Here's our summary of key economic events overnight that affect New Zealand, with news the world's economy seems to be ending the year in a flat funk. Momentum has leaked away and financial markets are sensing a fairly bleak 2024.
However American mortgage applications rose by +2.8% last week from the prior week, marking the fifth consecutive weekly increase and pushing applications to their highest level in ten weeks. Helping was the continuing fall in home loan interest rates with the benchmark 30 year fixed rate now down to 7.35% plus points.
Private businesses in the US hired +103,000 workers in November, below a downwardly revised +106,000 in October and well below the expectation of +130,000. That is according to the ADP survey. The November result brought the expected rise in services hiring, but an unexpected fall in manufacturing job levels. However, expectations for Saturday's (NZT) non-farm payrolls have firmed and are now at a +180,000 gain.
US exports of goods and services came in little different in October than September (-1.0%), but were +1.3% higher than year-ago levels.
In Canada, they too delivered a hawkish hold in their overnight monetary policy decision. They held its target for the overnight rate at 5% for a third consecutive meeting, in line with market expectations, leaving borrowing costs at a 22-year high. The Canadian economy currently seems stalled.
Canadian exports were also little changed in October from September (+0.1%), and almost the same year-on-year.
In Japan, sentiment at big manufacturers there surged, improving for a second straight month as the vehicle sector continued to recover from last year's semiconductor shortage and supply chain woes.
China is really battling that flu outbreak we noted a week or so ago. Hospitals are crowded, healthcare employees very stressed. Authorities are worried, using language that is easily decoded by their population.
Moody's put Hong Kong, Macau and lots of China's state-owned firms and banks on downgrade warnings overnight as it wasted little time in following up on an identical move the previous day on the mainland government's rating. The Hong Kong government isn't happy.
EU retail sales volumes rose in October from September but not by as much as expected. In the end the rise was trivial, but at least it is a volume rise. However, from a year ago, these volumes are -1.2% lower, although that is much better than the -2.9% decrease in September.
But German factory orders were unusually weak in October. They fell -3.7% in October from September, following an upwardly revised 0.7% rise in September. Analysts had expected a gain, but their industrial sector remains fragile. The biggest drag came from orders for machinery and equipment. These October order levels were -7.3% lower than year-ago levels. For an economy as large as Germany, that is a lot.
In Norway, their parliament has backed deep-sea mining in the Arctic Ocean. This is a bit of a surprise given they have a center-left government.
The independent Aussie PMI from the Australian Industry Group was also something of a depressing read. Their Index sank deeper into contraction in November on the back of falling demand and activity. It is now back at levels last seen in the depths of the pandemic. The activity/sales, new orders and input volumes indicators all materially fell in the month. Employment increased marginally. November's was the lowest reading since June 2020. On a trend basis, all four activity indicators point to contractionary conditions.
Australia released at Q3 GDP data yesterday, showing their economy grew +2.1% in the September quarter from the same period in 2022. That is better than the expected +1.8% year-on-year expansion, and the same as their Q2 expansion. Having noted all these year-on-year changes, we should also note that the change from the June quarter came in softer than anticipated - and it is this softness that is grabbing headlines across the ditch, especially the lower household incomes. It is a sharp contraction in per capita terms.
The UST 10yr yield is down -7 bps from yesterday at 4.11% with the slide extending. The key 2-10 yield curve is now more inverted, by -49 bps. Their 1-5 curve inversion is a lot more inverted, now by -97 bps. And their 3 mth-10yr curve inversion is now -126 bps and a little more more inverted. The Australian 10 year bond yield is now at 4.23% and down another -6 bps from yesterday. The China 10 year bond rate is little-changed at 2.71%. And the NZ Government 10 year bond rate is down -8 bps at 4.94%.
In New York, Wall Street has started its Wednesday session with the S&P500 again little-changed. Overnight European markets rose +0.7%, except London which rose +0.3%. Yesterday Tokyo ended its Wednesday session up a very strong +2.0%. Hong Kong bounced back +0.8%, but Shanghai fell -0.1%. The ASX200 also had a strong day ending up +1.6% while the NZX50 ended up +0.9%.
The price of gold will start today just on US$2,030/oz and up +US$13 from yesterday.
Oil prices are -US$3.50 USc lower in a notable drop at just on US$69.50/bbl in the US. The international Brent price is now at US$74.50/bbl. These are new 5 month lows.
The Kiwi dollar starts today at 61.6 USc and up +¼c from yesterday. Against the Aussie we are up +10 bps at 93.7 AUc. Against the euro we are up +¼c to 57.1 euro cents. That all means our TWI-5 starts today just on 70.7 and up +20 bps from this time yesterday.
The bitcoin price starts today at US$43,815 and up another +2.6% from this time yesterday. Volatility over the past 24 hours has been moderate at just on +/- 2.0%.
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66 Comments
The UST 10yr yield is down -7 bps from yesterday at 4.11% with the slide extending.
Even nearer-term EurIBOR spreads have gone nuclear. Dec '23 to June '24 has made a big push, rate cut bets more aggressive again more than earlier bank crisis. Something is spooking the global market place. Must be that soft landing every central banker keeps talking about. Link
Much more fear in Europe: EurIBOR futures have gone crazy. Monster demand for hedging there. Pushed inversions way beyond worst levels from earlier bank crisis. Full video: https://youtu.be/k0yMiRrLe_w Link
Same with US SOFR futures
I always laugh when 'the markets' are quotes as being up or down a perceptible amount, in any 24hr period. They are so big, inertia-wise, that such movements cannot be driven by physical realities.
Which leaves imperfectly-informed massed gambling, as the variable.
Why do we bother? More importantly, why do we think it means anything? .
Yep - casino economics.
Why the non-strop regulatory freakout about the basis trade? The answer in two charts
What Is The Basis Trade (This Is A Systemic Risk To The Financial System)
The Fed Is Ready To Start Digging Out Of the Avalanche
Exxon Hikes Buybacks 14%, Will Buy Back $20 Billion In Stock Next Year
Every inflation episode in NZ (and subsequent rate hike) over the last 60 years has been caused by a spike in oil prices. Our slower than necessary return to normal will be primarily the result of reducing oil prices. The correlation between changes in diesel prices and CPI six months later is about 85%!!
Despite the primary cause of inflationary episodes being well known, we choose to 'control inflation' at 'the back end' by adjusting the price of money (OCR). Hiking rates definitely increases unemployment, and this can slow the increase in the price of labour (yay). However, those higher debt servicing costs add as much cost to business as slower wage growth saves.
What? Yes, the maths is simple. Businesses and landlords have about $290bn of debt. So, a 3% increase in debt servicing costs adds nearly $9bn to their annual costs. Private sector businesses pay about $120bn a year in wages, so a 7% increase in wages adds about $8.4bn to business costs. So wages would have to literally see negative growth just to offset the extra cost of debt.
This is basically what happened in the last year - imported oil and goods prices have reduced, but increased wage and debt costs have more than offset those reductions - leaving us with stickier inflation.
A far more elegant solution would be to moderate oil price shocks by flexing imported oil excise duties and ETS charges so that any sudden oil price increase is passed through into the economy more slowly (ditto any price decrease). But, we can't have Govt or their agency interfering in prices can we...? Unless it is the price of money of course - that's all good.
In every case, the hyperinflation and even regular inflations are led by the balance-of-payments deficit, followed by a declining exchange rate, followed by increasing import prices and domestic prices, and then at the very end, money creation increases, just the opposite of what Milton Friedman and the Chicago School and the right-wingers say.
When you have a false view of what causes inflation for the last 100 years, ever since the 1920s, it’s not a mistake. It’s because there’s a social interest in having a wrong view. The social interest is essentially to squeeze government and essentially privatize everything. Link
Only just over 100 years since WW1. That catastrophic event though galvanised the world’s ever increasing interest in, then dependence on oil. Hence the Middle East suddenly had borders and rulers within, friends of the West. Humanity has had its ages, iron, bronze, stone and guess you might say now we are all in the oil age, for as long as it lasts. Wonder what age comes next though.
Audaxes..thks for the link.... Interesting interview... Thou its news to me that Germany is having a balance of payments crisis ? As far as I know, they have surpluses..??
In contrast...NZ has had chronic current acct deficits for many yrs, which have not caused our currency to devalue, too much, because foreign Capital still has confidence to invest here..? ie... There is demand for $NZ
So... I understand what Hudson is alluding to...and I only agree somewhat.
I'd suggest the trigger might be a shortage of foreign exchange , together with capital flight... rather than simply the.. BOP...ex. rate collapse.. ...inflation... money creation ..stepping stones he suggests.
AND...The cause of a loss of confidence , is probably a contribution of many things, ...?? eg.. civil unrest, bad govt, corruption ....etc.
If the world lost confidence in NZ and we have even a little "Capital flight ".... we would be in deep trouble...
And...while there is confidence, our exchange rate seems to be influenced more by relative interest rates..... rather than BOPs'?
Everyone seems to have it in for Friedman ..???
just my view.
One of the more insightful comments I've read here.
I see it as energy underwriting activity, therefore underwriting money. The physics variable is the efficiency ratio - and we've know since Sadi Carnot that there are hard limits to that. So it was the amount of fossil energy stock, adjusted for max efficiency, that we could base production upon (renewable sources don't equate, by some orders of magnitude - and I say so having been off-grid longer, and more efficiently, than most).
As we descend to renewables - as is inevitable beyond using a finite resource - the forwards bets on more energy being available, will be dishonoured one way or another (inflation, jubilee, collapse). The picture gets murky, because we hold proxy-in-abeyance in many forms, none of which are related to the essential energy input (Soddy wrote the definitive treatise, back in 1926).
Interwoven, is the problem of that efficiently-used energy requires Capex (extraction proposals) which expects a 'return', vs a society which cannot operate above a certain 'price' (reflecting a certain Capex level). The fudge has been increasing debt; increasingly more people than chairs when the music stops. The issued debt had to have gone somewhere, and that somewhere had not involve real production. Hence the everything bubble.
The lessons are two: 1: We cannot create real stuff, by creating money. 2. If we create more money than there is stuff, money will (one way or another) be worth less. Relating our trading-tokens to energy, is the guaranteed way to avoid divergence (of expectation, adrift from reality). That would eliminate the need for your shock-absorber approach.
Jfoe - I agree that it is all about the oil (diesel) price but have some questions I would like some clarification on:
- Did the temporary oil price reduction we had in place earlier this year improve our inflation position? It brought prices down but we still saw 7%+ inflation.
- What about imported inflation from other countries that are not managing diesel prices?
- If oil prices continue to trend up over time due to increasing extraction costs, how can this be managed?
- Yes, the oil price dropped (as did oil- and gas-related prices like fertiliser, plastic, chemicals etc). However, these cost pressures were simply replaced by price increases in wages, debt, food, rent, local govt rates and insurance. Thus we still saw overall increase in CPI.
- We import about $100bn of goods and services and our final consumption expenditure is about $300bn - so, yes, we are always going to be affected by overseas inflation. The trick is avoiding getting hit by a sudden hike in the price of something that is systemically important (like oil). This causes a shock wave through the economy - sending other prices up, and creating an episode of sustained / significant inflation. If you want to see how to handle energy price shocks - check out what Denmark did. Their inflation rate shot up to 10% when ours was 7%, but they prevented contagion with aggressive, temporary measures. They now have 'inflation' of -0.4%!
- We need to get off fossil fuels / oil! We are one of the few countries that can do this relatively easily as we have ample renewable capacity.
Jfoe, thks to you, I've become interested in Denmark... I like their Home mortgage policies, and am interested in their fixed exchange rate system..etc.
I like the way they seem to have come to their own way of doing things ?...
They seem to be a wealthy country ( curr. acct. surpluses )..... which is in contrast to NZ
Can you point me to how they handled the energy price shock..?? I cant find much on it .. Thks.
If it was all about oil price, why did we have 15 years of very low inflation prior to now? The oil price was not flat during that period.
Obviously a big spike in Oil price will cause inflation - as would a big spike in electricity prices, food prices, etc. In the UK it was gas prices.
It was not flat - but what do you think? Here's the pattern...
Its a bit of a difficult chart to read because it is change in oil price. In that scenario a spike in change in price is not actually as meaningful as it sounds; why would a short spike from 2% oil price inflation to 6% oil price inflation cause more CPI inflation than a long stretch of 4% oil price inflation would.
The studies on this conclude strongly that it is not the absolute price level that makes a price shift contagious (i.e. more widely inflationary) - it is a sudden shift in the price. It's the same with a lot of macroeconomic variables and models - it is the rate of change that counts.
Interesting JFoe but changing the cost of energy would not stop speculative leveraged lending in housing or any other market..... the only way that can be slowed is to remove the potential profit via costs/tax/regulation/risk.
Most RE and farming business is really leverage capital gain. as yields often don't make economic sense. diesel while a cost is not the driver its the cost of money.
MMT: where you can just assert simplistic partial models and selectively ignore currency and monetary fundamentals where it's inconvenient or complicates things.
What exactly are you correlating with changes in diesel prices and CPI? and how is this proof of "root" causality? Could changes in the exchange rate or OPEC front running be the real cause? If there is a shortage of oil and everyone subsides the price, no untended price consequences could be produced, right? or extra taxes on fuel are not inflationary but interest increases are?
This is worse than Limits to Growth. At least there's a fundamental fear of "Peak Oil" at it's root and PDK has sources with the complete argument so you can tell how serious he is. Do you want to convince me this is more than telling people what they want to hear?
Did someone mention MMT?
The economic fundamentals are energy, labour and raw materials. Our economies consist of organisations and institutions that utilise energy, labour, materials, and technology / machines to create things that people need or want. The things we value.
Now, to your questions...
- What exactly are you correlating with changes in diesel prices and CPI?
Weekly import and retail diesel prices from the 1990s with CPI 6 to 9 months later - the correlation moves between 50% and 85% depending on the period selected - it's been as high as 87% in the last few years. I am not personally claiming root causality although there are dozens of papers that show how changes in the oil price flow through into other prices - plastics, fertilisers, food, transport etc. It's pretty obvious.
- Could changes in the exchange rate or OPEC front running be the real cause?
The exchange rate impact for NZ is marginal. But, yes, of course OPEC price-fixing and strategy is a massive driver of oil prices. As the marginal producer they can choose to send oil prices up or down, and have done so regularly. For example, they periodically drop the price below $70 if they get too worried about investment in shale (which is unviable at that price).
- If there is a shortage of oil and everyone subsides the price, no untended price consequences could be produced, right?
I wouldn't suggest subsidising the price - just smoothing out sudden peaks and troughs. This 'bufferstock' approach used to be common practice and still is in some areas (e.g. US oil reserve).
If this is not MMT (or similar established thought) then you could explain where these assertions come from because otherwise they are just your "simplistic partial models..." with no background or context and is nothing more than ramblings (but I know are your a believer in MMT). I don't think these rambling would gain traction if they were not what people wanted to hear.
Having a pool of money (not a physical SPR) to subsidise (reduce normal taxation or overheads) requires people paying extra (a "tax") for fuel during "normal" prices and this would be inflationary. You are wanting to fix prices everywhere during an oil supply shortage (unintended consequences) or make just NZ pay extra for fuel during normal pricing and rely on a whole lot other factors staying constant during the crisis just because...
Because... sudden increases in imported fuel prices cause longer episodes of inflation! That's the literal thing we are trying to avoid, no?
Now, about that 'pool of money', the need to raise it via taxation, or the assumption that such spending would be 'inflationary'. You're basing this on a flawed understanding of monetary operations. Let's use an example. In the last 3 months, RBNZ have bought and sold about $49bn of foreign currency. Net investment has been about $5bn. Have taxes gone up by $5bn? What pool of money was involved? No and none. RBNZ just credited brand new money to the reserve account of the FX seller's bank. If and when they resell that foreign currency, they will sell the foreign exchange and reduce the balance of the relevant reserve account (deleting that money).
I don't know what a 'believer' of MMT is.
Your wanting to avoid (a so far mild) inflationary shock, I think worse things could happen.
When the RBNZ "prints" to "buy" foreign FX, it gets an asset that matches the liability on the balance sheet (with the tax payer agreeing to cover the downside risk). If we print to buy fuel we don't get any assets (or we burn them in liquid form).
Modern Monetary Theory is (tautologically) a theory that as one you can believe (in). Would it help if I use a different synonym?
You understand my only real goal here is: trying establish if there is any more deeper thinking behind your assertions in your OP or if you are just listing vague assertions that you think people want to hear? Loosely related factoids are not productive here.
Yet there are plenty of times that spikes in oil prices do not cause inflation. Prior to now we hadn't had inflation for 15 years, but in that time oil prices were all over the place.
I still think this inflation was cause by a low supply of almost everything due to Covid, and a high demand for almost everything because of Covid.
Hey Joe, love your comments, have a question if you have time
"Every inflation episode in NZ (and subsequent rate hike) over the last 60 years has been caused by a spike in oil prices"
Is this primarily due to NZ direct consumption of oil in NZ or overall oil prices impacting global economic supply chain (including manufacturing costs)?
What I'm getting at is would decarbonising oil use within NZ have a significant impact and decouple us from inflation or would the global oil relationship still drive inflation here?
Not a great economist so probably not worded as well as it could be, sorry
Central banks coordinate across the world to choke off investment, increase business costs, and transfer disposable income from spenders to savers and bank shareholders... Oh, we seem to be in a funk.
Countries with higher private sector debt that married monetary tightness with fiscal restraint are going to really struggle to pull out of the nosedive. NZ, Canada, Sweden, all screwed. Anyone else? Australia maybe?
https://www.nzherald.co.nz/business/indra-nooyi-says-its-time-to-get-a-…
excerpts:
Indra Nooyi, one of the world’s most powerful businesswomen has a stark message for New Zealand business: Get a plan.
Invited to New Zealand by Air New Zealand to stimulate action by the country’s top CEOs and Chairs into how this declining country can unite to stimulate growth, Nooyi came armed with a research report from BCG.
The research was supplemented with focus groups of young Kiwis either working or studying in US universities.
It suggested New Zealand could be divided into three groups: A complacent and well-off older group of New Zealanders who believed New Zealand was a good place to be and did not want anything turned upside down. They were happy with their share of the pie.
Another younger group of New Zealanders who did want to grow the pie but were concerned older New Zealanders were not interested, so they were more likely to leave to build their futures elsewhere.
Then a third, not so well off group, many Māori and Pasifika, who were less concerned about the size of the pie than needing a larger slice just to get by.
As Air New Zealand CEO Greg Foran later observed, “if you don’t actually work out how to grow that pie you are not creating an environment of growth and oxygen and what happens is that you will lose your talent because they want to go somewhere where there is growth and oxygen.”
Interesting analysis. I can't remember who said it, but I like the quote that goes something like... 'Small countries that do not have a clear plan for the future, will simply become part of a bigger country's plan'. Currently NZ is a (temporary) source of milk powder and logs for China - and a holiday destination for people that believe our clean / green myth. The sooner we face up to this being a pretty crap plan for the future, the better!
Not sure if Venezuela is considered as a small country but certainly troubled economically and destitute socially. Yet Venezuela is oil rich. But apparently they too have a plan. Get more oil by invading neighbouring Guyana. Best laid plans of mice and men. There it is.
corruption, within and without is keeping the country poor. They went socialist a few elections ago and those they gave power to entrenched their positions, and moved the country closer to a dictatorship.
I'm a little surprised the US/CIA didn't do anything, especially as their air force is based on relatively modern US equipment. Do a Chile on them (although I guess the world would be quick to challenge them if they did).
'can unite to stimulate growth,'
'somewhere where there is growth and oxygen'
Therein lies the flaw.
There is no 'somewhere else' anymore. As an Airline CEO and an Indian should know.
Growth is exponential, folks. The planet is creaking at the seams; we are a species in overshoot. By what chosenly-ignorant measure do these folk prescribe an exponential increase in smoking, to a lung-cancer patient?
Oh - I forgot...
As a New Zealander of European descent it disturbs and offends me to witness the new coalitions disrespect for Maori protocol during the swearing in ceremonies of parliament. Seymour complained of indulgent theatrics which seems like a fair description of the entire Westminster based system. Incidentally why is there such focus on removing the Māori names for government agencies? I can’t see any reason to do it.
They have to fund a few AKL projects that where using the fuel tax or the projects stop half done.... the fuel tax will disappear as the congestion charges appear and we will be net net. AKLers are screwed no matter who is doing the screwing, ACC or Central Gov. Oh and rates are going up again.
Coster will be gone eventually but ministers cannot fire these appointments. Mush like Supreme court judges in the US, but you stack the deck while you are in office.... Sp ministers above hate coster and beat police dislike his soft on crime style so he is gone burger soon anyways.
Maybe he can be seen to be tough on Crime, if so a great public servant who is merely executing ministerial directives.
".....public servant who is merely executing ministerial directives." That's the crux of it.
Mitchel might not be happy with him, but if he was just doing as his Minister directed it's a bit harsh to penalise him for it.
But then Mitchel was a cop, and a decorated one at that, so there may just be a bit of less than savoury history there?
There is an old adage about that;
"Be careful of the toes you stand on today, they may belong to the ass you have to kiss tomorrow!"
Maybe because its proving difficult to hire doctors from western countries who want to move to another modern Western nation, not a poor Pacific Island with crap weather.
Everyone is going to Australia. Why is that?
https://www.telegraph.co.uk/news/2023/04/15/nhs-doctors-australia-emigr…
You really think Australia's weather is better than ours? I would rather have a chilly winter than live by the mercy of your air conditioning systems in the annual summer heatwaves. "Heatwaves kill many more people in Australia than any other natural hazard, including bushfires, cyclones and floods." - https://www.nma.gov.au/defining-moments/resources/heatwaves
Meager, who has Ngāi Tahu decent, began his 14-minute speech mixing Te Reo with English, weaving in and out of the two languages as he introduced himself and congratulated both the new speaker Gerry Brownlee and Prime Minister Christopher Luxon.
That must have been confusing for most of the National party..
to me Mr Meager presented mana, intelligence and potential calibre that has not often been displayed in parliament in recent times. Don’t care what party he represents or who may or may not have been confused but please could we have more quality like this, in depth amongst our mps, from all sides of the house.
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