Here's our summary of key economic events overnight that affect New Zealand, with news the value of bank stocks are being marked down sharply today, globally.
First up today, the drama over the failure of some American banks has all the spotlight. Globally, government bond yields fell sharply as investors pared bets of higher interest rates and looked for safety. The US 10-year Treasury yield fell to a five-week low of 3.5% and the 2-year yield lost nearly -50 bps to 4.05%, marking the largest three-day slump since 1987. In Germany, their benchmark 10-year yield fell nearly -30 bps to 2.17% and the UK Gilt was down to 3.27%.
Regulators are huddling again today, with the US Fed in an unscheduled meeting. Rumours are swirling about other regional US banks, including Republic Bank, a bank based in Kentucky. Their shares are among the hardest hit today. But apart from some localised pressure points, markets are generally calm. The US President is out emphasising the overall regulator responses underway to keep it that way.
In the UK, HSBC took over the local unit of SVB for UK£1. It now has to bolster its liquidity by UK£2 bln to absorb those assets.
The main fallout so far has been the building expectation that the US Fed will pare back its rate hike program designed to restrain inflation. Financial system stability has suddenly trumped inflation fighting.
In economic data news, American consumer inflation expectations for the year ahead fell sharply to 4.2% in February, the lowest in twenty one months. In the prior two months this expectation was 5%. Aiding the steady retreat has been both food and energy costs. Expectations for inflation three years ahead are anchored well below 3%. The same survey shows that consumers expect their labour markets to "improve".
Elsewhere, Indian consumer prices rose at a 6.4% rate in the year to February, little-changed from January. But the rate between January and February was only at a +2% annualised rate, so there are expectations inflation pressures will ease there in coming months.
The UST 10yr yield starts today at 3.53% and down -17 bps from this time yesterday. (Recall, its recent peak was 4.08% on March 3, 2023.) The UST 2-10 rate curve is much less inverted and now at -61 bps. Their 1-5 curve inversion is sharply less inverted too at -79 bps. Their 30 day-10yr curve is unchanged at -102 bps. The Australian ten year bond is down another very sharp -15 bps to 3.32%. The China Govt ten year bond is holding lower at 2.90%. And the New Zealand Govt ten year is starting today at 4.42%, down -9 bps from this time yesterday.
On Wall Street, the S&P500 is ending its Monday session up +0.7% as the expected Fed rate hike pause is cheered. This seems to be a thumbs-up to the way the banking stress is being handled by regulators. Overnight European markets all fell a bit less than -3%. Yesterday Tokyo closed down -1.0%. But Hong Kong rose +2.0% and Shanghai rose +1.2%. The ASX200 ended its Monday session down -0.5% and the NZX50 closed down the same.
In our region, the devaluation of bank stocks has been sharp, a trend that started about six weeks ago. Over that period, ANZ, Westpac and NAB have all seen their share values fall -10%. CBA has seen a larger -14% fall. The current stresses took between -1% and -2% of that out yesterday alone (although CBA was only down -0.4% yesterday). But these are nothing like the fall for Credit Suisse shares. They are down -33% over the past six weeks, a bank widely identified as a very weak link in the global banking system. Short sellers are prowling.
The price of gold will open today at US$1911 and up +US$43 from this time yesterday. It was last at this level in early February.
And oil prices start today down -US$1.50 at just over US$75/bbl in the US. The international Brent price is still just under US$81/bbl.
The Kiwi dollar is firmer, now at 62.3 USc and a full +1c higher than this time yesterday. Against the Aussie we are up slightly at 93.4 AUc and a new high for the year. Against the euro we are firm too at 58 euro cents. That puts the TWI-5 at 70.6 and up +50 bps.
The bitcoin price has raced higher today and is now at US$23,987 and up a remarkable +16.3% from this time yesterday. And volatility over the past 24 hours has been extreme at +/-9.6%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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111 Comments
The start of the "everything crisis"?
https://surplusenergyeconomics.wordpress.com/2023/03/13/251-the-everything-crisis/
Good link. There were a couple of ranters yesterday, who clearly could do with some learning; here's another goodie:
https://ourfiniteworld.com/2023/03/05/when-the-economy-gets-squeezed-by…
Not that Morning Report is giving any idea that its got any idea....
"Financial system stability has suddenly trumped inflation fighting" when the prime objective of Central Banking, and hence financial stability is...fighting Inflation.
Inflation is going to roar if interest rates drop. Then what? We stand back and take a CPI of 20% on the chin and consol ourselves by refinance debt at 5%? We know where we are going; we've been there before, and we have chosen to ignore the past and its warning signs.
The Ghost of Paul Volker is walking the halls of The Fed and is about to turn into living form.
Pretty sure NewZealand’s economy is not in a position to withstand a return to the heyday of inflation in the last half of the 1980s, mortgages nigh on 20% for instance, but I am damn sure New Zealand’s society is not, and not even either, in a half measure of it.
They might have a clue about the future but they have absolutely none about how and what policies to introduce to pragmatically take NZ forward while addressing climate change issues. They have never talked about population, they have supported the BS ETS say that will cut our emissions and so on. They are hopeless and completely not credible.
Well the way the polls have it now you can look forward to a coalition government consisting of Labour, with a seething faction therein barely under control, the Greens & TMP, and the latter two actually in cabinet. What prospects then of a united , stable and equitable government given the approaching storm?
Prices are going to follow global markets - domestic control is marginal. Even RBNZ accepted in their last statement that 'nontradable' inflation was now far more aligned with offshore prices than before. The methodology used to split tradable and nontradable inflation was designed in 2003!!! It is useless - domestic prices are around 80% influenced by offshore markets (not 40% as previously thought).
The sooner we realise that we are a price taker across the board, the sooner we can focus on managing price gouging and stabilizing prices using more sophisticated tools than dumb monetary policy. Bufferstocks and smoothing mechanisms for fuel would be a good start. Let RBNZ focus on financial risks and regulation.
If there's historically an 80% relationship between domestic and global prices, that's probably partly because of the RBNZ consistently following global interest rate trends. I suspect we'd see the relationship break down pretty quickly if the RBNZ dropped rates lower than everyone else.
That’s what most people would expect, right? But we don’t know for sure because the status quo has been to remain with the herd. It would be a fascinating experiment to run, to drop NZ rates and see if/how far the currency falls in practice, but I think it would be a little… irresponsible, perhaps, to actually run it…
That will be a factor for sure - alignment of monetary policy responses. But, countries will not charge us different prices in their currency because our CPI is lower or higher than theirs. If major input costs like fuel, fertiliser, and food go up in US dollars, we have to pay those prices - we are a price taker. And, all of the prices in our economy flow from those key input costs (two-thirds of the energy our economy consumer comes from oil for example).
What does change if RBNZ get out of line with everyone else on interest rates is currency value, which is determined primarily by the desirability of NZ Govt securities relative to other countries (a function of differences in interest rates). If we want more control over our interest rates and prices, then we need to balance our trade. In the meantime we will waft in the wind of global forces.
What's the end game? We get the same level of inflation, but just on a much more drawn out basis. And there's still no serious plans to limit asset price inflation if we do end up with lower rates again, so I'm not sure what the objective of either a high or low rate environment is anymore. If it's to suck money out of the economy, it's being loaded up against a smaller and smaller group of home owners with bigger mortgages i.e. newer and recent home buyers, not people who bought 20 years ago and are almost debt-free. So what is the actual portion of home owners who are taking the pain, and how sustainable is that if we're going to drag it out?
We will be seeing more articles like these:
https://www.stuff.co.nz/bay-of-plenty/300818274/terrifying-mortgage-hik…
An extra $1000 a month for many. It's going to be tough going with people getting deeper in debt.
The problem I have with MSM stories like this is you don't know the background regarding when they bought and the size of the house and land. Many people have stars in their eyes when they buy a property and I'm not referring to accommodating a change in interest rates.
So yes there will be some financial hardship for a few (define few) but I expect the large majority will weather the storm.
I laugh when I hear people say the housing market will boom again in a year or two. It almost certainly won’t.
It might start turning up ever so incrementally in a year or two, but that’s it.
I wouldn’t rule out some kind of ‘lesser boom’ though at some point, as follows:
- OCR back to circa 3-4% by late 2024 / early 2025
- some kind of economic shock from 2025-2027
- OCR drops again towards zero and..,,. We’re off!!!! (Note though that this is conditional on what kind of shock it is. If it’s a real serious financial/geopolitical shock there won’t be a boom even if the OCR does plummet)
There are several trade-offs to living in larger, more complex economies but one good thing is that your life isn't always affected by systemic shocks. You have the ability to limit your exposure to business volatility by positioning yourself accordingly in the economic food chain.
I believe our fates here in simple ol' NZ however are more tied to the housing market than we think.
They'll be even more certain to go once they compare Aged care. I have family who moved to Oz 20 years ago, one just entering care now & its seamless, quick (a couple of weeks to be assessed & placed), accomodation & fees govt regulated & your estate can get 100% back on exit. Plus the health care system seems generous compared to nz (with Medicare & this eg is in Queensland).
Had a chat with an REA at an open home and enquired about the New Plymouth housing market. The gist was a very minor drop to end up with my interpretation its marking time. The only thing I forgot to ask was over what time period so I will take a stab at a year.
A further comment from the REA was that people are re-locating to NP. Akl was far worse than NP because insufficient immigration!
A bit late now though, isn't it. We have spent everything we had and all we could borrow on fighting each other over property, and now our fate will be determined by wholesale market interest rates, whatever they do. At this stage I don't think it matters much what we want or what we decide to try and do.
https://jameslavish.substack.com/p/-whats-a-debt-spiral-and-is-the-us
There is ZERO chance they can raise rates much over 5%. The interest burden on the $31T they owe will be larger than their entire national income. Debt to GDP over 130%, only one way out and that's Brrrrrr
The Fed are basically accepting US Govt Bonds as collateral at *par* (original value). This is huge - means that the big losses that banks have taken on Bond values (which catalysed the UK Trussonomics / pension plunge and the SBV collapse) are shored up. This will change the bond market considerably if they keep it up. Fascinating times.
RBNZ are at risk of being left out on a limb here.
Sure. US Fed will lend banks money through a mechanism known as the 'discount window'. So, if a bank is short of liquidity to settle payments or allow customers to withdraw money, they can borrow cash short-term - they just have to pledge some collateral to get the loan.
What the Fed have basically done is say that they will accept US Treasury Bonds as collateral for loans at 'par value'. So if a bank has purchased a Treasury Bond at par value of $500m, and it has since devalued to $450m because of interest rate hikes, the Fed will accept the bond as being worth $500m and give the bank a loan of $500m cash whilst the Fed holds the bond. This basically means that any Treasury Bonds held by banks are now worth 'par value' - and magically they now have more equity (and will be viewed as safer and less likely to trigger a bank run / panic).
What this all means depends on the operational details, but it will have to put upwards pressure on the price of Treasury Bonds, which puts downwards pressure on interest rates. The Fed surely cannot hike rates in this environment. RBNZ cannot go out on a limb with higher rates if the Fed stays where they are (or even drops back a bit).
Investors are really not any smarter than anyone else - indeed, often arrogance leads to less learning, and we can argue they're actually dumber.
So we can expect a lot of jumping from lifeboat to apparent lifeboat, driven more by panic and ignorance, than by reason.
They are saying policy walkbacks but in reality it’s about trying to win the next election. All their most stupid policies will be back on the table if they do, but with a name change and compliant media spouting how bad the opposition is and how wonderful labour is.
The saddest part? The opposition isn't capable of even pointing this out.
It should be easy money, all day long for National to work the angle of 'Hipkins was donkey deep in all these crap policies - he thought they were a great idea at the time, he's just lying to grab your vote and they'll be back with a vengeance' .
But they can't even do that. Well Seymour might be able to, but as he's just a minor party leader he'll never get the airtime.
If the nonsense wasn't viable to begin with, then it's actually not neutral. The handouts and the obligations that come with them are real and forever. But the tunnelled light rail project which is blowing out by something like 1500% was never really going to happen in that form. In that sense, the 'savings' aren't real because the project wasn't really real.
The huge increase in the pension per fortnight on 'living costs' grounds while workers continue to be denied inflation relief on tax rates is one of the worst and most cynical election year Happy Gilmore stunts I think I've ever seen.
That's my approach for this election. I've officially given up on caring about the wider implications of my vote and I'm just going to look at the policies and calculate whoever will put the most money in my pocket and vote for them. I'll probably just ask ChatGPT the morning of the election to tell me who will give me either the biggest tax cut or the largest handout. Everybody else is doing it, so why can't I?
Realistically I'm getting near the same. Our core services like health and education are unwinding either way, I doubt the outcomes will be meaningfully different under a National government than a Labour one.
I do want to know why an investor gets a deduction for interest on a rental property while someone who owned the exact same house and lived in it in the exact same way tenants would doesn't get a thing. If anything I'm going to start asking why we can't have private interest deductions for home owners, rather than questioning why investors should get them. National aren't going to budge on that one, might as well start trying to tilt the scrum in owner's favour.
As to how you offer the same benefit to renters out of fairness: I have no idea and that's the only reason I'm not banging on about it more. The accommodation supplement needs reforming/removing anyway, I'm not sure how that could be tweaked. Kate might have some thoughts on that.
Well, that's easy to answer. Rent is a business expense for businesses and thus tax-deductible, why isn't it for tenants who are paying exactly the same expense?
I mean, I can already claim up to 1/6th of my rent as an expense if I use part of the home for "business purposes".
There was already a high number, but this should add up to more sales to FHB
More or fewer first home buyers
For the second month in a row a strong proportion of responding mortgage advisers have said that they are seeing more first home buyers in the market. A net 59% have reported such this month from 31% in February and an average reading for the past three years of just +3%
More or less lenders willing to advance funds?
Our survey has reported a further improvement in adviser perceptions of the willingness of banks to advance funds to residential property buyers. A net 39% of brokers have reported improved willingness, up slightly from 33% last month and the strongest result in the near three years this survey has been running.
Mortgage Advisors can perceive anything they like.
5th April will be a more telling data point.
But regardless, I'll bet there are a few directors of The Bank of Mum and Dad squirming in their board seats. Looking at their Kiwisaver balances diminishing at the same time the collateral of the kids' home. And if the kids can't pay the weekly mortgage then they will have to do that as well, or.....
There was already a high number, but this should add up to more sales to FHB
Yawn. Sounds like the guy at the neighborhood BBQ talking about an email he rec'd with an opportunity from an obscure Malaysian royal with a chance to store some lost monies of their behalf.
Fine tooth comb between gold price in Kiwi pesos and its ATH. But look at silver go too. If this is is really a flight to safety, the rise could be dramatic going forward.
Historic night for ol' ratty. Finally put to the test as a refuge and safe harbor from counterparty risk and those fleeing monetary debasement. And boy didn't it perform. I overheard a normie nutting off at the water cooler that crypto is responsible for destabilizing the banking system. This is the kind of nonsense I'd expect to read in he the likes of Granny Herald. Maybe time for people to think about what's possibly going on. .
Barney Frank openly admits that Signature Bank was arbitrarily shuttered despite no insolvency because regulators wanted to kill off the last major pro-crypto bank.
Colossal scandal. This is starting to look very bad.
https://www.cnbc.com/2023/03/13/signature-bank-third-biggest-bank-failu…
Sounds like Chippy is starting to get his priorities right. Look after the people stuck on fixed incomes, stop pi**ing everyone off with poorly timed and though out policies and listen to feedback from the people concerned. A combination of direction setting and ‘carrying the people with you’. He comes across as pretty straight and sensible with a bit of the common touch. He smiles a lot which helps his messages as well.
Giving pensioners a huge increase on 'cost of living' grounds but denying indexing of tax brackets for workers isn't direction setting, it's literally just using the government coffers to head off NZ First so they don't have to deal with them again. There's nothing sensible about it, it's pure politics, and your kids and grandkids are paying for it.
They've got a decade's worth of indexing to square up on, which I'm not hopeful they'll actually admit at any point. But the reality of indexing is that public sector inflation has to be at or below general inflation or else it will end up as a decrease in core revenues. Given the absolute punishment workers are taking on food and housing costs, and given the government has been happy to run up a huge Crown debt balance post-Covid, I'm not sure I really care anymore. That's their problem, not ours.
Haha good one! Time will tell. I have my fingers crossed. Not much to get excited about across parliament at the moment in terms of vision and the ability to articulate it so most understand. So many issues facing the country at the same time. Requires a special person let’s alone politician to stay on top of things.
I think central banks are realising that the distribution and debt levels they've forced upon western economies means they either get crushed by high interest rates or crushed by inflation.
Short of a massive debt jubilee, there is no answer here in which developed countries can escape being savaged one way or the other, but asset price inflation is the closest thing they have to can-kicking so they may just embrace it. It's the American way!
Yes, I think currency collapse has always been the long game. Talk of avoiding currency collapse is just noise along the way.
They are preparing CBDCs to swap out for FIAT with a big sales job about how it is more convenient and secure. Then they will debase the crap out of it and we will relearn that govts and central banks can't be trusted with issuance of currency.
Sounds like a hint of old Greg Foss in there 😜
https://bitcoinmagazine.com/markets/bitcoin-value-in-credit-default-swa…
Add in the new CDS rate and I wonder what it comes out at!?!?
https://twitter.com/jameslavish/status/1635284729548394498?t=oKtxANQaxc…
Currently 44.3!
In our region, the devaluation of bank stocks has been sharp, a trend that started about six weeks ago. Over that period, ANZ, Westpac and NAB have all seen their share values fall -10%. CBA has seen a larger -14% fall.
Nomura predicts rate cut & QT halt at upcoming Fed meeting. Debut of new lending facility also possible, Nomura says: "Judging by the market’s reaction, financial markets seem to view these pol actions as insufficient, as stock prices for US financial sector continue to decline.” Link
3-Month Eurodollar Sep '23 (GEU23) >+100bps today
December 2023 Fed Funds future Yesterday: 4.84% Today: 3.84% These moves are of truly historical proportions Link
Official interest rate repression back with a bang - 5 year real interest rates down 47 bps from recent highs.
"Financial system stability has suddenly trumped inflation fighting."
With a hard choice, save the US dollar or the financial system, the Fed will opt for the later. This will lead to sustained growth in inflation as the Fed prints much more money in loans to support the system.
We are on the road to hyper-inflation and this is just the "on ramp".
I have long predicted this squeeze, namely inflation not being overcome whilst financial trouble occurs. This will get worse and it will leave central banks with an impossible dilemma:
a) keep raising interest rates to reign in inflation, and further destroy the economy.
b) pause or even lower interest rates to alleviate financial pain, at the cost of runaway inflation.
Either way, I see nothing but a worsening situation for 2023 and 2024 as well!
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