By Jason Wong*
Friday was an uneventful trading day. Strong Performance of Manufacturing Index (PMI) data on Friday night pushed global rates modestly higher. The US dollar (USD) was flat but commodity currencies underperformed, seeing the New Zealand dollar (NZD) close the week around US61.40 cents and the (Australian dollar (AUD) below US67c.
Strong global PMI data on Friday reinforced market views of further policy tightening ahead for the Federal Reserve, European Central Bank and Bank of England, pushing global rates modestly higher. US Treasury yields ended the day four basis points (bps) higher right across the curve, taking the 10-year rate up to 3.57%, and marking the end of an uneventful week that saw less volatility in rates than seen since early March. German rates saw a similar move across the curve.
PMI data showed increasing growth momentum for services sectors across the Euro area, UK and US and deeper growth contractions for the manufacturing sector for the regions noted apart from the US. With the services sector a larger part of the economy, composite indices improved across the board, signalling overall improved growth momentum in April. Composite indices for the Euro area, UK and US rose to their highest level in 11-12 months. The data suggest that the UK and Euro area might have skirted recession and raise a question whether the US economy will even get close to recession, despite a range of other indicators giving a clear signal of recessionary forces.
The surveys showed pricing indicators still too high for comfort. For the US, the commentary noted the upturn in demand had also been accompanied by a rekindling of price pressures, with businesses passing on higher costs to customers. A 25bps hike from the Fed early next month remains well priced, with the market seeing that as the likely final hike for the cycle. A 25bps hike from the ECB early next month is priced as a given, with some chance of a greater 50bps hike priced in. Same goes for the BoE, although with deeper conviction that 25bps is most likely.
UK retail sales volumes excluding auto fuel were weaker than expected in March, dropping 1.0% month-on-month with wet weather said by the statistics office to take the blame. However, the strength in January and February meant that sales for the first quarter (Q1) overall gained 0.6% quarter-on-quarter, the first three-monthly increase since August 2021. A separate survey showed UK consumer confidence rising to its highest level in a year.
Japan Consumer Price Index (CPI) inflation continues to steam ahead at a faster pace than expected, with the core rate (excluding fresh food and energy) up to 3.8%, its highest level since 1981. The headline rate nudged down to 3.2% and has been above the Bank of Japan’s 2% target now for 12 consecutive months. With the Bank of Japan forecasting inflation falling back below 2% later this year, the Bank has been in no mood to step away from its ultra-easy policy stance. Newly appointed Governor Ueda presides over his first policy meeting later this week and isn’t expected to adjust the policy stance. But over coming months, there will be rising pressure to abandon or modify its yield curve control policy, which continues to look well past its use-by date.
Fed data showed a small increase in liquidity demand from trading banks, breaking a run of weekly declines, with outstanding borrowing from the traditional discount window up $2 billion to $70b and borrowing from the new Bank Term Fund Programme up $2b to $74b. While the acute phase of the banking sector turmoil is over, there clearly remains some lingering pressures. The KBW Nasdaq banking index fell 1.5% on Friday, with weaker than expected earnings reports dragging down a few mid-sized banking stocks by 5% to 6%. The S&P500 nudged up 0.1%, with the week marked by low volatility and a 0.1% decline.
In currency markets, net movements were modest on Friday night and the key USD indices were little changed for the day, but commodity currencies added to their weakness during the NZ trading session and were notable underperformers. The NZD closed the week around 0.6140, taking its fall for the week to just over 1% and down on most of the crosses by a similar amount, a reflection of the big downside miss for the CPI earlier in the week. The AUD finished the week just below 0.67, with NZD/AUD around 0.9170. The Canadian dollar was the weakest of the majors for the week, not helped by the near 6% fall in West Texas Intermediate (WTI) oil prices.
NZD/Euro traded at a fresh 2½-year low of 0.5580, while NZD/British pound fell to 0.4930, just above its October 2022 low.
NZ interest rates continued to fall in the aftermath of the large downside miss to NZ’s CPI, with some global tailwinds supporting the move. Overnight indexed swaps (OIS) pricing for the May meeting nudged down to 5.45%, little changed for the week but down from the 5.49% level prevailing just before the CPI release. The two-year swap rate fell 11bps to 5.02%, also leaving the rate unchanged from a week ago, but down from the intra-week peak of 5.26%. The 10-year swap rate fell 9bps to 4.22%. NZ government bonds showed similar moves on the day, with some evident outperformance against US and Australia.
The economic calendar starts off light but gets heavier and more interesting later in the week. Germany’s IFO business climate survey is tonight and US new home sales and the Conference Board consumer confidence index come just after the ANZAC day holiday. The key domestic release this week is the ANZ business outlook survey. Key global releases include the Australian CPI, US and Euro area first quarter GDP, the US employment cost index and personal consumption expenditures (PCE) deflators, and the Bank of Japan meeting.
The easiest place to stay up to date with economic events is by following our Economic Calendar here ».
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*Jason Wong is BNZ's senior markets strategist. David Chaston is away this week.
42 Comments
Interesting OCED report out over the weekend, stating that NZ was the favoured destination for young people with higher education to emigrate too, what do these people know that we don't know. Are they expecting an expansion of the Ukraine conflict. Just found it interesting.
This would be relevant if our amenities and destinations were equally spread across the country on a per sqm. But they aren't, and neither are our beaches, parks, reserves, great walks or the roads to access them, which is pretty obviously the point I'm making - but apparently not obviously enough.
We do have less people, and more space
Sure, if migrants are willing to pitch a tent in the middle of nowhere and call it home. Otherwise, our existing infrastructure and economic capacity was built for hundreds of thousands of fewer people living in this country.
Meanwhile, we're on a net migration trajectory of adding close to 2% to our population in this calendar year, and all we've built in the last 3 years in the name of catching up are piles of consultation documents and business cases in Wellington offices.
"all we have built is piles of consultation documents"
https://www.interest.co.nz/property/120803/high-numbers-new-homes-are-b…
According to the this story we have been completing record numbers of houses, currently at a 'five year high'? In your view is that not correct?
This comment section is such a fact free zone at times. Used to be such quality. Now sometimes feels to be rivaling stuff with all the opinionated conjecture.
Cherry picking a single stat and applying that across the entire economy is confirmation bias.
After just 2-3 years of a construction boom trying to catch up for years of high population growth, we're re-entering a construction downturn. Dwelling completions are at best a lagging indicator, while the leading index here (annual consents trend) has fallen 13% between Feb 2021 to 2023.
On the broader infrastructure front, an MoE report in 2021 revealed 508 schools in NZ are now overcapacity, up from 214 in 2017.
A recent report from InfraCom opens with a statement - New Zealand’s infrastructure gap limits the labour market benefits cities provide. You don't have to work in the public sector like I did for a few years to identify euphemistic statements.
No intention to apply it across the entire economy sorry. I just pulled up the first relevant article google found me, as I wanted to refute the generalisation/euphemism that 'all that has been built in 3 years are piles of documents'.
As you note, there has been a construction boom. General view is it has been at or near capacity for few years now, building about as much as it possibly can.
Certainly agree there is deficit. With any luck the incoming industry capacity from the downturn can be applied to some of that.
One thing you can be sure of is those economists will attempt to oversimplify a complicated subject such as net skills acquired/lost with simple border crossing numbers. Yet to come across a single think-tank bring up the topic of lost productivity from losing NZ-trained resources and our economy having to make do with less-experienced migrants.
Talking to recruiters for my multi-faceted team (data modellers, cost estimators, engineering project managers, controls engineering, etc.), it appears that most businesses are struggling to find suitable replacements for outgoing talent. No shortage of incoming migrants with shiny papers but definitely not the quality we received pre-Covid in terms of job-ready skills.
It would be good to see more work done on why Aussie productivity is better than ours and has been for a number of years
Hence why the wage gap keeps growing?
parts of our economy have good/above average productivity growth eg Primary production, but as a country we are falling behind - so why?
Couldn't find recent research into the subject. Going by a release from NZPC in 2013 analysing productivity on either side of the Tasman, the fundamental difference came down to 1) a larger proportion of the Australian workforce being employed in industries with higher value-added per hour worked.
Also worth noting was that the majority of New Zealand industries under-performed on productivity compared to the same industries in Australia, including mining, agriculture, most branches of manufacturing, construction, retail and wholesale trade and financial and insurance services. The major divergence across these sectors came from 40% lower capital invested per hour worked and 22% less multifactor productivity.
In short, we have fewer people working in high-value sectors who also lack the advanced tools/systems/practices to produce as much their Aussie counterparts.
Yesterday I read this sad story on the nz herald and was motivated to do givelalittle (a first for me), $1000 anonymously. If you look up the page you can probably see my first name if you want to know it, and my message to Millie as the donation stands out. My reason for saying this is that you also might feel the same as I did toward this loving but needy family. Please forgive my intrusion into the conversation with this post 👍
Dunedin woman Millie Hardiman finds lifesaving help with surgery in Spain
https://www.nzherald.co.nz/nz/dunedin-woman-millie-hardiman-finds-lifes…
(Christine Lagarde)
In the 1970s, Central Banks ... failed to provide an anchor of monetary stability, and inflation expectations de-anchored – a mistake that should never be repeated for as long as Central Banks are independent and have clear price stability mandates....if fiscal policy focuses mainly on supporting incomes to offset cost pressures, that will tend to raise inflation, increase borrowing costs and lower investment in new supply.... Central Banks also have an important role to play here – even as protagonists.... we need to be ready for the new reality that may well lie ahead. The time to think about how to respond to changing geopolitics is not when fragmentation is upon us, but before. Because, if I may paraphrase Ernest Hemingway, fragmentation can happen in two ways: gradually, and then suddenly....And I have no doubt that Central Banks will measure up to the challenge.
https://www.ecb.europa.eu/press/key/date/2023/html/ecb.sp230417~9f8d34f…
We don't know the counterfactual of course, but on the face of it. You're right.
With one outstanding exception - the RBNZ, that has woken in fright from the nightmare that past policy decisions have brought to us, and is now correcting its errors.
Cheaper and/or more Debt isn't the answer to anyone's problems now. (which is roughly what Lagarde is also saying)
Amazes me how quickly they've done a 180 - if this was human personality it would be described as suffering from bi-polar/split personality disorder.
Interesting that it also correlates perfectly at the point when the Fed members were no longer able to gamble on asset markets!
'Oh look, hey we can no longer benefit from pumping up the share/bond markets so we may as well start raising rates'
This in Oct 21...
Fed cracks down on top officials' trading in bid to end ethics scandal | Reuters
And within months all asset markets peak and start falling as Fed suddenly decides that its time to start raising interest rates with never seen before eagerness.
Might be a coincidence but its almost too perfect to be anything other than just a conspiracy!
Then again...here is Jerome Powells filing for 2022.
His portfolio will be down a good deal given the holdings so I retract my view above.
Private equity crackup looming amid higher interest rates and escalating losses
Losses mount in REITs owned by Blackstone, the Carlyle Group, and Apollo.
So we're all off to Aussie then?
Three decades of policy missteps have contributed to a situation that is undermining the living standards of future generations. The Australian economy is being broken by a dysfunctional housing system that is inflicting long-term financial and community pain on almost every part of the nation. Decades of poor policies, greed, NIMBYism and population growth have allowed the economy to be consumed by the Great Australian Dream. In a country with some of the most expensive housing in the world, Australians are carrying record levels of debt to pay for homes ever more distant from their places of work. So serious are the problems that there are fears Australia could become a “Jane Austen world” where wealth will be determined by a parents’ housing portfolio, and people are forced into choosing between buying a home and having children.
https://www.smh.com.au/politics/federal/how-the-great-australian-dream-…
Am off to Quilpie. No just kidding, but it could suit someone working "remote"
This tiny Aussie Outback town will pay you $20,000 to move there | Stuff.co.nz
https://i.stuff.co.nz/travel/destinations/australia/131736489/this-tiny….
But over coming months, there will be rising pressure [on Japan] to abandon or modify its yield curve control policy, which continues to look well past its use-by date.
You would have thought that after more than 20 years, commentators would stop predicting the end of yield curve control! Why would Japan stop? They have complete and absolute control of interest rates - from short- to long-term. Their low rates mean that they can finance anything they want without shoveling interest payments at private investors. The opposition of course is purely ideological.
So, decent chance of the US sailing through this without a major recession - having hiked interest rates with next to no impact on the real economy or consumer prices (whilst continuing to invest in their country).
Meanwhile, in NZ, we are striding willingly into a recession because the central bank thinks it can sway global prices by wiggling the OCR around, doubling mortgage payments, giving the world the 'shock and Orr stare', and chucking tens of thousands of kiwis on the dole. What a time to be alive.
What about the last three decades where we decided to drop interest rates to zero for residential housing speculation (creating a massive domestic debt/asset bubble) to offset the deflationary forces that we were importing from cheap overseas labour via globalisaion (as measured in the cheap goods in the CPI)?
Also a 'what a time to be alive' situation.
But that is like saying 'let us not be human'.
I mean I've vocally been trying to convince people (the central bank, our politicians, thee general public) that we needed to change course (to avoid financial and social harm) for the last 10 years and what did I experience in return? I got ridiculed by large parts of society for being a 'doom gloom merchant'.
As far as I'm concerned, we can suffer the pain as a society that we deserve for acting like such ignorant fools. There appears to be only one way to learn lessons, and that is from experience and not from the mistakes of others (which I was I was trying to preach - but largely to deaf ears).
What is your suggesiton BTW to avoid what appears to be unfolding? (without causing even more unintended consequences?)
I agree, although populations are splitting so strongly into haves and have-nots that the stats on which labels like 'recession' and 'depression' depend are starting to lose meaning.
For years now, some of the richest countries in the world have had growing populations of homeless and trailer parkers. They were already in a depression years ago.
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