash at any rate to counterparties who can collateralise the loan with the most liquid and safe securities (government debt) in the event of a future liquidity/solvency crisis. MMFs in particular do not want the Net Asset Value of the fund to 'break the buck'. Thus US Treasury Bills (discount instrument) are the most pristine because they cannot be auctioned below 0.0%
Local NZ dealers are tapping the RBNZ for scarce bond issues at the bond lending facility window.
The 0.05% Fed RRP interest rate floor recently instituted to establish a short term interest rate bench mark above zero was breached today at a Cash Management Bill auction which printed a 0.045% median yield. Pristine collateral scarcity outweighs the utility of cash.
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