Here's our summary of key economic events overnight that affect New Zealand with news financial market reactions to yesterday's Fed announcements are still echoing around the world.
But first up today, and confirming the strong data we have been reporting for months, the first estimate of economic activity in the December quarter in the US has come in unusually strong, in fact the best result in nearly 40 years. GDP rose +1.7% in December from September which is an annualised rate of +6.9%. For the full 2021 it was up +5.7%. These are 'real' increases, discounting inflation. But the nominal rise takes the US economy to a US$24 tln behemoth - and supercharged by a strong exchange rate. By any measure, todays Q4 result is impressive, although it is not final - two more revisions will come over the next month or so.
This GDP data also gave us our first look at December PCE data, the inflation measure the Fed is said to prefer. They have an inflation problem with that up +6.5% and core PCE up +4.9%.
Financial markets are seeing a Fed that seems determined now to fight inflation, a job that is harder because they are late to the effort. And that may bring a bumpy road.
It could be especially bumpy for tech stocks. The latest to slip out of favour is Tesla, which is down an eye-watering -28% since the start of the year, including today's -8% dumping.
Meanwhile, initial jobless claims for last week were +268,000 and more than anticipated. There are now just on 2 mln people on these benefits, marginally higher than pre-Christmas, but basically back to pre-pandemic levels.
It isn't all good news. December durable goods orders fell -0.9% from November when a -0.5% fall was expected. This follows a stellar November, so a pullback from that isn't a major concern. But at least they are up +21% higher than the same month a year ago. New orders for capital goods are up +33% from a year ago, confirming business is investing freely now.
US pending home sales fell -3.8% in December from a year ago as a lack of inventory, and higher mortgage rates, keep a lid on their residential real estate market. It is a broad-based fade, nationwide. At least it confirms an economy that isn't 'just houses'.
In fact, the Kansas City Fed factory survey is evidence of a healthy manufacturing sector, even if it does have unusually tough cost and supply chain pressures. Activity expanded at a faster pace, and it was already running fast. Orders, including new export orders were up, but there was no sign that cost pressures were fading.
Today's US Treasury 7yr bond auction was well supported, raising US$61 bln from the US$133 bln that was bid. The median yield rose to 1.70% however which was up from 1.40% at the prior equivalent event a month ago.
Across the Pacific, Chinese New Year is starting. This year, authorities there are trying hard to prevent people from travelling because of the Covid risks. But the people are apparently more determined than ever to get back to their home villages after being locked away for two years. Could get ugly. The legal holiday is seven days starting February 1, but the migration - one of the world's largest, is now underway even if 'silent' this year.
And industrial profits from large Chinese companies remained positive in December, up +4.2% above the same month in 2020 which is actually their slowest pace in 18 months. They are talking up the 2021 gains over 2020 which of course are large given the weak base.
It is a week until the Beijing Winter Olympics. They will be subdued affair with little international sponsor support.
At the World Trade Organisation, China had something of a 'win' in its trade dispute with the US. And arbitrator there ruled China can levy US goods up to US$645 mln in penalty duties because the US had broken WTO rules. But the amount is much less than the US$2.4 bln that China had initially requested legal authority to target.
Meanwhile the EU is taking China to the WTO over Beijing's attempts to apply trade pressure on Lithuania for dealing with Taiwan in a friendly way. Beijing's trade bullying there is reminiscent of their pressure on Australia. The EU's response is also reminiscent of Australia's pushback reaction.
In Australia, the demise of their coal industry and the use of the mineral for electricity generation is relentless. The viability of thermal coal plants may fall quite quickly now as the cost of renewables falls sharply. The squeeze on fossil fuels is on.
In NSW, there were 17,316 new community cases reported yesterday, a decrease from the prior day, now with 181,527 active locally-acquired cases, and 29 daily deaths again. There are now 2,722 in hospital there off their high. In Victoria they reported 13,755 more new infections yesterday. There are now 119,153 active cases in that state - and there were 15 more deaths there. Queensland is reporting 11,600 new cases and 15 more deaths. In South Australia, new cases have slipped to 1953 yesterday with no more deaths. The ACT has 884 new cases and no deaths, and Tasmania 726 new cases. Overall in Australia, about 46,870 new cases have been reported.
The UST 10yr yield opened today at 1.78%, unchanged from this time yesterday but in between it was up as high as 1.88%. The UST 2-10 rate curve starts today sharply flatter at +62 bps. Their 1-5 curve is marginally flatter at +90 bps, while their 3m-10 year curve is marginally steeper at +176 bps. The Australian Govt ten year benchmark rate is little-changed at 1.96%. The China Govt ten year bond is +3 bps higher at 2.75%. The New Zealand Govt ten year is up +6 bps at 2.67%.
After that stellar US GDP result, Wall Street is up but with the S&P500 only gaining +0.8% in early afternoon trade. Restraint remains because the Fed is probably even more likely to raise rates now. Overnight most European markets were up +0.5% although London gained another +1.1%. Yesterday, Tokyo fell a very sharp -3.1%, Hong Kong fell -2.0% and Shanghai fell -1.8%. The ASX was also closed yesterday down -1.8%, and the NZX50 ended -1.1% lower.
The price of gold starts today at US$1795/oz and another -US$37 lower than this time yesterday. A week ago it was US$1841/oz.
And oil prices start today marginally softer than yesterday's recent high at just under US$87/bbl in the US, while the international Brent price is now just under US$89/bbl.
The Kiwi dollar will open today a full -1c lower at 65.9 USc as the greenback surges. Against the Australian dollar we are firmer at 93.6 AUc. Against the euro we are a little softer at 59.1 euro cents. That means our TWI-5 starts today at 71 and we haven't been this low since November 2020.
The bitcoin price has jerked back down today, now at US$36,513 and a sharpish fall of -4.6%. Volatility over the past 24 hours has been very high at +/- 4.7%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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103 Comments
Wonder how many households are looking at their large interest only mortgage with a calculator in the other hand and a view out the window of the jet boats & trailer & ute to pull it, all on tick. When money is cheap, borrowing is easy. Had to step in with extended family to dissuade a youngish couple, getting along under their own steam quite well, borrowing to buy expensive “unnecessaries” simply because the bank told them they could.
This is just the beginning. 2 year swaps still have way to go, and it is going to be up. up up. The repercussions of the new stance by the Fed are still to be fully reflected into current swaps, in particular on the 1-year to 3-year curves.
The rise in interest rates in NZ has just started. I would not be surprised at all to see mortgages at 7% at the peak of this upward cycle.
NZD falling again greenback and swaps going up. The cost to borrow will keep going up in NZ.
On top of it, most houses in NZ are in million+ dollar category. Average Salary is in sub 60k category /year. Inflation is high and price of necessities is going up. Paying 15% GST on food.
What will happen to our country and happy people?
Probably we should all just go on benefit and let taxpayers take care of us. Who will pay taxes if no one works? Yeah the Benefit are also taxed so I think it should be fine? Tax Benefits Tax is good cyclical economy.
How untrue. PI are subsidised in multiple ways:
1. They are exempt from tax on unearned income while earned income pays for our society. An effective subsidy by the working portion of society.
2. They are subsidised by Working for Families and the Accommodation Supplement.
3. They received the benefit of wage subsidies passed out last year, as many people were able to continue to pay full rents.
The aggrieved PI just need to open their eyes.
Yes they also get secret handouts from govt that I think you're not even aware of as you did not mention it. Late night rendezvous are arranged by real estate agents on behalf of the landlords and passed to them by way of cash in brown paper bags. I should not be telling you this, do not discuss with anyone. Head girl and landlord Helen brought this in and covid queen ardern is happy continuing with it
Grant Robertson feels that the personal tax rates don't need changing, at a time when most Kiwis will need to book at least a 6.5% payrise to catch-up on the annualised inflation that's already happening, with little regard for what might be coming in future - or see their purchasing power eroded on two fronts.
Even though the inflation at the checkout bit gets the headlines, you can't spend what the government doesn't let you keep.
Tax payers will be behind beneficiaries, this is a significant Labour voter block and will come first.
Although much is made of our inflation being broadly based in "non-tradables" we are in-fact beholden in large part to the cost of bank finance and our exchange rate as these determine the discretionary spending available on those non-tradeables. I agree we will see tax payers getting it from all angles but the government can only do so much, this is a natural cycle of destruction.
2022 is paining out to be painful year for many and worst hit will be those who got carried away and are over exposed to hyper bubble. Stock Market has already crashed ( hope it stops soon as just in few weeks have wiped trillion of dollar) and housing Market is standing at the edge of cliff.
Thanks to reserve bank governor for fuelling greed and FOMO, where many mum and dad investors will be worst hit.
Mr Orr should have known better that by kicking the tin can delay but cannot avoid and bigger the delay ( two year) bigger the crisis /pain.
taim . stock markets falling 10% is just part of the cycle , happens most years , its healthy . betcha the Dow will be higher at xmas than todays 34k . Big prob is our dollar is in the toilet and dropping , interest rates need to go up now , $4 gas will kill our economy
Further humour can be found in looking at the dumb spending. Large, dreamt-up numbers, "allocated" to problems but with no vision or direction on solutions the money is not close to spent, see mental health, health generally, housing, roading, you know the little things.
You mean changing the flag which no one wanted to do, even though it was also Labour policy at the time? Or the cost of the referendum itself, as in the problem was we actually asked New Zealanders what they thought?
I somehow think that people would not have applauded him for fiscal prudence had he just declared, the flag was being changed to a certain design (other than Laser Kiwi, which I'm pretty sure we would all have been cool with).
The prospect is king Charles - an anti-charismatic, elderly, rather stupid foreigner. Still I prefer that than a Kiwi leader. There is no politician I'd trust as president - we would end up with our own Trump. If it is a powerless ceremonial role you would end up with various has been politicians who could trade a smidgen of political power for the status of being the ceremonial leader - e.g. a president Winston. If it has to be a Kiwi then I can think of a few but they are all smart enough not to take on the job: Valerie Adams my first choice.
No, I'm happy to remain a 'slave of queen Liz'; one think I learned the hard way when i was a programmer: don't mess up a system that is working.
Absolutely, he needs to whack it hard and early. If he raises 0.5 in Feb, it will ensure that most people refinancing this year will be doing so at much higher rates, taking heat out of the economy.
I think he should do 75 BPs, for that reason. Bet he won't, though.
Firstly Orr shouldn't be having a holiday he has work to do February's decision should be under study now . It will be interesting to see what China does in light of Xi s pleading with the west recently to not raise interest rates this was a spectacle that never got much news , but to lose face by asking for that is a big deal , the west is obviously going to raise rates but by how much is the question and how will it affect china . NZ rates will be sucked along in the slipstream of what happens to rates elsewhere . It still amazes me people think nz is impervious to events overseas regarding monetary policy , Orr and Robertson are not in control of Nzs interest rate settings, they will have to follow international trends if the others go to 10% so will we .
Link to that Xi point:
https://www.afr.com/world/asia/don-t-raise-interest-rates-china-s-xi-te…
Exactly. The RBNZ clowns can only delay the inevitable. Ultimately, it is international fixed rates markets that dictate the interest rates settings in NZ.
The only thing the RBNZ did was to bury their heads under the sand and make the problem worse by pretending that the current monetary settings were not catastrophically and un-necessarily ultra-loose. Now, they will be forced to go much higher with interest rates than otherwise would have been necessary. The more timid they are, the longer they wait, the higher interest rates will have to go later on. It is already almost too late and an OCR peak at 4% is, in my opinion, a very clear possibility, with risks all on the upside.
With their incompetence and shortsightedness they are creating exactly what they are paid not to cause: financial instability, inflation and wild swings in the rates markets.
The fact that Orr has not been sacked yet is something that really baffles me.
Your view strongly differs from.mine, but I can see your reasoning.
If you are right, I think it's highly likely the NZ housing market will have the mother of all crashes, at least 25-30%.
It's a fascinating, but highly concerning, conundrum.
It's going to be very interesting to see how this all plays out.
Nah. 25% - 30% only goes back twelve months. The mother of all crashes would go lower than that.
There is still plenty of room for downward valuation.
The amount of debt that people have been taking on to gamble on the housing bubble is mind blowingly stupid.
Leverage is a two-edged sword. It's going to wipe out many of those that failed to exercise their common sense.
That'll give the govt and RBNZ something to do again. They should follow the Aussie liberals (?) plan and instead of just a handout to the wealthy (per the last 2 years) give every adult a nominal lump sum for certain uses (e.g. if they have a mortgage, for paying down some debt). This would help the genuine FHBs adversely affected by the last few years' central bank shenanigans without bailing out speculators (lump sum per person not per property).
Paying down that debt would also then reduce the overall amount of debt-based money out there.
HouseMouse . we will follow the Fed & interest rates only going up , but we may need to go further.
Our currency is in big trouble , Orr has left it to late , l fear inflation will take off , Jacinda & her team should be held to account , but her paid media wont do that....lotta pain coming down the track Mouse....prepare
Yeah, agreed. We are quite dependent on our import as we have less productive industries here. Technology used to be one of the good ones here in New Zealand until quite some famous firms being sold to oversea buyers, like weta cave, while our local investors have been busy with snapping up properties here. Education and Tourism industries are crippled. Only agriculture and construction left. Agriculture is doing alright, but construction is heavily relying on import. If other central banks moving up their rates, we will have to too, no choice.
"Breakfast briefing; US economy firing on all cylinders"
BUT Stock Market crashing on a daily basis. Most growth stocks are fraction of their ATH, few months / year before.
This growth stocks, when were riding high, it was unthinkable that they could fall as much as 90% and even bluechip stocks like Amazon, Shopify, Facebook.......no one could think that will fall as much by 30% - 50% losing all gain and are now at level seen a year before.
Those who entered few years back are still fine, though are seeing dip in profit unlike those who entered after pandemic in current boom.
What happens if Housing Bubble too take the same path.
Worst will be those who have entered during peak as in housing market even 10% -20% fall could be fatal for many, specially those who in greed have over leveraged.
In falling market, liquidity is high in stock market, compare to housing market. Also in stock market, boom and doom can be felt in days / weeks but in housing market, net effect is much slow and take months to feel the effect and by that time is too late.
No one is immune to greed. When many stocks had fallen 60% to 80%, normal thinking is that it can't go lower, example a stock that was $45 had fallen to $8.5 and many thought, it cannot get worse as company has 800 million cash reserve and is debt free but today in just a week or two is at $4.5.
So anyone who bought at $8.5 thinking that after 80% fall is safe, Is down by 50% and even this downfall has not stopped yet.
Greed and fear are both dangerous emotions when it comes to investing.
Good long term returns always reward investors with a good diversification and the appropriate investment mix in relation to their investment horizon.
Let the markets panic for a little longer (especially the newbies who have never experienced a downturn before) and then it is going to be a good market to buy into.
The USA is not firing on all cylinders thats MSM BS. What it really means is that the USA is really just on fire. I wouldn't trust a a single figure coming out of the USA, they are as bad as China but at least China appears to be going forwards while the USA is going backwards.
As important as inventory build in Dec '18 proved to be, it was tiny compared to what just happened in Dec '21. Together w/wholesale inventory we're really starting to see this whole "growth scare" at exactly the same time FOMC goes all in. Powell. SMDH. https://alhambrapartners.com/2022/01/26/fom
What we are seeing there is the unwinding of leveraged investments. Suddenly all that margin lending is looking pretty horrible as interest rates rise. Some have gone way over the top as well, with some P/E ratios looking very attractive. Then with the regulatory issues in China, a couple of Chinese tech companies I am in have P/E of less than 4 and market caps significantly less than their annual revenues!
But the stock market can remain irrational longer than I can remain solvent...
Let them eat cake.
During the middle of Jerome Powell’s press conference today, which supplemented the release of a Fed statement at about 2:00PM EST, Rachel Siegel from the Washington Post asked the following excellent question:
“I’m wondering if you can talk to us about any metrics the Fed uses to assess how inflation affects different groups of Americans, especially lower income earners, and are you worried that the Fed underestimates or can’t effectively measure the effect of inflation on some of the most vulnerable households.”
Powell stumbled his way through the beginning of an answer:
“It’s more a matter of uh…I think the problem we’re talking about here is really that people who are living on fixed incomes, who are living paycheck to paycheck. They’re spending most or all of their…of…of…what they’re earning on food, gasoline, rent, heating their…heating, things like that. Basic necessities. So, inflation, right away…right away…forces people like that to make very difficult decisions. That’s really the point.”
So far, so good, Jerome. Sounds like a massive fucking problem for a good portion of the country, right? But then, there was this:
“I’m not aware of um, you know, inflation literally falling more on different socioeconomic groups. That’s not the point. The point is some people are just really prone to suffer more.” Link
With respect to Auckland light rail. If the purpose is to connect the airport with the CBD, why not just build a short line from the airport to Puhini which already connects to the CBD?
Then you could spend the $14B on high speed rail between Auckland and Hamilton which would serve all those housing developments going in between the two cities.
Because the purpose wasn't meant to be about that at all. It was about getting buses off a crowded central corridor. Same with the Northwest.
The Airport was an afterthought that shitty governance and project management turned into the main event. It was no more a 'tram to the airport' than the Western Line is a 'train to Swanson'.
This is a good point but surely you can have a slow line in parallel that stops at every stop and a fast line that stops only at major stops - then people hop between for long journeys.
Also I’m going to assume the comment about leaving the country was directed at someone else.
The cost of light rail to the airport = $14B
The cost of high speed rail between Auckland and Hamilton is = $14B
The high speed rail between Auckland and Hamilton effectively connects the CBD with the airport. It connects Hamilton with Auckland airport. Population growth is south of Auckland will continue to be massive.
I don’t see how the business case for light rail is better given equivalent costs.
The point is you can connect everyone in a line between Auckland CBD and Hamilton to the airport and each other and remove massive numbers of cars from the road.
You have to think about the future population of these areas. Building infrastructure for the past is how we got where we are.
And as for people from Hamilton getting to the airport. I agree that is a low priority but it is a benefit worth counting. How many of these people now drive their car to Auckland airport and fly off on a plane and pay for parking for the whole trip. It’s nuts.
The benefits of the current light rail proposal is it helps a couple of suburbs get slightly better public transport. What I’m suggesting will connect two of NZ’s fastest growing cities, and link a much greater population to the airport.
The idea of the current proposal was increasing transport along a central corridor so you don't need to build out the entire southern part of the district. The actual percentage of total users who were going to ride from the city to the airport was a tiny percentage of projected users of the CC2M - I think it was like 4%.
The development in the Southern and North Western parts of the city is happening already - that's why connecting Mangere and connecting Massey/Westgate was so important.
Heavy rail proposals like you describe don't do any of that - they just entrench driving and force gridlock on areas with little other practical alternatives. And for the sake of what - the 4% of people who were going to use it purely for the airport?
The $14B option is only $14B because the government chose the most expensive option, and demanded that surface running light rail price in a whole bunch of property purchases alongside the central Auckland route (some of the most expensive real estate in the country) that it didn't actually need.
The initial Auckland Council proposal was $5b for three street level routes through the isthmus.
The 2017 election policy was $6b for both the North West and CC2M route.
Then Wellington paper-shufflers got hold of it, blew the scope out, just dropped the North West entirely and chose the most expensive option - and are now trying to tell us the real attraction is the poor, hard-done-by North Shore who got a busway over a decade ago is going to get some apparently badly needed infrastructure.
I'd suggest this is so far removed from what got them elected in terms of cost and scale that they have no democratic mandate for this, and I was a huge fan of the original proposal.
Agreed. We could have already had the Council option, the three central lines, the rolling stock and be reaping the development benefits from it now. Instead we've had a make-work scheme for Wellington civil servants and a bunch of engineering consultants who, I'm going to go out on a limb here, probably live on the North Shore.
There are two interesting movements that have occurred in my life. The financialisation and politicisation of all things. What this has meant is that the value of doing is replaced by the value of complexity and popularity.
All government spend has been politicised and that has resulted in wildly inappropriate and under-skilled young and poorly-paid people making policy choices. In the old days the politicians were elected in policy and then handed those over to accountable government departments with integrated delivery designs. The Ministry of Work was a good one as was the ECNZ. Since the devolution of this model cost has increased (way our of proportion to inflation) and productivity has nearly stopped.
In Australia, the demise of their coal industry and the use of the mineral for electricity generation is relentless. The viability of thermal coal plants may fall quite quickly now as the cost of renewables falls sharply. The squeeze on fossil fuels is on.
How is that?
Unfortunately, the link does not show any proof for those claims.
In fact, according to ycharts.com the coal price sits around USD 169/t, which is 250% higher than the pre-pandemic prices of Dec 2019.
US coal is also massively up (apparently, the price has been volatile in recent months).
Moscow is negotiating an increase in coal supplies to China, Russian Deputy Energy Minister Pyotr Bobylev said during a meeting of the State Duma Committee on Energy. He did not specify the volume of the possible increase in supplies but recalled that in 2021, Russia signed a memorandum on boosting coal supplies to India for the next 10 years from 6 mln to 40 mln tonnes per year. The Ministry of Energy did not specify to Vedomosti the volume of supplies to China that had been discussed.
Based on the data from the Federal Customs Service, China is already the largest buyer of Russian coal. It accounted for almost 18% of export deliveries in 2020, or 37.7 mln tonnes. According to the latest data from the Russian Ministry of Energy, in the first half of 2021, Russian coal exports to China rose 49% to 24.15 mln tonnes.
China is primarily interested in importing high-quality coking coal since it faces a shortage, namely due to trade disputes with Australia, Head of Equity Research at Alfa Bank Boris Krasnozhenov told Vedomosti. Link
There are only four choices, not that we as individuals get to choose.
1. High house prices, high inflation.
2. High house prices, low inflation.
3. Low house prices, high inflation.
4. Low house prices, low inflation.
Due to poor land use and housing policy over the last thirty years plus by all incumbent political parties, NZ has progressively moved up from number 4 to number 1.
Yet in jurisdictions with good land use and housing policies, they have historically always had low house prices and low inflation.
Which 'choice' is next?
Interesting times. Speaking to a few work colleagues who have $6-700K mortages coming off fixed in second half of year, they are shitting themselves. Will need to work harder so they get a bonus.
Me, sitting back relaxed, no debt, no mortgage, big house and in the top tax bracket and increasing their bonus targets for 2022, he he he.
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