Here are the key things you need to know before you leave work today (or if you already work from home, before you shutdown your laptop).
MORTGAGE RATE CHANGES
First Credit Union raised fixed home loan rates today
TERM DEPOSIT RATE CHANGES
Kiwibank announced some term deposit rate rises, now offering 5% for terms of 2 years and longer. But Rabobank went one better, offering 5% for a one year term, and the first bank to match SBS Bank with that offer. TSB also raised TD rates, offering 5% for two years and longer like Kiwibank.
14 YEAR HIGH
Food prices rose across the board with their sharpest rise in 14 years, up more than -10% in the year to October. And that pace didn't slacken in October from the steep annual rise. With a strong labour market, it is clear that the suppressing impact from a higher OCR hasn't kicked in yet. (Interestingly, there was some evidence out earlier today that higher official rates have started to suppress American inflation finally.)
TURNING GRUMPY
The local factory PMI took a turn for the worse in October, now contracting after a small expansion in September. This was its first contraction in any month in 2022. The new orders index fell the most and was the outright weakest across the major components, amid many manufacturers noting a softening in demand this month. The PMI production index eased, while employment dipped despite many respondents still reporting labour shortages. The mood in the factory isn't great. The proportion of negative comments in this survey is over 60%. Staff shortages and a fall off in new orders were mentioned by a significant proportion of manufacturers.
RENTS RISING FASTER
Stats NZ reported an unusual surge in the cost of rent in October, the second most in one month since before the onset of the pandemic. Over the past decade, they have only risen as fast three times. It is a North Island thing. Of course, one month doesn't make a trend, but it is worth keeping an eye on. Overall, rents are up +4.1% yaer-on-year, which isn't low either.
RECORD HIGH HERE, FLAT OR IGNORED ELSEWHERE
At $88.20/tonne, the local carbon price has risen to a new all-time high. Five years ahead, the derivatives market is pricing that at $114/tonne. Interestingly, the EU carbon price is actually quite static and back to where it was a year ago, flirting both higher and lower in between. The current EU Carbon Permit price is €73.05/tonne (NZ$123.70/tonne). COP27 isn't driving any new impetus for global carbon credit demand. Interestingly, the Ukraine/Russia war has added more than 30 mln tonnes of CO2e so far. It has been estimated that reconstruction of their war damage so far will add another 80 mln tonnes of CO2e. In a year New Zealand generates a bit less than 80 mln tonnes of CO2e.
BORROW & BUILD
The Government is to extend the use of its Treasury financing office to grow what Kāinga Ora/Housing NZ needs to borrow. Cabinet agreed to increase Kāinga Ora’s borrowing capacity by +$2.75 bln for FY2022/23. KO/HNZ already has financing liabilities of $9.8 bln as at June, so this adds +28% more. In the last five years Kāinga Ora has delivered over 8,370 newly built homes, plus over 900 retrofits (or less than 2000 per year). It is big, it is addressing a need that is urgent, but it also has been famously inefficient and/or rugged on its neighbours..
SWAP RATES FALL HARDER
Wholesale swap rates may have given up more of the recent strong lift but most of the real action happens near the close. Our chart will record the final positions. The 90 day bank bill rate is down -6 bps at 4.13%. The Australian 10 year bond yield is now at 3.66% and down another -14 bps. The China 10 year bond rate is little-changed at 2.70%. The NZ Government 10 year bond rate is now at 4.30%, and down -19 bps from this time yesterday and back above the RBNZ fix for the NZGB 10 year which was down an eye-popping -29 bps at 4.23%. The UST 10 year is now at 3.81% and down a very unusual -28 bps from this time yesterday, doubly unusual because it wasn't directly triggered by a US Fed announcement.
EQUITIES RALLY
Wall Street had an unusually strong session with the S&P500 up +5.5% after the US CPI miss, ending on a rising trend. Tokyo has opened its Friday session up +3.2% and heading for a weekly +3.5% gain. Hong Kong has opened up +5.4% and looking at a +5.7% weekly rise. Shanghai has opened up +1.6% which might allow it to posit a small weekly gain. The ASX200 is up +2.4% in afternoon trade heading for a +3.5% weekly rise. The NZX50 is also up +2.4%, but will only book a +1.1% weekly rise if that holds.
GOLD BACK UP
In early Asian trade, gold is at US$1748/oz and up +US$40 from this time yesterday. But it did end in New York earlier at US$1756/oz.
NZD BACK UP
The Kiwi dollar is sharply higher at 59.9 USc and up a full +1c. But it has been as high as 60.2 USc today. Against the AUD we are -½c softer at 90.9 AUc. Against the euro we little-changed at 58.9 euro cents. That all means our TWI-5 is now at 69.4 and up a net +30 bps from this time yesterday.
BITCOIN IN PARTIAL RECOVERY
Bitcoin is recovering some of its worst drops today, now at US$17,350 and recovering +7% from this time yesterday. Volatility over the past 24 hours has been extreme again at just over +/- 6.5%, although that isn't as high as the prior two days. Here's an explainer.
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78 Comments
Kiwibank TD rates now very close to flat curve 5%. I now expect Rabo and TSB to turkey peek 5.1% for their 5yr TDs. The US inflation saw slight drop to (still high) 7.7%, probably on the back of their strong dollar the last 3 months. Market reaction in the swaps and bond for the US looks a bit of an over-reaction, 7.7%is still very hign,
I think we may settle for a while at 5% TDs, 6.5% fixed 1 yr mortgages, and floating mortgages of 7.5 to 8 %. Good to see Kiwibank now giving retail TD holders a fair rate of 5% against mortgages of 6.5%, the historically fair margin. (The first (well 2nd to TSB) to respond to Orrs call last week for banks to give fairer TD rates). Well done Kiwibank and TSB.
I read somewhere that a peace agreement could produce a 9% up day on S & P 500, it was from one of the bigger quant shops so maybe thats the risk event they are pricing for. Possibly they are also seeing options activity from clients suggesting positions cover keeps flocking around 9-10% from the index. The US CPI print, could possibly make this a more expensive hedge to roll.
Well the Ukrainians appear to be giving the Ruskies hell at Kherson, they're fleeing in droves and are getting beat up at the transport junctions.
Russian media also look to be getting very vocal about what a failure this has been for them.
So long as Vlad keeps away from the red button, this isn't looking good for him.
I read that local Russian Media are talking about the retreat, but framing it in a positive way....
There is a very good BBC doc by Adam Curtis called Russia 1985–1999: TraumaZone (subtitled in promotional media as What It Felt Like to Live Through The Collapse of Communism and Democracy) is a seven-part BBC documentary television series created by Adam Curtis.
He Used BBC footage to explain the collapse of the soviet union communism then democracy and explains how the Oligarhs rose from corruption inside the communist party and eventually put Putin in place to remove the drunken Boris Yeltsin
It seems to me that Putin is no longer in control of the local media and they are spinning it to say "We are not fighting Ukraine we are fighting Nato". Putins and the Oligarchs must be as sick of the $$$ drain as the US is and Nato. I can see a peace deal coming perhaps without Putin anymore. The US will have effectively caused his downfall on the battlefield and destroyed any myth that the Russians could roll into Germany in a few days with Tanks.
Russia likely will try and use the Dnieper as a natural western border. It’s been that sort of defence come barrier since before recorded time. Napoleon & Adolf found that out the hard way, especially on the way home. They might then perhaps try and pipe water to Crimea from further upstream of Kherson. The problem with that though is they will need to establish a strong defensive line, and this is in vast open country, to the north from west to east to the south of Kharkiv. At present the front lines though remain very fluid and Russia have lost a lot of military capacity. Taking forces from the south east to shore up that prospective front in the north is probably underway but there is no guarantee it will be either in time or sufficient.
Well, I'm having half a kilo of lamb shoulder chops and will save the liquified fat to cook with my scrambled eggs tomorrow. Lamb shoulder chops only $16.99 a kilo. I did baulk at the scotch fillet price this week at $44 a kilo and went for rump instead at less than half the price.
Slight problem with ovine fat (tallow,) is the “grassy” odour. Asians are not partial to it, nor Nth Americans that are used to the grain fed equivalent and that applies to beef too. Used to happen here way back, fish and chip shops kept using dripping for too long, you got an almost animal pen smell coming through.
Lots going on today - let's have a look at how that higher OCR is doing at tackling inflation...
First up - rents. Economists are scratching their heads on this one. RBNZ are increasing borrowing costs for landlords who are also watching their capital gains evaporate - but they still won't reduce their rents. What's going on here - don't they understand monetary policy? Higher interest rates mean lower prices fools - get with the bloody program.
Second up, food prices. Up 10% in a year! Let's look under the hood here. Higher interest rates and other bills are pulling more $ into debt payments so spending on consumables is well down in real terms. So, why aren't those pesky prices coming down? Oh, they are, pork prices are down 2% over the year but beef is up 10%, vegetables are down 10% this month (but up 18% on the year), and eggs are up 22% over the year and 6% just this month. Damn it people - stop demanding more eggs than chickens can pop out, and buy more dead pigs and vegetables for a bit, we must have got loads of them.
What's that you say, our status as a major food exporter means that our domestic food prices are mainly set by international markets? Well, tell them to put their interest rates up then - that'll sort it...
To be fair, it was a little tongue in cheek. But, there is a serious point here - the banks are increasing the costs of doing business and expecting that this will 'slow the rate of increase of prices down'. RBNZ are basically banking on reduced consumer demand to slow price increases - i.e. that reduced consumer demand will have a greater slowing effect on price rises than higher costs of credit will have on increasing prices. My view is that they are wrong. They are not factoring in the market power that key players have in NZ nor how much prices are decided by offshore markets. For example, domestic retail beef prices have moved in lockstep with international beef wholesale prices for years. What we pay is what others are prepared to pay.
I worked at an offshore US subsidiary bank, in the early eighties, in London. Together with others we led Volcker by the nose to higher interest rates. Offshore Eurodollar subsidiary banks of global sovereign banks determine the global creation of credit, hence interest rates - more credit creation, higher interest rates, and the opposite.
This is what Milton Friedman called the interest rate fallacy, and it indeed refuses to die. We can tell what monetary conditions are in the real economy, as opposed to financial liquidity, though the two can be linked, by the general level of interest rates. When money is plentiful, interest rates will be high not low; and when money is restricted, interest rates will be low not high. The reason is as Wicksell described more than a century ago:
[The natural rate] is never high or low in itself, but only in relation to the profit which people can make with the money in their hands, and this, of course, varies. In good times, when trade is brisk, the rate of profit is high, and, what is of great consequence, is generally expected to remain high; in periods of depression it is low, and expected to remain low.
When nominal profits are expected to be robust, holders of money must be compensated for lending it out by higher interest rates. Thus, the same holds for inflationary circumstances, where nominal profits follow the rate of consumer prices. During the Great Inflation, interest rates weren’t low at all, they were through the roof well into double digits and higher by 1980. At the opposite end in the Great Depression, interest rates were low and stayed there because, as Wicksell wrote, the rate of profit was low and was expected to be low well into the future. High quality borrowers were given as much money as they could want while the rest of the economy was deprived of funds; liquidity and safety being the only preferences in what sounds entirely familiar. Link
Yes, over the last few months, for the first time since the GFC, rents have risen less than CPI. Mind you, rents picked back up this month (above CPI on a month-by-month basis) so we'll see how it plays out. My view is that rents are primarily determined by what tenants can afford to pay, which is a function of wage levels and accommodation supplement etc. The latent demand for rentals is huge - imagine how many people in Auckland or Wellington would move from a shared house into their own rented apartment if they could afford it.
Rents are a market. Supply and demand. Very little to do with costs, except over the longer term.
The idiots are allowing greater immigration, which increases demand, so voila. madness.
We see in Auckland immigration is the only thing that keeps the population up. Given that for 30 years now, net internal migration of "New Zealanders" has been out of Auckland. So demand there has been erratic because of covid etc. So rents operate differently there.
As an ex Aucklander of many decades ago, and a very frequent visitor there, I know how wonderful life in NZ can be elsewhere than Auckland.
Firstly, you need to get your identification sorted out.
Funds are actually debt-issued forward betting-slips, not real wealth.
Ask what backs those forward bets? And it's future energy (what, no economist told you that?).
Ask why we have a carbon problem, and it's because we are extracting energy and that's the resultant pollution from the burn (anything that was underground for the whole time we evolved, will be a likely pollutant - to us - if released above ground).
And we are half-way through that fossil energy. And we would need to use much of the remainder to build an alt system - the carbon pulse of which would render the planet unliveable to us.
So either way, this system is on the way out.
But you're worried about money???????? That's the least of our problems. What out grandchildren say about us (presuming there are any alive) is more the issue.
Lest we forget.
October 1973 to January 1974 saw the first of two extreme surges in inflation that decade, and a recession ending in 1975. After that crisis, inflation settled closer to 6-7 percent a year for a bit — not great, but not the double-digit crisis levels of later. Inflation soon ramped up again, partially due to surging energy and food prices. Before Volcker took office as Fed chair on August 6, 1979, the Fed had tried small increases in interest rates in hopes of taming prices. The approach took two tries to get its intended effect. Volcker’s tightening slowed economic activity enough that by January 1980, the US was in a mild recession. The Fed interest rates actually began falling after April, which limited the effectiveness of the Fed’s anti-inflation efforts. Inflation soon ramped up again, partially due to surging energy and food prices. The Fed tightened again, hard, after that and sparked another recession in July 1981. This one was far worse than the first.
Kāinga Ora mmmmmmmm,
When full time workers are renting cruddy/substandard housing, subsidizing unemployed people into brand new houses is probably a hard sell to the electorate. Kāinga Ora do sound like terrible landlords though.
Obviously declining house prices reduces the number of builds taken on by private developers, so to keep housing stock increasing at pace, the government could drive demand. HOWEVER, this could artificially prop up both house and land prices.
Such a command-&-control exercise usually produces ghettos in the medium to long term. Marxists do believe in the abolition of private property - it's pretty much the main tenant of Marxism. I personally think it would be better to focus on increasing the rate of homeownership in NZ.
Kāinga Ora and urban boundaries are probably artificially propping up land prices - high land prices are probably the real problem.. well, at least if you want to buy land anyway.
Meh.
Carbon units are just the latest speculative asset - with over a third of carbon units now held by investors. That's about 56 million units by the way - $5 billion worth. Gains on asset value for investors in the last few months must have been around $500 million. Govt talk about these privately held units as a 'stockpile', as if people are saving them up so they can pollute later; this just goes to show how little they understand about how trading in financial assets actually works. Why anyone would design an emissions trading scheme that let speculators in is beyond me.
Bang on Jfoe.
What we've seen with Bitcoin over the past year, we can expect to see with carbon credits eventually too. That's the "out" for carbon farmers, because credits are tied to the land; earn them and sell high, then when the market crashes, pay them back at pennies on the dollar and exit the game.
Kainga Ora could have built double or even triple that number of houses if they didn’t focus so excessively on architecture and urban design. what’s the problem with standard designs if they are good?
they take such a middle class approach to a long urgent crisis.
by the way Woods is always gloating about the number of new houses built. The net numbers (new homes built less those demolished to build them) don’t look so brilliant.
Thats an interesting thought but in AKL I think mostly 1 house off a big section then 2-8 on depending on where it is etc..... sure in expensive suburbs Forever homes are being built (Think sea views etc). Where could we find that type of info, on a monthly basis it could be a great indicator of construction stress.
Maybe this is a timing issue, takes longer to build than demolish? I saw a lot of building and more still happening in Glenn Inness over last 6 years its staggering how many new builds have been added. It was all done by developers and I think started under National, plenty of We will not be evicted from a few locals ......
You should split it across all three if you don't believe that you can accurately predict where rates we will be in.
Predict = forecast = guess. You could put it 1/3 in each bucket or skew it, place your bets... We could see the longer end fall away quite quickly if NZ CPI prints come in weaker then they have been and market prices in an Orr pivot.
Interesting question. Personally I would do 2 years. I don’t think mortgage rates will be any higher in 2 years than now, and there’s a good chance they will be lower. But many here will disagree, as most here seem to think we will have high inflation and interest rates for several years. If you think that is more likely, then 3 years?
5. (Ask yourself: "Why do they have 5?")
Crazy, I know. But if you'd asked us the same question at this time last year, 5 @ 2.99 % would have looked expensive compared to the rest of the card, and I'll suggest you'd have gone for a shorter term.
The same thinking applies today.
(NB: If the RBNZ et al lose control of Inflation, and we get a reaction that sees the OCR at 19.5%, today's 5-year fixed will be the same dream that 2.99% now is.)
Could be.
But is credit expansion more or less now than a year ago? (Less, for a reason)
You've hit the nail on the head. It's about "What if" and "what can I afford if I'm wrong?"
Can I afford to be wrong and be paying 7% for 5 years fixed when the OCR is back at 0.5%, or can I afford to be wrong and be paying 17% if the OCR is 19.5%?
That's what Risk is all about.
Exactly. That was my risk assessment last year. Would I rather be in a situation where I'm locked in for 5 years at a rate that's slightly higher than a 2 year rate, or be locked in for 2 years and come out at a rate significantly higher than I have budgeted for?
Peace of mind and risk aversion sometimes comes at a cost. However our 4.95% fix for 5 years in December last year is already paying dividends.
I've seen so many properties come on the market that were last sold near that peak in 2021. The prices paid just won't be achievable in this market - and the banks are signing very few new mortgages - hence all the interest-free terms being offered for top ups.
I suspect there is a concern about further mortgage stress out there, and banks won't want a lot of mortgagee sales coming onto their books.
So, my guess is that retail rates have likely peaked - no matter what the RB does in terms of further OCR rises - of which I think there will be one more only. Then stable for a couple of rounds, then inflation will have come under control.
If I had to re-mortgage now, I'd be asking the bank to give me 6-8 months interest-only on the floating rate - and fix after that (mid year next year), as I suspect there will again be better 'deals' in the market as they all try to re-fire the FHBs and the up-sizers
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