Here's our summary of key economic events overnight that affect New Zealand with news of a hint of stagflation risk.
The big story overnight is that the June American inflation rate has jumped more than the big jump expected. It came in at 5.4% when a 4.9% rate was expected. That is the fastest jump since 2008. Core inflation (without food or fuel) came in at 4.5% in June when a 4% rate was expected. Every component except medical care, rent and at-home food was up sharply. A lot of the pressure is coming from supply shortages which are expected to persist. And those supply shortages will depress economic activity. So fast-rising prices and lower-than-expected activity sets them up for a stagflation risk.
Markets have reacted cautiously. Equities are marking time, hesitating on rising bond yields. The US dollar is strengthening. Commodity prices are up in US dollars, so they will be rising even faster in local currencies.
The San Francisco Fed boss still sees this inflation as temporary and economic activity rising, so that Fed tapering is very much still the plan.
Earlier today there was a US$44 bln 30yr Treasury bond auction of which the Fed took US$6 bln. US$97 bln was bid, and the median winning yield was 1.31%. That is lower than the 1.44% yield at the prior event when bids exceeded US$101 bln. That slip is causing observers to judge today's auction a 'poor' one.
The US Government's June budget deficit came in lower than expected at -US$174 bln for the month to reach -$2.6 tln for the previous twelve months. But these large deficits represent huge improvements from a year ago where the June 2020 deficit was a massive -US$864 bln in the month and the whole year recorded -US$3.1 tln in deficit. Better fiscal management seems to be paying off. Tax revenues rose a remarkable +35% in June.
Both China's exports and their imports were up strongly in June 2021. Their exports grew at a much faster than expected pace in June on solid global demand. Imports growth also beat expectations, though the pace eased from May, with the values boosted by high commodity prices. From June 2019, exports are up +32% and imports are up +42%. They booked a +US$32.6 trade surplus with the US in June, and a -US$9.2 bln deficit with Australia. With New Zealand their records show a -US$772 mln deficit for them. These results come despite well publicised shipping and container availability issues. But despite this, China's export growth momentum is expected to continue for the rest of 2021.
In Europe, consumer inflation is being reported at more modest levels. In Germany, the June level was 2.3% and in France it was only 1.5%. The energy bite doesn't seem as fierce there, and food price changes hardly exist.
In Australia, June business confidence levels have taken a hit as their pandemic spread gathered pace in NSW and Queensland. But it was a pall that affected the whole country and not just those two states. Despite this fall, they are still at strong levels but the hit to growth is expected to build.
As a consequence, Canberra has reinstated its broad Jobkeeper subsidy support for firms affected in NSW on a 50/50 basis with the state government.
There were 89 locally acquired cases in NSW yesterday and another death.
Wall Street is lower with the S&P500 down a still-minor -0.2%. Overnight European markets all ended flat and little-changed. Yesterday, the very large Tokyo market ended with a +0.5% gain, Hong Kong ended with a +1.6% gain and Shanghai also ended with a +0.5% gain. The ASX200 booked a flat result. And the NZX50 Capital Index ended its Monday session up another +0.2%.
The UST 10yr yield starts today at 1.41% and up +5 bps. The US 2-10 rate curve slightly steeper at +1.16 bps. Their 1-5 curve is also steeper at +76 bps, while their 3m-10 year curve is also steeper at +136 bps. The Australian Govt ten year benchmark rate starts today at 1.38% and back up +5 bps from this time yesterday. The China Govt ten year bond is at 2.95% and down another -2 bps. The New Zealand Govt ten year is now at 1.56% and up +2 bps 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. There are indications of selling pressure in India as the pandemic hurts family finances.
Oil prices have risen +US$2/bbl today and in the US they are now just over US$74.50/bbl, while the international Brent price is now just under US$76/bbl.
The Kiwi dollar opens today just under 69.5 USc and softer than where we left it on yesterday. Against the Australian dollar we are unchanged at 93.3 AUc. Against the euro we are also little-changed at 58.9 euro cents. That means our TWI-5 starts today down slightly at 72.4.
The bitcoin price is now at US$32,755 and down another -1.0% from this time on yesterday. Since May 24, the bitcoin price has been held in a relatively tight band. Volatility in the past 24 hours has been low at +/- 1.6%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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46 Comments
On Inflation and how Fed is screwed as has no way they can control the inflation even if they want to is best explained in recent interview ( an hour back) by Peter Schiff.
Interesting take and if short of time watch from 4.21minutes onwards for few minutes to realise that QE and low interest rates are the new norm as fed has dug themselves in shit hole - best take on reserve bank theory/lie that inflation is transitory.
This will come back to bite them in more ways than one. On this site many commentors suggest that the RBNZ shadows the Fed in its actions if not its thinking, and the Government is using their advice to base a pay freeze on the public service, which will flow into the private sector (but will be countered by skills shortages). But on the streets, everyone is seeing real price rises everywhere, and as someone indicated the other day, once those prices are embedded, they are unlikely to go down. Plus OPEC is not playing ball with fuel prices pretty close to or at all time highs and these will embed that inflation across the board, unless Governments start regulating prices, and that just ain't gonna happen! They are too wedded to the 'free market' and couldn't see manipulation if it drove a truck over them!
So people across the board will demand pay increases irrespective of Government policy. Nurses now, and i commend the little bit of belated mongrel they are showing, but it needs to bark and bite louder, but others will follow.
Biggest manipulator are reserve bank governor as take easy way out to solve the crisis by throwing easy and cheap money. Throw when needed in emergency but should also know when to withdraw instead creating a permanent emergency situation for ever to justify free distribution of money. Even a dead company will survive if given money on a continous basis in one form or the other and government too are happy as can increase the dole, incentivise people not to work.
Short term gain for long term pain.
Its the arrogance that is killing them in a death by a million cuts.
Everyone who wants to follow the fed lead, is like following the pied piper all the way to Japan.
They need to take their medicine and start rolling back the QE and raising rates and deflate their bubbles, the stock market being the biggest of them all.
The longer the keep feeding it the more pain it will inflict later on. Unfortunately none of them have the balls to make it happen so they must continue their suicidal approach.
Surely some of the inflation is transitory don't you think? I really don't see why low supply and high shipping costs will persist for a long period of time unless Covid vaccines don't work. I also don't think the central banks will have any issue raising rates if they need to, I doubt it will take much of a rise to seriously dent demand and prices. But they would need to be sure that the inflation is real before putting the handbrake on, otherwise they are just slowing the economy for no good reason during a time of uncertainty.
Cathy Wood argues deflation is coming as increasing oil costs will drive faster development and adoption of EVs, which will drive oil prices lower as competition heats up. Also technology developments in other fields will offset inflation.
Also, how much oil is needed to produce a global fleet of EVs?
Edit: according to this an average of 350kg of plastic in an EV
https://www.visualcapitalist.com/how-much-oil-electric-vehicle/
'The metal resource needed to make all cars and vans electric by 2050 and all sales to be purely battery electric by 2035. To replace all UK-based vehicles today with electric vehicles (not including the LGV and HGV fleets), assuming they use the most resource-frugal next-generation NMC 811 batteries, would take 207,900 tonnes cobalt, 264,600 tonnes of lithium carbonate (LCE), at least 7,200 tonnes of neodymium and dysprosium, in addition to 2,362,500 tonnes copper. This represents, just under two times the total annual world cobalt production, nearly the entire world production of neodymium, three quarters the world’s lithium production and 12% of the world’s copper production during 2018. Even ensuring the annual supply of electric vehicles only, from 2035 as pledged, will require the UK to annually import the equivalent of the entire annual cobalt needs of European industry.
The worldwide impact: If this analysis is extrapolated to the currently projected estimate of two billion cars worldwide, based on 2018 figures, annual production would have to increase for neodymium and dysprosium by 70%, whilst cobalt output would need to increase at least three and a half times for the entire period from now until 2050 to satisfy the demand.'
https://www.nhm.ac.uk/press-office/press-releases/leading-scientists-se…
Yeah, one small problem with removing cobalt - added to the fact no one has figured out how to recycle these beasts. The hypocrisy of Greens pushing a product that can't be recycled.
'Both processes produce extensive waste and emit greenhouse gases, studies have found. And the business model can be shaky: Most operations depend on selling recovered cobalt to stay in business, but battery makers are trying to shift away from that relatively expensive metal. If that happens, recyclers could be left trying to sell piles of “dirt,” says materials scientist Rebecca Ciez of Purdue University.
...Recycling researchers, meanwhile, say effective battery recycling will require more than just technological advances. The high cost of transporting combustible items long distances or across borders can discourage recycling. As a result, placing recycling centers in the right places could have a “massive impact,” Harper says. “But there’s going to be a real challenge in systems integration and bringing all these different bits of research together.”
https://www.sciencemag.org/news/2021/05/millions-electric-cars-are-comi…
Lol, I see you are up to your usual FUD profile.
"If that happens, recyclers could be left trying to sell piles of “dirt,” says materials scientist Rebecca Ciez of Purdue University."
Cobalt has more uses than just batteries, its an important metalurical feedstock for making high quality tool steels as just one example.
And Li-ion Batteries are already being recycled, https://spectrum.ieee.org/energy/batteries-storage/lithiumion-battery-r…
Hi Praggers. Your link pretty much supports the AAAS article. If they are struggling to make money now what will happen in cobalt goes out of favour and the price drops. EV spruiking is driving the price of cobalt up. That 'resultant black mass with solvents' sounds nice.
'These startups aim to automate, streamline, and clean up what has been a labor-intensive, inefficient, and dirty process. Traditionally, battery recycling involves either burning them to recover some of the metals, or else grinding the batteries up and treating the resulting “black mass” with solvents.
...Battery recycling doesn’t just need to be cleaner—it also needs to be reliably profitable, says Jeff Spangenberger, director of the ReCell Center, a battery-recycling research collaboration supported by the U.S. Department of Energy. “Recycling batteries is better than if we mine new materials and throw the batteries away,” Spangenberger says. “But recycling companies have trouble making profits.'
https://spectrum.ieee.org/energy/batteries-storage/lithiumion-battery-r…
Mrs FE walks 8km to work all year round (only takes an hour! yes she's a fast walker!) She says it gives her time to prepare on the way in (and interact with all the other regular walkers/cyclists/homeless people) and destress on the way back. Takes less time and costs less than going to the gym.
How many other people live within 8km of work and could do the same I wonder?
Edit: to be clear she doesn't usually do it there and back in one day. She alternates between walking and cycling.
Yeah thats all good in the summer but its just no good in the winter. Tried that with cycling you need a shower at work when you arrive and a spare change of clothes that were already at work. No way I could walk 8km at that speed without stinking and sweating on arrival. Work wouldn't even allow me to have a key so I could take my change of clothes in during the weekend so great help they were in the cause. When the weather gets bad its simply a no go.
Winter's not that bad here. South island might be a bit chilly but I used to commute everyday in the UK winters. You just get used to it (and learn which gloves really work). It's not for everyone for sure, but as pointed out above it's probbaly going to be the future for a lot of people. Town planning might have to catch up though...
350kgs plastic, so about twice the amount of oil used as used in the oil changes in an ICE car during its life? Then there is of course all the fuel the ICE burns (200,000kms / 12km/L = 16000L at ~0.75kg/L = 12 tons of petrol give or take) , and of course ICEs these days are full of plastic too..
What if instead of manufacturing complete car bodies to put electric motors/batteries in, a company came out with a competitive EV retrofit motor & battery system. How many perfectly good car bodies end up rusting out in the junk yards due to blown motors? Wouldn't even need all the fancy bells and whistles a Tesla has. Engine and subframe mounts, wiring harness adaptor and a charge port to the existing fuel filler. Limit the torque output to the existing transmission/differential rating.
https://www.cnbc.com/2021/07/08/oecd-covid-19-has-destroyed-22-million-…
https://www.omfif.org/2021/07/central-banks-must-change-course-to-avoid…
https://www.marketwatch.com/story/here-are-four-reasons-the-west-is-hea…
https://www.imf.org/en/Publications/WP/Issues/2020/10/16/A-Vicious-Cycl…
https://www.ft.com/content/eb9c2e10-760b-4379-8fe0-d1144295c39a
https://www.bnnbloomberg.ca/global-chip-crisis-worsens-with-jaguar-warn…
Hang on, heres one you might like ... the Pandemic is a Wealth bonanza!
https://www.stuff.co.nz/business/125735639/pandemic-boost-to-household-…
I stick to Stuff if i were you
That just affirms that the commercial banks are creaming it, as always. People are blaming the RBNZ in it's policies, but the real fault lies with the government in failing to properly regulate and control the private banks. The banks pretty much control the economy, irrespective of what the Government or RBNZ say, and in my view, that needs to change!
Whose role is it to regulate the commercial/private banks? Government or RBNZ?
We don't have a money supply, we have debt creation lent into existence. Isn't this the role of the RBNZ and monetary policy?
If we're so afraid of the economy crashing should house prices fall, the financial stability mandate is a complete failure.
Currently as I understand it, it the RBNZ's responsibility to "supervise" the private banks, but this is only done through tools and regulations put in place by the Government. While the RBNZ is supposed to be 'independent', in reality it is a branch of Government. So it is the Government who regulates the banks.
Counterintuitively, could raising the OCR be inflationary in certain circumstances? Ie. The budgets of indebted households and businesses further stretched by increase in cost of debt?
Maybe a bit theoretical, as it ignores that many households will be some time away from rolling over their mortgage, and a significant number of households are mortgage free etc etc.
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
Raising the OCR will definitely have inflationary and deflationary impacts. The challenge is determining the net effect. For example, forward prices for commodities are higher when interest rates are higher (inflationary). Whereas higher mortgage servicing costs generally mean less consumer spending (deflationary). The other thing to consider though is that if someone is paying more, someone is being paid more. So if people are paying higher debt servicing costs, who is benefiting from that and will this increase consumer spending in NZ (inflationary)?
My view is that current economic settings - particularly the uber-isation of the labour market - make any significant inflation event highly unlikely.
I agree, there was lots of talk about "Tools in the toolbox" to sort this out but it was all BS, it takes far to long and is to difficult to bring in other control measures, raising interest rates is instant and has a 24hr impact. Even speculation on rates rises have got the banks already moving.
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