Weekend briefing: US to push back at large-company dominance

US to tackle big corporates; China cuts its bank reserve requirements; China's CPI slips; global food prices slip off highs; Sydney lockdown tightens; UST 10yr 1.36%, oil and gold up; NZ$1 = 69.9 USc; TWI-5 = 72.6

10th Jul 21, 8:10am by David Chaston

Bean Rock lighthouse, Auckland Harbour

Here's our summary of key economic events overnight that affect New Zealand with news there are a number of big key policy changes in the world's largest economies.

First in the US, their new Administration has kicked off a big push to promote competition in the American economy and push back on the winner-takes-all environment that has built up quickly over the past decade. "Capitalism without competition isn't capitalism. It's exploitation," Biden said when he signed the related Executive Order. It is now expected that US Federal Agencies will reinvigorate significant anti-trust activities.

At the same time, the US Fed sent its semi-annual Monetary Policy Report to Congress, noting supply shortages and hiring difficulties are holding back their recovery from firing on all cylinders.

In Canada they recorded a good overall gain in employment, but it was all for part time work and almost all for young people; full-time employment actually fell. And their jobless rate blipped up to 7.8% in June.

In China, as instructed by the Beijing hierarchy earlier in the week, their central bank has cut the Reserve Ratio Requirement. This is a cut the amount of cash that banks are required to hold as reserves, releasing about ¥1 tln yuan (NZ$220 bln) in long-term liquidity back into an economy that does seem to need some stimulus and these funds are being directed to aid small business. Even if this is not a major easing, it is a major shift in policy tone.

June car sales took an unexpected retreat in China, possible evidence of a softening economy. Year-on-year they were down -12% and this is despite a surge in the first few months of 2021. A shortage of computer chips is also likely to have been a factor.

China's consumer inflation rate is slipping, dipping from a modest +1.3% in May to +1.1% in June and another unexpected fall back. This is also consistent with a developing drag in their economy. Consumption isn't driving growth yet. (Also note that pork, beef and lamb prices are now falling.) On the producer side however, PPI inflation remains very high at +8.8% pa in June compared with +9.0% in May. That slip is meaningless to some, and an indicator that the top has passed to others. Cost pressures are putting a real squeeze on Chinese businesses, and they don't seem to be able to pass those costs on, not locally at least. And given their business conditions are neither expanding nor contracting at present, the coming squeeze may become uncomfortable.

China's new bank lending swelled +12.3% year-on-year in June.

Back in the US, they added 14 Chinese companies and other entities to an American economic blacklist over alleged human rights abuses and high-tech surveillance in Xinjiang. They said the companies had been "implicated in human rights violations and abuses in the implementation of China’s campaign of repression, mass detention, and high technology surveillance against Uyghurs, Kazakhs, and other members of Muslim minority groups in the Xinjiang Uyghur Autonomous Region." Beijing denies the alleged abuses.

The Chinese iron ore and metallurgical coal prices are staying high, although they haven't risen further this past week.

Copper prices may be slightly off their peak but they are still near decade highs. Aluminium is still near three year highs.

The Baltic Dry index is also staying high although it is not moving out of the range it has been in since mid-June which is its highest in a decade. But things are far hotter for shipping container rates. These are up more than +50% since May (when they were already high) and now average NZ$12,000 per trip globally. But there are plenty of situations where they are as high as NZ$17,000 in the China trade, and as high as almost NZ$30,000 for spot, last minute situations.

The NZ carbon price is now up to NZ$47.80/NZU, a rise of +11% in just a week (from $43/NZU) and up +54% in a year (from $31/NZU). Two years ago it was just NZ$23.20/NZU.

With a worrying jump in numbers, NSW is confronting “the biggest challenge we have faced since the pandemic started”. Restrictions have been tightened as case numbers grow. The number of people in strict isolation has doubled to 14,000 in a day.

For the first time in more than a year, the FAO global food price index didn't rise in June even if the dip was small. It is still one third higher than it was a year ago. Almost all the retreat was due to the already sky-high vegetable oils category. There was little relief in any other category however with dairy prices up +22% in a year and meat prices up +15% in a year.

The New York equity markets are firmer today with the S&P500 up +1.0% in afternoon trade. up +0.9% for the week and a new record high. Overnight European markets all recovered strongly with Paris starring, up +2.1% and London the laggard at +1.3% on the day. Yesterday, the very large Tokyo market was down another -0.6% (and down -2.7% for the week) but Hong Kong rose by +0.7% (but also down by -2.7% fo the week) while Shanghai ended flat on the day (and up a minor +0.2% for the week). The ASX200 ended its Friday session down -0.9% (-0.5% for the week) while the NZX50 Capital Index finished down -0.5% on the day and down -0.2% for the week.

The UST 10yr yield starts today up at 1.36% and up +7 bps overnight, and ending its recent retreat. The US 2-10 rate curve back steeper at +1.14 bps. Their 1-5 curve is steeper at +72 bps, while their 3m-10 year curve is also steeper at +131 bps. The Australian Govt ten year benchmark rate starts today at 1.38% and up +5 bps. The China Govt ten year bond is at 3.04% and little-changed. however the New Zealand Govt ten year is now at 1.55%, down another -2 bps and down -16 bps over the past week.

The price of gold is now just over US$1811/oz which is up +US$11/oz from this time yesterday, and up +US$20 from this time last week.

Oil prices have recovered overnight, up by almost +US$2/bbl. In the US they are now just over US$74/bbl, while the international Brent price is now just over US$75/bbl. That puts them back at week-ago levels.

The Kiwi dollar opens today just under 69.9 USc and recovering almost +½c from this time yesterday. Against the Australian dollar we virtually unchanged at 93.4 AUc. Against the euro we are slightly firmer at 58.9 euro cents. That means our TWI-5 starts today up slightly at 72.6 but still almost -50 bps lower than this time last week

The bitcoin price is now at US$33,472 and up +1.4% from this time yesterday. Volatility in the past 24 hours has been a moderate +/- 2.2%.

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

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26 Comments

by richard1965 | 10th Jul 21, 8:41am 1625863274

Most talked about and discussed topic is housing crisis. Everyday data / news suggests that housing market is running amok and RBNZ / Jacinda Arden, who won election on the very same issue is now perpetrator of the same still this Queen and her knights gets away as people running the country and so called experts and media, who should hold them accountable being beneficiary( vested interest) instead of raising the issue are part of the gang.

Sympathy/ lip service but nothing more than that :

https://www.nzherald.co.nz/nz/home-truths-nz-kids-moving-more-as-famili…

https://www.newshub.co.nz/home/politics/2021/07/new-zealand-housing-mar…

by Hans Brink | 10th Jul 21, 9:12am 1625865172

So nothing changes in politics. John Key's crew done exactly the same.

by Hardly | 10th Jul 21, 12:25pm 1625876748

Labour have thrown a lot at the housing market.

I don’t know what else they can do.

Yes interest rates are a problem but everyone expects them to start moving late this year as well.

by Beanie | 10th Jul 21, 2:56pm 1625885802

Labour could take a leaf out of Chloe Swarbricks book and state house prices need to come down.

I can't stand most of the Green MPs but Chloe always impresses me.

by Squishy | 10th Jul 21, 9:03am 1625864615

Impressed with Bidens chit-chat on reforming competition within industry, now let's see how much headway he makes against corporate interests.

by Hans Brink | 10th Jul 21, 9:20am 1625865619

There seems to be a world wide trend to break up the monopoly's of large business and to tax them, which is probably not a bad thing.

by scarfie | 10th Jul 21, 9:22am 1625865779

Jeff Snider pointed out the other day that the only way to keep employment up is to keep lowering interest rates. China increasing leverage in the banking system is just another part of this. Trouble is to keep the jobs you have to also inflate asset bubbles.

by Timmyboy | 10th Jul 21, 9:44am 1625867057

I tend to agree. The only way to keep this rapacious shite-show going is to bring forward consumption, investment, govt. spending etc. by running up more debt.

by frazz | 10th Jul 21, 10:43am 1625870581

They (we) are pooched..there is no way out of the big re-set which was avoidable, time to get on with it.

by ham n eggs | 10th Jul 21, 10:20pm 1625912443

Yes
We substituted resource burn growth for debt way back when resource limits first showed their hand... debt growth is now essential

by Audaxes | 10th Jul 21, 9:58am 1625867931

I believe he means low interest rates are a signal that exemplifies the failure to raise employment.

This is what Milton Friedman called the interest rate fallacy, and it indeed refuses to die. We can tell what monetary conditions are in the real economy, as opposed to financial liquidity, though the two can be linked, by the general level of interest rates. When money is plentiful, interest rates will be high not low; and when money is restricted, interest rates will be low not high. The reason is as Wicksell described more than a century ago:

[The natural rate] is never high or low in itself, but only in relation to the profit which people can make with the money in their hands, and this, of course, varies. In good times, when trade is brisk, the rate of profit is high, and, what is of great consequence, is generally expected to remain high; in periods of depression it is low, and expected to remain low.

When nominal profits are expected to be robust, holders of money must be compensated for lending it out by higher interest rates. Thus, the same holds for inflationary circumstances, where nominal profits follow the rate of consumer prices. During the Great Inflation, interest rates weren’t low at all, they were through the roof well into double digits and higher by 1980. At the opposite end in the Great Depression, interest rates were low and stayed there because, as Wicksell wrote, the rate of profit was low and was expected to be low well into the future. High quality borrowers were given as much money as they could want while the rest of the economy was deprived of funds; liquidity and safety being the only preferences in what sounds entirely familiar. Link

by MLSmith1 | 10th Jul 21, 9:53pm 1625910835

A failure to let capitalism reset and clear out the deadwood is why we have low interest rates… fn politicians clambering onto power.

by Fluffybunny | 10th Jul 21, 9:24am 1625865887

Not to be a sarcastic smart ass. But is this the point were bitcoin takes over as the global reserve currency and universal rock solid store of wealth, or is that next decade?

Or are we at the start of a long slow sell off period as people start to liquidate thier holdings relative to what price they were purchased?

Very serious questions and I welcome all serious comments and debate.

by frazz | 10th Jul 21, 11:18am 1625872733

Due to your previous posts Fluffy - no one is biting this morning, nice try though.

by Fluffybunny | 10th Jul 21, 2:54pm 1625885658

It's a serious question

by ham n eggs | 10th Jul 21, 10:27pm 1625912846

Debt is wealth
We cant store the "wealth" unless fiat debt holds
And Fiat debt relies on energy burn
Bitcoin is a croc

by Audaxes | 10th Jul 21, 9:36am 1625866601

In China, as instructed by the Beijing hierarchy earlier in the week, their central bank has cut the Reserve Ratio Requirement
How Do You Spell Escalating? C-H-I-N-A-R-R-R

And one final immutable correlation with all these things: the yuan’s exchange value against the dollar goes up (“weak” dollar consistent with global money increase). Chinese Money

by Audaxes | 10th Jul 21, 9:43am 1625867035

Bond Reversal In Japan, But Pay Attention To It In Germany

Yesterday, deStatis reported that Industrial Production in the country unexpectedly declined by 0.3% in May 2021 compared to April. The economy, particularly industry, is supposed to be further ramping higher as the later reopening frenzy reaches deeper into Europe (in a good way).

The day prior, though, deStatis released statistics on German Factory Orders which contained another one of those unwelcome surprises (not really) going around of late in global data. According to its calculations, factory orders tanked by 3.7% just in May (from the month before). This was the worst drop since last year’s full recession, and one of the worst in many years even as orders were anticipated (by “analysts”) to rise something like 1.5%.

Not just a huge miss, but the huge outright decline.

The reason for it? Not Germany’s economy which, by these numbers, continues to move along relatively well. Instead, it was demand from abroad which receded by so much: factory orders from other countries in the Eurozone were down 1.3% month-over-month in May, while, shockingly, orders from outside the Eurozone collapsed by 9.2%.

That’s neither a misprint nor an annual rate. A monthly decline of that magnitude in demand from outside Europe will get everyone’s attention even as foreign demand had been high beforehand.

Germany’s factory orders had been increasing consistent with the “boom” in overall trade and goods; the world, particularly the US, was buying up whatever Germany could make as fast as it could be made.

by Audaxes | 10th Jul 21, 10:00am 1625868036

QE infinity! #ECB to set new #inflation goal w/more flexibility. Decision marks significant change from previous target of “below, but close to, 2%.“ The consensus emerged at a special meeting on Tue & Wed to conclude ECB’s first strategy review in 20yrs. https://bloomberg.com/news/articles/
Link

by gnx | 10th Jul 21, 10:42am 1625870544

classic question from the property investors fb group'

My colleague has been told that to purchase as investment property she should borrow for her existing bank the deposit. Then use this at another bank for the purchase. In my experience most banks don't lend large amounts without wanting to know what it's for. And often wanting to put security over it too. How can you get around this?

All Answers
N
The deposit security would be over her existing property assuming she has the required equity and the remainder would be over her IP, using a different lender is best otherwise if she sells one of her properties her lender can clawback $$.
What she has… See More
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So banks do not encourage customer loyalty in this regard. Banks would no doubt dearly love to be able to share information on this sort of thing but this would raise the ire of the Commerce Commission.
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You can even say that your buying an expensive car for your family, new driveway for the car etc
Then change your mind, it's not scamming or unethical, it's just changing your mind, just keep in mind they may not lend for the same thing twice so if yo… Hi. Mortgage adviser here. Def a great idea however putting it into practise is way harder like you mentioned. Sometimes its easier to separate property when they can stand alone.

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hi, Don't we need to prove/show where the deposit came from? I believe banks will take it as a risk and will decline the mortgage request, unless the income/expenses rate is high enough.
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· Reply · 16m

We borrowed our deposit as an unsecured overdraft, our broker arranged it
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It’s a normal structure

What could go wrong??

by Pragmatist | 10th Jul 21, 12:23pm 1625876585

What was the point of posting this? Its common knowledge that most investment property purchases are leveraged off other property.

by Nzdan | 11th Jul 21, 12:46pm 1625964400

It's still pretty funny though and a bit scary. Seems every man and his dog with a little bit of equity in their property is going out and leveraging into investment property. What can go wrong?

Property is a good store of wealth as long as we don't run out of tenants to service the mortgages. 3.2k FHB borrowed in May this year (nearly 40k annualised), how many were tenants? 57k births p.a. 20 years ago, enough to fill approx. 14k rentals @ 4:1 as they leave home. Net migration is a standstill, and we're still building. We're struggling to fill jobs, rentals might be next?

by Pragmatist | 11th Jul 21, 1:25pm 1625966748

I have no problem if landlords struggle to find suckers to rent their mouldy rotboxes. And i noted that when our last rental came back on the market it was on trademe for over a month, which given its an average 3 bedroom rental in the nicer part of Mt Roskill/Lynfield was a little surprising.
Not sure your maths works.. how many FHB are moving from flatting to owning without the couple (and its almost always a couple now) living in a rental of their own?

by Nzdan | 11th Jul 21, 6:15pm 1625984109

Not sure but the maths still works either way? We had 57k births p.a. 20 years ago, if today they are now all couples moving into their own rentals that's approx. 30k rental properties required. Yet we have nearly 40k FHB buying their own homes each year. That's before we consider how many additional rental properties are added to the pool at the moment. Difficult to actually measure the household composition (flatting vs couple with empty rooms) but based on very limited data/assumptions the ratio of tenants to rentals could be shrinking and may continue if migration is at a standstill?

by J.C. | 10th Jul 21, 10:57am 1625871436

Loan repayment deferrals for mortgages and businesses back on in Australia. Will it ever end?

https://www.abc.net.au/news/2021-07-09/banks-announce-fresh-covid-suppo…

by Beanie | 10th Jul 21, 11:03am 1625871793

Just watched our Chief Human Rights Commissioner being interviewed on newshub nation. What a complete waste of money it is paying his salary. If he is indicative of the calibre of our senior government officials then I can understand the frustration our ministers feel in trying to get anything achieved.