Here's our summary of key economic events overnight that affect New Zealand, with news markets sense the US Fed is about to say it is done raising rates.
In the US, their annual inflation rate slowed to 3.2% in October from 3.7% in both September and August, and below market forecasts of 3.3%. Core inflation retreated to 4.0%, also a touch less than expected. Even the month-on-month data came in lower than expected. These are all small moves, but they had a large impact on financial markets, who took them as a signal that the Fed is done raising rates in this cycle. Equities raced higher, bond yields fell sharply, and the USD weakened sharply.
The American Redbook index of retail sales rose just +3.0% last week over the same week a year ago, and hardly keeping pace with inflation.
Despite that, the NFIB SME optimism index came in better than expected for October, even if it did edge marginally lower than in September.
In China, they are contemplating a release of ¥1 tln in low cost debt funding for urban village renovation and affordable housing programs, in its latest effort to bolster the struggling property market.
Markets are sensing something bigger is coming because iron ore prices are now rising and back near Mar 2023 highs.
EU GDP was unchanged in Q3-2023, but edged a touch lower (-0.1%) in the euro area from Q2. That means the annual year-on-year expansion hardly exists now. But this happened as employment rose slightly, ameliorating the impact.
But in Germany there was a surprise jump in economic sentiment, as measured in the widely-watched ZEW survey. Both the business and financial sectors drove the rise. Firms are indicating the bottom has passed.
In Australia, the widely watched NAB business confidence index fell to -2 in October from a downwardly revised flat reading in the prior month, pointing to the lowest level since May. However business conditions did edge up.
Australia released its September short-stay visitor arrivals data yesterday and they are still not back to 2013 levels yet, struggling to get to levels that existed a decade ago. They were 584,000 in the month, and the largest source was New Zealand (22%), followed by China (10%), then the USA (6%).
In a new embarrassment for PwC, the ICIJ has released a hoard of documents that shows the firm actively aided Russian oligarchs in Cyprus to avoid Western sanctions.
The UST 10yr yield is down a very sharp -17 bps from yesterday, now at 4.47%. And their key 2-10 yield curve is now slightly less inverted by -38 bps. Their 1-5 curve is now more inverted by -81 bps. Their 3 mth-10yr curve inversion is now -92 bps and much more inverted. The Australian 10 year bond yield is now at 4.57% and down -11 bps from yesterday. The China 10 year bond rate is unchanged at 2.67%. The NZ Government 10 year bond rate is down just -1 bp so far, at 5.26%.
Wall Street started its Tuesday session much higher, energised by the inflation data and up +1.9%. Overnight, European markets closed up about +1.5% except London which only managed a modest +0.2% gain, Yesterday, Tokyo ended its Tuesday session up +0.3. Hong Kong fell -0.2% however, and Shanghai ended up another +0.3%. The ASX200 ended Tuesday up +0.8% and the NZX50 wasn't far behind, up +0.7%.
The price of gold will start today at US$1963/oz and up +US$18/oz from yesterday, mainly on the USD change.
Oil prices have firmed about +US$1 overnight, to be just under US$79/bbl in the US. The international Brent price is up a bit less to just on US$83/bbl.
The Kiwi dollar starts today at 59.9 USc and up a full +1c from yesterday. Against the Aussie we are unchanged at 92.2 AUc. Against the euro we are also unchanged at 55.1 euro cents. That all means our TWI-5 starts today at just on at 69.2, and a net +30 bps higher.
The bitcoin price starts today at US$36,871 and down -0.7% from this time yesterday. Volatility over the past 24 hours has also been modest at just on +/- 1.1%.
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72 Comments
Firms are indicating THE bottom has passed?
Seems to me they're indicating they HOPE the bottom has passed, surely?
What happens when you run a society on assumptions: https://jonathanturley.org/2023/11/13/the-new-barbarians-pundits-raise-…
and an interesting take: https://strategic-culture.su/news/2023/11/13/the-unspoken-elephant-in-t…
Bbbbbut how can inflation in the US be down at 3.2% when govt deficit spending is 6% of GDP (about the same as NZ during peak Govt COVID spending), consumer spending is robust, interest rates are high and unemployment remains low?
For economists this must be like watching Newton's apple float upwards into the tree! For people with sense, this is entirely explainable - the medieval monetarist models are nonsensical.
Lol, and with every other channel disproven, economists are genuinely saying that inflation has come down because businesses and consumers expect (believe) that inflation will come down if the Fed hikes rates so they adapt their behaviours accordingly. It's voodoo. Even the (good) Fed economists know that this 'expectations' channel is BS.
I don't think anyone is particularly perplexed that inflation has come down. What has perplexed people (including economists) is that nothing major has broken. No big banking crisis, no stock market crash, no corporate real estate bubble popping, no housing market crash. Even unemployment has not risen considerably.
I recall absolutely nobody who claimed that this will be the case.
Great point Ashwin, I certainly predicted something to "break" in the second half of 2023. Is it a matter of delayed effect though ? I still think that 2024 will be a very tough year for NZ, I will have to admit being wrong and eat a lot of humble pie, if NZ is still doing fine by the end of 2024!
I still think something is going to break next year. There is still a lot of debt in NZ and around the world that is still to roll over to much higher interest rates. Plus savings buffers that were built up over covid has delayed the pain a bit. If we get are still talking about a "soft landing" at the end of 2024 will be very surprised.
Things did break - a couple of regional banks, and the commercial real estate industry doesn't look pretty either. But, the US Treasury spent big on getting things built and directly financing new industries, and the Fed backstopped the finance sector (and then some).
Not so!
When the monetarist models have the sun in the right place, with the wind exactly right, in exactly the right season, with every camera poised correctly, and shutter speeds adjusted exactly right ... The models work beautifully. The rest of the time? Not so much.
Joking aside - when models are created, but they only work some of time, or even most of the time, then the model is clearly not correct and needs to be revised. The biggest problem is that too many monetarists play down the need for revision and accept that "no model is perfect". When one investigates where their motivations are coming from, all too often we find "big money influence". It seems they are quite happy to have their models "fail" two or four times each economic cycle. And when these failures occur, it seem the same people make out like bandits. (I can't think why that happens. /s)
What's your underlying thesis here? I thought it was high interest rates are inflationary and deficit spending is good. Are you proposing this is a stable situation that US population and workers are benefiting from?
The US do have a contracting broad money and credit supply (where as ours is flat) to help soak this extra spending up. The US figures look not horrible but I would not call them good.
I don't have a 'increasing A leads to more B' thesis. The economy is a complex system and higher interest rates in one scenario can crush demand, but stimulate it in another. Similarly, a temporary burst of deficit spending can kickstart an economy to full employment or lead to inflation.
The reduced credit supply in the US (house market very limp) is causing the broad money contraction - debt is being paid off faster than new loans are being granted. Again, worth noting that many US businesses finance their investment with cash / reserves (or Govt grants at the moment). Also worth noting that broad money has gone from $15 trillion pre-COVID to $21 trillion now (40% increase). NZ broad money has gone from $326bn to $405bn (24%).
The reduced credit supply in the US (house market very limp) is causing the broad money contraction - debt is being paid off faster than new loans are being granted. Again, worth noting that many US businesses finance their investment with cash / reserves (or Govt grants at the moment). Also worth noting that broad money has gone from $15 trillion pre-COVID to $21 trillion now (40% increase). NZ broad money has gone from $326bn to $405bn (24%).
Thanks Jfoe. You get it. Unlike many of the water cooler set who seem captured by lazy thinking and mediocrity.
So your first comment is nothing more than you noting: that inflation is currently out of sync with what the "generally accepted" narrative would tell us to expect with that amount of deficit spending? (With some opinion.)
If we are looking at delayed effect of up to 3 years for broad money would we not also assume it will take years for the effect of deficit spending to have have an affect on inflation as well?
Analysis of govt deficit spending and inflation show no correlation in the medium- or long-term. The casual chain that the economists construct to suggest that deficit spending will lead to inflation is deeply flawed, with flawed assumptions at various stages in the logic model.
Where and when was the data used from and how was this analysed? (Is this result meant to disprove the Weimar, Zimbabwe and various South American countries narrative? also deficit spending is not the only cause of inflation.) Your supplying a factoid rather than answers. (Those questions in the previous post can be answered yes/no)
Was your initial post just MMT stuff posted out of context or is there something coherent there?
What do Weimar, Zimbabwe, Venezuela, Argentina, Turkey (etc) all have in common? They ended up owing shed loads of cash in a currency that they could not print. That's an inflationary deathtrap typically used by the IMF to force global south countries into the servitude of the global north..
In terms of a coherent framework for understanding the US drop in inflation without an increase in unemployment or reducing consumer spending, I think I would probably apply kiwi economist Bill Phillips's framework for understanding the mechanisms at play when import price shocks hit economies - and the conditions under which they subside. Read the third and fourth paragraphs of Bill's famous paper. Those are the paragraphs that the monetarists ignored when they bastardised his work to create the Phillips Curve and use it to smash organised labour in the 1970s.
Really bad is coming towards us quickly.
Historically, our economy has ticked on with stimulus (net bank lending + govt deficit spending) at around 8% of GDP per annum - $30bn in today's money. First quarter of this year we had about $5bn of stimulus so we are well short.
I suspect that getting out of this recession will require a combo of lower OCR to get the housing ponzi and business lending started and major govt spending. The trouble is the incoming govt will find it really difficult to open the spending taps - and they will try and do it via private financing schemes, which take ages to get in place and are very expensive in the long-term.
> getting out of this recession will require
It's hard to get out of something that doesn't exist. Last recession in NZ was it 2008/9 ?
https://www.stats.govt.nz/indicators/gross-domestic-product-gdp/
I'd recommend this article: https://www.interest.co.nz/economy/124432/we-asked-twenty-economists-ho…
Tax cuts in this environment and at this time in the cycle will be slightly inflationary.
(An increase in tax - for the ones spending in inflationary ways, or businesses setting inflated prices because they can - way back when the RBNZ started raising the OCR, or even before, would have seen our economy settle much earlier, so cuts now back to previous levels or below would entirely appropriate at this time.)
Depends how long you fix for. It isn't only the current OCR that affects fixed rates, it is future predictions too.
If you fix for 2 years and the OCR is heading down, the 2 year rate will be based on market assumptions of the OCR over that 2 year period. I think fixed rates will start decreasing now based on that US data and could be a lot lower by mid next year unless something changes.
re ... "... the 2 year rate will be based on market assumptions of the OCR over that 2 year period. "
Whose assumptions? The buyers? Or the sellers?
If the sellers (banks) have convinced buyers, through repetitive infomercials and statements eagerly poured over by the press and pundits (here for example) repeat it ad nauseum, that it'll be HFL and that HFL is accepted economic authodoxy, then the buyers will accept a higher price without question ... and sellers get to cream it in.
ComCom has much work to do. (And kiwis need to wise up, study economics, and realise who employs these soothsayers.)
PwC. Corporate greed unabated even after GFC 2008 exposures and the like of Enron beforehand. Takes me back the first QC I encountered (in those days the city only had two or three) who advise that in law there is much that is legal but immoral and much that is moral but illegal.
Yes Jfoe stands by his opinion and I guess he is therefore repetitive but he's intelligent, unlike the commenter who calls himself "DGM"
by Dgm 3rd Oct 23, 2:07pm
There will be many angry and repulsive folks for a couple of years to come.. until rates drop..... HFL... HFL... HFL...
Nor me my friend. I know I am a broken record on it, but then every article on here makes the implicit assumption that higher spending inevitably causes inflation, and that he only way to tackle inflation is by increasing the cost of credit. That's the broken record that winds me up!
Oh, and I've been right place, right time on 4 housing booms across three countries so don't worry about my personal debt situation!
I don't think you're summarizing Jfoe correctly when you say: " that interest rates can't reduce inflation (even though they have)."
Like me, Jfoe believes RB set interest rates are a very crude weapon that has inflationary effects (that is indisputable) and its acceptance (especially by vested interests) is based upon extremely shaky ground.
I don't think anyone disagrees that bludgeoning the economy with higher interest rates won't drive down inflation.
But is it the best way given the massive damage it causes to many sections ot society (while enriching the rich)? Or put another way, if you're starving, is slaughtering your milk producing cow (the economy) the best way to stay alive (drive down inflation)?
In the end, many seem to hope for lower interest rates and erosion of the wealth of the poorer in society as a necessary sacrifice to preserve property wealth. It's certainly not unlikely - given how many politicians are heavily invested in property. (E.g. see the pushing of taxpayer money the RBNZ's way to try to defend the currency in ways other than rates.)
Think it through, you lot; money is debt-issued. It expects something to be done, to repay that debt. Actually, more to be done, to repay the interest also. This gets lost in the mess of speculation, rentier-ing, and the holding-of-parcels-until-the-music-stops (sometimes addressed as: the velocity of money).
But the whole depends on the flows - and therefore ultimately on the remaining stocks - of key items; I call them energy and resources; Smil defines them as: cement, steel, plastics, and ammonia https://consciousnessofsheep.co.uk/2023/11/13/these-people-arent-seriou…
The problem is that the issuance needs to grow, the stocks are depleting; the graphs cross (regardless of nonsensical surveys of sentiment, which then get used as justification...). So the cost of materials/energy is greater at the supply-point, the competition greater too; which we in the West have addressed by offshoring production, and pretended we could buy the result by increasing the numbers we associated with out existing houses. It was all a bluff; everyone else (Russia, China, BRICS, 3rd World) is now calling that bluff.
The debt can only be increased so far, before nobody wants to be associated with the overhang (US the poster-child). But energy and resources are still essential - even if there is room to discard the discretionary. So we will bid. Which will require proxy - ever more of. Which puts the problem squarely in the issuance-of-proxy court; if they charge interest in a squeezed (or negative) space, they have to be displacing someone else - which has to be the borrowers; poorest first. But ultimately, you cannot reduce real scarcity by controlling the scarcity of money-availability.
Peter Turchin's 'End Times' is a fascinating read, as to how this evolves, and what signs to watch for (increasing wealth disparity being one).
I dont see any cuts in 2024. Todays minor shifts are little blips in data captured from a world chewing through its resources for bau + wars.
We have 20 years ahead of boomers in numbers happily spending their free gifts from monetary policy.
I'm with pdk, focused on the big picture.
U.S. federal tax receipts (trailing 12mos) have declined on a yearly basis for seven consecutive months, a dynamic only seen in prior recessions. This time is probably not different.
@LukeGromen here's the visual Link
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