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Dairy prices fall; US retail activity rises; pressure on US labour market eases; EU PPI rises extreme; RBA turns dovish; AU building consents jump; UST 10yr 3.63%; gold and oil up; NZ$1 = 57.5 USc; TWI-5 = 67.2

5th Oct 22, 7:23am by David Chaston

Here's our summary of key economic events overnight that affect New Zealand, with news the heat is going out of some of the global pressure points - and equity markets like that.

But first there was a dairy auction overnight, and not an especially good one. Overall prices were down -3.5% in USD terms and down -1.2% in NZD terms. Leading the fall was WMP with a -4.0% fall. We are lucky we have a depreciating currency because that has limited the retreat. There was also a large retreat in the butter price (-7.0%), but every component fell. This was a surprise in terms of the signals from the derivatives market, but the intervening Pulse events have signaled that WMP might be soft, and it was. This events decline ended the prior two price rises. Overall prices are back to where they were in August.

American retail sales last week rose to be +12.3% higher than the same week a year ago. This data is on a same-store basis and is the strongest result since the end of August. Some of this increase will be inflation of course, but not all of it.

Meanwhile, pressure on the US job market seems to be easing. The number of job openings there dropped to 10.1 million in August, the lowest since June 2021. That is down from a downwardly revised 11.2 million in July. The all-time record level of 11.9 million was in March 2022.

As expected, new orders for US manufactured goods were flat in August from the prior month following a -1.0% fall in July on that basis. Excluding aircraft orders, there was a small rise, but it was orders for consumables that were the strongest. Year-on-year these overall orders are up +12.8%.

The American logistics LMI rose in September, but that isn't necessarily a positive signal. It was fueled by high levels of inventory and the associated levels of cost and utilisation holding them. On the other hand, transportation metrics continue their slowed pace.

In Europe, new September data out overnight shows that pressure on producer prices there isn't letting up, rising an extreme +5% in the month to be +43% higher than a year ago. These are higher level than they recorded in August.

Late yesterday, the Aussie central bank turned dovish, raising their policy rate by only +25 bps when markets expected a full +50 bps rise. Only +25 bps is priced in at present for their November review. But markets now expect them to keep raising their rate well into 2023. Their new current policy rate is 2.60%. Markets now expect that to top out at 3.50% in the middle of next year. That is now a much longer hiking cycle that previously expected.

Aussie building consents raced higher in August on the back of a strong recovery in consents for rental apartment buildings. It was a much more aggressive rise than anyone expected.

Meanwhile, housing finance fell in August. Mortgage approvals are now almost -20% below their peak at the start of the year. This latest data on turnover and prices, available up to September, points to more weakening to come.

Later this morning, we will report on the Barfoot's September sales results. These come after CoreLogic pointed out the fall in prices nationwide is gathering steam. And this afternoon, the RBNZ will announce its decision on the OCR level. It is widely expected to rise +50 bps to 3.50%.

The UST 10yr yield starts today at 3.63% and down -2 bps from this time yesterday. The UST 2-10 rate curve is slightly more inverted at -48 bps. But their 1-5 curve is also slightly more inverted at -14 bps. And their 30 day-10yr curve is less positive at +76 bps. The Australian ten year bond is -9 bps flatter at 3.71%. The China Govt ten year bond is little-changed at 2.76% and may stay like that while they are on holiday. The New Zealand Govt ten year will start today at 4.17%, down -13 bps.

On Wall Street, the S&P500 is up strongly again in a risk-on mood. It is up +2.4% in late Tuesday trade there. Overnight, European markets were all very much higher led by Paris's +4.2% and trailed by London's +2.6%. Yesterday Tokyo ended its Tuesday session up +3.0%. Hong Kong and Shanghai were closed for public holidays. The ASX200 ended up a strong +3.8% and the NZX50 ended up +1.2%.

The price of gold will open today at US$1722/oz. This is up another +US$30 from this time yesterday to a three week high.

And oil prices start today up +US$3 from yesterday at just under US$86/bbl in the US while the international Brent price has risen to be just under US$91.50/bbl.

The Kiwi dollar will open today at 57.5 USc and nearly +½c higher than where we that this time yesterday. Against the Australian dollar we are up +¾c at 88.4 AUc. Against the euro we are down -¾c at 57.5 euro cents. That all means our TWI-5 starts today at 67.2, and little-changed since this time yesterday morning.

The bitcoin price is now at US$19,998 and up +2.7% from this time yesterday. Volatility over the past 24 hours has been moderate at just under +/- 2.2%.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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73 Comments

by Carinaz | 5th Oct 22, 7:29am 1664908184

Anyoneone thinking house market correction is over, is fine as long as not putting his money to get destroyed for now.

https://i.stuff.co.nz/life-style/homed/real-estate/130066721/housing-ma…

Why aren't home prices falling (FASTER)?....came across this video from USA.

https://youtu.be/aiH3RtOm0MM

by Nifty1 | 5th Oct 22, 7:54am 1664909658

House prices have dropped pretty quickly in NZ I'd say? Vendors are likely still unaware how far they've fallen hence they sit on the market waiting for last year's prices.

by Blackdog | 5th Oct 22, 8:01am 1664910080

happily living in their house, that's what houses are for. You only realise a loss or gain when selling.

by Solid_Granite | 5th Oct 22, 8:20am 1664911215

How on earth is the property ladder supposed to function if we're all happy where we are?

by Foxglove. | 5th Oct 22, 8:42am 1664912558

“supposed to function.” Not a great fan but even so, Michael Cullen summed it up rather nicely when he said something like - it’s bad enough when the property ladder keeps getting higher & higher, but it’s even worse when the rungs for that, are taken from the bottom of the ladder.

by KH | 5th Oct 22, 1:07pm 1664928421

The term "Property Ladder" always jarred for me. Seems to be a real estate marketing hype term. Keep busy changing houses, keep paying commisions

by murray86 | 5th Oct 22, 9:40am 1664916049

The connotation was fair. When i was young (Isn't that a song somewhere?) there was virtually no recognisable capital gain, but buying a house was considered compulsory saving. People understood that money in the bank, or under the mattress, tended to get spent, but if you bought a house, that money went into paying the mortgage which increased your share of the asset value. The rules then meant that the banks tended to be more accommodating about paying down the mortgage earlier. So after five years in a house, your effective capital to buy a bigger and/or better house was larger. There were also more hovels. Neglected houses that were ideal to buy cheap and rebuild, and i knew a few with the skills, enthusiasm and energy to be able to do that quite well.

by murray86 | 5th Oct 22, 10:04am 1664917440

And in that description lies teh argument why some tax policies should never be implemented. The choice to buy a house or rent is a personal one. And penalising people who bought by taxing the house value, when they inevitably sacrificed lifestyle to get that house because they are seen to have an advantage over people who chose lifestyle over owning a house, is nothing more than rank jealousy and unfair.

by Foxglove. | 5th Oct 22, 10:35am 1664919309

Alongside that. What seems to be being overlooked is the ordinary family household that bought their home & paid the mortgage. Some would have upscaled a few times, some doing so for reason of work transfers, some might be still in the original home. I would wager that there is a very large proportion of NZ households in that category, who as well have never ever owned any other property than their own home, and for the life of me I cannot accept that having the fundamental ability & right to a roof over your head, should be a fair target for taxation especially when local body rates are already being taken and largely calculated pro rata on value and central government mops up 15% GST on that.

by Solid_Granite | 5th Oct 22, 10:45am 1664919918

Say again to young people how they're making a personal decision to stay renting?

by murray86 | 5th Oct 22, 11:32am 1664922754

Hey Rocky I've argued that people are trapped today and that is wrong. But that is the politicians and Government who have done that by failing to regulate the market to ensure it is fair to all.

But I'm 65, so I was talking about the market in the 1980's when i bought my first home. It's very much different now.

by agnostium | 5th Oct 22, 2:01pm 1664931682

We voted for politicians who stood on a platform of not regulating the market. I don't think it's 100% fair to blame them for doing exactly what they said they would do. Deregulate, downsize the state, get out of the way of people making profit over everything else.

I mean over half of the commentators on this site who understand the issue and how it's come about will continue to vote for parties that stand for those things.

by murray86 | 5th Oct 22, 2:23pm 1664933021

I think it is more about the limited choice of politicians and/or policy options we get presented. But I don't think even the politicians understood the ramifications of their policies. Theory tends to look at people through rose tinted glasses, but at the end of the day we tend to be greedy, self centred and selfish.

by kiwimm | 5th Oct 22, 10:48am 1664920110

So you save your tax-paid money then you:

put it in a bank - it gets taxed
put it in a business - it gets taxed
put it in shares - it gets taxed
put it in Kiwisaver - it gets taxed
put it in your house - no tax

by murray86 | 5th Oct 22, 11:35am 1664922900

Take another look at your comment; in every instance bar one, only income derived from that money gets taxed.

For example;

put it in a bank - the interest gets taxed
put it in a business - the business income gets taxed
put it in shares - dividend income and capital gain on sale gets taxed
put it in Kiwisaver - the increase when realised gets taxed
put it in your house - no income is achieved - pay tax on it - Rates, profit on sale has always supposed to have been taxed.

Slightly different view eh?

by HGWR | 5th Oct 22, 11:24am 1664922279

Absolutely, it's infuriating how people don't understand this. Homeowners are just more frugal than renters. That's why every fancy restaurant, hotel resort and Tesla dealer is jam packed with renters throwing around their undertaxed earnings. The only way to stop them is higher income tax, or rent increases - preferably both.

by Solid_Granite | 5th Oct 22, 10:41am 1664919673

Yeah good point. In your day there were virtually no recognisable capital gains. Because back then the housing market was low risk low reward. So the property ladder made a lot more sense back then. These days it's clearly high risk high reward, given the insane capital gains we experience. And capital losses. You don't put all your wealth into a high risk market.

by agnostium | 5th Oct 22, 2:03pm 1664931827

The market has been protected from Capital losses for the last decade

by nguturoa | 5th Oct 22, 7:56am 1664909764

Question for all the experts on here.

Do we know what's happening in the NZ housing market? Do we kiwis have such huge wallets that we can afford $1 million average houses?

The price of land is through the roof everywhere in the country. Why are we paying more than half a million just for a piece of land. Are we the next SFO with silicon valley at our door step?

Are we really a very rich country and every back yard has a tree which grows money in Spring? Can i get a seed to grow one.

by mfd | 5th Oct 22, 8:02am 1664910144

More people could afford $1 million houses when they could borrow at 2.5-3%. Fewer people can now, hence prices fall to meet the available credit.

When existing house prices rise as crazily as they did over Covid without being matched by construction costs, this manifests in higher land prices. Simple arbitrage - if land prices remained low there would be a massive profit motive to buy and build. Therefore, the price of land gets bid up by people seeking that profit.

As an extreme simplification, solve the equation 'existing house prices = land price + build cost'.

Existing house prices are falling, build cost still rising. Land price can be expected to fall hard.

by willamonte | 5th Oct 22, 8:32am 1664911956

Construction costs are up around 50%. Make of it what you will but there is no way around that. In Canterbury you can buy a house 5 to 10 years old 20 or 30% below the cost of a new build. I don't remember seeing that in the NI.

by mfd | 5th Oct 22, 8:39am 1664912341

What's your source for the 50% increase, and over what time frame? The CCCI was up 10% from the start of 2020 to March 2022, I haven't seen a more recent report yet. In fact, the index value was 146.1 so we weren't even up 50% from when the series was indexed in mid-2013.

https://www.corelogic.co.nz/news-research/reports/cordell-construction-…

by HouseMouse | 5th Oct 22, 8:56am 1664913365

That looks underdone. Anecdotally (yes I know) residential construction costs up at least 25-30% over past 2 years.

by mfd | 5th Oct 22, 9:01am 1664913696

Yes, it's lower than I would have guessed from what the media has been saying. Unfortunately they don't report the individual components (at least, not to me). I'm not involved in the industry myself, so the best I can do is look for a decent data series.

There is a well known effect where people tend to overestimate inflation as the prices that change are more salient and skew perceptions, I expect the same effect happens here. Everybody hears about the huge increases in steel products or whatever but we don't hear about the products and services that haven't changed significantly.

by Uninterested | 5th Oct 22, 9:28am 1664915326

Conversely when price rises are announced they are normally on a % basis. So after a few such % increases, it has compounded into being something higher than just adding them up.

by mfd | 5th Oct 22, 9:54am 1664916874

This is fully accounted for in the index.

edit: I think I see what you mean, sorry. This may be an effect but I think overestimating is far more common. You see it all the time in comments here and elsewhere when people complain about how the inflation figures seem too low.

You are certainly right that many people are incapable of doing basic maths, and maybe your example has more of an impact over longer periods of time as increases stack up?

by Advisor | 5th Oct 22, 9:32am 1664915526

This is a more realistic report on construction costs in NZ. Corelogic produces this report based on data aggregated from across the market that feeds into its 'Sum Sure' calculator.

This calculator happens to be the gold standard in NZ for homeowners calculating the replacement costs for home insurance cover.

by HouseMouse | 5th Oct 22, 10:21am 1664918516

Well I guess it was up to early this year so there could be a further 5-10% on top?

Also it’s based on a large, detached group build house. Inflation will be running much higher on medium and high density builds which are more reliant on steel and concrete, and have far greater build complexity.

by mfd | 5th Oct 22, 10:39am 1664919576

Quarterly increase was running at 2.4% in March, so quite likely to be another +5% on top by now.

You're probably right the increase is different for different building types, not sure where to get hold of good data on that. I'd be surprised if it made enormous changes but perhaps the ~15% increase over Covid for their 'standard' home is more like 20% for higher density builds. 50% seems unlikely.

by Nzdano | 5th Oct 22, 11:38am 1664923131

Stats NZ reported 18% in the year to June 2022 and 7% to June 2021, so over 25% since Covid.

https://www.stats.govt.nz/news/annual-inflation-at-7-3-percent-32-year-…

Wonder why it's so different to CCCI?

by mfd | 5th Oct 22, 11:54am 1664924096

Good question. CCCI claims to be "a combination of labour, material, plant hire and subcontract services required to construct buildings". Perhaps the CPI construction segment doesn't include labour as that's accounted for elsewhere? I'm sure there's been pressure on wages in construction, but if the average wage had 'only' gone up 10-15% that could account for a lot of the difference.

As HM mentioned above, the CCCI I quoted is specific to a 200sqm 'standard' house which could be different to the 'average' the CPI would measure. I think they produce other indices but this is the free one that I can access. This could make up much of the rest of the difference.

Just guessing here - I don't really know. Maybe the CCCI covers other services like Council fees which have increased slower than materials?

by Nzdano | 5th Oct 22, 12:38pm 1664926713

It could also be builders profits?

The difference between producer costs, and what the consumer actually pays?

by mfd | 5th Oct 22, 1:05pm 1664928321

Could well be - anecdotally it's been a profitable time with high demand. I guess that's the froth that will disappear over the next year or two.

by willamonte | 5th Oct 22, 12:22pm 1664925748

I'm the source, I regularly look at the cost of building locally. It jumped 10 percent in under a month recently. An 1800/sq 24 months ago is now at least 2700. It was cheaper here than up north when I moved here 2 years ago, surprisingly so.

by mfd | 5th Oct 22, 1:07pm 1664928430

Interesting. From the data, it looks like that's largely a local phenomenon - the country as a whole has been more restrained.

by Harvey W | 5th Oct 22, 12:17pm 1664925458

Land cost is high partly because of rapidly increasing govt rules and regulations around subdivisions, and the resulting costs and delays, even in the last 2-3 years. Who would have thought from a labour government? Everything they touch makes it more expensive to develop and build.

by agnostium | 5th Oct 22, 2:08pm 1664932122

Not sure about your analysis here. The government has just forced council's to get rid of a whole bunch of regulations relating to housing intensification, by removing things like minimum parking requirement (so the market rather than council can decide how much parking to provide), requiring council's to allow up to 6 story housing near urban centres and rapid transport links and allowing up to 3 stories by right in a whole bunch of other zones.

It seems to me that the government is actively forcing council's to remove a whole bunch of NIMBY regulations that increase the cost of subdivision.

by Passerby | 5th Oct 22, 8:41am 1664912482

My friend sent me this. I have only a few words but can’t use them here. Asking almost a cool mil for 275sqm section. No home.

https://www.trademe.co.nz/property/residential/sections-for-sale/auction-3732373701.htm

by tyre_kicker | 5th Oct 22, 8:55am 1664913331

Yeah but look at those harbor views... of a motorway bridge

by HouseMouse | 5th Oct 22, 8:57am 1664913444

Could chop that tree down and BINGO add an extra one million to the value!

by The Person | 5th Oct 22, 4:09pm 1664939366

yeah and depending which way the wind is blowing, the motorway noise is still quite loud after travelling over the water.

by HW2 | 5th Oct 22, 9:08am 1664914133

Pt chev when it was it was working class and poor. And nearby the Oakley hospital asylum. Now its been "gentrified"

by Uninterested | 5th Oct 22, 9:31am 1664915497

Went there once on a school trip.

Oooooh.

Eye opener.

by HW2 | 5th Oct 22, 9:18am 1664914732

..... double posted

by DDH | 5th Oct 22, 9:55am 1664916942

Pt Chev is pretty resilient through all this. It's a place that people from anywhere might want to move to in Auckland.

Good access to motorways, close to the beach, lots of different stock, good schools and a reasonable community feel.

I doubt they'll get that price though. Drop 100k and it's possible.

by HouseMouse | 5th Oct 22, 10:23am 1664918613

I always thought it somewhat overrated. Yes close to motorways but kind of out on a limb. Bit shabby too.

by Fossil Lover | 5th Oct 22, 9:44am 1664916289

Three reasons. Debt, debt and debt. Government deficit spending, a healthy trade deficit and near zero interest rates without the matching productivity have led to massive asset and stock market inflation. As Putin has explained the western world is living above its means.

by Rex Pat | 5th Oct 22, 7:36am 1664908589

Silver is a bigger story that Gold. Shorts are being squeezed. Also NZD/GBP is now below 0.5000. The exchange rate is lower than before the UK mini budget.

by Baywatch | 5th Oct 22, 7:55am 1664909718

BTC is an even bigger story than Silver ..happy campers

by chebbo | 5th Oct 22, 8:03am 1664910218

Back over USD$20k for the first time in a while, bringing the YoY change to a meagre -60%.

Happy campers indeed. Dollar cost averaging and linear regression analysis, people! 🚀

by Baywatch | 5th Oct 22, 8:21am 1664911284

Bitcoin has an average annual return of 1,576% and a total return of 18,912% from 2010 to 2021, while SPDR Gold Shares had an average annual return of just 5.14% and a total return of 61.67% over the same period.

by Sam B | 5th Oct 22, 8:35am 1664912116

That would be great investment advice if I could buy in 2010 and sell in 2021. Neither of those are possible.

by Baywatch | 5th Oct 22, 8:44am 1664912671

Well hopefully you did not buy a house late last year..

by kiwimm | 5th Oct 22, 9:26am 1664915192

Just pick some dates that suit your argument e.g.

From 1988 - 2000, the Enron share price went from $1 to $90

by Kiwi Tim | 5th Oct 22, 10:04am 1664917466

*had

Tulips also had a mean rate of return too, wanna buy some?

by Baywatch | 5th Oct 22, 10:20am 1664918421

We still banging that drum after 13 years...???

by lonewolfnz | 5th Oct 22, 10:48am 1664920094

Crypto was the top performing asset class in Q3 (although bitcoin actually lagged most other cryptos)

I cashed out earlier this year starting at $47k or so on 1 April and got in post crash. Have been very happily DCAing (although bitcoin is a smaller percentage of my original portfolio)

by GV 27 | 5th Oct 22, 8:49am 1664912981

Dalio gone.

by HouseMouse | 5th Oct 22, 9:00am 1664913645

He apparently no longer thinks ‘cash is trash’.

by kiwimm | 5th Oct 22, 9:30am 1664915425

He was always good at timing.

Billionaire investor Ray Dalio is relinquishing control of the firm he founded, Bridgewater Associates, the largest hedge fund in the world with $150 billion in assets under management.

“This was the natural progression of events; as soon as we were ready, we went ahead,” Dalio said in an interview with Bloomberg, which was first to report the new on Tuesday before Dalio confirmed in a series of tweets. “I didn’t want to hold on until I died.”

The 73-year-old financier is stepping away from his title as co-Chief Investment Officer, a role in which he served since 1985, and has ceded his voting rights to the board of directors on Sept. 30 in the final step of the firm's succession plan.

Dalio said he will continue to mentor Co-Chief Investment Officers Bob Prince and Greg Jensen, as well as the investment committee. He will also serve as a member of the operating board and as a senior investor.

by taimaiakka0 | 5th Oct 22, 8:58am 1664913537

Good question, is it too late for Mr Orr to change and be influenced by RBA. Before RBA turnaround their were voices that RBNZ should move rate by 0.75% if not 1%.

https://i.stuff.co.nz/business/130074921/should-prospect-of-recession-m…

Interesting how narrative changes but more important is what Fed does as will have direct effect on world economy - like it or not.

NZ$ below 0.52 cents US$ is a possibility before regaining 0.62cents plus.

by Justa comment | 5th Oct 22, 9:51am 1664916678

I think RBA have got this wrong at a time when "Aussie building consents raced higher in August on the back of a strong recovery in consents". Food infation continues +5% last month in europe. OIl back up 7% last 2 days as OPEC signals production cuts (they want $90 +) Will be watching Oz inflation versus ours in 6 months time.

by Carlos67 | 5th Oct 22, 10:02am 1664917364

If Orr goes 0.25bps today its a sign he is trying to protect the property market, nothing more nothing less.

by Justa comment | 5th Oct 22, 12:48pm 1664927323

I think he has learnt his lesson on property bubbles, it will be 0.5% I am sure, Oz is an outlier.

by bw | 5th Oct 22, 9:24am 1664915063

Isn't today's StockX market action the best example we can have of what happens when the markets think "it's over!"?

This is exactly what happened 40 years ago, when % rates rises were eased off, as it looked like Inflation was under control, only to see market expectations shove it way up again. And we know what the answer to that was, then.

Yes, 'things are different' today. But I'd argue they are far bigger, badderer and worserer - to mangle the English language, and if we let Inflation get away again, then the remedy will be either making the solutions of 1980 look like a picnic, or Global War - as those who suffer the ravages of Inflation realise they have nothing left to lose.

by Fossil Lover | 5th Oct 22, 12:26pm 1664925994

If the stock markets around the western world collapsed to zero, our true productive economy will not be effected.

by DTRH | 5th Oct 22, 9:34am 1664915676

Looks like the old bouncing bomb, a few bounces up then hits target. Huge debt all over the world when it goes off will be quite a mess, people have borrowed way to much which has to be paid back sometime whether you’re a government or a individual.

by Fossil Lover | 5th Oct 22, 10:03am 1664917417

I am not sure western world governments care about paying back the debt they have amassed for their pet projects (Pfizer experiment?). That is up to the taxpayer!

Hey why not inflate the debt away, screw the savers and our young hard working wage earners, they can just live with mummy and daddy anyway.

by OldSkoolEconomics | 5th Oct 22, 10:20am 1664918443

Exactly. There is no chance of change.

The western economies are all massively over indebted - but who is going to tell them off or try to put a stop to it? They cant ever afford to pay it back and to be forced to do so would lead to social collapse... so they will defend their right to borrow at all costs.

That means the USA and allies would happily deploy their huge military power and fight to the end to protect their right to be broke and will borrow to make sure their military power stays #1.

Giant economic house of cards protected by brute physical force.

by DTRH | 5th Oct 22, 10:36am 1664919364

People with a mortgage and debt will end up paying for bank’s and government errors. They pulled a huge amount of people by dropping rates to near zero now when everyone is loaded up with debt the tapes are turned off people go insolvent and banks and a few rich people buy it all up at huge discounted price’s. Old playbook but works every time.

by Fossil Lover | 5th Oct 22, 10:45am 1664919933

Correct, central bankers policies are to prolong the business cycle expansion and put a floor under asset prices when they sag. The only growth the western world has experienced since 2008 has been fueled by increasing levels of debt. Central bankers are absolutely clueless how to stop the impending collapse, they are literally 'drowning in their own bullshit'.

by powerdownkiwi | 5th Oct 22, 12:19pm 1664925541

There we agree.

Not just clueless, but powerless.

There were physical limits to physical growth within a Bounded System.

by OldSkoolEconomics | 5th Oct 22, 10:11am 1664917862

Mortgage approvals are now almost -20% below their peak at the start of the year.

Surely this means there are still a lot of new people entering the housing market?