Here's our summary of key economic events overnight that affect New Zealand with news that Beijing seems to be on the back foot in a range of policy positions, and investors are not impressed.
But first, US jobless claims for last week fell marginally, but were at about the expected level. The number of people claiming these benefits also fell to 1.475 mln, that is to 1.1% of their workforce, and another all-time low.
Another American regional factory survey came in reporting a good expansion, but in this Philly Fed one there are signs the impetus could be fading. This survey’s indicators for current general activity, shipments, and new orders declined from last month’s readings even if they did remain positive. The employment index and both price indexes edged higher and remain elevated. But the future indicators for general activity and new orders fell sharply, even if overall, firms continued to expect growth over the next six months.
Meanwhile, Fed Chair Jay Powell made it clear when speaking as part of an IMF panel that the central bank remains committed to taming inflation, currently at 40-year highs, while virtually sealing in a +50 bps interest rate hike in May. Several other Fed policymakers, including regional presidents Mary Daly of San Francisco, Charles Evans of Chicago and Raphael Bostic of Atlanta, had delivered the same message earlier in the week. Now the outlier is hawk St Louis Fed President James Bullard who has been saying that hikes of +75 bps could be necessary to tame runaway inflation. No-one is out there saying a +25 bps is the right call.
China stocks were sharply lower yesterday as policy decisions to bolster a fading economy disappointed investors. The malaise runs deeper; capital outflows, triggered by market expectations of more aggressive rate rises in the US and Europe this year have alarmed officials in Beijing. And the Chinese yuan is depreciating in a worrying way as well. Investors are not optimistic that the side China is on in the coming new bipolar world will be the right one, and seem to be bailing. China's current economic policy making looks decidedly archaic.
The cost of shipping containers out of China fell again last week in a building trend. Bulk cargo rates remained static.
Inflation in the EU rose from 6.2% in February to 7.8% in March. This was marginally less than what was expected. It was less in the eurozone countries. (The US is at 8.5%, New Zealand at 6.9%. Australia is expected to come in at about 5%.)
In something of a surprise, EU consumer confidence improved in April. Didn't see that coming. Admittedly it is still at a very low level, but the grinding war in the east isn't weighing as much as you might have thought. But the pall hangs especially heavy over Turkey where war, inflation, and dodgy policy-making have driven them into a major funk.
And there were hawkish comments from the ECB that markets noticed as well.
In Australia, an annual study by KPMG and the University of Sydney Business School is reporting that Chinese firms invested NZ$900 mln in Australia during the 2021 calendar year, down very sharply from NZ$2.8 bln in 2020, as the pandemic accelerated a trend that started well before based on a falling out between the two.
Ratings agency Moody's has held its credit rating for New Zealand at Aaa, the maximum. Moody's said it "expects New Zealand's wealthy and highly competitive economy to continue its recovery, growing by 3.0% in 2022, from 5.0% in 2021. The economy demonstrated strong resilience in the face of the substantial shock of the Covid pandemic."
The UST 10yr yield starts today back up +8 bps bps at 2.92% and recovering up all of yesterday's fall. The UST 2-10 rate curve is slightly flatter at +25 bps. Their 1-5 curve is steeper at +97 bps. Their 30 day-10yr curve is also steeper at +256 bps. A fully positive rate curve has been restored across all maturities. The Australian ten year bond is now at 3.06% and down -3 bps. The China Govt ten year bond is up +1 bp at 2.88%. And the New Zealand Govt ten year up +4 bps at 3.52%.
On Wall Street, the S&P500 started its Thursday session up strongly. But that has now turned negative and it is down -0.9%. Much of the initial enthusiasm over upbeat earnings faded while prospects of an aggressive tightening seems to have spooked investors. Overnight, European markets were all up more than +1% on average except London who didn't manage any gain. Yesterday Tokyo ended its Thursday session up another +1.2%. But Hong Kong was down -1.3%, and Shanghai ended down a very sharp -2.3%. The ASX200 ended up +0.3% but the NZX50 closed down a minor -0.1%.
The price of gold starts today down -US$9 since this time yesterday at US$1947/oz.
And oil prices are marginally firmer at just under US$103/bbl in the US while the international Brent price is now just over US$107/bbl.
The Kiwi dollar will open today down more than -½c at 67.4 USc. Against the Australian dollar we are very marginally firmer at 91.4 AUc. Against the euro we are more than -½c weaker at 62.1 euro cents. That all means our TWI-5 starts today at 73.5 and -60 bps lower.
The bitcoin price is up just +0.6% from this time yesterday at US$41,670. Volatility over the past 24 hours has been moderate at just under +/- 2.5%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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42 Comments
So, NZ's inflation, at 6.9% is lower than either the EU's or the USA's.
Speaking of measuring inflation ...
Over the last two years, we had exorbitant increases in house prices, but house prices as such aren't part of the CPI measure, and therefore not the RBNZ's problem ... but many people couldn't afford to buy houses (or over-extended themselves to do so).
This year we have slowing house sales rates and falling house prices, while we have food, construction costs & fuel inflation rocketing away, such that now people are struggling to put food on the table, fuel in the car and developers are struggling to complete projects and stay in the black. And this is the RBNZ's problem, so they are raising interest rates in order to dampen CPI inflation.
Does this not suggest that the RBNZ's inflation mandate being limited to the CPI is targeting the wrong measure? Or a badly specified measure?
Should their mandate be maintaining price stability, including asset price stability, rather than CPI inflation plus employment?
What would be the downsides of broadening the RBNZ's inflation mandate to include all prices, not just CPI?
It's all a balancing act between trying to maintain a "free" market, and manage an economy to satisfy the various social requirements the state wants to deal with.
I'm not sure whether that's ever totally possible, people are now expecting continuity when pretty clearly every harvest isn't the same.
The RBNZ’s mandate already requires them to maintain the stability of the banking sector. Which would include ensuring all of the banks don’t become overexposed to a single asset class that is drastically over inflated on unsustainably low rates and over leveraged borrowers.
unfortunately they have chosen to ignore this part of their mandate
Using interest rates to control inflation is an extremely blunt tool. Low interest rates are intended to encourage firms to invest in capital infrastructure and boost GDP growth + inflation in future years, and decrease households propensity to save because the returns on savings accounts are paltry so they purchase more or find alternate investments. One of the large problems with this economic theory in my view is that it hasn't accounted for globalisation; rather than NZ building more factories and purchasing more real capital infrastructure, we have outsourced huge swathes of our economy to low cost developing nations to provide us with the outputs of those investments (consumer goods) instead.
Our economy has pivoted over the last few decades to be a services economy rather than a productive one. If we look at the primary sectors of our economy, largely farming and to a lesser extent forestry for example, low interest rates have stimulated investment in these sectors but it has largely gone into land because that's what these industries use as capital. On top of that, we've incentivised rampant speculation in housing and profligate consumer debt for the next car/boat/bach. Meanwhile our clothes are being stitched together in a sweat shop in some country whose labour laws and working conditions would make our Minister for Workplace Safety weep, which turns up in the CPI as low inflation. We've basically misread the situation and incentivised the wrong things in our economy, then used the wrong system to measure the impacts of our policies.
Exactly....we used imported deflationary pressures from globalisation (cheap goods) that reduced measured inflation.
As a result, mortgage rates went down with the OCR even though these shouldn't be correlated!....i.e. we have imported cheap foreign goods which has resulted in the RBNZ saying to everyone 'oh look here everything is cheap so have some cheap money to speculate with against the housing market'.
Instead it has been used as an excuse to create excessive amounts of debt housing debt because 'you can afford it now that we can import cheap foreign stuff'. That is very foolish thinking in my view (and we might be about to find out why in the coming years if global supply chains never recover to where they were before).
In a more sensible world...if we have cheap foreign goods, meaning we have more discretionary spending ability..then mortgage rates shouldn't have dropped in response..they should have stayed consistent prevent a debt/price bubble from forming and keep debt in a relative place to domestic incomes.
Now that we're importing inflation, not deflation, people are arguing that mortgage rates shouldn't rise....yet we've just done the complete opposite for the last 30 years to get us into the position that we find ourselves....either we shouldn't have done what we've done for the last 30 years, or we need to acknowledge that there is a significant policy/theory error of how monetary policy works/should work to provide financial stability. You can't have your cake and eat it too...central banks need to be consistent with their policy settings otherwise we will end up with very distorted markets, and house prices that are completely out of whack with fundamentals and never aligned with domestic incomes (which is what they should be).
Exactly....we used imported deflationary pressures from globalisation (cheap goods) that reduced measured inflation.
New Zealand shoppers order groceries from Australia as inflation soars
Nice comment Shorething
Our hypocrasy is glairing and obvious, but most choose to ignore it.
Much of the goods we import are made under conditions that dont meet our local standards, some bordering on remote slavery.
How clean we look not pumping oil or mining coal in our own backyard but happily have these shipped halfway around the world and in the example of coal a much inferior and damaging product.
Blindly and happily riding on our high horses...
Yes, turning up our noses at locally sourced natural gas derived methanol to replace it in the market with coal based methanol from China is a disgrace. Butcher the high paying local jobs and replace with offshore strip mining. Economic and environmental vandalism from green do gooders.
yes -- far better to mine our own cleaner coal -- insist as part of the permits that the land is restored to a better purpose -- recreational conserved parklands / reserves for example -- tax the profits heavily to improve the roading and rail infrastructure to the sites - new tech will mean in 20 years coal will not be required for energy or power -- look at how Germany thinks it can move from russian oil within 12 months -- now its hand is forced -- its the same with many forms of energy -- the technology for change is there -- but the will and control of the huge Oil conglumerates is not!
Correct....and you can see how house prices departed from the long term trend line (over 100 years of data) around 1990 through to now as we imported deflation via globalisation allowing the RBNZ to continue to drop mortgage rates and allowing more and more debt to be extended to house prices.
Not an intelligent move....its like these economists can't see the wood for the trees. And we now have decades of failed monetary policy that could in the coming years become very visible to everyone involved.
House prices are way over valued if average wage earners cannot afford to buy, in Auckland average house is 12 x average wage couple earners that is crazy and market will just keep sinking till this is corrected, so average prices in Auckland should be maximum 450k for average house who will buy now when interest rate going up from emergency levels and inflation at 6.9 % this will take maybe two years to hit bottom after which hopefully a law will be introduced to stop speculators dealing in house market.
Whatever average wage couple earners are being paid x 4 so if wages come to 120k x 4 480k max. The fact is they also need the 20% deposit could take around 5 years to save. People just need to stop speculating on houses give all people chance of have own house it’s so hard for young couples to see a future in this country.
A focus on managing monetary inflation (i.e. growth in the monetary base) rather than CPI inflation seems more sensible to me.
If growth in money broadly matched growth in GDP then I suspect we would have avoided some of the issues that seem to be around the corner....
Talking to a well established builder. Shortage of material, escalating prices and delayed delivery of same is dire. Use to do a couple of specs in between contracted builds, but now no show. In fact if property/house prices do drop off significantly more, then a new house could cost more to build than its market worth.
This is because many paid a premium price on top of premium in greed as at that time house prices were going up monthly if not weekly and at times in double digit.
All this was done without economy consideration with assumption that ponzi will continue and this confidence came from rbnz and governments action.
Even if shortage, depends on what price.
As long as passing the parcel was on as it happens in any ponzi everything was fine as everyone was blinded by greed and why not as it was truly and actively supported by people running the country, though the same people may deny but facts are for all to see.
Not just NZ but world over downfall has started..
https://www.macrobusiness.com.au/2022/04/panic-selling-engulfs-australi…
Biggest rise in house prices was in NZ - 45% plus compare to Australia and USA where it was 22% plus. So will the fall be as steep in NZ compare to other countries. Looking at how fast the NZ market turned and has already fallen by appox 10% plus rapidly, it seems just like rise, fall will be in extreme.
To be seen will it stabilize at this level or still has a long way to go.
considering NZ house prices rose to far and fast, a correction is overdue by all measures. how big is the question, also as has happened in the past it normally flat lined for a time after the correction, BUT things have changed ie banks reliance on the mortgage book for a larger proportion of profits. so will the correction be short and sharp decline in prices or a long flat period is the new question.
Yes and correcting house prices that go up too fast is a very hard thing to do because of the leverage involved, especially if animal spirits have been highly active in the market on the way up.
A small loss in confidence and lending of credit can soon become widespread fear and the lending system starts collapsing upon itself. Not saying this is what is going to happen, but it is a risk that should be acknowledged.
i watched the housing market turn in the US during the GFC and observing the narrative change is fascinating....it goes quite quickly from 'buy, you can't lose' to 'don't touch, it...you are going to lose your fingers'. We appear to be at the cross roads between the two frames of mind at present...interesting times.
A fully positive rate curve has been restored across all maturities.
The 5yr & 7yr are inverted versus the 10 yr UST and the 3yr about to be.
The FOOD.AX BetaShares Global Agriculture Companies ETF Hedged appears to be taking off on the ASX for anyone looking for options to hedge for inflation.
https://finance.yahoo.com/quote/FOOD.AX/
(NOT INVESTMENT ADVICE...)
I have two agri / commodity investments (etf/reit) both accellerating away..
Both provide good yeilds too.
Smart People are ditching high growth tech/debt reliant investments in favour of things that actually provide value.
Question : given btc seems stagnant, is inflation actually eating away at its value also?
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