Information breakfast; Risk at the Crossroads

Here’s our roundup of the weekend’s main economic events affecting New Zealand, with news that the week ahead will be dominated by interest rate decisions from major central banks including the US Federal Reserve, the Bank of Japan and Bank of England. The August inflation rates reported for Japan and Canada will also be of concern.

All this will come after global recession warning of the World Bank which focuses the minds.

Most stock indexes ended last week down sharply as investor fears grew. And S&P500 futures suggest Wall Street will open tomorrow -0.8% lower. Since its peak in January of this year, the S&P500 is now down -19.3%. The cacophony of news when it reaches -20% and a bear market could well drive it to a new low. It is certain that the p/e ratios must be corrected in this new environment of much higher benchmark interest rates.

But consumers seem to have had enough the “fear” mood – they already did. Now they seem to feel better about life.

In the United States, the University of Michigan consumer sentiment survey increased to its highest level in five months, under the effect of a sharp and recent drop in inflation in gasoline prices. Will it last? Who knows. Will the mood of investor fear last? It looks equally uncertain, but they have to swallow mounting losses. Along with their bond investor brethren, stock market losses mount and portfolios lose value. Negative mood could become a self-fulfilling trend in the second half of 2022.

More positively, it should be noted that the “provisional settlement“of the US rail dispute is a significant risk far from the immediate future. Given where the parties were, it is quite an achievement, under pressure. Ratification seems likely.

China released key data on Friday evening, and some of it was unexpectedly positive. Retail sales rose +5.4% in August compared to a year ago, an expansion twice the rate of July. Industrial production grew by +4.2% on the same basis, also beating expectations. In reality, electricity production surged in August, up nearly +10% from levels a year ago. But that’s still a bit of a puzzle because these recent “power” surges are much more than can be explained by industrial activity or consumer behavior.

The Chinese central bank fixed the value of the yuan (CNY) at 6.93 per US dollar on Friday. But in freely traded offshore markets, CNH is trading at over 7. If you can get CNY out of China, there is now a good arbitrage trade with an “easy” 1% gain on every trade.

Chinese citizens are as heavily “invested” in residential real estate as Kiwis, perhaps even more so. But Data Friday shows that in 50 or their 70 largest cities, new home prices fell in August compared to July. This is the maximum in more than seven years. More broadly, for home resales, 56 of these 70 cities posted price declines. The impact of the “wealth effect” on large numbers of Chinese households will be negative and, for many, worrisome. It may be that there is construction of a social malaise.

Meanwhile, in Germany, they took control of some Russian-owned energy assets in the country to shore up its energy security concerns. Russia has shut off its gas and oil taps and Germany needs the local infrastructure to operate with alternative supplies, which are starting to pour in in volume, including from the United States. The price of oil and gas is not rising, nor are futures prices.

Elsewhere in Europe, Hungary is becoming Russia’s cheerleader at a time when inflation is soaring. He capped mortgage rates, food prices and fuel costs. It also cracks down on dissent, and the EU is worried about democracy in Hungary and withholding $7.5 billion in aid while these anti-democratic measures are in place. Hungary has inflation at 15.6% pa and a reference interest rate of 11.75%.

The 10-year UST yield starts today at 3.46% and remains unchanged from this time on Saturday. The UST 2-10 yield curve is little changed at -42 bps. Their 1-5 curve is slightly more inverted at -35 bps. But their 30-day-10-year curve steepened to +81 basis points. The Australian 10-year bond is up +1bp at 3.72%. The 10-year Chinese government bond is unchanged at 2.69%. And the New Zealand 10-year government will start today at 4.08%, also where it was on Saturday. Also note the sharp rises in wholesale swap rates in New Zealand on Friday, pushing higher again. Our one-year swap rate is now its highest since 2008. Our two-year swap rate reached that benchmark in June, fell, and is now almost back to that level.

Bond investors may suffer losses, with equity investors joining them, but data released on Saturday (for July) shows an international rush to transfer money to the United States. During the month, they reported that the sum total of all net foreign acquisitions of long-term securities, short-term US securities and bank flows was a inflow of US$153.5 billion. Although these flows are quite variable, there have been an upward trend in them since 2019.

The price of gold will open today at US$1676/oz. That’s -US$41 or -2.4% below where it was at this time last week.

And oil prices today start little changed from Saturday at just US$85/bbl in the US, while the international Brent price is still just US$90.50/bbl.

The Kiwi Dollar will open today at just 59.9 USc and slightly firmer than at this time on Saturday. For the week, this is a devaluation of -1.2%. Since the beginning of the month a devaluation of -2½%. And since the beginning of 2022, the devaluation is -12½%. Against the Australian dollar, we are unchanged at AUc 89.2. Against the euro, we are still just below 59.9 euro cents. All of this means that our TWI-5 today starts at 69.6, slightly firmer but still very close to a two-year low.

Bitcoin price is now at US$19,674 and virtually unchanged from this time on Saturday. Volatility over the past 24 hours has been modest at just over +/-1.3%.

The easiest place to keep up to date with the risks of events today is to follow our economic calendar here.”

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