Here's our summary of key economic events overnight that affect New Zealand, with news that is impressive out of North America.
First up today, the Americans have delivered a stellar Q3-2023 GDP expansion, far higher than the optimistic forecasts, and far higher than the very good Q2-2023 expansion of +2.1%. In Q3, the giant American economy grew +4.9% according to their advance estimate. Better, this was built on stronger than expected consumer spending.
Their PCE price index, an inflation measure the US Fed takes note of, rose +2.9% from a year ago, with the 'core' measure up +2.4% and less than expected.
That was just the start of their 'good economic news'. US durable goods orders rose a startling +6.0% in September from a year ago, up at a +4.7% rate from the prior month. No one saw this surge coming either. Capital goods orders were hit out of the park, up +16% from the same month a year ago.
New initial jobless claims for last week came in at 192,000, and while still very low, it was marginally higher than a week ago. But there are now only 1.58 mln people on these benefits, also unusually low.
US exports rose +2.9% in September from August, but that still leaves them -2.2% lower than the same month a year ago. Their merchandise trade deficit rose marginally.
Also somewhat unexpected - and positive - was that American pending home sales rose in September from August when analysts were bracing for another fall. But even after that bump, they remain historically weak.
Canada said weekly earnings there were up +4.2% from a year ago in August, an unchanged rate from July. Given inflation there is running at 3.8% pa, workers there are keeping up, even making real gains.
In China, international banks are reporting sharply higher provisions and losses for their business there. Standard Chartered led these reports, Japanese banks exposed there too are reporting a similar profit hit. American banks are noting similar stress in their Chinese operations.
There has been quite a turnaround in Singapore as well. Industrial production jumped more than +10% in September from August, although that was largely just making back the dire August result. But it has shrunk the year-on-year shortfall to just -2.1%, much better than the expected -4.8%.
In Europe, the ECB hit the 'pause' button after a series of ten consecutive rate increases since July 2022. It claims it sees a gradual easing of price pressures. It is also looking at an impending recession. Still, this leaves their policy rate at 4.5%, its highest in 22 years. Its quantitative tightening program - selling off its bond holdings - continues unchanged.
In Turkey they raised their policy interest rate by +500 bps to 35% earlier today. That's up from 8% in June. An eye-watering policy about-face. They have inflation running at over 60% pa now.
Global containerised freight rates fell another -2% last week, taking them down -57% from a year ago. Rates to and from China are the weak links; rates across the Atlantic actually showed rate increases. Bulk cargo rates topped out over the past week and are now falling.
The UST 10yr yield has fallen -10 bps from this time yesterday, now at 4.85%. Their key 2-10 yield curve is less inverted, now by -18 bps. Their 1-5 curve is inverted by -59 bps. Their 3 mth-10yr curve inversion is more inverted, now at -53 bps. The Australian 10 year bond yield is now at 4.83% and up +1 bp from yesterday. The China 10 year bond rate is little-changed at 2.74%. The NZ Government 10 year bond rate is -2 bps lower at 5.57%.
Wall Street is sharply lower again; in its Thursday trade the S&P500 is down -0.9%. Overnight European markets were all lower with Frankfurt down -1.1% and Paris down -0.4% and the others in between. Yesterday, Tokyo ended its Thursday session down a sharp -2.1%. Hong Kong fell -0.2%. But Shanghai rose +0.5% yesterday. The ASX200 ended its Thursday trade down -0.6%. And the NZX50 fell -0.3%.
The price of gold will start today at US$1984/oz and up +US$7/oz from yesterday at this time.
Oil prices have ticked back down -50 USc today to be now at just over US$83.50/bbl in the US. The international Brent price is now just over US$87.50/bbl.
The Kiwi dollar starts today at 58.1 USc and down -10 bps from this time yesterday after dipping sharply in between. Against the Aussie we are up marginally to 92.1 AUc. Against the euro we have risen slightly to 55.2 euro cents. That all means our TWI-5 starts today slightly firmer at 68.4.
The bitcoin price starts today at US$33,812 and down -2.2% from this time yesterday and off its eighteen month high. Volatility over the past 24 hours has been modest at just on +/- 1.5%.
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78 Comments
So, in America:
- Increased interest rates not passed through to mortgagors as they are almost all on 30-year fixed rates (average mortgage yield in the US is 3%, NZ is 5.4% and still rising 12 basis points a month).
- Businesses re-financed their debts long-term when rates were low.
- Govt is spending happily on infrastructure and other stuff they need for the future (inc weapons, which are backdoor stimulus / subsidy for their defence sector)
- High interest rates are driving hundreds of billions of new dollars into the economy through the interest on reserves channel (quickly becoming one of Govt's biggest area of spending)
- Inflation has fallen to around 3.7%, unemployment at record lows etc
- Very clear to anyone with sense that (a) higher rates in the US are net stimulatory (noting there are exceptions like real estate, residential construction, some areas of finance etc) and (b) inflation was not driven by demand-side factors, nor by 'too many people having jobs'.
- I am not saying that high rates won't break something in the US (or across the rest of the world) - just drawing some conclusions about how we got here.
- There are well-known commentators that predicted that this would happen a year ago - they were laughed at.
Now look at Turkey (conventional policy restored, inflation reversed trend and started going back up), and advanced economies like NZ where rates are demonstrably slowing the economy by making working people poorer BUT inflation is proving stickier than in other places (because businesses are just passing on the higher cost of credit!!!)
These should be the end days for monetarism, but the (blind) faith amongst economists remains strong.
Jfoe, are you suggesting that the US would have even lower inflation right now if they left their cash rate at ~0%? I am not convinced.
Once you have hyper inflation like Turkey you are screwed, they will struggle to get control of that again. The trick is to never get there in the first place.
I really think if the RBNZ left the cash rate at 0.25% our inflation would still be heading up. Regardless it would be a very risky experiment because the outcome can be disastrous.
I am not suggesting that at all. It is clear that higher rates have taken the wind out of the US property market for example, and slowed other forms of speculative investment (eg borrowing for share buybacks). However, the two questions to ask are:
- Are current US interest rates net stimulatory for the US economy?
- How much impact are US interest rates having on the overall price level in the US? If US rates were 3% would the overall price level be going up faster? If they were 7% would price rises be slower?
My reckons (and that is all they are) is that the answer to question (1) is a resounding 'yes' and the answer to question (2) is interest rates have a very weak impact on the US price level as they work predominantly through the discredited 'expectations' channel. Any impact that rates do have on prices are clearly being drowned out by other factors (recovering supply chains, oil prices, increased productive capacity, etc etc).
In terms of NZ / RBNZ, my whole point is that higher interest rates in the US have a completely different impact on the US economy than higher rates in NZ. Here, higher rates are:
- demonstrably making people poorer through the mortgage channel
- loading huge costs onto businesses who have very differently structured debt than US businesses (eg US Govt backs low rate loans for agriculture - our food producers rely on expensive revolving credit)
- putting (net) upward pressure on prices as we have a low-compeitition environment meaning businesses will protect margins and pass on input price increases (and deal with lower sales volume as people get poorer by reducing staff etc)
- slowing consumer demand a lot, which is already leading to increases in unemployment (which will accelerate rapidly in early 2024)
Now, the question for NZ is can we afford to reduce rates in early 2024 whilst the US stays higher for longer? The answer to that question is probably 'no' - our current account deficit makes that very difficult indeed.
There can be costs to refinancing ... Each State seems to have different rules..
US law works on the basis that once a loan is paid back (e.g. re-financed, house sold, etc.) the bank may only charge break fees that equate to the length of time before the bank can re-lend the money. So it ends up being a few months interest.
This site has a break fee calculator. Not sure how it works as I've never used it.
Kiwis don't understand how break should be calculated so banks sucker them thinking the break fees are for all the interest on the remining fixed term.
Have I mentioned that kiwis aren't that bright?
https://www.newyorker.com/magazine/2020/02/10/can-we-have-prosperity-wi…
In 1930, the English economist John Maynard Keynes took a break from writing about the problems of the interwar economy and indulged in a bit of futurology. In an essay entitled “Economic Possibilities for Our Grandchildren,” he speculated that by the year 2030 capital investment and technological progress would have raised living standards as much as eightfold, creating a society so rich that people would work as little as fifteen hours a week, devoting the rest of their time to leisure and other “non-economic purposes.” As striving for greater affluence faded, he predicted, “the love of money as a possession . . . will be recognized for what it is, a somewhat disgusting morbidity.”
Sort of missed it a little there didn't he?
He forgot to factor in the human psychological need for influence/power over others (mine is bigger than yours). It is interesting though that he had a somewhat 'socialist' view in that the wealth would essentially be fairly and equally distributed. Somewhat blinkered perspective of limited and constrained resources and human psychology.
Greed and lust for power are too big an influence. The question I guess is without being too draconian how can we ensure it is dialled back so everyone benefits?
The conundrum in a nutshell. Thank you.
My simple way of putting it is the US needs to raise rates and can afford to, and NZ needs to raise rates to align with the US but can't afford to.
Hopefully the US will do the right thing and realise how critical milk powder is to the world economy and hold their rates lower. Yeah, all will be fine.
Very good comment. A stark difference between NZ and the US economy. NZs economy as a housing market with some farms out the back is being laid bare, the lack of productive/business investment in this country has meant we don't get the same stimulatory benefits as the US does with higher rates (which is all in the productive sectors). Because of our lopsided economy, the majority of people will suffer instead when interest rates rise.
Look no further than the housing speculator pollies that have worked hand in glove with the RBNZ to ensure land owners get all the wealth while business owners and working people get asked to pay more and more. Its been 20 years of inaction with tax and monetary policies built for the 1980s, not today's world. But don't worry a housing specuvestor and a english literature finance minister that doesn't even know what productivity is will definitely turn it around. You get what you vote for.
So what you are saying is that the OCR is a good tool for controlling inflation, but the RBNZ has gone way too far with it? That seems like a different argument to Jfoe's. What do you think the OCR should be? 3%?
I have often said the RBNZ has probably overcooked the OCR (although Australia didn't go as hard as us and they still have inflation rate increasing, so now I am not so sure). But I doubt they have got it drastically wrong, 1% at the most.
re ... "... break something in the US (or across the rest of the world) .."
October & November are the scariest months for stock markets if my memory serves. Plenty of time yet. ;-)
Ah yes. Though this time it will be different. HFL and similar crap.
No. It won't be different. Same cycle. Same backward looking philosophies being used by leaders. Same outcome.
FYI: It's not unusual to have a surge just before the sticky brown stuff hits the whirly thing so don't be fooled.
Waiting and watching.
Jfoe, thanks for the great explanation!
So where does that leave NZ ? Most of our borrowing is short term mostly 1- 2 years so the same logic doesn't apply. Are you suggesting NZ should lower the OCR ? If so, would that not lead to a much lower NZD ? Is a lower NZD perhaps acceptable, making our imports more expensive but helping our exporters and probably NZ's productive industry?
Thanks Jfoe. I've been reading these articles (and comments) for many years. This is maybe the first time I believe a series of comments from a user warranted commendation. Regardless, it inspired me to find my log-in details (from many many years ago) and say what I've been thinking for most of that time when I read this website.
Firstly, thanks to the fantastic journalists who take the time to write on this website. This website is second to none in terms of being the source for delivering; timely and unbiased information relating to NZ economic matters (IMO).
My further observations are; the majority of comments appear to be from a small sub-section of users and they are; repetitive in content, self serving (or self congratulatory) in nature, and almost entirely from a narrow minded group of self-focused pundits. The confidence levels from most commenters appears to exceed their intelligence and/(or) experience (in most cases).
Thank you to the journalists, and people like Jfoe, who aim to share unbiased intelligence and wisdom with their comments!
"Very clear to anyone with sense that (a) higher rates in the US are net stimulatory”
Have to say..... its not at all clear to me..
looking at the history of interest rates and downturns , there is a very loose relationship . Often the economy dips into recession AFTER the Fed starts lowering interest rates.
Im one of the Guys thinking there will be a down turn, and while the NZ economy is obvious.. ( facing hardships) , the USA economy is not so straightforward.
My own view is that I think the FED will play hardball, until it sees some hardship...some cracks. ( The USA share mkt might be a proxy for that ).
I think is a brave man that draws any kind of conclusions about Turkey and monetary policy/inflation .... Turkey is a complicated mess.... in my view.
https://en.wikipedia.org/wiki/Turkish_lira#/media/File:Euro_exchange_ra…
Interesting chart showing USA oil production.. ( being energy independent is pretty helpful ).
Click the interactive play button on linked graph
https://ourworldindata.org/grapher/oil-production-by-country?facet=none
Oh, there is absolutely a chance that the Fed breaks something in the financial / real estate sector and that this spills over into the rest of the economy with damaging effects. My point was that the current rates appear to be net stimulatory - if they are not then they must be irrelevant. I could buy that too.
Now re-read your statement here:
looking at the history of interest rates and downturns , there is a very loose relationship . Often the economy dips into recession AFTER the Fed starts lowering interest rates.
Sounds like you are saying that reducing rates might dampen the US economy.... so can't be the reverse be true?!?
Turkey is a crazy, messy place - but I am just looking at what happened. Conventional monetary policy restored in June, quickly followed by an uptick in inflation after 12 months of it reducing. What else explains it?
No...I'm not saying that lower rates might dampen things.... ( I hold the traditional view that higher rates tend to suppress investment... the transmission mechanism being the difference between %rates and yields on investments... AND Capital investment is a big part of future profits.)
I'm saying that Higher rates for longer can take a long time to fully have an impact.
I'm saying that there is not a simple cause/effect relationship between interest rates and down turns, .... The impact of FED policy changes can take a long time to work its way thru the economy. ( obviously , the weakest link in the chain gets impacted first. )..... and the back ground Macro economic environment is different thru each cycle... so the effects can manifest in different ways. (An example of that might be the strength in the Labour mkt. in this cycle. )
It is probable that the FED reduces rates because it sees a downturn gathering momentum... well before it manifests as a recession.
In regards to Turkey.. ..
To argue that a blip in inflation rate is caused by a Monetary policy decision in June ( 4 mths ago )... is a Big call..
They also loosened foreign exchange controls back in june . https://www.al-monitor.com/originals/2023/06/turkey-eases-forex-control…
The lira has devalued by over 40-50% since May.. ( That alone , must feed into consumer prices ).
Like we both agree, Turkey is crazy messy !!. Im not smart enuf to discern the outcomes of policy decisions they might make....and the whole Middle East situation makes it even more messy.
Like others... I enjoy reading your comments jfoe... many thks.
Tide going out on intermittent energy scams.
BERLIN, Oct 26 (Reuters) - Siemens Energy shares plunged nearly 40% on Thursday, wiping 3 billion euros ($3.16 billion) off its market value, after the group said it was in talks with the German government about state guarantees following big setbacks at its wind unit.
After $280 Billion Wipeout, Green Stocks Confront Soaring Debt Costs
(Bloomberg) -- There appears to be no end in sight for the multi-billion dollar rout in renewable energy stocks, as a surge in borrowing costs threatens to squeeze returns in the sector for years to come.
Until recently expected to displace oil-and-gas companies from mainstream investment portfolios, clean energy stocks have instead become a no-go zone for many. Investors have been pulling money out, wiping over $280 billion from the market capitalization of green stocks globally since their August 2022 peak — not quite boom-to-bust but a dramatic unraveling nonetheless for a market that was all the rage at the turn of the decade.
https://www.bnnbloomberg.ca/after-280-billion-wipeout-green-stocks-conf…
https://www.reuters.com/business/energy/siemens-energy-seeking-billions…
You're measuring the wrong thing.
It's a matter of being energy-independent, post cessation of external supply. Which is inevitable, the source being finite.
And having gone there 20 years ago, I can report that the 'business case' stacks up too. By some orders of magnitude. Not surprising; energy underwrites money 100% (not the other way around), so if you concentrate on the underwrite.... vs counting in keystroke-issued fiat, you tend to be right-er.
Funny old thing.
In 20 years, all-in including generator fuel in the early days, I'm sub 20k spent. Well sub. And I reckon I can coast the next 15 years on what I have.... and no power-cuts....
Court of Appeal Opens Coast to Maori Ownership | NZCPR Site
"10 million hectares of the richest natural resources in the country covering the distance between the average spring high tide waterline and the 12 nautical mile Territorial Sea limit, along with the airspace above, the water space, and the subsoil, bedrock and mineral wealth below."
I come from central Europe, where over hundreds of years, many different invaders of different ethnicities have ruled. Yet we understand that it's best to have one set of National rules applying to everyone in the country, no matter their ancestry.
Why can't we have one set of rules here, that apply to all New Zealanders, no matter their ethnicity?
As a starting point look at the "Division" tab.
But, you already know that.
I would think that ACT 3 item referendum would get 100% yes votes. But clearly there is a campaign against it.
- All citizens of New Zealand have the same political rights and duties
- All political authority comes from the people by democratic means including universal suffrage, regular and free elections with a secret ballot
- New Zealand is a multi-ethnic liberal democracy where discrimination based on ethnicity is illegal
A referendum by turkeys voting for quails to be the main item at Christmas dinners.
ACT disgusts me. Tyranny by the majority. https://en.wikipedia.org/wiki/Tyranny_of_the_majority
Yes, let's toss equality of suffrage. Tyranny of the minority would never happen.
I feel ill linking to Leftipedia.
https://en.wikipedia.org/wiki/Dominant_minority
Tell me - when you visit a doctor, or trust in a surgeon, do you rely on and trust their expertise?
Or do you post your symptoms on Facebook and rely on the noisiest people on Facebook to diagnose your problem and dictate what treatments you'll recieve?
Think about it.
I'd suggest looking up the Dunning Kruger Effect too.
btw - Saying, "ACT disgusts me", is clearly my opinion (hint: the word "me") and is therefore not abuse. English not your first language? No problem. I forgive your confusion.
Good graph in the NZH titled: Interest rate increases cause costs to outpace inflation
It really is about time we dropped the name "Official Inflation" and called it what it actually is: The RBNZ Inflation Measure", or RIM for short.
The graph clearly shows what we all know. a) inflation for real people is actually much worse than the RBNZ RIM measure lets on. b) Jfoe, Yvil et al are right in that a high OCR without equivalent wage growth is inflationary.
Have I mentioned that temporarily increasing taxes - while introducing some new ones - can have the same effect as a high OCR on damping down inflation?
And it can work much quicker.
And it keeps the money in NZ.
And it reduces government debt.
And it allows -public services to be maintained.
And it facilitates investment in much need infrastructure.
And yet dumb kiwis voted for a government that will reduce taxes? Kiwis are as dumb as dirt. We deserve every shafting we get.
https://www.nzherald.co.nz/business/household-living-costs-accelerate-o…
Yip the two options we have are to reduce deficit spending (but this will cause rising unemployment and pain for people) or we can increase taxes (to offset the high deficit spending we currently have to keep the economy out of recession).
As it stands, we think we can have our cake and eat it too.
We can't.
Kiwis are as dumb as dirt.
Sadly, I have to agree with you.
Kiwi's literally fell for a carrot dangling about their snout, a tiny carrot only a select group of maybe 3000 households will be eligible for and the remainder being shafted left right and centre to pay for the tax breaks of an elite caste of slumlords.
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