Here's our summary of key events overnight that affect New Zealand, with news investors are watching bond markets.
And the bond markets are wondering what the narrowing of the yield curves signal. Typically, a yield curve flattening is a prelude to an inversion which has been a reliable signal that a growth phase is about to end and a period of retrenchment and recession is imminent. The last time there was a rate inversion (that is, long term rates lower than short term rates) was in 2005 and that lasted to 2007 before the 'prediction' became true in 2008/9. But there was a noticeable lag.
Today, that yield curve is shrinking but is not yet inverted. The Fed's push to raise benchmark rates to 'normal' is gathering steam and markets are accepting there will be at least two more rises in 2018, possibly three, and now some are talking of four. That is putting strong upward pressure on the short end. The long end is also rising, but not as fast, so the difference is narrowing.
The economic growth phase in the world economy has now extended to approach ten years and it is unusual growth can be maintained longer without a sharp and often painful correction. The fact that the US authorities are squandering their recession-fighting firepower is of special concern, so investors worry that the next downturn will have extra bite.
In China other factors are at play including the effects of the trade tussle with the US. But their yield curve is falling fast. The authorities there have capricious powers to shift market signals, but this is one they will find hard to manoeuvre over the long term.
The World Bank and the IMF are having their annual meetings at present and they are both singing warning songs; songs that seem out of tune with the real global economy. Their own forecasts show growth next year will expand.
But they know the tide will turn at some point and that time is closer than markets think, they argue.
A sudden rise in commodity prices recently is unlikely to be sustained and can itself signal a sharp reversal.
Rising debt levels, both household and Government, are also behind their concerns. Without monetary and fiscal tools available, the official responses to the next downturn will be weak.
New Zealand is in a particularly good position however. We do have plenty of fiscal headroom. And household debt is overstated by including some substantial business debt (mainly for residential landlording businesses) so the real load is lower here (136%) than comparable other countries (Australia = 200%). And we have some monetary policy headroom. But given our exposure to trade, that headroom won't actually last very long if the US, China, and Europe sneeze.
We need grownups operating the world's largest economies and sadly that is lacking. Other than us, no-one is repairing the roof while the sun is shining.
At least in Australia they are tackling the corrosive issues in their financial services industry. That patch will have important implications here.
The UST 10yr yield is still rising and now at 2.92% (+5 bps). The US 2-10 rate curve is holding today. The Chinese 10yr is still sinking fast and now at 3.53% (-8 bps) while the New Zealand equivalent is at 2.87% (up +3 bps). The sinking yield in China is now catching up with them; their 2-10 curve has shrunk markedly today.
Gold is at US$1,345/oz in New York, and down -US$6.
Oil prices are basically unchanged overnight and now still just over US$68/bbl and the Brent benchmark just over US$73.50/bbl.
The Kiwi dollar has retreated further and this morning is at 72.7 USc. That is down 100 bps in a week. On the cross rates we are at 94 AUc and 58.9 euro cents. That puts the TWI-5 at 73.9 its lowest in three weeks.
Bitcoin is now at US$8,267 which is a +1.8% rise from this time yesterday.
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16 Comments
I would argue that the Auckland Council is not repairing its roof while the sun is shining.
Well thats a gloomy start to the day David
The COSL (coalition of sore losers) will not be happy
Interesting comments on future of global and New Zealand economies.
90 at 9 usually just reports on events overnight. In depth analysis of current events and implications for global and New Zealand economies worth a article on its on which I would look forward to and find really valuable.
here is a historical chart about the yield curve... historically once it turns -ve , the slow down can happen a yr later. ( of course, the -ve yield curve is not, in itself, the cause of a slowdown ).
Personally, I'd be surprised if the curve turns -ve..
The linked chart includes the fed funds rate, which adds a little perspective.
https://www.stocksbnb.com/reports/all-remains-well-despite-the-recent-f…
https://fred.stlouisfed.org/series/T10Y2Y/
I'd give it another 300 days, but you're right the slow down happens later. September 2019 would be my pick for the start of a slow down.
Roelof, thanks so much for the link. I didn't realise the pattern 1) rate hikes 2) yield curve inversion 3) recession was so consistent in the past, hence predictable. IMHO it's one of the best graphs I have ever seen to predict a recession.
Given its past consistency, we can predict the yield curve to turn negative around August 2018 with the recession to follow in July-Sept 2019 (in the USA). Will be very interesting to see if/when it eventuates
I regard an inverted yield curve as kinda like .... "dark clouds" forming on the horizon.
Another "dark cloud" might be increasing oil prices.
http://www.infomine.com/investment/metal-prices/crude-oil/5-year/
Another "dark cloud" might be where we are in the short term debt cycle ( business cycle )
https://www.linkedin.com/pulse/its-all-classic-main-questions-timing-wh…
Peter Warburton holds the view that long terms rates may rise... so I'm not so sure the yield curve will invert.
( long term rates rising , in itself , might be enuf to cause a slowdown )
Hence, in our central case that long-term yields in the developed countries are going to rise in the next 12 months, yield curves should steepen in the future and levitate financial stocks, especially in Europe. Even though nominal GDP growth in Germany has been robust over the past few years (3.5% to 4%), long-term yields have been artificially lowered due to the ECB asset purchases program (figure 2, right frame). With the ECB stepping out of the bond market, long-term yields in Germany and other core countries are more vulnerable to an upside than a downside move.
https://www.economicperspectives.co.uk/european-banks--a-strong-buy-.ht…
The beauty of "dark clouds" is that you can kinda see things unfolding... and then mkts changing trend can kinda confirm things.. eg. real estate mkt, share mkt...etc.
I've learnt the hard way that predicting, and having strong expectations, is dangerous for my financial health....
...If the models are accepted and it becomes widely known that July-Sept is 'the date, then one would expect preperarations will begin to vacate the markets prior to crunch time.
Surely this must mean that the 'date' rapidly becomes earleir than the models predict?
New Zealand is in a particularly good position however. We do have plenty of fiscal headroom. And household debt is overstated by including some substantial business debt (mainly for residential landlording businesses) so the real load is lower here (136%) than comparable other countries (Australia = 200%).
Genuine question - does this mean debt held by property investors is distorting NZ's household debt picture and they will be the primary folk exposed if there's a significant correction as discussed in this column?
Excluding household debt on the basis it is applied for a “business purpose” is ridiculous. What matters is the nature of the debtor, not the purpose for which the loan proceeds are applied. Both the debt and in the income are relevant to a households balance sheet. The comparison of the reduced figure vs the Aussie figure is also ridiculous, as the Aussie figure no doubt does not benefit from this same moment of make believe. So the real comparison is household debt of about 175% vs 200%. We are better, but only in the sense our debt figure is slightly less awful than Australia’s.
I'd also add that using GDP as the "income" metric is , in reality, a very fuzzy rough guide. It can lead to a false sense of security..
An analogy might be... That I include my visa spending as part of my "income", when applying for a loan, because my visa spending is a part of my "personal GDP".
Business debt is business debt and needs to be assessed in relation to business assets and business income. Renting out anything (long term) is a business.
Household debt used for consumption (including for shelter) is something quite different and only relies on household income levels.
Mixing the two distorts how we look at debt level loads, especially household debt. And only in NZ do we mix the two up when it relates to the business of residential rental accommodation business. We need to keep them separate or else people run off making exagerated claims that just aren't true and are inaccurate comparisons with levels in other countries.
Best to discuss issues based on the proper data.
Mixing the two distorts how we look at debt level loads, especially household debt. And only in NZ do we mix the two up when it relates to the business of residential rental accommodation business. We need to keep them separate or else people run off making exagerated claims that just aren't true and are inaccurate comparisons with levels in other countries.
In that case, are you saying that private and h'hold debt to GDP in Australia is even greater than 200% if you account for lending for investment properties? If that really is the case, perhaps the problem for NZ's financial stability is sitting on the doorstep.
Yes the arm wrestle between the Fed and the bond market is interesting indeed. One of them has it wrong. The Fed can afford to be wrong but for bond investors being wrong will be catastrophic.
"We need grownups operating the world's largest economies and sadly that is lacking. Other than us, no-one is repairing the roof while the sun is shining."
Quote of the day, DC
So you agree with David Chaston that the world is failing in its policy making, except for NZ. That's a vote of confidence.
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