Here's our summary of key economic events overnight that affect New Zealand, with news the strength of global labour markets is still on display, especially in the US.
But first, despite mortgage interest rates back rising again, last week mortgage applications rose as well and that breaks a three week retreat.
For all the talk about how Americans are supposedly loading up on more credit card debt, the latest data on overall consumer debt (January) shows it rose a very modest +US$15 bln and far less than was anticipated.
But the key overnight news has been the release of more data that points to a 'hot' labour market, not fading yet.
We get the US non-farm payrolls report for February this weekend (NZT) and it is expected to reveal their employment rose +205,000 on top of the prior month's +517,000 unexpectedly good gain. Today, the private ADP pre-cursor report was also strong for February, showing a gain of +242,000 and well above the expected +200,000. That has changed the risks for the non-farm movement to the high side. There is some evidence that the continued expansion is due to many more women returning to their workforce.
Data for their January JOLTS report also came in better than expected. The number of job openings fell by 410,000 to 10.8 mln in January and much better than the 10.5 mln expected, and the December levels were revised higher.
American exports rose in January from December and were at a level higher than anticipated.
All this data, especially the labour market data, is keeping pressure on the Fed. A return to outsized rate hikes are more likely now starting at their next review on March 23 (NZT), a rate that has already risen to 4.50% so far. A rise to 5.00% is priced in, and markets now expect it to rise to 5.65% within the next six months.
Locally, we should also note that our own two year swap rate rose to 5.54% yesterday, its highest in 15 years.
Canadian exports also rose more than expected in January and that enabled them to report a good trade surplus for the month when a deficit was expected.
Meanwhile, the Bank of Canada has kept its policy rate unchanged at 4.5% and maintained its quantitative tightening is a well-signaled and expected decision. Inflation is running at 5.9% there but their central bank thinks it has done enough for now with rate rises. It thinks their inflation will fall from here.
In China, their housing woes are having an interesting impact on mortgage borrower sentiment. Homeowners are paying down their loans much faster. Also motivating this are cash shifts back from disappointing returns in investment funds. This overall effect is showing up in bank earnings as they miss out increasingly on the long flow of interest earnings.
In Germany, 'real' retail sales were lower than expected, in fact they fell in January when a small rise was anticipated. But their industrial production data went the other way, expanding much more than expected in the month. However, that still left it -1.6% lower than the same month a year ago.
In Australia and in an overnight speech, the RBA Governor went out of his way to make two points. Firstly that future rate hikes by them are uncertain and very data dependent. And secondly, they don't care where the US rates end up; they are not trying to match them. This added a very dovish overlay to what was a hawkish RBA Statement on Tuesday. Markets now have to figure out the RBA's resolve on beating inflation which is currently running at 7.8%.
On the logistics front, you may recall the 2021 and 2022 period where it was hard to get empty containers for overseas trade. Well now the situation has reversed. China especially is awash in empty shipping containers which are clogging up their port systems.
And yesterday we noted that air cargo volumes are now weakening. Today, January data shows that air passenger travel is strong and growing, also a sharp turnaround in a year. Domestic travel seems to be back to pre-pandemic levels, although there is some way to go for international travel. But it is recovering fast.
The UST 10yr yield starts today at 3.99% and a net +3 bps higher from yesterday although in between it got up to over 4%. Powell's Congressional testimony is moving this around today. The UST 2-10 rate curve is more inverted at -110 bps, a new 42 year record. The more inverted this gets, the more that signals markets think they are in for a hard landing. Their 1-5 curve inversion is a little more inverted at -91 bps. Their 30 day-10yr curve is actually less inverted at -72 bps. The Australian ten year bond is down another -3 bps at 3.66%. The China Govt ten year bond is up +1 bp at 2.91%. And the New Zealand Govt ten year is starting today at 4.67% and little-changed from this time yesterday.
On Wall Street, the S&P500 is ending its Wednesday session down -0.3% in late trade. Overnight, European markets were mixed with Frankfurt up +0.5%, and Paris down -0.2%. Yesterday Tokyo ended its session up +0.5%. Hong Kong fell a very sharp -2.4%. and Shanghai fell a minor -0.1% recovering from a sharp fall for most of the session. The ASX200 ended its Wednesday session down -0.8%, while the NZX50 fell -0.5%.
The price of gold will open today at US$1817/oz and down another -US$4 since yesterday.
And oil prices start today down -US$1.50 at just over US$76.50/bbl in the US. The international Brent price is down to just over US$82/bbl.
The Kiwi dollar is down marginally, now at 61.2 USc. Against the Aussie we are back a little at 92.6 AUc. Against the euro we are little-changed at 58 euro cents. That takes the TWI-5 to 70.1 and little-changed from yesterday.
The bitcoin price is little-changed again from this time yesterday, now at US$22,143 and a further -0.7% slip. And volatility over the past 24 hours has been modest at +/-1.1%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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57 Comments
I’ve definitely adjusted my view on interest rates. They look like being higher for longer.
However…. This is likely to mean their descent will be quicker, once demand destruction has really kicked in by the middle of this year.
So their peak in NZ may be higher than I thought (perhaps an OCR peak of circa 5.5-6%) but I still think the OCR will be back at around 3.5-4% by mid 2024.
Things are going to start getting really ugly.
cash is King! (For now)
As a natural cynic, note it is election year. Would that not suggest a latent desire, if not need, to hold off on anything too ugly getting to the surface, at least for the next seven months?
Yeah, nah. Of course the government won’t want it to get ugly, but it will. Just so much on the ground chat right now as to how things are falling away. I don’t rate the guy, but for what it’s worth Tony Alexander’s latest survey shows a pretty ugly falling away in spending intentions. Dining out spending intentions dire, yet we are importing a whole lot of people to work in hospo. Go figure…
By that measure then, the next OCR adjustment will be both critical and an indication, I would suggest, of any “political consideration” being included in the setting.
I'm picking an OCR 8% plus. The belief it will drop because people won't be able to service their mortgages I concur with, however, I believe debt concentration is what is going to determine where they end up. We already know 2/3 aren't directly affected at all, and a further 2/3 of the remaining are minimaly impacted. This indicates the vast majority of the debt lies in the hands of the remaining 1/9 - and the cut-off point for the 1/9 is still half the average rent paid by 1/3 of households. Pretending it's linear (and recognising it most likely isn't), that would indicate only 5% of households are affected much at all. There will be collateral damage, but the average business in NZ employs just over 4 people. That leaves 15/20 people not affected directly, assuming all those 5% struggling were business owners involved in the construction industry (which is highly unlikely). And given the rebuild opportunities afforded by the recent weather events, I doubt we're going to see the real workers (tradies) suffering too soon - assuming they are prepared to go where the work is.
At the same time you have the aging out of the boomers causing skills shortages in the workforce. - and this is happening around the western world, not just NZ.
Throw in the resilience of the American mortgage market (who are also in a bubble, albeit much smaller) and I just can't see rates not going up further.
This will take years to play out, and we're going to see all the speculative absolutely blasted to pieces - especially in the tech and FIRE sectors - but that is only a tiny fraction of the population.
So far, the only basis I've seen for "OCR won't go above .. blah blah blah" is hopium linked to personal risk.
Pretending it's linear (and recognising it most likely isn't), that would indicate only 5% of households are affected much at all.
You get that this is a huge political argument against massively hiking the OCR right? Like at some point all you are doing is inflicting more pain on a small group of people. It's pointless if things remain otherwise bouyant.
I don't really disagree with anything else you've said, but at some point there will be a consideration given that goes beyond the economic data, and just driving people out of their homes while the rest of the country carries on as-is will go down like a cup of hot sick amongst the general electorate.
But as for FIRE stocks, it may only affect a small part of the population on a headcount basis, but it will absolutely demolish Kiwisaver and that may have political consequences too. You're not going to have much luck forcing people into a retirement scheme as funds hit the floor.
"at some point all you are doing is inflicting more pain on a small group of people".
The thing is though this is just collateral damage. The intention of the RBNZ when it raises interest rate is to drive down CPI into the 1-3% bracket as per their mandate.
The intention of the RBNZ is irrelevant, tbh. If that was their sole focus then we wouldn't be in this mess in the first place.
Seems more like that the intention of RBNZ is to be seen to be doing just enough so that people leave them alone.
You are going to see so much international carnage well before rates get to these levels. The Eurodollar market cannot sustain rates FED rates at 7... Private equity and REIT will all have fallen over with rates that high, you would have pushed the world into a global depression (which may be coming like it or not).
Yeah. However, from a cost-of-debt perspective, the thing about interest rate rises is they get less effective the higher they get.
Going from 0.25 to 2.0 is an 800% increase... but from 6% to 8% is only 33%. So those who buy in at higher interest rates (as those who sell at as the lower rates become unaffordable) will be better placed to weather further increase, and that cycle continues yadi yada.
Long term, average rates are round 6-6.5%. My main reason for calling 8% is a) I expect them to overshoot, and b) that's not too far off history (OCR hit 8.5% just before GFC, and we saw much higher rates in the 70s and 80s pre-OCR).
There will always be carnage during a correction, and many who thought they were "onto a sure thing" will find they weren't.
Your language usage is showing that you watch YouTube video's from the Maverick. (Yadi yada). I agree fully with this and your previous post because that is what we are heading for. The OCR and wholesale interest rates at a higher peak (end of this year) and at a higher level for longer until mid 2025.
nope. yadi yada is just a literary device.
Interesting comment. I'm wondering about the 5% of households facing the sharp end being described as "affected much at all". My feeling, yes just a feeling, is that 5% will be severely affected which would be around 70,000 households. Hopefully most will get through by curtailing spending, stopping KiwiSaver payments, cancelling subscriptions and unnecessary insurance, getting second jobs and not eating out.
We are about to create a new class of household. Once they were aspirational and middleclass (actually most of us are working class and always have been) and now they are in negative equity with high mortgage costs and barely holding things together day to day.
I Imagine of the 5%. 4 out of 5 will get by but just have no quality of life. Their kids won't be able to do activities. They will be eating beans and rice not meat. The last 1% will be foreclosed on.
So about 14,000 mortgagee sales.
I think you are hugely underestimating the collateral damage. A big chunk of the economy is FIRE, you destroy that and there are all sorts of big flow on and multiplier impacts.
I think there’s every chance that with an OCR of 8% (or even 6.5-7%) we would see unemployment well above 10%, quite likely around 15%.
While I have limited sympathy for destruction in the FIRE area, I have plenty of sympathy for the many people who would be part of the nasty collateral damage.
Probably, and I'm not saying it like it's a good thing (though long term I believe it will be).
I will note, history disagrees with your unemployment prediction: even in 2009 after the 8.5% OCR we peaked at 6.5% unemployed. There looks to be a fairly strong correlation between OCR and unemployment rate over the last 35 years (2002-2008 the only real aberation there - not sure why - possibly the opening up of trade agreements with china?).
House prices and the economy are much more sensitive to interest rate hikes now as compared to 2008, because the debt levels are so much higher (even accounting for growth in incomes).
cash is King! (For now)
Kiwi Wealth (Fisher Funds?) KiwiSaver monthly returns have just been updated for February. Cash is now their only fund with a positive return over 12 months (+2.71%), a whole 8.66% better than their default fund over the same period (-5.95%).
Worth noting that from the 1st of December 2021 they changed their default fund to be more aggressive. If you stayed in the original default fund, you'd only be down 1.61%.
I'm getting an urge to pull the trigger on my KiwiSaver and go cash.
I've written off my KS in my mind given I still have 20 years to exit the scheme. I've been on a savings suspension now for a few months and more than likely will continue to roll this over every 12 months or so whilst paying the min 1k. It's better that I can deploy the funds directly into metals, interest based assets and other securities while maintaining the feeling of some form of liquidity.
I switched to Cash last year July. Initially I thought it was a mistake but now 8 months later I accept it was a good decision.
once demand destruction has really kicked in by the middle of this year
Do you think will it be a shallow recession or full on "great depression level" as per Zachary
There is still a large part of the population that are largely not affected by rising int rates. Also, not much time left between 9 march and mid year
It will depend on how high the OCR goes. If it goes to around 5.5%, then a moderately bad recession. If it goes to 6.5-7% or more then a bad and deep recession.
Going to 5.5 is high probability
however the banks have the ability to reduce margins if they want. They can absorb some of the increase if its in their better interests.
Come on HW2 what's wrong with you? I clearly wrote great depression level situation for some households.
Zachary Smith | 6th Mar 23, 10:02am Without doubt a large number of people this year are going to face a challenge, the challenge of their lives possibly. Severe financial hardship that will result in either a large financial loss by being forced to sell in a bad market, great depression level like hardship requiring cutting back on food and taking on extra work, and bankruptcy. This will take quite a toll.
I think your tone is getting offensive now
https://www.nzherald.co.nz/business/house-values-falling-but-still-up-2…
minimum another 24% to go
Canterbury values are now 45 per cent up on what they were before Covid
Probably not eh, we've seen substantial inflation and increases in earnings over that time frame. I don't think 30% from peak pre any inflation adjustments is unreasonable, with it clawing some back as we add more and more people. Which... is kind of all we know how to do.
Lol.
Not increasing population = bigger house price drops.
Increasing population = infrastructure overload.
We need a strategy. The current knee jerk reactions to crises and economic issues is not just foolish its embarrassing. We need a strategy for the economy and country and changes should be tweaks that are un line with the strategy.
We have traditionally done Agri and Tourism well, through in education and immigration.
But Labour and the Greens hate Agri, and will shortly hate forestry, Kiwis won't work in minimum wage tourism.
You can't just pivot away from your strengths, especially as so much debt is tied up to them.
Apparently we used to be quite good at trading houses, now , not so much.....
Even if there is something you hate doing, you do it because you know you have to. Eg listerine gargle. You know if you dont, then people will avoid you.
Same in politics. Ruminant animals are a necessary evil. Too many trees creates too many enemies so are expendable.
Or run with Helen-grads idea of a knowledge economy. 20 years too late, we missed the bus
Sound money system would be a start..
Still lots of people moving to Chch from Auckland, Wellington etc. Checked in a family of 5 immigrating from Karachi to the airbnb. I honestly feel the market down here has stabilized and is well supported - certainly for family homes.
The CoreLogic guy made an important comment yesterday
Re Tauranga, which has some of the highest priced homes to incomes in NZ, He noted that people take there wealth to Tauranga, and many of these have low incomes but also low/no debt.
Is a worry re FHB affordability, but the wealthy not really buying these suburbs anyway. With Auckland prices dropping away, less ability to transfer wealth, its going to be a slow market dominated by estate sales and people moving into rest homes IMHO over next few years.
Are you sure about moving to Wellington, ...they are in for a shock if so.
It is now increasingly clear that the US Fed is impotent - in fact it is probably making inflation worse. How so?
Companies make investment decisions based on their future outlook (the cost of credit is a tiny factor) and mortgagors are all locked into 30 year deals so they don't give a toss about rate hikes. Consumers still have jobs and they still have the same amount of money to spend. So, the economy keeps rolling on.
Meanwhile, higher rates are increasing the costs of doing business (as they are here), which is putting upward pressure on prices! At the same time, the Govt is throwing billions in stimulatory interest payments at the banks (interest on their huge reserve accounts). The US Fed is fighting fire with petrol.
Now, this would all be pretty hilarious if the US rate hikes were not pulling up rates across the world. If a country like NZ has lower interest rates than the US, we will see billions of dollars shifting out of NZD and our currency will depreciate. So we are effectively pushed into hiking rates with the Fed - despite our rates already taking us off a cliff at current levels. If you are a developing country with dollar denominated debts, you are screwed all ways.
Now, just to add farce to farce, RBNZ have finally realised that our tradable vs non-tradable inflation data is totally useless. Stats NZ worked out (in 2003!) that we control around 60% of our prices onshore and we have used those figures since. At the moment, we probably control around 20% of our prices. So, if imported inflation continues to run at around 5%, we would have to have to see domestic inflation at -5% to get down to 3% target! Are we going to see rents and building costs dropping by that amount?!?
It amazes me given all of the above that our economists and central bankers sit at their board tables and have serious conversations about wiggling the OCR about to tame inflation. It is time for a radical re-think.
If you are a developing country with dollar denominated debts, you are screwed all ways.
This is going to be the international tipping point,
Market size[edit]
Since the Eurodollar market is not run by any government agency its growth is hard to estimate. However, the Eurodollar market is by a wide margin the largest source of global finance. In 1997, nearly 90% of all international loans were made this way.[10]
In December 1985 the Eurodollar market was estimated by J.P. Morgan Guaranty bank to have a net size of 1.668 trillion.[11] In 2016, the Eurodollar market size was estimated at around 13.833 trillion.[12]
by Audaxes | 10th Dec 22, 8:57am
New Urgency In the Marketplace Lacks Meaning to Monetary Officials
Right on “schedule”, the 4-week T-bill rate, perhaps the most reliable and easiest to understand of any indicators, has plummeted consistent with a growing even major collateral strain developing. Not only is this once again well below RRP, it is less than the current RRP even as the next FOMC hike to it is but days away.
This collateral shortfall isn’t exclusive to repo. As I often remind people, the few who get serious enough to question all that wordy dogma, collateral is as much about derivatives, maybe even more these days than straight repo. In the balance sheet constrained environment post-August 2007, there are several fundamental reasons why, say, offering currency swaps would be a far more attractive option.
Those swaps can be structured as synthetic repo, basically leaving yet another huge part of the monetary system out of any official count(s). How huge? We don’t really know, but this week the BIS put out a report which tried to assume a hard number. The best its researchers could do was – and you probably saw this on the internet somewhere, it was all over social media if, as usual, for the wrong reasons – figure $80 trillion.
Not only that, this $80 trillion is mainly…offshore. The amount of unrecognized eurodollars is, well, enough to cause more problems that mere central bank words would never be sufficient to answer for. After all, the BIS tacitly admitted:
“FX swap markets are vulnerable to funding squeezes. This was evident during the Great Financial Crisis (GFC) and again in March 2020 when the Covid-19 pandemic wrought havoc. For all the differences between 2008 and 2020, swaps emerged in both episodes as flash points, with dollar borrowers forced to pay high rates if they could borrow at all.”
What the BIS didn’t say, and never really does, is that as swaps “emerged” as “flash points” that also meant huge collateral demands, too. If a borrower who had borrowed eurodollars in a synthetic repo suddenly finds the costs of rolling it over unaffordable or unavailable, this suddenly panicked borrower might have to scramble to fill the funding gap in straight repo – assuming they could find the right collateral at the same time so many others are likely to be attempting the same.
Jfoe good summary - and of course made worse in US by strong drive from Govt (and businesses) to onshore
In my assessment we have all been "protected" from inflation over the last 20 years by China (and other asian manufacturers) - going to be interesting to see if they can continue to drive prices down - its going to be tougher for them to do so but if they cannot then unemployment rises as does risk to CCP -who can solve the problem by assisting businesses or maybe starting a war
https://www.nytimes.com/2023/03/07/magazine/china-spying-intellectual-p…
This sort of behaviour only makes it tougher for them to recover
Yes. If a country decides to onshore production of things that require X hours of labour at a higher cost than in the previous offshore country, then of course the prices of those things will increase. The same logic applies to supply chains and shipping, higher regulatory burdens in some countries, rising wages in countries that we used to get to work for us on the cheap etc.
If things genuinely cost more to produce, then can we call the increasing price of those things 'inflation'? Will reducing demand make the costs of production cheaper?!?
Always appreciate your insights Jfoe. Wondering what you think RBNZ should be doing that they're not? Seems we're on a slow-moving train wreck and there's nothing that can be done about it.
I just wish RBNZ would look at the most recent data and wake up to the fact that they have done more than enough to achieve their goal of killing consumer demand. The lag on monetary policy is significant and as spending reductions wash through the economy, we are in for a terrible 2023.
More ambitiously, I wish RBNZ would turn round to Govt and say
"Look, we can keep swinging our interest rate hammer, but with imported inflation at these levels, and no sign of you lot doing anything useful on the policy / fiscal side, we are simply going to crush workers and businesses, fail to make much difference at all to measured inflation, and cost you the next election. Pull your finger out and do something - talk to France, Spain, Germany etc.'
For all the talk about how Americans are supposedly loading up on more credit card debt, the latest data on overall consumer debt (January) shows it rose a very modest +US$15 bln and far less than was anticipated.
Great chart to explain how unaffordable the housing market has become. The average monthly mortgage payment in Atlanta has gone from $320 in 2012 to just under $2,000 now. Link
Portfolio manager at one of the largest hedge funds in the world, and he specializes in real estate: Link
Love it
The plane engines are off, its an absolute disaster.....
I imagine a discussion is going on right now at Barfoots, Ray White etc They have significant ongoing expenses, that will not be covered given sales at at the lowest volume in 20 years. Their vendors are still reading headlines that prices are still 24% above pre covid and want these prices, whereas most buyers are looking at 2019 RVs and offering below these. Hence there is a wide margin in what both sides see as value.
Standoffs like these can last a long time, unless an external credit event moves things along. Both the Fed and RBNZ are hell bent on moving the collapse of Equities, employment and real estate along. The trap is well set now.
And when the nose of the gliding plane tilts down as its speed decelerates, the last remaining gulps of fuel in the tanks will swill forward and give the engines one last gasp of thrust. The passengers will sigh and remark to each other "Whew! That was close", loosen their seatbelts and hope they can land before the engines cut out for good.
Of course, it all depends on altitude. And from what I see the plane is still way above gliding-landing height. As the note suggests "It's (going to be) an absolute disaster."
...they don't care where the US rates end up...
That's a weird thing to say, unless Australia is going to try to financially cut itself off from global markets? Everyone is trying to export inflation right now.
Australia are exporters - they can actually afford to ignore the Fed because they are not relying on overseas investors wanting to buy Aussie Govt bonds (which is how trade deficits are closed in reality).
If you want to look at some numbers to illustrate - check out what our trade deficit is doing to overseas holding of NZ Govt bonds.
Data for their January JOLTS report also came in better than expected. The number of job openings fell by 410,000 to 10.8 mln in January and much better than the 10.5 mln expected, and the December levels were revised higher.
2 and 3 bedroom homes in Auckland are disappearing. Especially the 3 bed ones at the moment.
We've gone from glut last winter to famine and no sign of this crash stopping. Its not just a house price crash
I guess high immigration increasing rental demand?
However a steady stream of new builds coming through, and will many of the immigrants return home when the economy tanks?
Immigrants return home
Yes I dont know the answer to that. But you are guessing and saying the economy will tank by mid year. Hahaha
The outcome is determined by thousands of individual immigrants decisions collectively
There was a not insignificant number of families immediately displaced by the flooding in January - they are moving out of motels etc. into rentals. In the suburbs I monitor, we noticed an almost immediate drop in the number of rentals available after the event. (And know about a dozen people whose houses were red-stickered and followed that trajectory).
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