Breakfast briefing: Expecting higher inflation

US inflation expectations rise; UST yields slip; India inflation rises; Japanese machinery orders jump again; NSW making no progress yet; UST 10yr 1.36%, oil and gold dip; NZ$1 = 69.8 USc; TWI-5 = 72.5

13th Jul 21, 7:22am by David Chaston

Here's our summary of key economic events overnight that affect New Zealand with news inflation isn't going away in some large economies.

Markets are awaiting the June US CPI data due tomorrow and a number close to 5% is expected, but first up today, inflation expectations in the US are still rising and fast. They jumped to +4% in May, and gave now jumped higher again to +4.8% in June as the expectation of prices in one year. And that is a series high for data that started in 2013. Expectations of house price gains in one year rose to +6.2% and also a new series high.

The US Treasury tendered a 10 year bond overnight and that brought lower yield bids. The US$44 bln tender brought $97 bln in bids (of which US$6 was taken by the Fed) and the median yield was 1.31%, down from the 1.44% at the equivalent tender a month ago.

In China, there is increasing concern even in official channels of a slowing economy.

In India, their June inflation rate was released overnight, coming in at +6.3% and well above the RBI target (of 4%). Food prices (+5.2%) helped keep it high but it was fuel (+12%) that was the monthly driver.

Japanese machine tool orders made a very strong recovery in June, up +6.6% from a strong May and their best post-pandemic level by far. From June 2019 this latest data is an impressive +34% higher, so this sector is in fully back, and more.

The overall level of Japanese machinery orders in May also rose far above expectations, a surge that took them up to almost ¥2.8 tln and +20% higher than for May 2019.

In Australia, regulator APRA said banks should develop tactical fixes to IT systems to make sure they can process negative interest rates, and failing to do so creates a material risk. APRA is far behind the RBNZ who pushed through that requirement in 2020.

Yesterday, NSW reported +112 new locally acquired cases, taking the current known infection level to 626. 63 are in hospital, 18 are in ICU. High numbers are expected today.

Wall Street has opened marginally higher with the S&P500 up a modest +0.2%. Overnight European markets were all up about +0.6% although London was flat. Yesterday, the very large Tokyo market ended with a very strong +2.3% jump, Hong Kong ended with a +0.6% rise and Shanghai ended with a similar +0.7% gain. The ASX200 was up +0.8% despite the Sydney lockdown. And the NZX50 Capital Index ended its Monday session up +0.6%.

The UST 10yr yield starts today at 1.36% and unchanged. The US 2-10 rate curve slightly flatter at +1.13 bps. Their 1-5 curve is little-changed at +73 bps, while their 3m-10 year curve is unchanged at +131 bps. The Australian Govt ten year benchmark rate starts today at 1.33% and down -5 bps from this time yesterday. The China Govt ten year bond is at 2.97% and down an unusually sharp -7 bps. The New Zealand Govt ten year is now at 1.54% and little-changed from this time yesterday.

The price of gold is now just over US$1805/oz which is down -US$3/oz from this time yesterday.

Oil prices have fallen -US$1.50/bbl and in the US they are now just over US$72.50/bbl, while the international Brent price is now just over US$74.50/bbl.

The Kiwi dollar opens today just under 69.8 USc and marginally softer than where we left it on yesterday. Against the Australian dollar we are softer at 93.3 AUc. Against the euro we are also softer at 58.8 euro cents. That means our TWI-5 starts today down slightly at 72.5.

The bitcoin price is now at US$33,088 and down -2.4% from this time on yesterday. Volatility in the past 24 hours has been moderate at +/- 2.4%.

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

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53 Comments

by taimaiakka0 | 13th Jul 21, 7:37am 1626118661

https://www.nzherald.co.nz/business/inflation-expected-to-hit-fastest-r…

Somehow, Mr Orr will justify it to suit his narrative.

Problem with reserve bank is that it does not analysis the data to take action accordingly but action / inaction is pre decided and than the data is interpreted in a way to justify their pre determine act.

by donny11 | 13th Jul 21, 9:10am 1626124205

"The RBNZ have noted an increase in the CPI for the June Quarter however we we believe that this increase in CPI is transitional in nature. It is largely the result of supply constraints that have manifested themselves in the post COVID19 global economic recovery. These supply constraints have put upward pressure on commodities, which have in turn been passed on to businesses. To date businesses have been largely absorbing these costs however as business confidence increases we are starting to see these costs passed onto consumers. Another factor not to be overlooked is the increase in consumer spending & the lowering of savings rates to normal levels. In 2020 the savings rates increased significantly as consumers adopted a "wait & see" mentality in response to the pandemic. With the population being vaccinated & the end of the pandemic is sight saving rates are returning to more normal levels. This process of savings rates returning to more normal levels is putting temporary upward pressure on the CPI".

by rastus1 | 13th Jul 21, 9:45am 1626126320

Conveniently overlooking that a big chunk of savings was covid cheques - which have now been spent.
And I'm not sure why the RBNZ think the end of pandemic in sight? NZ has not had the pandmeic....yet.

by Pragmatist | 13th Jul 21, 9:56am 1626126962

Covid Cheques? Who got those, certainly not the general public.

by two otherguys | 13th Jul 21, 10:08am 1626127737

Covid cheques - Yes
That was Robertson's $12 Billion wage support splurge in March-April 2020
Don't tell me you've forgotten already

by Pragmatist | 13th Jul 21, 10:19am 1626128367

Those didn't go to the bank accounts of Joe public, they went to businesses. Most employees did not get extra cash in hand, many got reduced wages, the only reason most of them had increased savings was because they couldn't go out and spend.

by murray86 | 13th Jul 21, 7:42am 1626118930

There is a tidal wave of inflation coming at us, and all the denial in the world will not save the RBNZ and the Government from the consequences of it. It will be an interesting ride, devastating for some I suspect.

by Pragmatist | 13th Jul 21, 7:49am 1626119363

All depends whether you catch the wave of wage inflation, or are a poor sap that gets dumped on by a breaker.

by JustAnOpinion | 13th Jul 21, 8:28am 1626121702

Yep I hope history does not repeat here but can't see how it won't. Those with assets get the undeserved, unearned value appreciation and those without get the desperation and frustration. The only bright spot might be some good wage increases but these are not evenly spread. "In the year to June 2020, the annual wage rate increase was 3.0% for the public sector and 1.7% for the private sector." Good time to live in Wellington.

by KH | 13th Jul 21, 8:49am 1626122942

Always a good time to live in Wellington. No jobs jobs lost there due to Willington

by General Comment | 13th Jul 21, 9:51am 1626126716

Always a good time to own a house in inner Wellington too. It's a win/win scenario. National government = country wide open for business = price rises. Labour government = burgeoning public sector = price rises.

Trying to actually buy a house in inner Wellington though...that's the kicker.

by Bugger | 13th Jul 21, 8:36am 1626122203

You won’t be getting a wage rise. For the last 20 years the west has gone hell for leather importing low wage immigration, thinking it’s the bees knees in keeping costs down. Having hyperinflation in the cost of living, not wages (created by the plonkers themselves), is the nightmare the RBNZ doesn’t want. They’ll be forced to hike rates.

by Pragmatist | 13th Jul 21, 8:46am 1626122812

Err, speak for yourself, I will be getting a payrise.

by youngdumbandbroke | 13th Jul 21, 8:51am 1626123064

Public sector?

by Pragmatist | 13th Jul 21, 11:06am 1626131198

No, small privately owned company with no public service ties at all.
The public sector wage freeze is about to be put on defrost, i'll be surprised if there no announcement before this time next month, probably starts with the nurses, then the other public service departments will jam a wedge into the crack and break it wide open.

by brisket | 13th Jul 21, 8:47am 1626122824

What will force them to? Their mandate is stability. Neo-feudalism can be stable. And property owners have a death grip on NZ politics for the foreseeable future.

by Nzdan | 13th Jul 21, 10:51am 1626130268

Received 7.5% this year. Nothing during Covid but received 100% pay.

by Avocado | 13th Jul 21, 7:56am 1626119792

Short term i agree. Medium long i think deflation is the more likely outcome.
The first time ive actually agreed with central banks predictions i think actually. Inflation will be temporary. Way too many disinflationary forces me thinks. Im just a pleb tho soo..

by frazz | 13th Jul 21, 8:23am 1626121430

My favourite pizza joint - large pizza was $28 - now $36.50, yer I can really see them dropping the price after a couple of months?

by ham n eggs | 13th Jul 21, 8:26am 1626121573

and if their customers dry up?

by Let me be Frank | 13th Jul 21, 8:44am 1626122694

then its a sign their business is unsustainable and their doors will close

by Advisor | 13th Jul 21, 9:23am 1626124989

The more sought-after alternative in the sector is to replace locals on their payroll with cheaper migrants, strike a cash-for-residence deal with them and drop the menu prices.

by Let me be Frank | 13th Jul 21, 12:25pm 1626135916

That may be the sought after response, however there is no guarantee it will continue to be viable. Certainly it is becoming more difficult politically.

by ham n eggs | 13th Jul 21, 9:36am 1626125789

indeed
costs go up, customers wont pay the increase, so doors close
The problem being this will soon be a widespread deflationary spiral ... many businesses are currently unsustainable

by Let me be Frank | 13th Jul 21, 12:27pm 1626136048

Deflationary initially yes...whether it becomes a self reinforcing spiral is not a given.

by Foxglove. | 13th Jul 21, 11:24am 1626132263

if only!

by mfd | 13th Jul 21, 8:49am 1626122941

For inflation to be temporary, they don't have to drop prices back to where they were, they just have to not raise them again. Inflation is the change of prices, not the absolute level.

The question for the RBNZ isn't whether prices will fall back to where they were, it's whether there is an ongoing cycle of price rises.

by SimonRo | 13th Jul 21, 9:11am 1626124271

This is a machine with momentum, and I'd say it has been just starting to get a visible roll going for the last 12 months. It probably will take another 12-24 months for that set in and become widely acknowledged. After which, maybe it peters out.
So I just wonder at what point does it become an ongoing cycle that the RBNZ would attempt to influence?

by frazz | 13th Jul 21, 9:17am 1626124659

"For inflation to be temporary, they don't have to drop prices back to where they were, they just have to not raise them again" sorry that does not make sense - inflation surely is purely a raise in prices even if it is one off?

by mfd | 13th Jul 21, 10:29am 1626128942

Yes it is, but the RBNZ are concerned about ongoing inflation. It doesn't matter what's already baked in, it matters what else is coming. If inflation rises to 5% then drops to. 2%, no problem. If prices continue to rise at 5%, problem. They're in the unfortunately difficult business of predicting the future.

by Dave Moderato | 13th Jul 21, 9:18am 1626124729

Ha! Better than reducing the quality of the pizza.

by Kjeldorian | 13th Jul 21, 11:06am 1626131182

Building materials have gone up 15-30% this year with more price rises coming. Highly doubt they will come down.

by Burni | 13th Jul 21, 12:04pm 1626134663

Timber has been subject to global supply and demand creating shortages here slowing up construction.

by Foxglove. | 13th Jul 21, 8:16am 1626120967

Hit by a wave or dragged into it in the wake of the big global economies? to put it figuratively, NZ is but a picket boat in the fleet riding the waves in the wake of the battleships. Like flotsam & jetsam on the tide. Keeping it nautical, previous minister such as Cullen & English have navigated NZ pretty well through situations, never too high, never too low. Remains to be seen if same security blanket is there now.

by powerdownkiwi | 13th Jul 21, 8:40am 1626122433

Cullen did what all politicians do, even when challenged
http://www.oilcrash.com/articles/powr_007.htm

Here's a demolition-job on all pollies:
https://www.resilience.org/stories/2021-07-12/the-show-is-over/

"You can and will continue to pretend. But nature and physics will not fall for it. Nature and physics are not entertained nor distracted by your theatre."

Keep that comment in your head, every time you hear the talking heads. And those who regurgitate their outpourings.....

by Foxglove. | 13th Jul 21, 9:01am 1626123690

No need to coach me there son. Hard pressed to find a critic of politicians more jaundiced and cynical than I. If anything perhaps David Lange’s pre departure quote something like “ will be leaving just a fly speck on the myriad wallpaper of world history” is as succinct as it gets relatively. I was at school with Michael Cullen where he finished dux by a country mile. It is widely accepted he is of considerable intellect, but amongst that there are twists and turns whereby that talent seems to need to resort to some pretty base gutter sniping from time to time.

by rastus1 | 13th Jul 21, 9:48am 1626126531

Cullen was responsible for the working for families policy.
Also in power back when housing mess was being imbedded.
So intellect, but zero foresight.

by Foxglove. | 13th Jul 21, 10:40am 1626129635

Well he’d never get any fan mail from me. But unlike much preceding inaction he at least did produce some innovation for the future with Kiwi Saver & the dedicated Super Fund. Nobody done much since either except for watering down contributions.

by Burni | 13th Jul 21, 12:06pm 1626134795

Working for families? You mean the landlords super fund. WFF artificially boosting income available for rent payments in a market with a shortage.

by murray86 | 13th Jul 21, 12:37pm 1626136677

I found Cullen arrogant and hypocritical. He was a plastic socialist, famously referring to "rich pricks" (I suspect out of rank jealousy) while lacking the understanding that for most Kiwis he was one of them!

by Galloleous | 13th Jul 21, 9:08am 1626124110

Oh inflation is only 5%! Dont worry guys its only transitory! Its not like the government isnt stealing 5% of your time every year.
https://www.rl360.com/row/tools/inflation-calculator.htm?Currency=1&Amt…
Oh you had $50k, kept it for 5 years? Great now you only have $39k and the government is happy for you :D

by Jonny.Foe | 13th Jul 21, 8:12am 1626120767

Many prices are increasing as a result of supply chain bottleneck issues, some wages might go up a bit (good), some money will be redistributed (that’s what inflation does), prices will mostly adjust back down, and we will be back to 1-2% inflation at the most by the end of the year. Apart from house prices obviously - but speculative financial investments are not included in inflation!!

by JustAnOpinion | 13th Jul 21, 8:22am 1626121356

Yes this is the Fed's view as well, that inflation is transitory. I think it will be longer than a year, particularly if the consumer psychology is triggered, FOMO on assets (supply chain issues feed into this) build new price floors that take time and good information to have fall back down.

by Roelof | 13th Jul 21, 8:38am 1626122282

Inflation might settle back down...but I think most of the price rises wont adjust back down that much....and are here to stay..
And....if we continue with money printing and ultra low interest rates at some point prices will rise again .
When Central Banks talk about "transitory inflation" do they mean the rate of growth in prices or that prices will come back down to where they were before..??

Back in the 1940s the CPi rate had peaks and troughs.. High CPI inflation , then low inflation and then high inflation
In that time Central Banks kept interest lows ...
https://www.dropbox.com/s/bmg7d2wesscurgu/1940s%20inflation.png?dl=0

by mfd | 13th Jul 21, 8:51am 1626123077

They mean the rate of growth. If prices plateau at a higher level, inflation goes to zero. Some prices obviously will drop back, e.g. shipping once things settle down.

by Jonny.Foe | 13th Jul 21, 9:02am 1626123772

Low wages are now stubborn and held up by minimum wage regulation rather than market forces. The workforce is also increasingly uber-ised. In this environment, you simply cannot get the wage / price spirals that used to support inflationary events (e.g. oil price / wage spiral in the 70s).

Low interest rates enable people to borrow more to buy houses - the key driver of increased house prices. But the effect on the prices of goods and services is tiny - in fact I think an increase in the OCR is as likely to cause inflation as it is to reduce it.

by Burni | 13th Jul 21, 12:08pm 1626134919

Well house prices gave certainly inflated with debt serviceability and lower returns elsewhere driving them.

by richard1965 | 13th Jul 21, 8:15am 1626120906

Why Bernard Hickey is correct that rise in interest rate will not stress housing market......did tax changes made any difference to investor demand ?

No government and reserve bank has any intent to stop the party instead if fear of it even slowing will go all out to support and promote the ponzi - Universal truth.

https://thekaka.substack.com/p/dawn-chorus-why-rate-hikes-wont-stress?t…

by JustAnOpinion | 13th Jul 21, 8:20am 1626121235

The banks stress test your mortgage application at 6-7% so there is plenty of room to move the OCR up to 2% or so.

Wage inflation will have to be pretty spectacular to do anything to general housing affordability but I have hopes that with the borders closed for another 18mths or so we can get wages maintain station with inflation .

by Cowpat | 13th Jul 21, 9:01am 1626123679

Surely the question is not whether existing mortgage holders can stomach an additional 200bps , but whether a decline in the pool of new entrants to the market will stop the music.

by JustAnOpinion | 13th Jul 21, 9:58am 1626127087

Yes that is worth watching, we are seeing it turn due to supply meeting demand but have a fair way to go. "Kiwibank senior economist Jeremy Couchman says the surplus of 13,000 homes only nibbles around the edges of the huge shortage which the bank estimates to be about 67,000 houses."

If we keep the borders closed for another couple of years then I think we will see the supply catch up.

https://www.stuff.co.nz/life-style/homed/real-estate/125026169/five-to-…

by Let me be Frank | 13th Jul 21, 8:51am 1626123098

Bernard persists in his analysis based on the lie of averages.

by Tom Joad | 13th Jul 21, 8:27am 1626121627

Of course if there was the global poitical will to rebalance the distribution of power away from capital and back to labour we would have had inflation a long time ago.

Instead we have the dead-end street of CB market manipulation. There are no good outcomes from loading the world up with non-productive debt and pretending it's growth. Inflation or deflation - given where we are now neither will be good.