Here's our summary of key economic events overnight that affect New Zealand, with news that's all about the Fed who not only raised rates today, they also see more big rises before the end of the year.
As expected, the US central bank has raised its policy rate by +75 bps to 3.25%. Interestingly, that is now above the RBNZ policy rate (of 3%) for the first time since March 2020, and outside the pandemic period and the period immediately before it, the first time in more than 20 years. It is also their highest since early 2008.
The US Fed has also significantly raised its sights on where its policy rate is headed in its battle against inflation. By the end of 2022 they expect this rate to rise to 4%. Markets have priced in more with a year-end rate of 4.25%. A year out they now see a 4.6% Fed Funds rate, up sharply from 3.8%. And their view of how that comes down from there is now much more restrained.
This is a slightly more hawkish view than they had at previous reviews.
Markets initially responded by bidding up the value of the US dollar. Our currency fell -40 bps on the news but is now back up. The UST 10 year benchmark bond rate rose to a new high since 2010 on the news but then sunk to below its pre-announcement level. The S&P500 which was up +0.8% just before the news turned down by -0.6% and is now back up. Oil prices fell.
In other data released overnight, US mortgage applications actually rose last week from the week before, a rare rise in a declining trend and is down about -30% from the same week a year ago. A large part is due to fast rising interest rates, with the benchmark 30-yr rate at 6.25%, and up +25 bps in just one week.
American existing home sales slipped in August, although not be as much as they did in July. But it does extend the streak of declines to seven straight months. Rising mortgage rates got the blame here, and of course it won't get any easier after today's Fed moves.
The Asian Development Bank has downgraded its forecast for China's 2022 growth to +3.3% from +5.0% in April. The bank also cut its projection for next year to 4.5% from 4.8%. At the same time, it said, the emerging Asian region is forecast to grow at a +4.9% rate, instead of its earlier April +5.3% forecast. It has been rare for China's expansion to be significantly less than its much smaller neighbours. In fact the last time that happened was 30 years ago as Deng Xiaoping was working to recover from the disastrous Mao Tse-tung years. It was a foundation that served them well - until Xi Jinping, it seems.
China is cutting the regulated price of petrol again, its seventh reduction so far in 2022.
In Australia, their central bank says it will not pay a dividend to their government “for a number of years” as it nurses balance sheet losses relating to its bond purchase program that could top AU$58 bln.
The UST 10yr yield starts today at 3.51% and despite some sharp initial reactions higher has now fallen to a lower level than this time yesterday. The UST 2-10 rate curve is more inverted at -50 bps. Their 1-5 curve is unchanged at -31 bps. But their 30 day-10yr curve has steepened further to +106 bps. The Australian ten year bond is little-changed at 3.71%. The China Govt ten year bond is also unchanged at 2.68%. And the New Zealand Govt ten year will start today at 4.05%, up +6 bps from this time yesterday.
In Wall Street's Wednesday trade the S&P500 was down -0.6% immediately after the Fed's announcement but looks like it will close higher by +1%. Overnight European markets all closed up about +0.7%. Yesterday Tokyo ended down -1.4%, Hong Kong closed down -1.8% and Shanghai closed down -0.2%. The ASX200 ended its Wednesday session down -1.6% and the NZX50 was down -0.6%.
The price of gold will open today at US$1684/oz. This is up +US$18 from this time yesterday, moved only after the Fed news.
And oil prices start today down -US$1 from yesterday at just under US$83/bbl in the US while the international Brent price is now just on US$89/bbl.
The Kiwi dollar will open today at just on 59.1 USc and +20 bps higher than this time yesterday, following the US Fed signals. Against the Australian dollar we are slightly firmer at 88.3 AUc. Against the euro we are actually up almost +½c to 59.5 euro cents. That all means our TWI-5 starts today at 68.8, and up +20 bps.
The bitcoin price is now at US$19,422 and firmer than this time yesterday. Volatility over the past 24 hours has been moderate at just on +/- 2.2%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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91 Comments
DXY currently sitting at 111.05...USA can just go buy the world up at this rate as currencies gets slaughtered.
No big waves, on Fed rate hike. Investors staying on the sidelines, and many might have locked in on interest bearing assets.
Kiwi on a ride down to 0.55 USD by November, possibly sooner as this rate.
Has anyone asked the Finance Minister about whether he's concerned about the Dollar's impact on imported inflation?
The markets are clearly signaling that there is zero faith in our ability to hike our OCR to meet inflation because of all the debt that's been baked into our system over the last few years. We appear to be trying to meekly lift the OCR in fits and starts and just hope everything outside our borders suddenly gets better.
Correct the RBNZ have been living on hope that the problem would just go away. We now pretty much have to hike a full 1% to try and stay ahead of the game. FED announced possible rises throughout 2023 which would be a killer even at minimum rises.
We are so screwed.
Yes we must absolutely hike by 100bps next month, and I am now fully convinced that the OCR peak will be at, or slightly above, the 5% mark. Until very recently I was thinking about an OCR peak of 4.75%, but I now reckon that this is too low as a forecast. And if there is a risk, it is on the upwards side for sure.
In 2008 it was over 8%. If, and it's a big if, they actually think they can control inflation, I would expect rates at or above this level.
What was the exchange rate vs the usd at that time. It is all relevant and remembering that most of our goods are imported
Maybe the high rates were why the USD was higher?
I was in the US during/after the GFC and was sending US dollars back to NZ. Exchange rate was 0.5 so was doubling what I was saving in USD.
Yes but remember 8% was way too high, and our reserve bank has a history of doing that. I really don’t see what the rush is. Sure they can’t do nothing, but they have already raised a lot, it’s not a race to see who can have the biggest crash.
Yes, 8% wouldn't be good, but in terms of reigning in inflation. It should not be discounted as a possibility.
You sound more like a doom gloom merchant these days Carlos than people who were previously labelled DGMs when they warned about how reckless we being in years gone past as we created massive asset/debt bubbles.
What a strange world we live in.
... the question is , where to from here ?
I think that inflation will remain high for longer than anticipated .... keeping the OCR up , which will impact upon mortgage holders ... energy supply in particular , seems to gave been mismanaged by many countries ...
... a strange world indeed , the winds of change are rattling the shutters on our Hobbit Holes in the Lockdown Kingdom ...
2023 is when we are going to see the lag effects of interest rate hiking realised.
I think our economy is in big trouble.
Don’t believe me? Go to a mortgage calculator and insert a 700k mortgage at 9%, over 30 years. Then think about what that level of unaffordability will mean for the demand, and therefore construction of, townhouses and apartments going forward…
Once the current large bunch of half completed developments are finished by April 2023, there’s going to be a massive fall away in construction activity. That’s going to have a big impact on the NZ economy.
Resource consents application numbers are already down 30-40% in Auckland and Wellington. That’s a key leading indicator.
Pay rises at 7% sure help mortgage repayment capability though HouseMouse.
Only if all your other living costs are fixed.
Not at all. If your other costs go up 7% and your pay rise is 7% then the amount left over to pay your mortgage also goes up 7%.
Although due to tax brackets a 7% pay rise does not translate to a 7% take home pay rise.
But that isn't the case - globally we are experience negative real wage growth.
Also, if inflation is 8% and 40% of your mortgage costs are fixed for 5 years, then a 5% pay rise will beat the inflationary impact of CPI.
We have (around the world) negative real wage growth that Jimbo...that means everyone is getting poorer. And standards of living will have to drop.
If that means it gets easier to pay your mortgage (I'm not convinced it does), but your life is becoming worse, I'm not sure I'd describe that as a win.
At this point the billions we export to Australian businesses will continue growing as a political pain point.
Sure, but do the math. I am talking about FHBs, and to a lesser extent investors, who are the key market for the huge number of townhouses that are being built in Auckland.
Lets assume a couple with a household income of 150k at the start of the year. A 7% increase in income takes them to 161k.
Assuming no student loans, they will have a net household income after tax of circa $2150.
It’s not enough to service that near $1300 pw test, is it?
It requires a 200k household income. Yes a certain proportion of FHB households will attain that, but probably less than 10% of FHB households.
compare and contrast to 2-3 years ago. The mortgage is say 600k. Interest rates at 2.5%, stress tested at 6%. That’s $830 per week!!!!! Doable for the 150k household.
This is all about the math, and the math ain’t favourable….
And it will be even worse than this, because I haven’t accounted for inflation in the wider economy, which will be eating in to the 7% gain.
Discuss
I personally dislike the idea of being labeled strongly as a DGM or perma bull etc. It's all Just analysis and cause and effect relative to personal positions.
Its also hard to blame individuals of not focusing on potential downside risk, when there are entire industries and MSM publications almost solely dedicated to pushing just the upside narrative.
Yeah its just very hypocritical that people who were bullish and the world is fine a few years ago (or even last year) and were laughing at people and calling them DGMS who thought we were behaving recklessly, are now screaming that the world is going to end.
It’s best to be somewhere in the middle but very few people manage that. Being overly gloomy or overly optimistic can’t be good in the long run.
We are sliding against the Yen. Japanese monetary policy is that inflation isn't something they should be concerned about so they aren't lifting their central bank rate. Meanwhile, we are going backwards against it at a rapid rate of knots.
The money markets have a clear crisis of confidence in our institutions' ability to preserve financial stability and rein in inflation. At what point does someone, anyone, start asking questions as to why?
People need to wake up to how far NZD could fall. The early 1990s are calling.
https://www.poundsterlinglive.com/bank-of-england-spot/historical-effec…
Well put.
GV27
38 cents.....ouch
that was early 2000s right?
Japan have basically opted out of the monetary policy game. Currency traders know what Japanese bonds are worth because the JCB controls the price rigidly - by buying them whenever they drop below a floor. The traders also have confidence that the JCB will do what they say they will do. This stability and surety means that the value of the Yen reflects the strength of the Japanese economy - what it imports, exports, its trade balance etc - i.e. the things that the value of a currency should reflect in a floating exchange rate model! Also worth noting that the inherent stability created by Japan's yield curve control means that inflation tends towards zero (it's natural rate).
This is a very interesting insight.
KeithW
Japan have basically opted out of the monetary policy game. Currency traders know what Japanese bonds are worth because the JCB controls the price rigidly - by buying them whenever they drop below a floor.
perhaps we just need to import less. Higher prices on imports will curb consumption just as higher interest rates curb house prices.
Yeah, import less and produce locally (and export) more.
People still have to travel to work and eat. 'Curbing of consumption is another way of saying 'lower standards of living' but with a frilly bow.
Let’s call it belt tightening. :)
There seems to have been plenty of unnecessary frilly consumption over the last decade. But yes, given some of that has paid wages here too, the flow-on effects will be interesting.
Our standard of living is based on how much we get to consume?
What exactly is this lower standard we're afraid of?
How exactly has our standard of living improved over the last 30 years? It's like standard means there's some benchmark we're expected to meet, keeping up with the Jones's. Has meeting this standard improved our quality of living?
Our standard of living is driven entirely by how much is left over after meeting the basics. Food, shelter, water, and you can throw travel to and from the job you need to pay for stuff in there too. I'm prepared to wager that keeping up with the Joneses or the Evans' or the Thomas' is probably pretty far down the list given how far incomes have to stretch to cover the above.
Fed Governor Jerome Powell in last meeting had said that if he was a FHB, will not buy now but wait for reset and today when questioned what he meant by that, his answer and I Quote "Correction" a difficult correction is expected.
Everyone knows what correction is - it is 20% fall and above.
This admission coming from Fed Governor is BIG.
Liked the questions that governor Powell was asked by media.
Check the link below for Powell statement and interaction with media...link is via meet Kevin :
You know this Meet Kevin guy has just launched a business called House Hack - where he's trying to raise funds to buy into the RE market when it crashes... Additional to this he sells courses on buying real estate & gets revenue off YouTube through his click bait. I'd say based off of this, his views could be abit skewed...
His head is also too large for his body...(just an observation) ...better link here for full Fed analysis
https://www.youtube.com/watch?v=1fwRZuO9I5I
I agree and can ignore Kevin but listen straight from Fed Governor - his statement and response to media.
Need no one to analyse as is clear and loud.
(Not a fan of Kevin but it just popped up and was live streaming fed meet so went with it)
Meet Kevin has done very well, he sold off his risk assets earlier this year knowing interest rates and inflation were in the rise. He can swing between bullish bearish frequently but ultimately makes mostly good decisions. His followers got I bit sour on him when he went flipped bearish in crypto after months trying to pump it. He's got nothing on the maverick of wall street
Looked like abit of a dork here...https://youtu.be/XhJMBGOV35w
Less than twelve months ago these clowns were still spouting that InFLaTIoN is TraNsIToRY while blowing dangerous asset bubbles.
If no one is ever going to hold you accountable for it then you can just say whatever you want.
The inflation is transitory the problem is that transitory period could be the rest of the decade.
Global inflation is transitory in the sense that it will transition more working class people into poverty and transit more wealth out of their hands into the pockets of the rich.
At least the poor will always have the rich to eat.
Watch for the rise of more gated subdivisions as we decide to live with the problem rather than deal with it.
What a future. We can be either be taxed to death by Ardern and Co or their ilk or taxed for protection by 501s etc. Ram raids should be seen practice sessions. It’s ironic that police started out as private protection in countries like Scotland
Everything is transitory if you zoom out far enough
Annnnnd S&P500 back down -1.5% again.
These whipsaw gyrations in the markets every time Powell opens his mouth never cease to amaze me.
The market is asset prices, and asset prices are valued by the cash rate?
"A year out they now see a 4.6% Fed Funds rate, up sharply from 3.8%".
An OCR peak of 5% by mid next year is now virtually certain, with mortgage rates north of 7%.
It is very sad that the prophet was cancelled. He only ever spoke the truth.
True. He saw it coming well before we all did.
where's doubting Thomas The Phalse when you need him? Actually we don't really need him
But no more than 5%, Wall Street has made that clear and Jerome will not want to upset them as he has all his wealth tied up with them.
I must say, I'm surprised the markets haven't gone up, although that was the initial reaction. 0.75% wasn't enough. We all know that. Powell, especially, knows that. Regardless, whatever was said, and maybe it was his talk of "Normalising the Yield Curve" that did it, but more will be done. Maybe that's finally sinking in?
OCR to stop rising at 4.75%? Good luck with that.
More articles about kiwi's not paying their taxes but spending it on the next model Ranger.
https://www.stuff.co.nz/business/money/300694678/fringe-benefit-tax-may…
If people can't use the current easy Ute tax dodge that might seriously affect sales of Utes.
I saw a ford wildtrak with marketing company signage the other day. LOL
For a couple of years now, small companies have been able to nominate specific vehicles (I think two?) to sit outside the FBT regime. But it changes what you can claim in terms of running costs. So people still popping off about the ute thing are kind of missing the bigger picture there.
I'm also not sure how this sort of data captured the other common way of dealing with FBT for small companies, which was to return an equivalent amount as an FBT contribution as company income from within the shareholder current accounts.
I don't know the exact terminology (my accountant handles this bit) but you can have a vehicle that is owned by the business but available for personal use, and you basically apportion a use percentage for business vs personal use. E.g. I use my car 50/50 business and personal use, so I can pay all the running costs through the business but there's an adjustment made on a 50% basis at the EOFY.
I think the naughtier behaviour is coming from people claiming the vehicle is 100% business use and then using it to tow the boat or head up the skifield.
So many Utes owned by business that only ever glog up the city or tow boats/jetskis in the weekend..but hey its a tax break.
See above; also note from IRD:
Double cab utes
A common error we see is the FBT treatment of double cab utes. Utes may be considered work related as they are dual purpose vehicles, however this does not mean they are automatically exempt from FBT.
I think the naughtier behaviour is coming from people claiming the vehicle is 100% business use and then using it to tow the boat or head up the skifield.
The main issue all along was the belief that being a double-cab ute triggered alone triggered a specific exemption, when there four total criteria to the 'work vehicle' exemption. It became basically a tedious meme and usually was the result of 'My mate's accountant' or other such third-hand information. Terry wrote some good stuff on this, basically even tax experts like Andrea Black were caught out a bit by it.
Sounds about right. I've never had a ute and have no desire for one, but that does explain why you see so many of them.
I do recall my accountant saying that with the "apportionment" approach to business vehicle ownership (outside of the FBT system) the primary issue is as I described - that people buy flash cars through the business and claim the vehicle is only ever used for business purposes. For example, buying a brand new Range Rover and claiming it's only ever used to drive to meetings.
Interesting, thanks. Funnily enough, my mate's husband is an accountant with a sign-written company ute...
As a contractor/ltd Co, I maintain a logbook and record miles driven to the office vs what is used for personal use.
I always found the actual rules about FBT were quite clear.
Those who tell tales about 'signage' and 'double cab' just illustrate the human capacity to make up crap and believe it when it saves them money.
The rules may have been quite clear but even media coverage has highlighted it's also been a matter of enforcement and compliance. Where a practice of not applying the rules to a certain type of vehicle has occurred, sales may have followed:
However, recognising that some company vehicles, like a van, have little feasible personal use, IRD allows employees to drive these home and use them for emergency work-related calls, with a couple of conditions. First, the vehicle must not be primarily designed or intended to carry passengers. Second, company branding must be prominently and permanently affixed. Third, if the vehicle is used privately in ways other than driving home or for emergency calls, then FBT must be paid for that day.
How utes are exempted
IRD has decided that most double cab utes satisfy the requirement that the vehicle was not primarily designed or intended to carry passengers. Therefore, companies are incentivised to purchase utes as employee vehicles, even if another type of vehicle would suit the work better.
Moreover, although the requirement that FBT be paid when the employee uses the vehicle privately - to tow their boat out to the lake over the weekend, for example - this is rarely enforced, tax experts say.
“The global wealth report by investment bank Credit Suisse shows New Zealand experienced the biggest spike in average wealth per adult, ballooning by US$114,000 (NZ$193,248) in 2020 to bring the total average wealth per adult to US$472,153 in 2021 – a 32% year-on-year increase.”
Heck. We certainly live in a lucky country I can hear cheering in the streets outside my house. Hang on, it is the poor with pitchforks looking for a share of my new found wealth.
Yeah that the problem with that calculation its not an "Average" per person, some people got a big fat zero and worse still they are now going to get pinged for other peoples huge gains.
it will be fascinating with house prices falling - to see what this looks like next year.
This year will also have more adults being brought from overseas and more Kiwis turning adults - the majority of both will never be able to afford homes in NZ.
I suspect that won't affect the stats because speculators and migration ticket-clippers will grow their wealth at the expense of this lot and balance out the shortfall.
Exactly. I wonder what the average % of household wealth is attributed to the current value of their home/property portfolio.
As expected, the US central bank has raised its policy rate by +75 bps to 3.25%. Interestingly, that is now above the RBNZ policy rate (of 3%) for the first time since March 2020, and outside the pandemic period and the period immediately before it, the first time in more than 20 years. It is also their highest since early 2008.
by Audaxes | 14th Sep 22, 9:36am
NZ$/US$ = 0.5990.
New Zealand Dollar/U.S. Dollar (^NZDUSD) forward rates have turned positive out to 1 year, beyond one week. Thus USD interest rates expected to be higher than NZD equivalent over this period.
The next RBNZ review is the 5th October, mark it in your diary. Currently its 3% and it will be going to 4%.
You still think house prices won’t fall
much?
I just don’t see any way the rbnz can keep pace with the Fed. We’ll definitely be going up in October, but I’ll be very surprised if it’s 1% this time. The housing market is already being crushed at current ocr (+ flp). I guess inflation is the underlying figure, but geez, it is a tight spot we are in now.
No big falls down here in Tauranga mate, homes.co.nz have got this. May fall to the new RV but still a way to go here. My mother just bought a house so she is back in the game, note that's back in the game and not on the game.
I'm looking to buy in Tauranga also, but this recent quote got me good as it seems like the most artificially over priced place relative to infrastructure in nz right now.
"Ah yes TGA, the shining exception to the rule!
The Derek Zoolander of the NZ housing market.
So hot right now!
lol"
@Carlos: one week ago you were telling me that RBNZ would raise 50 not 75 basis points at the next meeting; now you think it's going to raise 100!
I still say 75.
100 or we are screwed. This bet is not costing me a cent but the supermarket is taking all my cash instead I just invested all my savings in fresh tomatoes.
While I have been expecting interest rate increases to hit the housing market and cause a fall of somewhere between 25%-35%, it's looking more and more likely each day that view is way too conservative. Our market could easily end up down 40%-50% by 2024.
Central banks now have to kill economies to reign in the inflation THEY created with ultra-easy monetary policy settings, which they all held in place for far too long. This is an epic whipsaw on their part which will go down in history for its utter incompetence.
Well done Te Putea Matua!!!!
In Australia, their central bank says it will not pay a dividend to their government “for a number of years” as it nurses balance sheet losses relating to its bond purchase program that could top AU$58 bln.
by Audaxes | 28th Aug 22, 12:35pm
As a sidenote, based on average Treasury yields at the various points that the Fed has expanded its balance sheet, we estimate that the Federal Reserve’s $9 trillion balance sheet is now underwater. If the Fed was an actual bank, and if banks marked their assets to market value, the Fed would be insolvent. Of course, the Fed doesn’t mark to market, nor have banks done so since the early-2009 market low, when the Financial Accounting Standards Board relaxed FAS Rule 157 (which is actually what ended the global financial crisis – by making bank insolvency opaque). In effect, the Fed has created liabilities for which there is now no corresponding asset, and now finds itself wandering into fiscal policy, which is the sole domain of Congress. Needless to say, nobody cares.
Even without capital losses (which can be recovered by holding the bonds to maturity), the Fed will also go underwater if the interest it pays on reserve balances exceeds the interest it earns on the bonds it purchased. In this case, the Fed can be expected to book any loss as a “deferred asset.” As Ben Bernanke explained before Congress years ago, when the Fed books a loss as an asset, “it is an asset in the sense that embodies a future economic benefit that will be realized as a reduction of future cash outflows.”
What Bernanke meant with that hand-waving gibberish is this: Fed normally returns the interest received on its asset holdings back to the Treasury, for the benefit of the public. If the Fed’s bond purchases lose money, that interest will instead be used to cover losses. See, “it is an asset in the sense that it embodies a future economic benefit [to the Fed] that will be realized as a reduction of future cash outflows [to the public].” Yay. Link
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