A review of things you need to know before you sign off on Friday; 5% TD offers come from more banks, PMI contracts, rents rise fast, carbon price hits record, swaps sink, NZD rises, & more

Odds are even for 6% by Christmas, almost a cert by February. FLP is ending 6 Dec and we could see a 100bp OCR rise 23 Nov so when those 2 sink in with the possibility of yet another rise in Feb being priced in.

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.

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What is that?  A well-fed human face, smirking at a hungry looking rabbit who could have lived for 12 weeks on all those greens?

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.

Mt Landers..have you considered running for PM?

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.

I reject the premise of that statement.....

I have the figures somewhere from a few months back, the net numbers don’t look so great. I will dig the stats up. Remember in some of their development areas only a third of new builds is social housing.

Not a bad idea.

I think the terminal OCR rate to control inflation is lower today with the expansion of credit lending, place your bets....

Squeaky bum time for those hapless vendors.

A lot to think about. I'm sure I'm not the only reader pondering this for real. Thanks everyone.