Breakfast briefing; A slowing China reins in global inflation |

2022-09-11 13:58:32 By : Ms. Linda Shen

Here's our summary of key economic events over the weekend that affect New Zealand, with news the iconic 2022 inflationary pressures from rising commodity prices seem to be easing, and as fast as they rose earlier in the year.

But first, in the US it is their Labor Day long weekend holiday, essentially signaling the end of their summer holiday season. Markets will return to regular mode on Wednesday, NZT and volumes traded will be more regular.

Global food prices retreated again in August to their lowest level in seven months, due to a broad-based fall, Cereal prices went down -1.4%, led by a -5.1% drop in international wheat prices on improved production prospects, especially in Canada, the US and Russia. Dairy prices fell -2% and meat prices fell -1.5% from the prior month.

In China, three state banks have been ordered to lend ¥200 bln (NZ$45 bln) to property developers so that they can complete projects underway, so that buyers off the plan can get their properties. Laudable as it may be, it crystalises the losses involved. Those developers are also bust, having burned through the cash from the original sale (mainly other, earlier bank loans). The new loans to complete the projects guarantee they will deliver the projects at huge losses (¥200 bln or more?). The Chinese property development sector is a huge drag and drain on their economy. It is very hard to see how those three state banks will ever get their money back. The losses are to be socialised, it seems.

Construction machinery manufacturers in China are seeing orders and profits plunge.

Meanwhile the regions from Hong Kong to Japan and South Korea are bracing for a super typhoon, Typhoon Hinnamnor. Most of China's coastal regions will be affected too, including Shanghai. Hong Kong and Shanghai equity markets are likely to be closed today. This is a biggie with winds expected to gust up to nearly 300 kph and sustained winds over 200 kph.

In the US, the headline non-farm payrolls data reported a +315,000 rise, pretty much as analysts had anticipated. But is was less than the outsized July gain although similar to May and June. The jobless rate ticked up to 3.7% on a higher participation rate. This is the seasonally adjusted data, but the 'actual' data is very similar this month (+309,000) taking their employed labour force to just under 153 mln and its highest ever.

Average hourly wages rose +5.2% from a year ago.

It is hard to image a recession when employment and wage growth is strong. The Fed will be emboldened to push ahead against inflation knowing their labour market remains tight despite all the inflationary hurdles. Equity markets retreated on this thought.

But American July factory orders slipped when they weren't expected to. They fell -1% in July from June, but remain +11.6% higher than year-ago levels

But there is evidence supply-chain pressures are easing, including for carmakers. Ford has been posting strong year-over-year gains on climbing electric-vehicle sales and improved deliveries of trucks and SUVs. The company’s EV sales increased fourfold from a low base a year earlier, while sales of ICE vehicles rose by a quarter.

In Canada, Vancouver is reporting that sales of houses are down -45% from year-ago levels in August, and prices are now dropping month-on-month. Toronto's report was little better.

In South Korea, inflation seems past its peak. It rose 5.7% year-on-year in August, slowing from a 24-year high of 6.3% in July and below the consensus forecast. Energy and food prices have started declining from elevated levels. The country’s annual inflation rate also slowed for the first time since January and marked the slowest pace in three months.

According to GDP figures from the IMF, India has now grown to be the world's fifth largest economy, displacing the UK.

The most dramatic data has been from the EU. Their producer price index surged +3.7% in July alone, to be up +38% in a year. That means it is accelerating at a truly stunning pace. But even among that, one country stood out - Ireland, who reported that their producer prices rose +26% in one month! to be +48% higher than a year ago. "Interesting" statistical data collection there. Ignoring the crazy Irish data, Italy (+6.5%) and Germany (+5.6%) led the month-on-month rises by Europe's large economies, whereas Spain (+0.0%) and France (+1.6%) were the most restrained of the remaining large economies.

Meanwhile, Gazprom said it "found a new fault" in its pipelines to Europe and is shutting down supply semi-permanently. That will no doubt save their senior executives from accidentally falling out a high-rise window. (Usually, windows that don't open in the first place.) Contractor Siemens says it isn't aware of any issues and hasn't been asked to fix anything. The EU has adopted price caps on buying Russian energy; and Russia has said it will stop selling to any country that adopts price caps. This is motivating a very fast shift away from fossil fuels in the region, so may have a long-term positive effect. But the short-term pain will be acute, even if Europe seems willing to accept those consequences.

Germany is instituting an excess profits tax on energy suppliers there. That is part of a much wider program of "support" to deal with the impending winter pressures.

We should also note that prices for some commodities are sinking, some back to their July lows, others well below. For example, copper is retreating and heading towards its July low again, but aluminium is now near an 18 month low. Nickel, zinc and lead are back to July lows, but tin is also approaching 18 month lows. Iron ore is heading for year-ago lows. All are weak because markets judge Chinese demand will remain weak.

The UST 10yr yield starts today at 3.20% and up +1 bp from this time Saturday. The UST 2-10 rate curve is a little less inverted at -20 bps. Their 1-5 curve is slightly less inverted too at -16 bps. Their 30 day-10yr curve is unchanged at +73 bps. The Australian ten year bond is +1 bp higher at 3.65%. The China Govt ten year bond is little-changed at 2.65%. And the New Zealand Govt ten year will start today at 4.01%, and also unchanged.

We haven't updated movements in the US Fed balance sheet recently. Quantitative tightening is well underway, with more than US$140 bln shed from their holdings since mid April. It is likely the pace will pick up a bit on this sell-down, draining liquidity, and on its own, and independent of their policy rate signals, putting pressure on yields.

Junk bond yields are rising fast again too, and probably related go the Fed actions. The recent peak was in early July and they fell from there. But over the past week they have surged higher again. Although benchmark rates are rising sharply, these junk bond yields are another marker to watch as losses build for the holders of this script.

The price of gold will open today at US$1713/oz and little-changed from this time yesterday, but down -US$25 in a week.

And oil prices start today marginally firmer at just on US$87/bbl in the US while the international Brent price is now just over US$93/bbl. A week ago these prices were US$93/bbl and US$99/bbl respectively so a sharpish -7% fall in a week.

American petrol prices are still slipping. They are currently averaging NZ$1.64/L nationwide after having been NZ$1.67/L a week ago and NZ$1.79/L a month ago. They peaked at NZ$2.13/L in June, so down a quarter from then and releasing significant inflationary pressure because they are now almost back to February levels.

The Kiwi dollar will open today at 61.1 USc. From a week ago it is virtually unchanged as well. From a month ago it is down -3.3%. Against the Australian dollar we still up at 89.8 AUc and up +0.8% in a week. Against the euro we are up to 61.4 euro cents and little-changed in a week. That all means our TWI-5 starts today at 70.7 and up +20 bps for the week.

The bitcoin price is now at US$19,841 and down -0.6% from this time Saturday. But it is -3.5% lower than this time last week. Volatility over the past 24 hours has been low at just on +/- 0.9%.

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

Daily exchange rates Select chart tabs US$ AU$ TWI ¥en ¥uan €uro GBP Bitcoin Daily benchmark rate Source: RBNZ Daily benchmark rate Source: RBNZ Daily benchmark rate Source: RBNZ Daily benchmark rate Source: RBNZ Daily benchmark rate Source: RBNZ Daily benchmark rate Source: RBNZ Daily benchmark rate Source: RBNZ End of day UTC Source: CoinDesk

Your access to our unique and original content is free, and always has been. But ad revenues are under pressure so we need your support.

Supporters can choose any amount, and will get a premium ad-free experience if giving a minimum of $10/month or $100/year. Learn more here.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

In China, three state banks have been ordered to lend ¥200 bln (NZ$45 bln) to property developers so that they can complete projects underway, so that buyers off the plan can get their properties....

The Chinese property development sector is a huge drag and drain on their economy. It is very hard to see how those three state banks will ever get their money back. The losses are to be socialised, it seems.

Indeed - Student Loan Forgiveness: A Boost For The Middle And Upper Classes Which Costs $300BN And Raises GDP Only 0.1%

Thanks for sharing that link. It’s a very sensationalist article with many assumptions and very little evidence to back said assumptions. 

Yes.  But to see those to be rewarded described as ".... the double masters / cat owning demo...." will keep me amused all day. 

- "The European Central Bank is poised to deliver the largest interest rate rise since the creation of the Euro, as it fights to bring surging inflation under control"

- "The German government is to impose a windfall tax on electricity producers and use the proceeds to finance a new €65bn package of relief measures to soften the blow of soaring inflation and higher energy bills".

Wherever anyone thinks % rates are going, justified or not, lower doesn't look like it.

Europe's challenge is that their economy is built on cheap Russian resources, primarily energy. Don't underestimate how hard this winter will be economically and politically.

"This is motivating a very fast shift away from fossil fuels in the region, so may have a long-term positive effect. But the short-term pain will be acute, even if Europe seems willing to accept those consequences"

Europes winter could see their economies obliterated and they wont be able to print their way out of trouble.

They desperately need Ukraine to strike a peace deal! Every day inches closer, I wouldnt be surprised to see a change in rhetoric, and pressure being applied towards a peace deal.

There will be no peace deal for Ukraine. Russia will only accept total surrender, anything less would be a lie. And then the rest of Europe would come under threat from further aggression from Russia. The Europeans have finally realised that. They don't need a peace deal, they need to force Russia out of Ukraine and stabilise the border, and that includes Crimea. Putin will need to go too. As long as he has power, Russia will be a threat.

There is another scenario Murray.  It's another little ethnic war, for which no correct border can be drawn.  And Russia will be happy enough when it achieves the Russian speaking Donblass region.

Always being aware that this did not start in February. Locals in the Donbass have been murdering thousands of each other each other since 2014 at least. 

Not so sure, the ethnic Russians outside of Russia borders in the old Soviet states are either the people resettled or their descendants as a part of the Soviet plan to establish control. Their belief that they would always be loyal to the motherland was the basis, plus likely the promise of good jobs with power and income to go with them. I understand your point, but it will come down to the attitudes of the people. I would suggest that Russia's conduct in this 'special military operation' is such that to ethnic Ukrainians all Russians are evil (they don't refer to them as Orcs for nothing) and Russia is the great evil empire. Nothing that has happened would disabuse them of that opinion. I don't think a Russian would be safe in Ukraine for a long time to come. Even Ukrainians with Russian sympathies are being hunted out now, especially as it appears some were spotting for a missile strike a month or so back.

Agreed and a peace deal is the only possible outcome to at least try and stop the fighting for a couple of decades. The problem will never go away and will keep on flaring up like the untold other border wars around the world. Ukraine cannot win this war.

Ukraine will never settle, that has already been made very clear. The outcome you are to all intents suggesting is one of genocide. For Ukraine to lose, Russia will be carrying out a pogrom against Ukrainians. The world would not stand for that. Not acceptable. The most likely outcome will be a coup in Russia and Russia pulling out completely, but until that happens there will be a meat grinder in Ukraine which Russian mothers are already starting to resist. 

Russia holds all the cards and are just playing for time. Another six months and  it will be like Yemen the war you never hear about anymore.

No Yemen is Middle East and there has always been conflict there. Europe has been seen as more or less stable since the collapse of the USSR. I find it ironic that Putin has been the biggest threat to that stability since then. This war threatens the rest of Europe, and the European economy. It is not going to go away for Europeans. Plus, and I have said this before, when Putin runs out of bodies to throw into it, the question still sits unanswered, will he escalate to nukes rather than admit defeat? 

Russia has no interest in Europe what so ever, other than to sell them cheap energy.  The aggressor is NATO interventionism, not Russia.  And Zelensky is the one that needs to go, not Putin.  So you got it all wrong.

#Germany to spend total €65bn on 3rd energy relief package to ease pressure on households as Russian gas supplies dwindle & energy bills soar. Coalition govt wants to reduce electricity prices for basic consumption. Germany seeks EU rules to cap profit taking at energy firms. Link

Sweden announces emergency support for energy producers as EU considers action

Companies face rapidly rising collateral demands, prompting policymakers to warn of ‘financial stability threat’

France’s economy isn’t they rely on nuclear power. Smart.

I assume that funds (incl Kiwisaver) which are 'high growth' will have some exposure to junk bonds.

Does anyone know if this is this correct?

Not that it directly affects me because I have only got conservative and cash funds.

Many conservative funds are heavy weighted to bonds. All lower yielding bonds values are marked lower,as new bond issues are taken up at a higher rate, so it may well affect your balances. It has affected my conservative funds balance,which has needed ongoing top ups to keep the nominal balance at the same level. When the interest rate cycle heads lower,that will provide a capital gain ,as my newly purchased top ups ,will have( hopefully,) a higher yield,therefore ,worth more. I expect to see no beneficial gain in 2 years. But who wants to be in USA equities,where the potential for substantially higher losses are likely? Even with exchange rate buffering, it's a higher risk. That's my risk averse take on it.

OUCH! Global Bonds tumble into their first Bear Market in a generation. Bloomberg Global Bonds Index drops 20% from its Jan2021 peak. European bonds have been hit hardest w/almost -40% ytd as Russia’s invasion of Ukraine sends gas prices soaring.

Kiwi Wealth’s growth fund is 100% shares I believe.

It's Not Just the Japanese Who Can't Afford to Wait for the Inevitable Truth

For the last several years, the behavior of Japan’s yen against the US dollar is near perfectly correlated with the eight-week average of US$ repo fails. From the outside, which means the mainstream, this sounds like one of those nonsensical relationships built up in fevered imagination by superstitious blasphemers. If I go outside three days in a row and it rains each time, this doesn’t mean I control the rain just by leaving my house.

But this JPY-repo connection isn’t some fly-by-night, temporary oddity. It has lasted well more than two years and the association is only getting stronger. With particular emphasis following the last weeks in February, first weeks in March, the yen is now at a multi-decade low while the average of total repo fails at a multi-year high equal only to March 2020 (going back half a decade).

This is Big Problem territory and then some, for both sides of the Pacific.

I wrote about what’s going on here several months ago, so no need to rehash the mechanics. Short version if you haven’t seen it: what’s wrongly called the “yen carry trade” is really Japanese banks redistributing eurodollars on a collateralized basis. Given the inherent maturity mismatch when doing this, Tokyo’s big firms end up short dollars and short collateral.

Thus, any dollar shortage which strongly implicates collateral problems (isn’t this all of them?) comes out in something like repo fails, tied now closely together with JPY as Japanese banks struggle mightily under the weight of being eurodollar-ed.

Seriously, Good Luck Dethroning the (euro)Dollar

Part 1 of June TIC: The Dollar What.

How the World’s Dullest Market Quietly Created a Synthetic Dollar Empire

Multiple claimants on collateral post of cards dosnt even begin to describe it.

Jeremy Grantham (GMO) believes this is the end of the super-bubble:…

This is a massive speech by Putin. ''The economy of imaginary wealth is being inevitably replaced by the economy of real and hard assets''. His strategy is clear. Sticky inflation -> higher (real) rates needed -> pain for hyper-financialized economies. Link

NZ property would no doubt be classified as a super bubble popping. 

The USA are in a blatant denial phase, a recession without a recession. The coming months are popcorn as we watch it hit the fan.

It seems both Biden and Jacinda will deny recession until elections.....    but its always the economy stupid.

Meanwhile, the UK is seeing ongoing exercises in excuse making and pretense.

How does the US pay for it's roads, if not through petrol taxes?

Thy make them out of concrete too. Expensive, but they last a long time.

Especially since they don't melt in the ever increasing temperatures and get harder and harder for their entire lifetime.

I can only imagine the destruction in NZ if we had to go through a super typhoon on a semi regular basis. 300 kph winds! Those poor people in the firing line.

I do wonder what the average Kiwi matchstick house would stand up to. Everything would be long gone at 300km/hr, I suspect most places would start to get into serious trouble at anything over 100km/hr.

The houses will be fine, we use Winstone Wallboards plasterboard as a bracing element.  The most superior and resilient product/system in the world.  

Much of NZ is in a very high or extremely high wind zone (especially Wellington). So can handle 200kph. 300? Not likely.

Whats this km/hr windspeed crap? Its knots. Always has been.

In other more boring news the Cat 5 isn't clickbait "super". La Niña suppresses Pacific typhoon and hurricane activity.

"On August 30, Hinnamnor became the first category-5 storm on Earth in 2022, as winds reached 260 kilometers (160 miles) per hour. As noted by Yale Climate Connections, it was pretty late in the year for the first storm of such intensity; an average of 5.3 category-5 storms form each year globally."

My thoughts exactly. Poor buggers.…

Ministers in Wellington think Auckland Council has been overzealous in the way it has applied character protections to villa-heavy central suburbs and potentially in breach of new planning laws designed to free up urban land for more apartments and townhouses.

If the Labour and National govt ruled in Italy, Venice would become fair game for mirror glass rectangular buildings.

What happens when you base you energy policy on a manipulated Swedish teenager rantings. Perhaps they should eat cake?

"UK pubs must hike pint prices to £20 each or face closure this winter, expert warns

Running costs for pubs are set to increase by 500-600%, putting a huge number at risk of closure, says Tom Stainer, chief executive of real ale campaign group CAMRA"

"Will the energy crisis spell the end for German bakeries?

Skyrocketing prices for electricity, gas and grain are putting an existential burden on Germany's many bakeries. Only large chains and successful artisan bakeries are likely to survive, said one baker in Bonn."…

The shift to warm beer has begun?

Tories in power for 12 years now. Of course it's a Swedish teenager's fault though. 

We noticed that you're using an ad blocker. Or, your browser is blocking ad display with its settings.

Your access to our unique and original content is free, and always will be.

Please help us keep it that way by allowing your browser to display ads. How?

Create a SUPPORTER account with no ads here.

If you're already a Supporter, please use the Supporter Login option here.

The calculations in this tool are controlled by

Terms & Conditions apply to every loan.