Here's our summary of key economic events overnight that affect New Zealand, with news markets are ending the year mired in uncertainty. (H/T Westpac)
They are coming to realise that central banks are really (truly) focused on beating the inflation threat, and are unlikely to be dissuaded by a few bumps along the way - like a recession, or a deteriorating labour market. This is new for investors, who had until now priced in an easing bias on the expectation central banks would blink. They aren't so sure now.
Certainly a slowdown is coming. The first of the December PMIs are now available, on a 'flash' basis, and the American factory sector is now at its lowest ebb in 31 months, and now contracting. Their giant services sector is actually shrinking at a faster pace. The demand retreat the Fed wants is here.
And there are signs inflation is easing too.
American petrol prices are falling noticeably now. From a year ago, this week's national average price is -3.8% lower. More importantly for consumers there it is -15% lower than just a month ago. On average, American pay NZ$1.328 per litre retail. (Yes, these are "pump prices" so they do include taxes, but sales taxes do vary widely between states and counties. So this the just an average.)
Import activity at some key US west cost ports are down sharply. There were steep declines in November and they are extending into December too. The US import engine is stuttering and many economies across the Pacific will feel the impact in an outsized way.
There were flash PMIs out for other countries too. In Japan, the Markit survey shows factory activity is now contracting at a similar rate to the US, while they still have an expanding services sector, and interestingly a faster expansion than in November. That may surprise a few analysts.
In the EU, everything is contracting however. Their factory sector is shrinking at a lesser rate however, and their services sector is shrinking at a lesser rate too. These 'improvements' weren't expected. Germany provided the moderation here, a turnaround from November when it was France, but France is weakening faster now.
The German central bank sees a mild recession in 2023, and a moderate recovery after that. For them, it will be a soft landing, they say.
In Australia, private sector activity slowed amid higher interest rates in December. The service sector is still contracting and the wind has gone right out of the expanding factory sector, and that expansion has disappeared now.
Separately in Japan, they have approved a major defense overhaul in a dramatic policy shift. The security threats from China, Russia and even North Korea has jolted them into action, reversing policies that have been in place for 70 years.
And separately in China, policymakers suggested that anti-pandemic restrictions could be loosened further as the government seeks to stabilise flagging growth. At their Central Economic Work Conference officials said they will "optimise and adjust" pandemic control policies. The streets of key cities are eerily quiet has infections spread and people stay home, either to self quarantine, or avoid infection. Foreign investors see a very tough 2023 ahead in China, especially American investors.
And that negative view is showing up in the Chinese government bond market. Foreign holdings of yuan-denominated bonds traded in China's interbank market declined further in November, making the 10th consecutive month of outflows.
And separately in Australia, their new prime minister has declared their energy market has failed, and a central government intervention is the only way to fix it. This is new for Australia; the attitude of the last 50 years has been to roll over to the interests of large commercial investors. There is fierce pushback this time too, but not the usual acquiescence by government. It will be an interesting tussle to watch.
The UST 10yr yield started today at 3.48%, and up +4 bps from this time yesterday and re-building after the recent big drop. A week ago it was at 3.56%. The UST 2-10 rate curve is less inverted from yesterday at -70 bps. Their 1-5 curve is also less inverted at -101 bps, while their 30 day-10yr curve is more inverted at -37 bps. The Australian ten year bond is down -2 bps at 3.46%. The China Govt ten year bond is unchanged at 2.92%. And the New Zealand Govt ten year will start today also very little-changed at 4.33%.
Wall Street's Friday session is negative again with the S&P500 down -1.5% and heading for a weekly retreat of -2.7%. Overnight, European markets were down on average about -1%. That left London -1.9% lower for the week, Paris and Frankfurt -2.9% lower. Yesterday, Tokyo closed down -1.9% for the day to be -0.8% lower for the week. Hong Kong rose -0.4% yesterday, to be -0.7% lower for the week. And Shanghai ended flat in its Friday session to be -0.9% lower for the week. The ASX200 closed down -0.8% for a -0.9% weekly change, while the NZX50 ended its session unchanged for an essentially unchanged week. But that was enough for the NZX50 to come out on top of the markets we follow.
The price of gold will open today at US$1790 and up +US$12 from yesterday. But that is down from US$1800 a week ago.
And oil prices start today down -US$1 from this time yesterday at just under US$75/bbl in the US while the international Brent price is just over US$80/bbl. A week ago these levels were US$71/bbl and US$76/bbl respectively.
The Kiwi dollar opened today at 63.8 USc and a little firmer from yesterday. A week ago it was at 64.1 USc. Against the Australian dollar we are up more than +¾c to 95.4 AUc. Against the euro we are at 60.2 euro cents and up +½c. That all means our TWI-5 starts today at 72.6 and up +40 bps and back to week-ago levels.
The bitcoin price is now at US$16,821 and down another -3.3% from this time yesterday. A week ago it was at US$17,161 so a net -2.0% fall over the past 7 days. Volatility over the past 24 hours has been moderate at just +/- 2.3%. The auditing firm working on Binance and crypto.com has dropped (or "paused") work at both firms.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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43 Comments
Nasdaq down 32.6% ytd 2022 a terrible year for tech
Meta -60, Amazon-50, Apple-20 Microsoft-25 alphabet-40
I wonder whether 2023 will be equally savage
I would think so.
Many of these companies have been significantly over valued so like many asset classes they will be getting re-priced based more on value fundamentals instead of pie in the sky future prospects.
Apparently things like Alexa and Google Assistant have been extremely expensive to implement but haven't yielded commensurate returns.
So, tech giants are unable to convince the masses to pay hundreds of dollars and put listening/tracking devices in their homes or strap them to their wrists? Shocking!
I think the uptake has been ok it's more that it hasnt been very 'monetizable' for want of a better word.
All these companies are trying to compete for our attention but not all attention can be profited from.
Sounds just like overpriced Manurewa shiteboxes
On the COVID outbreak (breakout, really) in China, I saw an interesting comment on a John Campbell YT last night that illustrates the massive and rapid turnaround in controls:
My daughter works in China and currently has covid, a very mild case. She works at a big theme park, living in a large onsite housing complex. A few months ago she'd have been sent to a central quarantine facility, a month ago she'd have been sent to a quarantine block in the onsite housing. A week ago she'd have been isolating in her room. When she contracted covid she asked if she'd have meals delivered to her room, but was told just to go to and get food from the cafeteria and wear a mask. She is actually allowed to work now with covid if she feels up to it. There is a shortage of tests and her employers can't provide any. She has managed to get some from fellow workers who were more prepared, but they are hard to come by. A large proportion of the people she works with have contracted it. It was a very shambolic and distressing process for her as things changed there, with no-one really knowing what was going on for a while. Staff testing sites were removed but she still needed a 'clear' status from her health kit app to get access to certain places, but it was no longer updating due to the missed tests. Thankfully things are settling down now but it's bizarre how it's gone from the strictest controls to basically none in a few muddled weeks.
Interesting.
I suspect the CCP pulled back once they saw the real risk of mass uprisings.
Maybe there is a tiny semblance of ‘people power’ even in communist states.
Perhaps, perhaps not. Like just about anywhere else a coup, an uprising or whatever devolves around the loyalty of the military. Simplistically, they can support or they can crush. Unless of course the military itself splits, maybe a regional command breakaway, then you have civil war.
I think the power of the internet makes governments very wary about letting public discontent grow too much.
Typical, Fed's RRP "floor" reset today at 4.30% yet...bills. 4w way less, 8w a little less, 3m not much above and below IOER (I'm keeping the "E", the rate hikers can call it IOR if they want I don't care since they also tried to call it a floor when it wasn't). Link
New Zealand—a ‘Southern Link’ between China and South America?
And yet:
UNGA adopted by 123-50 the motion "Towards a New International Economic Order." Look at the split in the vote between the West and the Global South. Highly telling. Link
will we end up in BRICS ?
Not content with their 24% pay rise our fireman are now upset that they can no longer steel electricity from work.
Perhaps start a give a little page chaps, the finance on those Teslas must be crippling.
I'm sympathetic to their pay demands but had to smirk at this.
Thats called TTP
And while you are at it tell them no more charging their phones at work as well, and cold showers mandatory....hmm what else?
NZ GOVERNMENT BOND REPURCHASES - LSAP Repurchase History Data Published: 16 Nov 2022
Audaxes,
What are you trying to tell us?
The spreadsheet accessible from the first link shows that NZ Debt Management ( "The Government") has since July purchased approximately $2.5 billion of very long-dated LSAP bonds from the RBNZ. That is the first stage of QT.
The second link simply shows that none of these deals were settled on 15 December, which is correct. Some deals were made on 15 December but settlement is in the coming week. So what are you trying to imply?
KeithW
Sale of New Zealand Government Securities
Description Details
Sale date 15 Dec 2022
Settlement date No Sale Held
NZGBs sold-
Amount sold ($m)-
Furthermore, QT is the action of selling the bonds back into the market place (reverse the original QE asset swap). This operation extinguishes the particular bonds purchased by Treasury from the RBNZ.
You seem to be trying to imply some misbehaviour. I do not agree with you.
KeithW
You are making all the assertions - I commented that the RBNZ failed to update the data page for this transaction on the date of sale.
I cannot see a scenario where a world awash in debt (at government, business and private levels) can survive the much higher interest rates worldwide. I see very difficult times in 2023-2024 with state, company and personal loan defaults and I still stand by my call, made at least six months ago, that interest rates will plummet again, probably at the end of 2023 (the exact timing is difficult to predict).
I agree with you, and this is why it's so important to understand the difference between monetary inflation and price inflation. It's not just an academic distinction.
Interest rates may plummet, but the vast majority of debt still isn't going to be paid back. It can't possibly be at this point. It will be defaulted on, a process which reduces the supply of money and credit relative to available goods and services, which is monetary deflation by definition.
What does that mean for debtors? The true cost of a loan is the rate of interest minus the rate of monetary inflation. This means that in a deflationary environment you need to subtract negative inflation (i.e. deflation) to work out the true cost of the loan. If deflation is high, this means that the true cost of debt could also be high, even if interest rates are low.
For savers, it means the opposite. Even if interest rates are low, the real value of their savings could be increasing at a much higher rate.
Note that in neither case does it matter what the CPI is doing. Monetary deflation will tend to result in falling prices, as each unit of currency increases in relative value and you therefore require less of them to purchase the same thing. But if other factors are causing the cost of things to rise, nominal prices may stand still, and therefore deflation will not be reflected in the CPI.
In short, it doesn't really matter much what happens with nominal interest rates, or the CPI. As the huge mountain of debt we've created implodes on itself, savers will be rewarded, and debtors are going to find themselves in a lot of trouble.
Hi Chebbo,
Thanks for your reply. I also agree with most of what you say except for one central thing, you say "The true cost of a loan is the rate of interest minus the rate of monetary inflation", in my view the true cost of a loan is the rate of interest minus the rate of price inflation, or even more specifically the rate of wage/income increase. The cost of a loan is a cashflow measure, (i.e. the movement of money), therefore I don't agree with comparing it to monetary inflation, which is the the amount of money available increasing or decreasing (an asset/liability measure). I do agree that the amount of money available or in debt (monetary) can ultimately influence the price of money (CPI) but IMO it's wrong to directly compare monetary inflation with interest rates.
Please note, I'm not arguing with you, I want to have a genuine constructive debate I'm happy to hear your counterpoint.
There's not really any argument to be had here, we're talking about two completely different things. You're talking about the nominal value of debt, I'm talking about the real value.
Wage/salary increases may improve someone's ability to pay down the loan, but the value of the loan to be paid down remains the same. Monetary inflation reduces the real value of the loan, since each dollar is worth less than it was when the loan was taken out.
Consider borrowing $50,000 off your parents back in 1973. That loan would be much easier to pay back today than it would have been back then, but why? Yes, you are getting paid more in dollar terms, but that is not because the value of your work has somehow increased. It's because the value of the dollar has decreased, thanks to monetary inflation.
You are paying off a much smaller loan than what you took out in 1973. Not the same loan only faster.
Love your work Chebs. When the hoi polloi get sold on the idea that inflation reduces their debt obligations, it is often wrong-headed. Typically the assumptions are as follows:
- The "inflation" indicator is typically the watered-down CPI construct. As you rightly point out, monetary inflation and CPI inflation are two different things.
- People believe that incomes increase at a rate equivalent to inflation. This is a furphy and has not been the case in modern economic times (and most definitely from the 1970s). As technology advances, this means constraints on wage growth..
Yes, and this is how people will end up getting themselves into trouble. Someone will be paying 3% on a mortgage, see a 5% CPI print, and think to themselves:
"Aha! Since I know that the real cost of debt is the rate of interest minus inflation, and 3 - 5 = -2, my mortgage is actually being eroded by 2% per year! This is a great time to have debt. In fact, I think I'll go and borrow some more."
Problem is that the CPI measures price inflation, which isn't what erodes debt. A CPI print of 5% could mean that the price of consumer goods is increasing by 8% per year, but monetary inflation - the type of inflation which does erode debt - is running at -3%, or 3% deflation. This means the actual cost of debt is 6%; twice the nominal rate of interest, and fully 8% higher than what was calculated using the CPI.
In other words, a terrible time to be holding debt, and an even worse time to be taking on more.
Thank you very much for your reply Chebbo. I'm unfortunately unable to carry on this discussion, as I'm out on X-mas do, (currently on a toilet break, yep a bit pathetic to check Interest while out, lol) but I would love to continue this discussion another day with you, as I agree with many points but not all of them.
Cheers
Any time Yvil. I always enjoy hearing others' viewpoints. Enjoy your Christmas do!
Undoubtedly true but economies are slow moving beasts. I'd suggest we will have significant rate rise overshoot as RBNZ is both slow to react and overly cautious. Thereafter given the same we might expect a series of slow rate cuts. Perhaps mid 2024 before we see rate reductions and then at a slow pace.
Very much agree about the "slow moving beast". On the other hand, I believe rates will be cut at a fast pace when the proverbial hits the fan, especially given the RBNZ's history of its reaction to a downturn (Covid is a prime example)
I disagree, they want it to hit the fan, and will keep it there long enough to wipe a bunch of stuff out.
Hmmmm they want it to get bad (to help kill inflation) but not *that* bad that it totally kills the economy and leads to large levels of unemployment and instability.
Hence they will stop hiking the OCR by mid 2023 and might start easing it late 2023 or early 2024.
I also disagree on that, they want to stop the economy in its tracks, increase unemployment and have a bunch of other entities default on their debts.
They want a managed period of destruction. Whether they have much control over the management, only time will tell.
So we may end up with a National government that has to spend more than it would ever want to on increased social costs due to the state of the economy.
The RB doesn't want to destroy or haemorrhage the economy, they are trying to slow it to thus reduce inflation. When inflation comes down, there will be a delay before interest rates come back to the neutral rate of 3 to 4 percent at wholesale level. The RB will not want re stoke the inflation fire.
They don't want to destroy the economy, but they do want a certain level of destruction.
I'm really surprised by your view that "they want yo kill the economy". Firstly can you clarify who "they" is? The Government, the RBNZ?
Then, why on earth do you think either the reserve bank or the government, which by the way is likely to change, would want to kill the economy ???
The RBNZ is doing it via monetary policy, but the government will be aware.
I think there's a number of different fronts being fought.
-The US is playing economic warfare with its currency, which is going to cause more sovereign debt crisis' overseas.
-NZ is going along for the ride to a certain extent, by moving somewhat in parallel with the fed.
-The RBNZ know they have to kill off a percentage (or probably 3 to be fair) of employment, to reduce labour supply issues.
-The RBNZ want to kill off the more marginal debt out there. Drawing a longer bow, I think they're also somewhat conscious of the moral peril 14 years of money printing has created and will send the market a bit of a lesson.
My gut says they'll wait a while to let some destruction happen before they pivot.
Even without all this fancy stuff my power bill in the four months I have been with new provider Octopus is $277 in credit. Due to the solar feedin payment 17c.
https://i.stuff.co.nz/environment/climate-news/130786927/how-your-ev-co…
Small weekend piece in the FT questions whether the 2% inflation target is sacrosanct. Very much a universal policy goal from the Fed, EU central bank and of course RBNZ.
Should it be dropped the implications for asset prices (everything from stocks, bonds and real estate) would be a financial tsunami as the yield curves rose to price in the new dynamics.
Can't see that winning any votes but we live in strange times.
Reality bites
world recession all of 2023
nz tail at end of dog
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