Very stimulatory

Delivered on By Justin Pyvis

Good morning! Not all is well across the ditch, and we’re not talking about PM Jacinda Ardern, who’s currently stuck at home after contracting COVID-19.

Two new reports from Westpac and Infometrics painted a less-than-rosy picture of the Kiwi economy, warning that inflation-adjusted house prices may fall over 20% and that the economy is “struggling to resource further growth in the near-term”:

“In effect, the New Zealand economy is red-lining and continues to operate above capacity, with higher prices overshadowing any real growth.

Fractured supply chains, accelerating inflation, higher interest rates, and high levels of absenteeism from Omicron combined to throttle back the economic engine. Higher inflation is forcing the Reserve Bank to lift interest rates higher, faster, which will help take some of the wind out of an overheating economy, but the risk of a hard landing becomes higher with each passing day.”

New Zealand’s government, like Australia and the US, borrowed and printed heavily to finance its war on COVID-19, increasing its core crown net debt from around 19% of GDP in 2019 to an expected 40% of GDP next year.

Essentially, large demand stimulus into a supply shock resulted in an overheating economy with rapid asset price appreciation and inflation that’s running at 6.9% annually.

How Kiwi policymakers navigate what’s going to be a very tricky cooling off period without causing a recession remains the big uncertainty.

New Zealand’s 2022 Budget will be released tomorrow.

Reading the tea leaves

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Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries.

The US S&P500 added a solid 2.02% overnight thanks to a strong US retail sales report in April showing a 0.9% monthly rise along with a 0.8% increase in US industrial production, “showing manufacturers are making strides meeting steady consumer demand and investment growth”.

Those reports allowed the market to largely shrug off comments from Fed chair Jerome Powell, in which he admitted he got it wrong and stressed his determination to fix inflation:

“In hindsight, it would have been better to raise rates earlier.

We know that this is a time for us to be tightly focused on the time ahead and getting inflation back down to 2%.

No one should doubt our resolve in doing that… What we need to see is inflation coming down in a clear and convincing way.”

Locally the ASX200 gained 0.27% in a mixed bag of a day, with only 5 of the 11 sectors making ground led by energy (+2.1%), while healthcare and industrials (both -1.1%) were the biggest drags, the latter falling after the proposed takeover of Brambles (-7.6%) collapsed just a day after being revealed.

Food for thought

It's like the pandemic never happened: Consumer prices have surged, more than offsetting the disinflationary forces of the lockdowns.
It's like the pandemic never happened: Consumer prices have surged, more than offsetting the disinflationary forces of the lockdowns. Source

The minutes of the Reserve Bank of Australia’s (RBA) May policy meeting, at which it raised the cash rate for the first time in 11 years, were released yesterday. They provided some context to the decision for the 25 basis point hike, noting that:

“An argument for an increase of 40 basis points could be made given the upside risks to inflation and the current very low level of interest rates.”

Leaving the the cash rate unchanged wasn’t even one of the three agreed options of “raising the cash rate by 15 basis points, 25 basis points or 40 basis points”.

For good reason, too. As the RBA reported:

  • “Upstream price pressures were increasingly being passed on to final consumer prices of many goods, as supply chain pressures persisted and demand remained strong.”
  • Labour market “conditions had strengthened further since the start of the year and were the tightest in many years”.
  • “Strong growth was expected to resume over the remainder of the year as household spending patterns continued to normalise and incomes rose.”
  • “The outlook for dwelling and business investment remained positive, although capacity constraints related to materials and skilled labour shortages was a growing challenge for firms.”
  • Government spending “was expected to increase strongly over the first half of 2022 and remain at a high level over the forecast period”.

If the RBA had been paying attention it would have noticed many of those pressures starting to build a year ago, necessitating the reversal of its “very stimulatory” monetary policy. But hindsight is 20/20 and at least the RBA eventually realised that it needed to start reigning in demand.

However, it was disappointing to see that the RBA failed to acknowledge its own role in causing inflation – not adequately offsetting domestic demand – preferring to deflect to “global factors”:

“While the significant rise in inflation had been largely the result of global factors, which were likely to have a more temporary effect on inflation, the flow of information on inflation and wages over the preceding month had been consistent with more persistent inflationary pressures arising from limited spare capacity in the domestic economy.”

So the RBA still doesn’t understand how it got itself into this mess, yet expects us to believe it will be able to tame inflation while engineering a soft landing. Yikes. 😬

Chewing the fat

Bits and bytes

🗳️ According to the Australian Electoral Commission, 22% of those eligible – around 3.75 million people – have already cast their vote on the federal election.

💸 The RBA’s version was nearly 7x larger: Treasury estimates that the Reserve Bank of New Zealand’s quantitative easing experiment in 2020-21 is expected to cost taxpayers $NZ5.1 billion.

✂️ If re-elected the Coalition will increase the so-called “efficiency dividend” – a mechanism that cuts some existing public sector budgets each year – from 1.5 to 2%.

😷 “Doctors are pushing for indoor mask mandates to be introduced as COVID-19 numbers surge in several Australian states.”

📈 A rare “triple-dip” La Niña, combined with the pandemic and war in Ukraine, could see the prices of many food items continue rising.

🚑 80-year-old Georgina Wild died of a heart attack in Perth after it took paramedics two and a half hours to arrive after she called for help. The expected response is 15 minutes.

🌋 The eruption of the Hunga Tonga-Hunga Ha’apai volcano on 15 January was the largest since Krakatau in 1883, sending “massive pressure waves racing through Earth’s atmosphere”.

📉 Supposedly pegged to the US dollar 1:1, TerraUSD is now worth just 13c: “Luna Foundation Guard said it spent almost all of the bitcoin in its reserve last week in a futile attempt to save terraUSD.”

✈️ The new President of the Philippines, Ferdinand ‘Bongbong’ Marcos Jr, flew to Melbourne “where his youngest son Vincent is said to be enrolling to study at the University of Melbourne”.

📣 After pushback from Musk, Twitter’s board said it is “committed to completing the transaction on the agreed price and terms as promptly as practicable.”

📝 “Sweden’s foreign minister Ann Linde has officially signed her country’s' application to join NATO, following Monday’s announcement that accession would be going ahead.”