Here's our summary of key economic events overnight that affect New Zealand, with news the IMF is warning the worst of the current economic turmoil is yet to come.
However first in the US, retail sales last week on a same store basis fell away noticeably from the same week a year ago. Inflation can barely explain the 'growth' in this latest survey.
But American consumer inflation expectations for the year ahead moderated again for a third consecutive month, now at 5.4% in September, the lowest in a year, and down from 5.7% in August. The long-run average inflation expectation is 3% so there is still a long way to go to get these down from elevated levels, but five-year-ahead expectations are only 2.2% pa. Their median home price growth expectations declined marginally to just 2%, its lowest reading since June 2020. And expectations for the cost of medical care is also seen slowing but to a still-high 9.2%. On the other hand, consumers expect prices to rise faster for petrol.
US central bank policies do seem to be working on getting these expectations reset. But consumers remain unhappy with them (which is par for the course). Nobody likes their medicine, even when it seems to be working.
The US Treasury auctioned a 3-year bond today and as has become normal, it was very well supported (and despite the fact that the US Fed is no longer bidding). But the yield investors expected rose to a median of 4.24% which was up sharply from the 3.50% at the prior equivalent event a month ago.
In China, their September data shows they pumped out a lot of bank debt to support their economy, in fact twice as much as analysts were expecting and a new record high. This comes as authorities are supporting a slowing economy that is being hit by a property crisis and an unfortunate resurgence of pandemic cases.
In the UK they too are pumping out vast additions of central bank support as their financial crisis extends.
In Australia, business sentiment fell in September even as business conditions improved. The NAB business confidence index fall was the lowest reading since June, amid concerns over rising interest rates and a gloomy global outlook. Sentiment fell in retail, wholesale, transport, recreation & personal services, and finance, business & property sectors. Meantime, business conditions rose, being above their pre-COVID peak, with sales surging while both profitability and employment were unchanged but stayed elevated.
The IMF says the world's economy is seen expanding +3.2% (real) this year, in line with its July forecast, but expects it to grow at a slower +2.7% in 2023, down from 2.9% earlier predicted, according to their latest update of their World Economic Outlook. All this while global inflation is expected to run at a massive +8.8% this year. The 2022 forecast is actually a brave position to take given what others are suggesting. But even they say, "In short, the worst is yet to come, and for many people 2023 will feel like a recession." China's stumbles are a key headwind for the global economy, they say.
The UST 10yr yield starts today at 3.89% and unchanged again. The UST 2-10 rate curve is less inverted at -40 bps. But their 1-5 curve is more inverted at -15 bps. And their 30 day-10yr curve is unchanged at +92 bps. The Australian ten year bond is holding at 3.97%. The China Govt ten year bond is unchanged at 2.76%. The New Zealand Govt ten year will start today at 4.12%, and up +12 bps and marching steadily higher.
Wall Street is up +0.6% on the S&P500 in their Tuesday session. Overnight, European markets fell by about -0.4% although London closed down -1.1%. Yesterday Tokyo was closed down -2.6%, Hong Kong closed down another -2.2%. But in contrast Shanghai ended its Tuesday session up a minor +0.2%. The ASX200 ended -0.3% lower, but the NZX50 rose +0.4%.
The price of gold will open today at US$1681/oz. This is up +US$13 from this time yesterday.
And oil prices start today down -US$2.50 from this time yesterday at just under US$88.50/bbl in the US while the international Brent price has fallen a bit more to be just over US$93.50/bbl.
The Kiwi dollar will open today at 56.5 USc and a full +1c higher than this time yesterday. Against the Australian dollar we are +¼c higher at 89.1 AUc. Against the euro we are +½c higher at 57.8 euro cents. That all means our TWI-5 starts today at 67.1 and up about +90 bps.
The bitcoin price is now at US$19,169 and a mere -0.1% lower than this time yesterday. Volatility over the past 24 hours has been modest at just over +/- 1.3%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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58 Comments
How on earth do the IMF foresee 2.7% global growth next year?
Especially when this is another headline this morning:
IMF warns of global house price crash
"The Fund warned that housing markets were now at a “tipping point” after surging by more than 20pc during the pandemic. It warned that rising mortgage rates would price many out of the housing market, with the biggest risks facing China and other emerging markets"
It warned that in the worst case scenario, house prices could fall by a quarter in real terms over the next three years in emerging markets, while in advanced economies, the fall could be as much as 10pc.
"Aotearoa New Zealand" cementing it's place in the league of emerging economies.
‘As much as 10pc’ in real terms, LOL.
And the rest!
‘As much as 10pc’ in real terms, LOL.
And the rest!
Wgtn house prices already down down 35% from ATHs when priced in gold. There's your "real terms."
And we're just getting started. Most Kiwis have no idea what's going on.
If you're walking around pricing everything in the hot alternate store of wealth of the day, I guess maybe you'll dollar cost average your way to enlightenment.
If you're walking around pricing everything in the hot alternate store of wealth of the day, I guess maybe you'll dollar cost average your way to enlightenment.
Well you could replace gold with USD and get a similar magnitude. But that should be telling you something about what's really behind the great Kiwi wealth creation experiment.
Can you really talk about people walking about ignorant to what's going on and then cite rises in gold and the USD as your evidence?
I guess you can, but you're ignoring a lot.
Can you really talk about people walking about ignorant to what's going on and then cite rises in gold and the USD as your evidence?
I'm sure you were possibly unaware. Regardless, the 'why' is more interesting.
Why the USD is so high is a different story to the long term fortunes of NZ. In and of itself, it's not telling you a whole lot other than what the FEDs up to at the moment.
You devised your conclusion and then have gone looking for the markers.
Why the USD is so high is a different story to the long term fortunes of NZ
I also used the gold price. I know you don't purchase houses in NZ with USD or NZD (even though it can be done). Framing house prices in the relative value of currencies is interesting if you understand that the credit creation mechanism is important for the conversion of base money to broad money.
Only 5 months dude, you can do it!
Takin' Brock back to the to the sweet times
The hot nights
Everything is gonna be alright
In the summertime
They were taught economics?
That would do it.
Haha yeah
They do it the same way someone would forecast the weather. Take previous data, look for storm clouds, and make your best guess.
It was easier when there was an omnipotent, omnipresent diety telling us what would happen and working in mysterious ways. Now, we know too much.
Models are models, they will obviously always have their limitations.
Doesn’t avoid the fact that the models are flawed, and could/should be redesigned to get greater accuracy.
I wonder if there’s any chance the models are designed to err towards more positive economic forecasts, given inflation is (supposedly) such a focus of governmental (and inter-governmental, in this case) organisations?
Is it possible to make really accurate predictions of such complex systems?
If we had a super uniform centrally controlled global authority, it'd be easier.
There's many entities doing many models, I guess some are going to have positive and neutral bias.
Most Economic models are like sausages, if you knew what went into them you would not consume them.
Just put some tomato sauce on it.
All models are wrong, but some are useful (and delicious?).
Fundamentally economics are a human construct based on human interactions. Most of the economic practice if not all has a tendency to idealise the theory, looking at it as if it exists in its own right, (possibly totally ruled and controlled only by computers?) which results in human psychological responses not being considered in the extreme or at least minimised. Add in the point you made, that the system is complex, and I would suggest that it would be impossible to be able to factor in every single thing that would have an impact, and then accurately predict the human response to that. Thus the answer to your question is simply "No". But people do expect them to be a guide or hint.
Good take. At best, it's a pointer, but it's a human science, so you can't expect it to perform the same as a hard science.
We can regularly see the market performing irrationally, hard to separate that tendency from basic economic foundations and reason.
Yes but I also like your response above "Just add tomato sauce". That makes the BS the economists feed us more palatable!
Even the predictions we make feed back into the system and change behaviour. It's a chaotic system so we should be suitably humble about our ability to predict anything.
A couple of hundred years ago, economics models assumed that consumers were stupid and misinformed, whilst businesses were cunning and smart. The maths behind this model was found to be flawed, so the next model (which has kinda stuck) assumes that consumers are rational and informed, and businesses are slavish responders to consumer preferences.
And in all models it is crucial to be able to understand the assumptions that underlie them, and the impacts of those assumptions. Human psychological responses can be notoriously unpredictable, if only because we can never know and understand all the influences on people in any circumstance. So again no matter what model is used the accuracy is at best questionable and at worst rank BS and you can never know for certain until history gives you the lens of hindsight.
But at least it is a good apprenticeship for a career in writing horoscopes.
When the professor of economic in reserve bank fails that too miserably, cannot blame the students as first has to look as who was teaching the economic.
The economic crystal ball has "grow" written in black marker on the outside, so whoever is reading it doesn't have to think too hard about the message to the masses.
REINZ HPI press release for Sept should be in at 9am....the closer we get to the anniversary of the peak, the harder it will become for the media to manufacture positive headline spin!
Yep.
But once we pass the peak, and assuming price falls slow (big assumption) that will be a new source of spin. ‘Look, prices are falling year on year, but less than the previous month!’
Sure I've heard this already: "It's bad...but it's less bad. You can see the market shifting..."
‘Look, prices are falling year on year, but less than the previous month!’
This is easy to deal with -- 'Price falls appear to be flattening', "Prices look to be bottoming out'.
REINZ HPI press release for Sept should be in at 9am....the closer we get to the anniversary of the peak, the harder it will become for the media to manufacture positive headline spin!
They've probably been practising their copy on different scenarios and putting them to the test in focus groups (cheap, informal FGs anyway. Apparently proper research is too expensive for Granny Herald).
An interesting few days ahead of us, what with US Inflation figures due. And all as close as we can get to the coming 35th anniversary of "Black Monday"
Turmoil on UK bond markets went "way beyond" the Bank of England's previous stress tests, Andrew Bailey has revealed. The Bank of England Governor urged investors to finish winding up positions that they can’t maintain, saying the central bank will halt intervention in the market as planned at the end of this week. “My message to the funds involved and all the firms is you’ve got three days left now,” Bailey said at an event in Washington on Tuesday. “You’ve got to get this done.”
Take big lumps now or massive lumps later........
Interesting stuff Audaxes. Given that most NZers are unaware NZ is a "swap nation", it posssibly doesn't mean much. But so many are blaming the Great Satan (and Putin) for the world's woes, they'll probably overlook the cosiness of the relationship.
J.C. can you or Audaxes explain those swaps? How and why they work? I don't understand what is going on there.
I think that is where the "Fed' print fiat currency to get nations in debt (become debt slaves to the Fed), thus exporting their inflation overseas. A great concept if you are the USA, until foreign nations wake up to the fact the USA is bankrupt.
I'm no expert but it's a liquidity function for central banks. Where it all gets a bit hazy for me is why they're necessary with the existence of the EuroDollar framework.
https://www.federalreserve.gov/monetarypolicy/bst_liquidityswaps.htm
That link suggests that the Fed has taken on the parent role of securing the liquidity of 'selected' central banks? In other words they have made themselves the world banker for those client banks. High risk indeed as we see that the Feds actions are so often based on insular, self interested motivations.
Scary really when the Fed is not answerable to the world for their actions or the consequences of them. And for the world, if the US public is stupid enough to put idiots like Trump in the President's seat (or god help us -someone worse!) that house of cards may come crashing down.
But it does provide some understanding on why the value of the dollar is so robust (?) as it is not just backed by the US economy, but will to a degree also be support by the strength of those other economies too. It's be interesting to see if say hypothetically the Swiss elected their own version of Trump who would drive their economy down the toilet, would the Feds cut them loose?
The USA economy probably takes $3-4 trillion debt every year just to operate. (Under exaggeration). Trump ain't no idiot. The productive economic people of the USA put Trump in power, not the liberal money seeking government, non productive sector. Worry about NZ. Worry about NZ, not the USA. How about Ardern drove our economy down the toilet!
I recently sent this email to a British friend in need of an explanation:
Pensions watchdog called in to emergency talks on UK market turmoil
UK pension funds are huge They are sitting on a very large amount of 30y receiver swaps (''betting'' on lower interest rates) to hedge long-dated liabilities This requires very little upfront cash payments, hence cash is invested in stocks, EMs, credits etc
30y swap rates explode higher like never (literally, never) before - it's margin call time. Wait a second though - most of the pension fund cash is tied in riskier assets that the Clearing House doesn't accept as collateral! Well, we'll go to the BoE...
...and post this collateral there and get some cash in repo from them. Ah, but pension funds don't have direct access to the BoE. Ok, let's ask banks...yeah, sure :) Banks were smelling this from far away, and actually contributed to the massive move higher in rates. Link
The fixed-rate payer receives floating interest, and is said to be long or to have "bought" the swap. The long side has conceptually purchased a floating-rate note (because he receives floating interest) and issued a coupon bond (because he pays out fixed interest at periodic intervals). On the other hand, the floating-rate payer is said to be short or to have "sold" the swap. The short side has conceptually purchased a coupon bond (because he receives fixed interest) and issued a floating-rate note (because he or she pays floating interest).
The principal or notional amount is never physically exchanged (hence the term 'off-balance sheet') but is used merely to calculate the interest payments.
So an IR swap is an agreement between two parties to exchange a stream of cash flows calculated as a percentage of a notional sum calculated on different bases.
Liquidity means a market maker commitment to engage balance sheet capacity to execute the price making function. If balance sheet capacity (the real money in the system, therefore liquidity) is systemically impaired, as in a crisis, or a crisis that doesn’t really end, then to get dealers to give up their precious balance sheet capacity and engage on the other side of a swap someone would have to pay a hefty premium to make it worth it (risk-adjusted) for the dealer to do so.
I can only offer USD examples – mainly because that’s the market I worked in.
The UST 30yr yield
I/R Swap 30-Year (SWAADY30.RT)
Hey Jay, Maybe Check The Swaps Before Committing to Taper
The swap spread is itself a very simple matter: the raw difference between the quoted fixed leg of a vanilla interest rate swap and the same maturity nominal US Treasury yield. Interpreting this resulting spread, that’s the problem. By all textbook accounts, the former would never be less than the latter because if that ever happened this would seem to suggest the market pricing the US government as riskier than the financial counterparty on the floating side of the swap.
Yes, blasphemy but especially so only starting in October 2008 and continuing every month thereafter.
For this mainstream approach, such financial products are analyzed through this improper lens of generic “credit risk.” Throw that nonsense out the window; a negative swap spread isn’t about credit risk but liquidity and balance sheet capacity.
Quite simply, it takes some financial institution’s balance sheet capacity to take on an interest rate swap (the farther the maturity, the more capacity it requires). If balance sheet capacity (the real money in the system, therefore liquidity) is systemically impaired, as in a crisis, or a crisis that doesn’t really end, then to get dealers to give up their precious balance sheet capacity and engage on the other side of a swap someone would have to pay a hefty premium to make it worth it (risk-adjusted) for the dealer to do so.
In a swap, it would mean discounting the price of the fixed leg even to the point this fixed leg yields less than a UST of the same maturity. A negative swap spread, therefore, an indirect but reliable indication of systemic liquidity and balance sheet elasticity.
I was never an Interest Rate (IR) Swaps market maker, but I know the basics because my trading desk live priced semi annual bond equivalent.synthetic swaps using 3mth futures strips (eurodollar FRA stacks) out to four years. (many years ago). Detailed explanation - http://www.omo.co.nz/CHEML.PPT - you need excel power point to open.
FX swaps are not that different - FX swaps and forwards: missing global debt?
Central banks are called upon to fill a gap that the private sector banks consider too much risk.
Man that was some job you had Audaxes, after reading that I'll just head out and cut some scrub or something I can understand.
Credit Suisse not out of the woods yet?
https://www.cnbc.com/2022/10/07/credit-suisse-to-repurchase-3-billion-o…
Troubled bank Credit Suisse offered to buy back up to 3 billion Swiss francs ($3.03 billion) of debt securities Friday, as it navigates a plunging share price and a rise in bets against its debt.
The Swiss lender also confirmed that it is selling its famous Savoy Hotel in Zurich’s financial district.
In a statement Friday regarding the offer to repurchase debt, Credit Suisse said, “The transactions are consistent with our proactive approach to managing our overall liability composition and optimizing interest expense and allow us to take advantage of market conditions to repurchase debt at attractive prices.”
It comes after Credit Suisse’s shares briefly hit an all-time low earlier this week, and credit default swaps reached a record high, amid the market’s skittishness over its future.
The New Zealand Govt ten year will start today at 4.12%, and up +12 bps and marching steadily higher.
4.42% isn't it?
NZD now just under 56.0 currently.
S&P currently down 0.83% now so another red day today by the looks.
Nasdaq bounced well, short squeeze or news based?
£ just took a nosedive as well. 1.0990.
"I don't think I can hold her much longer, Captain"
Impossible, she is unsinkable.
Women and Children first please gentleman...
Here’s a rare thing - a good article from NZ’s MSM:
https://i.stuff.co.nz/business/opinion-analysis/130131416/dileepa-fonse…
John Banks II. I wonder when he will have a Ticker-tape parade down Queen Street.
IMF stats are interesting. Formed back in the USA at the start of the Brenton Woods thing. Some 191 countries have joined, about 100 countries have received bail outs, only 50% are better off and some 32% are now considerably worse off after a bail out (Source-Aljazeera) Basically so many countries now are fraught with corruption that Billions of dollars just goes "Missing".
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