Here's our summary of key economic events overnight that affect New Zealand, with news the global services sector has delivered a solid dose of optimism today and markets are reacting. The global economy is showing real resilience despite rising borrowing costs and elevated energy and food prices, a sign that central banks may need longer than anticipated to bring inflation under control.
First in the US, there were two respected services PMIs out overnight, both positive. The widely-watched local ISM one didn't dip from its strong January expansion when a dip was expected. Its employment component was especially strong. New order levels however were what really starred.
The internationally-benchmarked Markit one moved from a contraction to a minor expansion. They said new orders contracted but that employment rose.
Both reported that cost pressure reduced, although one noted that firms are still taking the opportunity to raise prices.
Meanwhile, the Fed said they will need to raise rates to higher levels than previously anticipated to prevent inflation from picking up if the recent strength in hiring and consumer spending continues. ECB officials are saying similar things. Oddly both the bond and equity markets are ignoring the warnings today.
In Canada, the expected bounce back in building consents didn't happen in January after the sharp fall in December. They got another fall.
In China, their private Caixin service sector PMI also reported a good expansion, a bounce-back from January and confirming the official measure. New orders and employment rose in a direct response to their re-opening.
The expansion in the services sector was even stronger in India in February, out-shining both the US and China.
Singapore is doing it tough however. Their PMI turned negative in February as firms there pulled back, and the retail sales dived worryingly from the prior month in a report for January.
Germany reported that its exports rose in January from December to be +8.6% higher than the same month a year ago. Meanwhile they say their imports fell, mainly because their imports from Russia dropped -37% in January. They are learning fast how to do without Russian energy.
In the EU, they say producer prices fell in January from December and the year-on-year rise is moderating fast. This was a much larger monthly fall (-2.3%) than was expected (-0.3%).
In Australia, home lending was weak in January, dropping the most month-on-month since July 2022. Lending to investors fell the most. House price declines are suppressing listings and are likely to reduce loan sizes, putting downward pressure on total lending.
Global food prices were stable in February from January according to the FAO monitoring. That puts them -8.1% lower than year-ago levels when they were rising sharply. They are now -19% below their March 2022 peak and back to levels we first saw in October 2021.
We have noted this before, but the latest update has coal prices falling even further this week, down -12% in just one week, down more than -50% since the start of 2023. Most other commodities are holding their price levels, but lithium is another that is also falling sharply. Another weak 'commodity' is the carbon price, with the NZU price down more than -20% since the start of 2023.
The UST 10yr yield starts today at 3.97% and down -11 bps from yesterday but up +2 bps from a week ago. The UST 2-10 rate curve is more inverted at -89 bps. Their 1-5 curve inversion is little-changed at -76 bps. Their 30 day-10yr curve is much more inverted at -69 bps. The Australian ten year bond is down -7 bps at 3.87%. The China Govt ten year bond is unchanged at 2.94%. And the New Zealand Govt ten year is starting today at 4.76% and up +9 bps from this time yesterday. A week ago it was at 4.67%.
Wall Street is in its Friday session with the S&P500 up +1.5% in late trade. If it holds that it will end the week up +1.2%. Overnight, European markets were varied with London unchanged, Paris up +0.9% and Frankfurt up +1.6%. Yesterday, Tokyo closed also up +1.6% for a weekly rise of +2.2%. Hong Kong rose +0.7% for a very impressive weekly gain of +3.8%. Shanghai rose +0.5% yesterday for a +2.2% weekly rise. The ASX200 ended its Friday session up +0.4% but that only resulted in a -0.3% weekly dip. NZX50 fell -0.3% yesterday and that was also its weekly result.
The price of gold will open today at US$1847/oz and up +US$11 since yesterday. It is up +US$36/oz for the week, or a 2.0% rise.
And oil prices start today up +US$1.50 at just under US$79.50/bbl in the US. The international Brent price is now just under US$85.50/bbl. These are weekly rises of +US$3.50/bbl.
The Kiwi dollar is unchanged at 62.1 USc. Against the Aussie we are down -½c at 91.9 AUc. Against the euro we are little-changed at 58.5 euro cents. That all takes the TWI-5 to 70.4 and down -20 bps from yesterday, but up +20 bps in a week.
The bitcoin price is down -3.7% today from this time yesterday, now at US$22,411. A week ago it was at US$23,103. And volatility over the past 24 hours has been high at +/-3.5%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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47 Comments
Even today the Fed's Waller basically admits they're just making it up as they go, sticking their fingers in the air at the mercy of the monthly winds blowing back and forth of volatile high frequency data. They're don't have any conviction because they don't know inflation. Link
Markets aren't raising the terminal rate point because the fundamentals warrant it, rather they're reprising how the Fed is likely to respond to recent data regardless of the fundamentals. IOW, the markets know how policymakers think and how little conviction they have. Link
The Irrationality That Forms the Beliefs of Janet Yellen
As today, policymakers were perplexed about where it was coming from – the inflation, not the economic weakness. Owing much to the work and influence (political and otherwise) of Economists Paul Samuelson and Robert Solow, beginning with their 1960 paper dryly styled, Analytical Aspects of Anti-Inflation Policy, the unemployment rate became the center of focus.
Quite a lot of debate over the decades has been spent on it because of how much it impacted contemporary thinking (somehow still surviving in “evolved” formats to the present day). Alan Meltzer in his History of the Federal Reserve observed “The Phillips curve was an empirical relation with no formal foundation, but it had great appeal and moved with remarkable speed from the economics journals to the policy process.” That appeal was understandable, obvious, and regrettable.
Regrettable not because this theory when put into practice had been responsible for the Great Inflation, as many today still believe, as Meltzer asserts, in the absence of legitimate explanation, rather because the idea of Samuelson and Solow’s “menu of choice between different degrees of unemployment and price stability”, as they put it in that paper, presumes inflation always within the grasp of authorities.
Well that first sentence that first section that first comment could, I suggest, be easily transposed with “the RBNZ’s Orr” and be just as telling and accurate, couldn’t it.
I find it quite comical that the equity and bond markets aren't taking the Fed seriously that rate hikes will continue until inflation drops. "Nah, they will totally pivot when something breaks. We're good".
I wonder what Powell having a tantrum would look like? Have the money printer brought on stage and take a baseball bat to it?
The sad reality is that The Fed etc al have absolutely no intention of stopping price rises (let's call it Inflation as others might). If they did, they'd be on top of it instead of underneath it with their interest rate policy settings. The market know that. And as long as Central Banks chase price rises up - their obvious intention - then market rates can safely lag behind.
(PS: It's just a continuation of their negative real interest rate policy of "More of what didn't work last time, must work this time")
but lithium is another that is also falling sharply.
‘They Now Need Democracy’: Internet Fears for Iran’s Safety as Tehran Finds $500 Billion in Lithium
If they can’t develop and/or exploit it themselves undoubtedly their well established and mutual relationship with the CCP and China might come in handy?
There is one problem - are lithium ion batteries they way of the future - just saying.
https://www.imeche.org/news/news-article/the-big-battery-challenge-3-po…
I notice when Orr put up the OCR last week the banks were quick to put up mortgages but are very slow to put up Term Deposit rates. Banks have just increased their margins / profits.
Could it be, we the citizens have to remain poor to help finance the current account deficit? - some history.
None of the major banks have raised mortgage rates.
Indeed...if you had a nice little earner running would you be inclined to risk destroying it for the sake of a few extra bucks?
(being aware that you currently have a choice, which may not remain the case)
Makes you wonder if the demand for term deposits by banks has reduced.
Also what Albert said
Interest rates only matter to the mostly average buyer in the country. There are plenty of rich who keep buying bigger and bigger properties and do not really care how much they borrow or pay in interest.
The term deposits are not a big portion of banks business, so they do not care. RBNZ keeps on giving enough cheap money to the banks at the expense of tax payers so banks do not have to fight for cash. They will pay minimum for term deposits as they don't need their business really.
An excellent aerial photo (zoom in) showing the extent of flooding in the Hawkes Bay.
https://data.linz.govt.nz/layer/112726-hawkes-bay-010m-cyclone-gabriell…
Germany reported that its exports rose in January from December to be +8.6% higher than the same month a year ago. Meanwhile they say their imports fell, mainly because their imports from Russia dropped -37% in January. They are learning fast how to do without Russian energy.
Germany’s Scholz Visits Washington Amid Worries Over Ukraine ‘End Game’
Chancellor Olaf Scholz arrives Friday for a quiet working visit with President Biden, sparking speculation that they will discuss tough questions on how to end the war.
Germany are between a rock and a hard place. IMO a large portion, 50%?, of EU inflation is due to the EU's war contribution via sanctions. The US is sitting pretty. Less competition from the EU and specifically Germany so they will pound the Ukraine support drum as the Ukraine is a proxy mostly for the US and so nobbles Russia. Germany will have to dance to the US tune.
I'm glad you used apostrophes when describing carbon units as 'commodities'. They are permits to pollute that have basically become speculative assets - things that you can buy or short etc depending on your bets on the future of the Emissions Trading Scheme. Whoever decided that non-participants should be able to trade NZUs 'to grease the wheels of the market' (or whatever) is a total idiot.
"Whoever decided that non-participants should be able to trade NZUs 'to grease the wheels of the market' (or whatever) is a total idiot. "
I'll put in the name for you. James Shaw
NZ 10 yr now 4.75.............
Will all the school kids that protested about climate change yesterday be walking, biking or taking the scooter to school on Monday...or will mummy be dropping them off in the car??? 🤔
Yeah I wonder. I was thinking the same
The last student protest leader got outed by HDP for flying international for leisure but telling others not to
The environment ministry was outed this week by DS for spending nearly one million on flights, 100k on taxis and a mere 200 dollars on public transport.
They will still say its the boomers that are to blame. I say its a boomerang that came and took them out
Two survived the asteriod impact, then.
Everyone sees through the preacher who does the exact opposite of what they preach.
Christchurch mayor tells school strikers his stance on climate changed after Cyclone Gabrielle | Stuff.co.nz
https://i.stuff.co.nz/environment/climate-news/131354568/christchurch-m…
Plain stupid mayor. Doesn't he know Jack that its not new.
As we get younger voters, and brainwashed pandering mayors appointed they will be making up rules on the fly that will not help
You can't blame people for being forced into the system that is badly designed. These kids are asking for the system to be changed. We're not going to solve the issues we face by asking people to make choices which disadvantage them over others who choose not to make those choices.
If you look at how sports have cleaned up their acts, they don't rely on players making the right choices, they change the rules and penalise those that don't comply. Climate change is no different, it's system change we need. System change isn't achieved by relying on virtuous individuals choosing to change their behaviour, it's achieved by changing the rules of the game. That's what these kids are asking for.
Well the thing with kids, is they often don't have much of a choice? They're kind of at the whim of where their parents choose to live and what means of transport they can provide.
What next? Are you going to start meme'ing about how you were the last generation that grew up with glass bottles and how kids today are the "throw away plastic" generation?
More seriously, you need to ask how safe are school children, especially primary school, walking to school. Children are getting beaten up and robbed at bus stops even. There are unfortunately but undeniably a lot of nutters, criminals and deviants about. Additionally road traffic is in itself a big threat to them. Somebody suggested here,what would be good would be a neighbourhood founded system of groups of children being escorted by parents or alternative adults. Guess with two parent working families, time and application is not as available as it used to be.
Walking school bus.
Where there's a will there's a way.
How about changing our streets so that they are not death-traps to anyone not moving along them in a one-ton metal box?
Well perhaps, but there was more than one aspect originally suggested, wasn’t there. Anyway well and good, focus entirely on whatever spins your wheels.
Mummy in the SUV...who's at fault?...hint the owner
I think NZ Employer Kiwisaver contribution needs to be increased over time to 10%.
I'm surprised there seems to be zero conversation or party policy about this but if Australia can do it why can't we?
Its currently a 10.5% employer contribution in Australia moving to 12% in the next couple of years. Also its compulsory in Australia and I think it should be in NZ.
The result is Aus super balance ends up being double NZ super balance based on someone earning $80K over 40 years. $300K in NZ v $600K*
The benefits are obvious for the individual but also for NZ as there will be less reliance on the Govt and less pensioner poverty.
Obviously we aren't in a good space right now as business owners or a country but we should be soon and should start the conversation to make sure our kids stay in NZ long term.
*for a worker working from age 25 to 65 earning $80K per year. Based on putting 3% employee contribution in both countries and 10.5% current Aus Employer contribution v 3% in NZ (which is actually nearer to 2% after ESCT tax is deducted - wrongly imposed by the then Fin Minister at the time in my opinion) - calculators used Sorted and moneysmart.gov.au
For years many crowed about a “new normal” of cheap money for as far as the eye could see. We are returning to the “old normal”, where money is much more expensive and cash will offer a decent return above expected inflation.
Chris Joye - AFR - It’s important to zoom out and synthesise the big structural changes that are taking place before our eyes, which will irreversibly alter optimal asset-allocation decisions. The bottom line is that you want to be liquid and avoid the unusually high downside risks of illiquidity right now.
Since January 2022, our economists have forecast a US and global recession arising in late 2023 or early 2024, and their modelling continues to imply that this is likely.
We are returning to the “old normal” where money is much more expensive and cash will offer a decent return above expected inflation. David Rowe
Central banks are singularly focused on demand destruction and crushing inflation back to their circa 2 per cent targets. They are actively hiking rates while explicitly forecasting recessions in countries like the UK and New Zealand.
This is an existential battle for central bank credibility, and we do not think policymakers are worried about downside economic risks. Indeed, they have to secure these downside scenarios to deliver price stability.
The central bank “put option” – which has consistently bailed out equity investors and those long risky asset classes, like junk bonds, since the 2008 crisis – is dead and buried.
We do not think that a serious recession is priced into stocks or high-risk debt. Equities have priced in the discount rate changes, but not recessionary probabilities, in our view.
Unfortunately, illiquidity is creating extreme cognitive dissonance in asset pricing. With global cash rates rising above 4 per cent to 5 per cent, many highly rated government bonds offering 4 per cent to 5 per cent, bank deposits paying 4 per cent to 6 per cent, and bank bonds paying as much as 6 per cent to 7 per cent, the minimum hurdle rates for all other asset classes have soared.
To allocate to anything other than cash and high-grade bonds, one would want to be paid a risk premium of 4 per cent to 5 per cent, which translates into minimum expected returns of 9 per cent to 10 per cent.
Yet valuations in illiquid markets – such as residential property, commercial property, private equity, venture capital, high-yield debt and private loans – have been incredibly slow to adjust. And less sophisticated investors are continuing to allocate capital to assets trading on inferior yields to cash and government bonds with vastly higher probabilities of loss and little-to-no underlying liquidity, which makes scant sense.
Default cycle
The global economy is about to experience a very serious default cycle. Interest rates have risen by a record margin. Households are carrying record levels of debt. The economy will go into recession or experience a radical retrenchment in growth. Sadly, scores of businesses and families had predicated their finances on the assumption of the “low rates for long” paradigm persisting.
We face the spectre of high rates for a potentially very long time. Central banks are scarred by missing this inflation crisis, which our modelling suggests was fuelled as much by excess demand as supply-side rigidities. While central banks should pause this year, there is a non-trivial risk that there will be a second phase to this hiking cycle if core inflation rates do not promptly move back to their 2 per cent targets.
Disturbingly, markets do not appear to be pricing in any possibility of a second phase to this monetary cycle: they universally assume rates will peak this year and then drift lower.
When central banks do come to cutting, they will be slow – and eager to avoid over-stimulating again. None of them know where the true “neutral” cash rate is, and they will be careful as they approach it. Most central banks do not expect to cut until 2024 or 2025, and the cuts may be modest when they come.
Zombie wipeout
Our systems show that the share of listed companies that don’t have sufficient profits to pay the interest bill on their debts has almost doubled in the US, UK, Europe and Australia over the last decade. This is based on 2021 financial data – before rates started rising.
These zombie companies will be wiped out. That is what the central banks want: they are actively seeking job losses, higher unemployment, lower wage growth and the demand destruction required to get inflation under control.
Since the global financial crisis and the advent of the search for yield, many business models and asset classes were predicated on the persistence of uber-cheap money. The pervasive search for yield saw demand for income-rich equities, residential and commercial property, high-yield bonds and private loans explode.
In the period after 2008, this dynamic was amplified by global regulators forcing banks to reduce lending to the sectors that had historically accounted for big balance-sheet problems and bank blow ups. Regulators made it difficult for banks to provide finance to residential property developers, commercial property owners and high-growth zombie firms.
This “sub-prime” business lending shifted into the rapidly growing non-bank sector, which sits outside the regulatory net. The growth in high-yield issuance, private lending and crypto finance was fine for as long as credit default risks remained contained. But this required interest rates to stay very low.
Crossing of the ways: valuations in illiquid markets have been incredibly slow to adjust, yet less sophisticated investors are continuing to allocate capital to assets trading on inferior yields. Louie Douvis
That cycle has turned. Lenders will be reluctant to acknowledge loans going into default, and will be restructuring them to extend terms, reduce repayments and/or swap debt for equity.
One way or another, a substantial default and restructuring cycle is inevitable. In contrast to every other shock since the GFC, when risky borrowers were bailed out by zero rates and endless money printing, this time around many will face insolvency.
The history of the financial world teaches us that during recessions many non-bank lenders die, while the banks need to be backed by explicit government-guarantees and the availability of central bank lending facilities.
The huge increase in the yields on cash and liquid, high-grade bonds will likely see a shift of asset allocation away from equities, property, infrastructure and junk debt.
We are seeing this in record book-builds for new highly rated bond issues. This process will be amplified by the regime change for defined-benefit pension funds globally. For decades, these have run large funding gaps that have recently transformed into surpluses as a result of the giant increase in interest rates slashing the present value of their current liabilities.
Previously, when defined benefit pension funds in Australia, the US, Britain, Europe and Asia faced funding deficits, they were forced into chasing yield (risk) to try to close these gaps via allocation to public and private equities and other racy sectors, such as commercial property and junk debt. But with the sudden emergence of funding surpluses, they are looking to lock in this security by reallocating back to high-grade bonds paying lofty fixed interest rates.
This is also driving an enormous increase in the demand for fixed-rate as opposed to floating-rate paper. These yield-based buyers could in turn compress credit spreads sharply for as long as overall yields remain high, and alternative investments fail to compete in risk, return and liquidity terms.
This has been evident in recent fixed-rate bond transactions that have experienced striking spread compression for as long as they continue to pay an attractive total yield.
No boom next time
Investors should not expect the classic post-GFC boom in asset prices once the correction has passed. After every shock since 2008, central banks floored rates and ran quantitative easing to infinity. They could only do this as long as inflation remained very low. This time around, the structure of interest rates is fundamentally shifting higher.
Central banks are revising their estimates of the non-accelerating inflation rate of unemployment (NAIRU) and the neutral cash rate back up to more normal levels, after experimenting with the idea that NAIRUs had fallen and neutral rates might be lower than in the past.
It is likely that this will unwind some of the shifts in asset allocation that flowed from the secular decline in interest rates, and the advent of very benign price stability, since the adoption of inflation targets in the early 1990s (i.e. the huge equity and illiquid assets binge).
The risk is that central banks struggle to get inflation rates back to their 2 per cent policy targets, and have to precipitate deep downturns to secure price stability.
This would be bad for all asset classes, except cash. Asset prices have to adjust permanently lower in response to permanently higher discount rates, and potentially a period of permanently lower growth as household and business balance sheets deleverage further.
Rather than the big post-GFC bounce that many have hoped for when they “buy the dip”, one may be better off “selling the rip” when these bear market rallies emerge.
For years many crowed about a “new normal” of cheap money for as far as the eye could see. We are returning to the “old normal”, where money is much more expensive and cash will offer a decent return above expected inflation.
So (Niffty/HW2) what you think if the yield needs to be 9-10% .... I guess there may be a couple of thousand less sophisticated investors left, then its turtles all the way down
Are you 1/2 less sophisticated investors ?
You seem keen to buy here when everything seems to point to a massive risk asset correction, are you the bag holders those hoping to get out, pray will buy their property?
Do you aim to buy up after the "massive correction". In your thinking high inflation leads to high interest and will bring that correction about. Also, can you confirm when the recession is starting, you told us it would be mid this year.
You do seem to have an equation swirling in your head that goes 'high given return leads to low capital values'. You roar with laughter in a deeply evil way while chowing down on a juicey steak. But all the time forgetting the other factor being income stream.
Unfortunately this line of conversation only leads to shouting and accusation from numpties. Big in denial that such an outcome could occur.
I often hear that the seventies and eighties brought falling real property prices. But this masks the fact that average auckland prices went up 20 times over 15 years. Rents went UP from a few dollars per week to more than one hundred.
I am not so sure Real Estate is going to be a great investment as long as interest rates stay high.
If there isnt a big drop you will not see a rise back to Nov21 without interest rates going way lower or waiting a long time.
If there is a big drop its likely that there will be a bounce out over the 8-10 years from the bottom.
The answer there is to buy high yield low maintenance.
I am just no longer a believer that property can provide a decent risk margin, for me personally its about food security, mmm steak.
The trouble is that property is a longterm investment. Looking forward, people like you always say, "what if"
High yield AND low maintenance in one sounds primo. Nifty1 says seek and you will find
And people like you look in the rear vision mirror and assume the past predicts the future. - just saying.
Use intuition, logic and emotions to make decisions, a powerful combination. My first investment property had been on the market for a long while with no takers, it was offering 16 percent return and we negotiated 18 percent.... when int rates were one third of that. I saw it as an absolute bargain to grab with both hands. The cashflow meant we could buy others which were not such good yield but were still more investable.
The point is that anyone could have done what we did but all refused and so the vendor wanted out.
Remember what nifty1 says .....
This time will come again, be ready, now is not that time.
HW2 and many many people like him are living in a different paradigm, a fantasy of a ‘glorious past’. The next ten years are likely to be very different to the last 10 years.
HW2 is far from alone. In fact he’s representative of the status quo.
More than this, though, Hartnett argues that what we are seeing is not a cyclical shift to higher rates, but a structural one.
“War, globalisation, fiscal excess, bailouts, net zero [mean] higher inflation and rates,” he says in his latest missive. His “secular script” is reproduced below:
- An era of extraordinary monetary policy (lowest rates of 5000 years) is over
- Inflation is a secular reality not a cyclical theme
- Governments have poor balance sheets, must pay higher yields to attract finance
- The combination of higher inflation and higher interest rates leads to a mean reversion in equity valuations
- The end of a necessary bear market will coincide with a credit event; until then, cash as good as bonds and stocks
When is the much vaunted recession beginning. The award for living in fantasy land belongs to you Housemouse. When has even just one of your touted predictions come true
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