Here's my summary of the key events overnight that affect New Zealand, with news some key US markets are also seeing a surge in foreign house buying.
But first, today's dairy auction was almost a non-event. Prices changed very little and volumes were modest. Overall, prices are up +0.2% in USD terms, down -0.7% in NZD terms. WMP prices are up +0.3%. Of special note however is that the price of butter rose +3.4% to US$6,004/tonne, the first time ever it has reached that level in theses GDT auctions and is +160% higher than their low point in August 2015. Dairy fats are back in favour. Cheddar cheese also rose to their highest level since May 2014.
In the US, they are seeing a "massive surge" in foreign demand for houses, pushing up prices in key cities. In all, foreign buyers and recent immigrants purchased US$153 bln of residential property in the US in the year ended in March 2017, nearly a 50% jump from a year earlier. The biggest buyers remained the Chinese, but the surge was fueled by the Canadians who piled in in a big way. Buyers from China, Canada and the UK represent half of all this activity.
Japan is the front line for fighting deflation. They have growth and now stable consumer prices finally, but that is after massive monetary policy responses fighting deflationary effects. But they, and the world, face a new threat: e-commerce, otherwise known as the Amazon effect. Consumer prices are under attack from a much more efficient way of delivering consumer goods. The Bank of Japan is likely to lower its forecast of inflation in its upcoming monetary policy report. Targeting inflation is increasingly looking like a last-century approach. And in Sydney, a former RBA board member is arguing that the world's central banks should switch to a system of using official interest rates to target nominal income growth to ensure huge household and government debt burdens are unwound safely. "[Y]ou can still have the same credibility if you do have a very explicit income target, which is really growth plus inflation," he says.
Major US bank Citigroup has announced it will be decamping from London to Frankfurt in response to Brexit. This will just be the start of these types of decisions and this announcement comes at an uncomfortable time for the British who are just now getting down to brass tacks in their discussions with Brussels.
In New York, the UST 10yr yield has continued its slide lower and now at 2.26%. These declines are mounting up; it is down -10 bps in two weeks although it is still up +10 bps in a month.
The price of oil is up today and is now at just under US$46.50 a barrel, while the Brent benchmark is now just under US$49. However, another OPEC country says it will break the output cut deal they agreed just last month.
The price of gold is up too, this time by another +US$8 at US$1,241/oz.
And the US dollar is struggling, making the Kiwi dollar look good at 73.6 USc. But we are lower on the cross rates at 92.9 AU¢, and at 63.6 euro cents. As a result the TWI-5 index will start today at 76.6.
If you want to catch up with all the changes yesterday, we have an update here.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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12 Comments
What Warwick McKibbin ( the RBA ex-Board Member mentioned above) still fails to contemplate is that low interest rates are the cause of the problems that we have today. Until he contemplates that lowering the price of everything via low financing costs is precisely why the Inflation Targeting policy has failed, and that lower interest rates have starved the World of productive investment, rather than non-productive speculative investment, I doubt anything but 'turning Japanese' awaits any of us. Yes, it would have been painful in 2008, but short in duration, and those that would have paid the price, in general, were able to afford it. Now? Not only will 'they' still pay, but The Rest of Us, who have progressively less chance of affording 'it' are going to pay as well.....Deflation and Negative GRowth ( forget about +GDP!) are an ingredient almost certainly baked into tomorrow's economic pie....
"The Reserve Bank of Australia looks to be putting households on notice it has pegged the equivalent to eight rate hikes above today's level.....The move.... implies mortgage rates would hit 7.25 per cent, "
Or maybe, just maybe, they've realised their error?
http://www.afr.com/news/economy/monetary-policy/rba-sets-35pc-as-new-no…
RBNZ tried the same nonsensical ruse nearly two years ago and failed to generate any tangible results - witness yesterday's CPI inflation outcome.
These estimates suggest the nominal neutral 90-day interest rate sits between 3.8 and 4.9
percent currently. The mean of these indicators is 4.3 percent. The Bank currently judges that the nominal neutral 90-day interest rate sits at 4.5 percent - within the range of estimates and close to the mean of these estimates. This implies that current monetary policy settings are expansionary, although these models highlight some emerging risk that the neutral interest rate is falling further. Read more
Ingrained, but unfounded ideological focus must be rooted out from our economic system before it's too late.
...central banks navigate by inflation; inflation isn’t behaving no matter what we do; we don’t really know why; but we also believe that this “contradiction” is temporary because we believe it is temporary.
It’s the same part of a speech given by Janet Yellen, Haruhiko Kuroda, and any number of other faceless empty suits sitting atop the organizational charts of major central banks. They all think low inflation is temporary, and yet they continue to say that year after year after year. At some point even the speechwriter has to point out the meaning of the word “temporary.”
It is the sequence behind it that ultimately has driven the media narrative, though backwards. Mario Draghi believes inflation will in the intermediate term (which is today, from the view of 2014, let alone 2012 when he really started) go to 2% by way of a strengthening, sustainable economic advance (which he would and does admit as being low-grade). In other words, he doesn’t see it now, he just believes in it because inflation will go back to 2% and that is how it will get there.
The media, on the other hand, focuses on what he says as a matter of faith and blows it up into a matter of analysis. This is why these cycles only repeat, because the economy isn’t doing what it is supposed to, as proved consistently by persistently low inflation despite already massive QE’s, NIRP, and a thousand other (ABS, covered bonds three times, etc.) monetary interventions over the intermediate term. Read more
The thing with foreigners buying houses in America is that it does not matter one bit because the US is just massive in terms of having physical land for development and is able to supply or even able to over-supply new houses at an astonishing speed and a ridiculously low price compared to us.
A new 4 bed house in a city the size of Auckland would be as low as US $250,000 when we have prices of nearly NZ $1,000,000 for the same thing .
Population density of the US is 33 per square km, New Zealand has 18 per square km. Should be proportionally plenty of land over here.
Agree that there is a problem with building costs over here by comparison.
https://en.wikipedia.org/wiki/List_of_countries_and_territories_by_popu…
Would you like to buy a house atop Mt Aoraki or Mt Taranaki, or Ruapehu, or somewhere around Waiouru, Desert Road
Go down to SI and measure the proportion of land that is un-inhabitable such as Southern Alps, Kaikouras, Remarkables, Fjordland, then try the West Coast
I'm struggling to find good data on this, but the US also has significant mountain ranges as well as deserts that I wouldn't want to live in. Even if you ruled out the whole South Island (I appreciate some of the NI is also uninhabitable, but I suspect it's counterbalanced by the habitable areas of the SI), the densities are pretty comparable.
I suspect this data isn't entirely appropriate, but it places the US and NZ pretty comparable in terms of % of total land used for agriculture (44.5 vs 43.2) and forest (33.3 vs 31.4), suggesting the land composition is reasonably comparable.
https://www.cia.gov/library/publications/the-world-factbook/fields/2097…
That's a subject for discussion (land and NZers ability to compete with foreign buyers).
Houses available, and NZ's ability to build more, seems not to be coping too well. If this government had been competent they should have long ago instituted the Aussie requirement that limits foreign purchases to new builds (and apply this to short term visas too).
Boatman, don't fall for the supply side nonsense. To me it is a good thing that the USA are going to find out about the effects of excess money looking for yield somewhere. It is the money various central banks have printed looking for a home now that the lustre has been lost from the commodity currencies/countries. You could say the peak extractive value has been reached in these countries, now the money is looking for a new home.
It will be interesting to see if investors take profit and flee Auckland.
In New York, the UST 10yr yield has continued its slide lower and now at 2.26%. These declines are mounting up; it is down -10 bps in two weeks although it is still up +10 bps in a month.
Hmmm...
The market-implied probability of a hike by year-end has declined in the past two weeks with Treasury yields. The odds are now about 40 percent, down from 60 percent on July 7, based on the current effective fed funds rate and the forward overnight index swap rate.
The 10-year yield has declined in six of the past seven trading days, after touching a two-month high. Futures prices are hovering above 126, which is enough to make profitable a potentially unprecedented strangle trade initiated last week. Read more
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