Economy Watch

Kia ora,

Welcome to Tuesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the international edition from Interest.co.nz.

And today we lead with news that American regulators have been active overnight.

First today, we should note that the regional First Citizen's Bank (assets: US$109 bln and #36) has taken over large parts of failed Silicon Valley Bank's business (assets US$72 bln being acquired). The takeover comes with SVB's balance sheet sanitised by regulators. The combination will make a bank that ranks #26 in asset size among all US banks. The remaining assets of SVB are being held by the FDIC for disposal.

Meanwhile, the closer the Fed regulators looks under the hood at SVB, the worse it looks. Charges against SVB management seem likely.

None of this news encourages investors to step up and fund new business start-ups in the way SVB did; that sector is now in the pits.

Secondly, regulator the Commodity Futures Trading Commission is suing Binance over some alleged serious regulatory failures, and alleged dishonesty by its CEO. They are being charged with willful evasion in an action that comes as no surprise to crypto and money-laundering watchers. The bitcoin price fell.

Elsewhere in the US, the Dallas Fed's factory survey for Texas was another poor one for their oil patch. It has now been consistently negative for more than a year now, the weakest region in the US. New orders were weaker, but the jobs component remained strong even if pay pressures eased. The outlook wasn't flash however.

Across the Pacific, in a grim start to 2023, China has reported that is industrial profits suffered a sharp retreat on their reopening in February, down more than -22% year-on-year. A damaging price-war in the Chinese car industry isn't helping as firms struggle for growth in demand. This official industrial profits report hurt both the Hong Kong and Shanghai equity markets because is was so unexpected.

Meanwhile in a bit of a surprise the other way, Taiwanese consumer sentiment improved in March. It was their highest reading since May 2022 as the economy recovered from pandemic disruptions and households' sentiment strengthened across the board. This is not to suggest sentiment is high again; it is not. But the improvement was unexpected.

In Germany, another business sentiment survey showed the continuing improvements of other similar surveys. In fact this was their fifth consecutive improvement, and its highest since February 2022 - and all this comes after the banking turmoil news.

But of course this may change with strikes spreading in Germany. Inflation is stoking wage demands there.

The World Bank is warning of a long-term global downturn. Average potential global economic growth will slump to a three-decade low of just +2.2% per year through 2030, ushering in a "lost decade" for the world's economy unless policymakers adopt ambitious initiatives to boost labour supply, productivity and investment, they say.

The UST 10yr yield starts today at 3.52%, up +15 bps from yesterday.

The price of gold will open today at US$1956/oz and down -US$22 from this time yesterday.

And oil prices start today up nearly +US$3 from yesterday at just under US$72/bbl in the US. The international Brent price is now just under US$77/bbl. 

The Kiwi dollar is little-changed against the USD and now at 61.9 USc. Against the Aussie we are also little-changed at 93.2 AUc. Against the euro we are down -¼c at 57.4 euro cents. That keeps the TWI-5 down at 70 and down very marginally.

The bitcoin price is lower today, now at US$27,138 and down -2.1% from this time yesterday. Volatility over the past 24 hours has been high at +/-3.0%.

You can find links to the articles mentioned today in our show notes.

You can get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston and we’ll do this again tomorrow.

Kia ora,

Welcome to Monday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the international edition from Interest.co.nz.

And today we lead with news investors are bracing for another week of financial turmoil.

But first up, there has been a "thumping win" for the Labor Party in the NSW state elections, far more decisive than anyone expected. The Greens struggled and got no coat-tail advantage. Their Teals held on to repeat some of the Federal election gains. The hard-conservatives, characterised by the religiously-inspired Abbott and Morrison leadership suffered another big loss and is finding its culture war stands are losing stands.

In Europe, markets are increasingly worried about Deutsche Bank. It has been eyed for years over some long-standing shady practices often with Russia, but now, post-Credit Suisse, confidence is leaking away to a serious extent. On March 9, its share price was €11.51. It ended on Friday at €8.54. Shareholders are nursing a -25% dive in just two weeks on growing speculation the giant German bank could be following Credit Suisse's deadly path. It has wide-ranging issues. When confidence in a bank goes, it can go suddenly. The German Government is scrambling to reassure the market. But the odour is affecting many other banks as well.

On a more positive note, Eurozone economic growth accelerated to a ten-month high in March according to the latest flash PMI survey data, adding to signs that their economy is reviving after falling into decline late last year. Inflationary pressures have continued to moderate, with input prices even falling sharply in manufacturing. Jobs growth has also accelerated and business confidence in the outlook has remained resilient despite concerns stemming from recent banking sector stress and higher borrowing costs. Having noted all those positives, the overall rate of expansion is still quite modest.

Across the Atlantic, American durable goods orders fell -1% in February from January, to be just +1.0% ahead of year-ago levels. Mainly this was because of weak aircraft orders which have been a drag for a few months now. Orders capital goods were up +3.8% if you exclude defense and aircraft orders. Including both, capital goods orders were down -4% from year-ago levels.

But perhaps the March data will be better? The latest PMIs for March are healthy in the US. The flash Markit PMI for March reports the fastest uptick in US private sector business activity for almost a year, as new orders returned to growth. Their services sector expanded faster in March, and their factory sector's February contraction was almost eliminated in March. There is nothing in this report to indicate the US labour market is pulling back, but there are indications that price inflation remains high. This will steel the US Fed for an even higher benchmark interest rate to try any take more steam out of the expansion. Certainly that was the view of Fed hawk James Bullard overnight.

And banking turmoil issues are still playing out in the US with reports that depositors are moving funds from banks to money market funds, and close to NZ$½ tln has shifted this way through Friday. This is a significant funds flow, even for the giant US banking industry. The beneficiaries? money market funds run by JPMorgan Chase, Goldman Sachs, and Fidelity.

North of the border, Canadian retail sales grew more than expected in January from December, but the year-on-year situation sagged somewhat to be +5.0% higher. It was healthy car-buying that helped the January data.

Across the Pacific. the Japanese inflation rate fell to 3.3% in February from January's 41-year high of 4.3%. The latest figure also marked the lowest since last September. They had serious and sudden deflation in February from January, running at an annualised -7% rate.

The inflation fall came even as the Japanese services sector expanded at a faster rate in March. And their factory sector held it own, even if it isn't back expanding yet.

As the Brazilian president visits Beijing this weekend, China has agreed to restart beef imports after trade was initially halted due to a case of mad cow disease a month ago.

Singapore reported some awful industrial production data for February, far weaker than anyone saw coming. The contraction is running more than -11%

Separately, the IMF boss noted over the weekend that the risks to global financial stability have increased. She also urged China to 'rebalance towards consumption'.

The UST 10yr yield starts today at 3.37%, unchanged from Saturday and back to early February levels. 

The price of gold will open today at US$1978/oz and up +US$1 from this time Saturday. A week ago the gold price was US$1975/oz, so very little net change here.

And oil prices start today unchanged from Saturday at just over US$69/bbl in the US. The international Brent price is now just under US$74.50/bbl. 

The Kiwi dollar is unchanged against the USD and now at 62 USc. Against the Aussie we are little-changed at 93.4 AUc. Against the euro we are also little-changed at 57.7 euro cents. That keeps the TWI-5 down at 70.1, which compares with the week-ago level of 70.9.

The bitcoin price is little-changed today, now at US$27,734 and up +0.1% from this time Saturday. Volatility over the past 24 hours has been modest at +/-1.9%.

You can find links to the articles mentioned today in our show notes.

You can get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston and we’ll do this again tomorrow.

Kia ora,

Welcome to Friday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the international edition from Interest.co.nz.

And today we lead with news that despite the expectations of bears, the US labour market hasn't wobbled yet.

US jobless claims rose +213,000 and a small dip from the previous week. This was about what markets expected and still no indication a any special American labour market stress. There are now less than 1.9 mln people on these programs. This overall little-changed result is actually quite impressive given all the news of growing tech and start-up layoffs recently.

Sales of new single family houses rose +1.1% in February from January to an annualised rate of 640,000, the highest level since August last year. Given the upturn in the existing home market, analysts had expected an even stronger result however. And the industry will be disappointed because they have more than 8 months of unsold inventory at present.

The Chicago Fed's national activity index for February revealed little material change even if the index softened marginally.

The Kansas City Fed factory survey also had little-material change but at least it was positive in March.

Canada's population is now approaching 40 mln in a fast 2022 spurt. They added a record +1 mln new people over in 2022, largely boosted by immigrants and the substantial intake of Ukrainian refugees. The expansion is a stunning +2.7% in one year, their fastest ever post WWII.

Taiwan's industrial production fell a sharp -8.7% in February from the same month a year ago. But as bad as that sounds, it is far less than the -20% retreat in January. Still it is the fifth month-on-month fall in the past six months, and global tech demand, especially from China, remains very weak.

Taiwanese retail sales slumped in February from January, but were still up +4.2% above year-ago levels. This is quite good in fact given their inflation ran at 2.4% over the same period.

Taiwan's central bank raised their policy rates by +12.5 bps with their key rate now 1.875% with a hike that wasn't expected.

The EU's consumer sentiment survey for March was out overnight and while it remained quite negative, it remained near its best level in over a year.

Overnight three European central banks reviewed their policy rates and two mimicked the US Fed with a +25 bps rise. Norway raised theirs to 3.0% and England raised theirs to 4.25%. Norway has inflation running at 6.3% and in England it is running at 10.4%. The Swiss raised their by +50 bps to 1.5%. They also reminded investors in Tier 1 bonds that they agreed to have them treated as capital in the event of a bank failure and those who invested in Credit Cuisse AT1 bonds can have no complaints because that is what they agreed to.

In Australia, the State of NSW votes this Saturday, and the latest poll suggest that the ALP is widening its lead over the Liberal incumbents. 

Freight rates for global containerised shipping fell again last week, extending the long decline. They fell another -2% in a week to be almost -80% below year ago levels and are now -35% lower than ten year averages. Bulk freight rates, which have been rising recently, topped out this week and are also falling now too.

And the lithium price retreat is getting even steeper.

The UST 10yr yield starts today at 3.44% and down a large -11 bps from this time yesterday, and back to early February levels. 

The price of gold will open today at US$1995/oz and up a strong +US$47 from this time yesterday. And that is a new one-year high for the yellow metal.

And oil prices start today a little softer from yesterday at just over US$70/bbl in the US. The international Brent price is still just under US$76/bbl.

The Kiwi dollar is up almost +½c against the USD and now at 62.9 USc. Against the Aussie we are also almost +½c firmer at 93.5 AUc. Against the euro we are also a little firmer at 57.7 euro cents. That puts the TWI-5 up at 70.6 with a +20 bps gain.

The bitcoin price is marginally lower today, now at US$28,544 and down -0.5% from this time yesterday. And volatility over the past 24 hours has been very high however at +/-4.1%.

You can find links to the articles mentioned today in our show notes.

Good journalism and independent financial news coverage is an expensive business and we need your support to keep doing what we do.

You can get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston and we’ll do this again on Monday.

Kia ora,

Welcome to Thursday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the international edition from Interest.co.nz.

And today we lead with news all dominated by the US Fed decision which is playing out in real time as you hear this.

They have raised their policy rate by +25 bps to 5.0% today as widely expected.

But the outlook was more hawkish than expected. "The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time." and "the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective."

Their official note hardly noted the banking crisis. It is essentially all about fighting inflation. That means the upcoming Powell press conference will be focused on that.

Markets reacted with the expectation that bond markets will be taking more pain and benchmark yields eased slightly. Equities jumped on the modest rate hike. The USD fell, but only relatively modestly.

Of course these are just initial reactions. After the backgrounding from Powell at 7:30 am NZT there could well be more dramatic reactions.

Meanwhile, the recovery of the long-dormant US housing market took another step last week. Mortgage applications rose +3% last week, a third consecutive week of increases. Their 30 year benchmark mortgage rate fell by -23 bps to 6.48%, declining for a second consecutive week. Having noted these changes we should also note it is early days. Mortgage applications are still down -36% from a year ago, and mortgage rates are up from 4.16% a year ago.

Things are not so good in the commercial and office real estate sector. Office tower owners face pressure on two fronts: borrowing costs and vacancies. And bankruptcies are starting to emerge with two big landlords succumbing in the past few days. More than 17% of the US office supply is vacant and an additional 4.3% available for sublease. Nearly $US92 bln in debt for those properties from non-bank lenders comes due this year, and another $US58 bln will mature in 2024. We are likely going to see a cascade of landlord defaults and the global office and commercial market get significantly re-rated. New Zealand and Australia won't be spared these markdowns even if vacancy rates stay tolerable. Lenders everywhere will derisk.

In northern China and around Beijing, they are getting their worst air pollution is years. It is as much environmental as industrial.

In the UK where they released February CPI data overnight, they didn't get the retreat below 10% they expected. In fact, CPI inflation rose to +10.4% with a rise from January running at a rate exceeding +13% pa. Inflation is biting its hardest there since their October surge. This is all a somewhat surprising result because Germany, Italy and Spain are all recording slowing or lower inflation rates. French inflation is similar to the UK, even if not quite as high.

In Australia, ASIC has told their superannuation fund managers they must revalue their asset portfolio to market conditions much more frequently in the current environment, recognising the market repricing even for unlisted asset valuations. At the same time, they are on the warpath looking for greenwashing.

The UST 10yr yield starts today at 3.55% and down -4 bps from this time yesterday. 

The price of gold will open today at US$1948/oz and up +US$7 from this time yesterday.

And oil prices start today up  +US$1 from yesterday at just under US$70.50/bbl in the US. The international Brent price is now just under US$76/bbl.

The Kiwi dollar is up almost +1c against the USD and now at 62.5 USc after the Fed decision. Against the Aussie we are +¼c firmer at 93.1 AUc. Against the euro we are also a little firmer at 57.6 euro cents. That puts the TWI-5 back up at 70.4 with a +50 bps gain.

The bitcoin price is marginally higher today, now at US$28,685 and up +0.7% from this time yesterday. And volatility over the past 24 hours has been modest however at +/-1.4%.

You can find links to the articles mentioned today in our show notes.

And get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston and we’ll do this again tomorrow.

According to Statistics New Zealand's Consumers' Price Index (CPI) inflation is running above 7%, its highest level since 1990. The Reserve Bank, tasked with targeting CPI inflation of between 1% and 3%, has been aggressively increasing its Official Cash Rate, which means higher interest rates flow through to borrowers and savers.

Given the importance of the CPI as a measure of the changes in the price of goods and services for NZ households, do we have its settings right? What's in it, how is this determined and measured, and is a quarterly CPI release frequent enough?

To address all this we spoke with Bill Rosenberg in a new episode of interest.co.nz's Of Interest podcast. Rosenberg, now a Commissioner of the Productivity Commission, is the former Policy Director and Economist at the Council of Trade Unions. He was also one of nine people Statistics NZ appointed to a committee to independently review the CPI 10 years ago.

Rosenberg notes interest payments are excluded from the CPI. And while housing rentals and purchases of newly constructed dwellings excluding land are in, sales of existing houses are not. The CPI is "an index is designed for the Reserve Bank," Rosenberg says and the Household Living-Costs Price Indexes (HLPI), another Statistics NZ series, is a better measure of inflation for NZ households. It includes mortgage interest payments.

The latest HLPI figures show the annual inflation rate in the December quarter for all households was 8.2%, significantly higher than the CPI's 7.2%. 

The HLPI breaks out different indexes for all households being the average household, beneficiaries, Māori, superannuitants, highest-spending households and lowest-spending households. The CPI, in contrast, measures how inflation affects New Zealand as a whole. Thus the HLPI is able to show highest spending households experienced the biggest annual inflation increase of 9.4% in the December quarter because they spend more on interest payments than other household groups.

"I think there should be more focus on the HLPI, the Household Living-Cost Price Index," Rosenberg says.

"It's more representative of the costs that people face and people can actually go to it and see 'roughly speaking I'm [a] middle income household, I can see how my costs have been changing'," he says.

Kia ora,

Welcome to Wednesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the international edition from Interest.co.nz.

And today we lead with news that equity and bond markets are in more of a positive mood ahead of the US Fed's meeting tomorrow morning.

But first today, there was another dairy auction overnight and it was yet another weaker one, made worse by both a slumping cheddar cheese price, and the recent gains by the NZD. Overall prices were down -2.6% in USD terms and down -3.3% in NZD terms from the last auction. That puts them -36% lower than year ago levels. Every product fell, the least by the high-volume WMP (-1.5%), and the most by the cheese price (-10.2% from two weeks ago).

Of the 25 auctions in the past year, 19 have delivered lower prices. The price index is now back to a level we last had in December 2020. This continuing slide will probably have analysts reaching for the calculators to assess what the farmgate milk price will have to be reduced by.

US retail sales inched higher last week from year-ago level on a same store basis (+3.2%) but that isn't enough to account for retail inflation. Retail volumes continue their slow shrinkage.

However there was an unexpected surge in American existing home sales in February with them rising to an annual rate of 4.58 mln or more than +14% higher than year-ago levels. The apparent end of rising mortgage rates has emboldened buyers to commit - and sellers to respond. That was their largest rise since July 2020 and ends a year-long decline. But prices aren't responding to the additional demand yet; they remain -0.2% lower than year-ago levels. That was their first year-on-year fall in 11 years. The higher demand volume is coming from regions where home prices are decreasing and the local economies are adding jobs. It is their strong jobs market that is delivering these gains.

In the US banking scene, California's First Republic has seen its shares rally as confidence returns that it will survive. This comes after a Fed-prompted rescue undertaken by a set of much larger banks. US Treasury boss Janet Yellen commented that they will support deposits at other banks if that becomes necessary. But as we have seen elsewhere, management, shareholders and bondholders will always take the first losses.

Canada's CPI inflation rate slipped to 5.2% in February, a retreat from the January 5.9% rise. The change from the previous month is similar.

In China, they are starting a new surge in flu infections. The rate of people testing positive for influenza reported by hospitals across the country jumped to 53.2% last week, with H1N1, or swine flu, the dominant strain, forcing the suspension of some school classes in Beijing and Shanghai. By comparison, the rate for Covid was just 2.3%.

The German ZEW indicator of economic sentiment rose again in March, the third consecutive improvement, but the gain was far less than in February.

In Australia, APRA is apparently telling banks that it wants to know much more about their exposures to start-ups and crypto-focused ventures following the collapse of Silicon Valley Bank and volatility at global lenders.

Meanwhile, the minutes from the March 7 RBA meeting revealed they are likely to keep their cash rate unchanged at 3.6% on signs of economic softening. Their next review is on April 4, 2023.

More generally, markets are sensing today that contagion risks are fading, so risk appetites are rising.

The UST 10yr yield starts today at 3.59% and up another +10 bps from this time yesterday. 

The price of gold will open today at US$1941/oz and down another -US$35 from this time yesterday.

And oil prices start today up a strong +US$3.50 from yesterday at just under US$69.50/bbl in the US. The international Brent price is now just on US$75/bbl.

The Kiwi dollar is down -¾c against the USD and now at 61.7 USc. Against the Aussie we are -¼c lower at 92.8 AUc. Against the euro we are also -1c lower at 57.3 euro cents. That puts the TWI-5 at 69.9 with a solid -60 bps retreat.

The bitcoin price is much higher today, now at US$28,477 and up +3.0% from this time yesterday. And volatility over the past 24 hours has been modest however at +/-1.9%.

You can find links to the articles mentioned today in our show notes.

And get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston and we’ll do this again tomorrow.

Kia ora,

Welcome to Tuesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the international edition from Interest.co.nz.

And today we lead with news that both bond and equity investors are still buying - despite major repricing underway in the giant bond sector. The S&P500 is up today. The UST 10yr benchmark yield is higher too.

But as the embers of last week's bank blaze smolder, investors are assessing where to next. Scepticism that the risk to banks is over, is high. But the weekend unveiling of a new large central bank facility coordinated by the Fed only brought token demand overnight, which is a good sign.

The pressure on some American regional banks remains however (especially First Republic where a second rescue is underway), and investors wonder about the sense of the Swiss concentrating all their risks on one giant global bank.

And although most investment managers think the regulatory actions taken so far will be sufficient, their investments in bank bonds are at serious risk after the Credit Suisse bonds were essentially wiped out. There is now a serious repricing of risk in these bonds underway, and questions about the very future of the US$275 bln market in high-yield bank bonds that are used to underpin bank capital requirements.

However, with the Fed reviewing the situation in its meeting this week, investors seem to now expect a rate hike pause, although +25 bps is still priced in for this Thursday's announcement (NZT). Equity investors aren't shying away from buying.

But in Hong Kong, there was a very sharp sell-off of bank shares, especially those of HSBC which fell more than -6% yesterday. There were also sharp markdowns of other European-based banks overnight.

As widely expected, China kept its key lending rates steady for the seventh straight month at its March fixing late yesterday. The one-year loan prime rate (LPR), which the medium-term lending facility uses for corporate and household loans, was left unchanged at 3.65%; while the five-year rate, a reference for mortgages, was held at 4.3%.

Taiwanese export orders fell for a sixth straight month in February, hurt by both slower Chinese and other global demand. These exports are a bellwether for global tech demand. If there is a positive, it is that the latest fall it is that they shrank at a slower pace in February.

In Germany, producer prices are retreating now and were down less than -4% on an annualised basis, the fifth straight month of decline. Energy prices are keeping overall prices elevated still. On a year-on-year basis they slowed for the fifth straight month to a 17-month low of +15.8% as sharp hikes through September are still echoing in this data.

The German central bank had an improving assessment of the prospects for the German economy in its latest update.

Locally, the most likely impact on the global bank turmoil will be that risk premiums rise for debt funding. Benchmark yields may fall, but those risk premiums are likely to rise, limiting the 'benefit' of lower interest rates.

The UST 10yr yield starts today at 3.49% and up another +5 bps from this time yesterday. 

The price of gold will open today at US$1976/oz and down -US$13 from this time yesterday.

And oil prices start today down another -50 USc from yesterday at just under US$66/bbl in the US. The international Brent price is now just under US$72/bbl.

And we should also note that lithium prices continue to fall sharply, now down almost -50% from their peak in November. This should ease the cost of EVs.

The Kiwi dollar is down -¼c against the USD and now at 62.5 USc. Against the Aussie we are -½c lower at 93.1 AUc. Against the euro we are also -½c lower at 58.3 euro cents. That puts the TWI-5 at 70.5 with a -40 bps retreat.

The bitcoin price is a tad softer today, now at US$27,651 and down -1.1% from this time yesterday. And volatility over the past 24 hours has been moderate at +/-2.4%.

You can find links to the articles mentioned today in our show notes.

And get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston and we’ll do this again tomorrow.

Kia ora,

Welcome to Monday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the international edition from Interest.co.nz.

And today we lead with news Credit Suisse has been sold off at a bargain-basement price.

There is a deal in Switzerland where their #1 bank UBS will buy their troubled #2 bank, Credit Suisse. It is probably a deal no-one wants however, except the regulator. Their central bank is funding a US$100 bln liquidity support arrangement for the merger in a bid to end the crisis at Credit Suisse. At least 9000 jobs will be cut at Credit Suisse, probably more after the takeover. UBS is said to get their rival for US$2 bln which given their shareholders funds pre-deal were on the books at US$45 bln, the shareholders are all but wiped out getting 5c on the $1. Senior management is all fired and the board dismissed.

Through this turmoil, investors will continue to monitor the situation in the banking sector this coming week and await monetary policy decisions from major central banks including Fed, BoE, SNB, and Norges Bank. Also, in the spotlight will be inflation figures for Japan, the UK, and Canada. Finally, PMI data for the US, Japan, and Europe should provide some details about the health of the manufacturing and services sector in March.

In Asia, the People's Bank of China is expected to leave its loan prime rates unchanged following fresh liquidity injections.

Late on Friday, they cut their reserve ratio again to induce even more lending. They cut it by -25 bps, the first reduction this year. For its biggest banks it is now 10.75% and its lowest in sixteen years. For smaller institutions it is down to about 7.6%. Rating agencies are probably still nervous about where Chinese banks are at present however.

China also said their fiscal revenues fell -1.2% in the first two months of 2023 from a year earlier. Of note is that local governments are finding fewer buyers for land, an important source of 'income' for them as the housing development markets stay in the doldrums.

China is brutal when it changes direction; just ask bond traders. Suddenly and unexpectedly, regulators cut off market data for their US$21 tln bond market on the basis that providers of quotation details weren't 'permitted' properly. Suddenly bond traders were operating blind. Things are returning to a sort-of-normal now.

Meanwhile, China has reduced its holdings of US Treasury paper by -17% over the past year. Other countries are too. But to be fair, foreign holders of American debt have always been a minority.

Singaporean exports fell -8% in February from January, much more than anticipated. Year to date they are down -16%.

US data released over the weekend was a touch softer than expected with industrial production slipping slightly in February and the University of Michigan sentiment survey for March coming in a little weaker than expected. But at least inflation expectations retreated in this survey.

In Canada producer prices fell in February, the seventh dip in the past ten months. They are now only +1.4% higher than year-ago levels and may be a key reason the Bank of Canada skipped a rate increase at its review last week.

The OECD has raised the expansion prospects for major economies from the trim they made a few months ago. This improvement is because they see inflation easing now. But the improvement will be muted because interest rates will keep risks high. However, higher interest rates to squash inflation is the right medicine, they say.

Meanwhile the prices of some core commodities are rising again, like iron ore, and steel. But coal is continuing its steep retracement. And copper is going nowhere.

The UST 10yr yield starts today at 3.44% and up +4 bps from this time Saturday. 

The price of gold will open today at US$1989/oz and up another +US$14 from this time Saturday. That is up +US$125 or +6.7% in a week.

And oil prices start today down -50 USc from Saturday at just on US$66.50/bbl in the US. The international Brent price is at just under US$72.50/bbl.

The Kiwi dollar is still up against the USD and now at 62.7 USc. Against the Aussie we are up at 93.6 AUc. Against the euro we are also up at 58.8 euro cents. That puts the TWI-5 at 70.9 with an +80 bps surge over the past week.

The bitcoin price is much firmer today again, now at US$27,964 and up another sharp +5.3% from this time Saturday. And volatility over the past 24 hours has been moderate at +/-2.5%.

You can find links to the articles mentioned today in our show notes.

And get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston and we’ll do this again tomorrow.

There's no reason why a partnership between the Government and banks making equity investments in small and medium sized businesses (SMEs) wouldn't work in New Zealand, says the man who heads up such a fund in Australia.

The NZ Government expects the major banks to be in a position soon to decide whether to join it as an investor in a business growth fund (BGF). This comes after last year's Budget proposed a BGF to improve SMEs' access to finance, with up to $100 million earmarked for Crown investment as a minority shareholder alongside banks.

Speaking in interest.co.nz's Of Interest podcast, Anthony Healy, CEO and Managing Director of the Australian Business Growth Fund (ABGF), explains how the ABGF works and sets out why he thinks such a fund is easily transferable to NZ. Healy, now based in Melbourne, was CEO of BNZ between 2014 and 2017.

"There are no differences that I could identify that would suggest the Fund wouldn't work [in NZ]. And I think the banks in New Zealand, their parent banks obviously supported the concept here, so it's not unknown to them," says Healy. "...the economies, the market, the business environment, they're very similar. The banking system's pretty similar."

Establishing a BGF was a recommendation made by the Government's Small Business Council in its New Zealand Small Business Strategy in 2019. 

The ABGF received A$100 million from the Federal Government, A$100 million each from the Aussie parents of ANZ NZ, ASB, BNZ and Westpac NZ, plus A$20 million each from HSBC and Macquarie Group.

Healy suggests a $400 million to $500 million BGF feels about the right size for NZ.

"There are tens of thousands of SMEs that would fit the [investment] profile in New Zealand. They could be in every sector of the economy," he says.

In the podcast Healy also talks about how he got involved in the ABGF, getting the banks onboard, why it fills a gap in the investment market, the ABGF's investment process, the returns it seeks, the investments made to date and lots more.

You can find all episodes of the Of Interest podcast here.

Silicon Valley Bank’s meltdown this week was partly because it had been investing customer deposits in US Treasuries, considered one of the world’s safest investments, without hedging the risk of interest rates rising. 

Last year was the first since 1870 that bonds and equities both experienced an annual decline, as the interest rate shock destroyed the value of assets in almost all classes. 

Investors have been rushing to redesign their portfolios as the style of investing, which had worked so well in the years post-global financial crisis, somewhat fell apart. 

Speaking in interest.co.nz's Of Interest podcast, Greg Fleming, head of global diversified funds at Salt Funds, said fiscal and monetary stimulus during the pandemic had created several parallel bubbles which are now deflating. 

"We had an extraordinary amount of money sloshing around after Covid triggered that super-stimulus; not just fiscal stimulus but also central bank stimulus."

“That amount of money sloshing around the system had to find a home. Many markets took that money, some as solid as residential property, others as ethereal as ethereum.” 

Bubbles in both dependable and speculative markets have been deflating and bringing investment portfolios with them. 

Silicon Valley Bank, for example, was at the heart of the venture capital boom which occurred in 2021 as cashed up investors looked for places to invest all the excess liquidity they found themselves holding. 

Deposits rushed into the bank as start-ups raised big funding rounds and Silicon Valley Bank invested that cash in treasury bonds. 

But it couldn’t last, start-ups stopped depositing money when venture capitalists stopped writing them checks in 2022 and sky-rocketing rates depleted the value of the bank’s bonds. 

It's a classic boom and bust story. The economy got too hot, the bank grew too fast, and it imploded when conditions suddenly reversed. 

Not all assets and investments have experienced the dizzying extremes that Silicon Valley Bank has, but most have charted a similar direction of travel. 

Accident waiting to happen

“If you go back three years, and were constructing a portfolio from scratch, one thing you would see was horrifically expensive bonds everywhere, that looked like an accident waiting to happen,” Fleming said. 

“It is almost wearying to see people expressing surprise at the bond meltdown that happened last year, it was always going to happen and was just a question of minimizing your investors' exposure to it.” 

The meltdown was the worst bear market in bonds that has ever occurred, which coincided with a bear market in stocks. These two assets have traditionally had an inverse-correlation, meaning one would fall when the other climbed. 

That has not been the case in the past year and these two asset types have begun moving in the same direction, posing a challenge to traditional portfolio construction.  

It is possible both stocks and bonds could rally when – or if – central banks cut interest rates, extending the correlation between the assets. 

This might require investors to look for other uncorrelated assets to smooth out volatility in portfolios. Examples might include infrastructure, carbon credits, or even commodities like timber. 

In its quarterly Global Outlook Report, Salt Funds said the approach of building portfolios from hundreds or thousands of individual securities was reliant on broad multi-year market rallies such as occurred after the global financial crisis. 

“However, such rallies may now be found to belong to a vanished era, where central banks cushioned or prevented recessions by expanding liquidity and lowering the cost of activity through interest rate suppression”.

With central banks now focused on price stability, and willing to induce recessions to get there, the era of “wave riding investment strategies” may have passed. 

“For instance, it is plausible to foresee a phase in which the main market benchmark indices move sideways in ranges, whilst individual securities within them still offer scope for better outcomes.”

Fleming said his expectation for financial markets in the remainder of 2023 was that it won’t be as bad as it might have felt this past week. 

“We’re in more of a dilemma than a disaster,” he said. “It is a dilemma because the central banks do have to put a stopper in inflation, but they don’t want to break too many things that are reliant on yields not going through the roof”. 

“Be satisfied with the quality and the underlying balance sheet of anything you invest in; be very, very vigilant about that."

You can find all episodes of the Of Interest podcast here.