Here's our summary of key economic events overnight that affect New Zealand, with news all dominated by the US Fed decision which is playing out in real time as you read this.
They have raised their policy rate by +25 bps to 5.0% today as widely expected.
But the outlook was more hawkish than expected. "The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time." and "the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective."
Their official note hardly noted the banking crisis. It is essentially all about fighting inflation. That means the upcoming Powell press conference will be focused on that.
Markets reacted with the expectation that bond markets will be taking more pain and benchmark yields eased slightly. Equities jumped on the modest rate hike. The USD fell, but only relatively modestly.
Of course these are just initial reactions. After the backgrounding from Powell at 7:30 am NZT there could well be more dramatic reactions.
Meanwhile, the recovery of the long-dormant US housing market took another step last week. Mortgage applications rose +3% last week, a third consecutive week of increases. Their 30 year benchmark mortgage rate fell by -23 bps to 6.48%, declining for a second consecutive week. Having noted these changes we should also note it is early days. Mortgage applications are still down -36% from a year ago, and mortgage rates are up from 4.16% a year ago.
Things are not so good in the commercial and office real estate sector. Office tower owners face pressure on two fronts: borrowing costs and vacancies. And bankruptcies are starting to emerge with two big landlords succumbing in the past few days. More than 17% of the US office supply is vacant and an additional 4.3% available for sublease. Nearly $US92 bln in debt for those properties from non-bank lenders comes due this year, and another $US58 bln will mature in 2024. We are likely going to see a cascade of landlord defaults and the global office and commercial market get significantly re-rated. New Zealand and Australia won't be spared these markdowns even if vacancy rates stay tolerable. Lenders everywhere will derisk.
In northern China and around Beijing, they are getting their worst air pollution is years. It is as much environmental as industrial.
In Hong Kong, interbank funding rates was spurred by demand for the local currency amid market volatility and quarter-end needs, the city’s monetary authority said. The overnight cost to borrow in the interbank market soared +253 basis points to 4.14% on yesterday in its biggest gain since 2006. The one-month gauge increased by +51 basis points, the most since the global financial crisis in 2008.
In the UK where they released February CPI data overnight, they didn't get the retreat below 10% they expected. In fact, CPI inflation rose to +10.4% with a rise from January running at a rate exceeding +13% pa. Inflation is biting its hardest there since their October surge. This is all a somewhat surprising result because Germany, Italy and Spain are all recording slowing or lower inflation rates. French inflation is similar to the UK, even if not quite as high.
In Australia, ASIC has told their superannuation fund managers they must revalue their asset portfolio to market conditions much more frequently in the current environment, recognising the market repricing even for unlisted asset valuations. At the same time, they are on the warpath looking for greenwashing.
The UST 10yr yield starts today at 3.55% and down -4 bps from this time yesterday. The UST 2-10 rate curve is unchanged at -59 bps. Their 1-5 curve inversion is a little more inverted at -93 bps. And their 30 day-10yr curve is also more inverted at +49 bps. The Australian ten year bond is little-changed at 3.34%. The China Govt ten year bond is still unchanged at 2.88%. And the New Zealand Govt ten year is starting today up +9 bps at 4.25%.
Wall Street has opened its Wednesday trade with the S&P500 soft by -0.3% ahead of the Fed. After that it was up slightly. Overnight, European markets all rose by about +0.3%. Yesterday Tokyo gained a strong +1.9%, Hong Kong rose +1.3%, and Shanghai gained +0.3% in Wednesday trade. The ASX200 ended its Wednesday session up +0.9% and the NZX50 was up +0.5%.
The price of gold will open today at US$1948/oz and up +US$7 from this time yesterday.
And oil prices start today up +US$1 from yesterday at just under US$70.50/bbl in the US. The international Brent price is now just under US$76/bbl.
The Kiwi dollar is up almost +1c against the USD and now at 62.5 USc after the Fed decision. Against the Aussie we are +¼c firmer at 93.1 AUc. Against the euro we are also a little firmer at 57.6 euro cents. That puts the TWI-5 back up at 70.4 with a +50 bps gain.
The bitcoin price is marginally higher today, now at US$28,685 and up +0.7% from this time yesterday. And volatility over the past 24 hours has been modest however at +/-1.4%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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79 Comments
Hmmmm..
Falling energy prices risk stoking inflation, says Bank of England
Keep in mind what we're dealing with here. "Inflation" is what ever central bankers want it to be (they have no clue what it really is). First inflation was surging energy prices. Now falling energy prices are inflationary. There's an Oprah meme here. Link
Kicking hard, when some one is down. The common man will be affected more with these moves. Prices are not going to come down. Just more pain to satisfy the Fed's vanity. Vanity is not Fair.
Let us see Warren doing something substantive to rattle Biden and his Economics Team.
Fed raising rates, will push up cost of existing borrowers of all types. Businesses will pass it on. Reduced business and reduction in price are not going to happen quickly. Home loan rates will go up. The single minded Fed is not helping the common man.
Even if the Engineered Recession ensues, it will be the common man who will suffer more. Banks and the Stock portfolio of the rich will survive
Trump is sure to come back, if a recession happens, due to Fed moves.
In the UK where they released February CPI data overnight, they didn't get the retreat below 10% they expected. In fact, CPI inflation rose to +10.4% with a rise from January running at a rate exceeding +13% pa.
Some of that was food but even core inflation (which is ex. food) increased. Another example of there being more work to do for Reserve Banks.
Who would have thought the 'Fed' would guarantee all depositors. Was that the card Bernanke said he had hidden up his sleeve? Desperate times. The 'Fed' is just teasing the hard working wage earners and savers, with a .25% raise to tame inflation for us, at the same time yet again bailing out their rich buddies. What a corrupt system. Just how influential is the world's reserve currency and the USA will go to any lengths to keep it.
imagine if they didnt guarantee the deposits. They dont properly run tests on the financial positions of all the smaller banks (as they do in europe) so the slightest hint of trouble at any usa bank on social media - would result in a run on it. That would be a potential disaster with chaos if multiple runs start at once. This way everyone can breath easy and they can work through any issues without time pressues.
https://www.azerbaycan24.com/en/indonesia-to-ditch-visa-and-mastercard/
Putin started the process - it ends with the USD not being the global default reserve currency.
David - 'It is as much environmental as industrial'.
But that 'environmental' is human-caused:
https://www.npr.org/sections/goatsandsoda/2021/05/30/1000530563/buried-…
https://www.researchgate.net/publication/330247892_The_consequences_of_…
People also say climate change did this or that - while avoiding the point that climate change is industrially-sourced; it's us.
Yeah, but.
There is one problem with brisk and dollar is doomed point of view - brisk is a cooperation of a third world counties with mostly authoritarian folks running them trying to feel good about themselves.
Perhaps Saudi can be somewhat an exception (with regards to gdp part).
Indo might have a great future, taking demographic into account, but they’d have to tackle corruption first.
Most of the people there don’t have access to banking system the way we know it anyway. And have a variety of new tech solutions trying to address that now instead. E.g. even Stripe Connect (b2b version of Stripe) can’t be used there despite Stripe being active in the region for over 5 years now.
In addition if they want tourists, they're going to have to accommodate the cards somehow.
Having said that, it is an interesting move in the big picture push back against the banks. These cards were set up by the banks, and it is easy to understand that they were a tool to strengthen their position in controlling 'money' in an economy. Take away the cards and most economies will have to revert to an alternative, and the most preferred one will likely be simple cash. A possible alternative would be a central bank issued credit/debit card. Worth discussing?
Democracy - if you can call the US democratic - was a product of a period of surplus energy. That is reducing hand-over-fist. Benign autocracy may well be the quicker way to adapt; as we see in this country, folk deny, folk believe, folk obfuscate; and the average voter is in the dark.
Yes. Indonesia's population growth-rate is reducing - but it is still on the wrong side of the ledger; they added 2 million last year. They are seriously overpopulated.
I suspect the Great Simplification will include a return to some form of cash - a physical-token system. That is what we can expect from the massed disbelief engendered when our current system is seen to have placed more bets than there were chairs, when the music stopped.
Great stimulator for a discussion. "Benign Autocracy"? A modern Lee Kwan Yew? That'd be a fraught role, and what of the old saw "Power corrupts, absolute power corrupts absolutely"? How do we ensure that any leadership is actually 'benign'? I doubt there is a politician in NZ today who could do that. What chance the US or China, or Europe? We are so screwed!
The ultimate power of a community rests in the people. People gift power to their leaders in a democracy or perhaps a 'benign autocracy', but power stolen is a fragile thing that is constantly being tested, and requires significant resources to sustain. Our politicians have become complacent in their seats, and the music of people who will not be slaves is slowly getting louder around the world (it seems loudest in France, ironically). If the current turmoil doesn't serve to remind our politicians who they really serve (I note today's news articles about lobbyists), the consequences of their own actions might be the baton's wave to push that music to a crescendo!
With or without surplus energy the world leadership must be able to chart a course for the species that brings us better into alignment with the environment, and set aside the hubris that has us believing we can control all. Failure will lead to the demise of our environment to the point that our species own survival will be in question. I would suggest that the biblical story of the garden of Eden actually defined not just the beginning of the species journey, but it's end too. In succeeding we will result in re-creating Eden, living in balance and harmony with our environment.
That's the irony. the line "the music of people who will not be slaves again" comes from the song in the musical Les Miserables, about the French Revolution. It is ironic that the French of all people, don't remember their own history.
Perhaps it is time to reverse a change in the Place De La Concorde and remove the obelisk gifted by Egypt, and put back the guillotine (it's in the Louvre) to remind the leadership who they actually work for?
India is allowing more countries to trade in Rupee. Also, it gets Cheaper Russian Oil and pays by Rupee. A good example of co-operation to undermine the USD. If China pitches in and makes a triumvirate of anti-USD moves, then Russia, China and India could pose a great threat to USD as a reserve currency, with the ability to manipulate exchange and value intenationally.
February sees record high for rent prices across NZ - Trade Me
https://www.google.com/amp/s/www.newshub.co.nz/home/money/2023/03/febru…
4 percent increase
"CoreLogic however found rents were falling in Auckland, where they sat at $583 a week, down 0.8% annually, and falling in Wellington, where they sat at $595 a week, down 3.7% annually."
They are not disclosing the source of their rental data. Even their specialist area of sales data based on settled sales, is the most out of date information in the marketplace.
Landlords asking for higher rents, but data shows often not achieving them | Stuff.co.nz
Landlords are asking for record-high rents, but rental price data shows the actual amounts tenants are paying is largely flat or even falling in some areas.
Trade Me released data today suggesting the median rents landlords were asking for had hit $600 for the first time.
However, drawing from data on actual rents paid, CoreLogic reported landlords had lost the upper hand and that rents were flat or even falling.
Nowhere is the disconnect between what landlords want and what they appear to be achieving more clear than in Auckland and Wellington.
Most landlords, especially the amateur ones, haven't been all that fussed about what rent they take in. It's a by-product of ownership. They are solely focussed on the future resale price of the asset(s).
And given where interest rates are off too, that's going to overshadow their thinking for some time to come. 4% rent rise is what, $30 bucks a week? And 4% fall in the value of the asset is $30,000. 20 years to get that back at today's prices.
That's right. I think what is going to happen (after the news just out from REINZ that Feb '23 was the lowest transaction level since 1981) is the longer term 'smart' investors who are sitting on 100% gains will sell up. They have room to meet buyers expectations due to the oversized capital gains they have realized.
We also have the over leveraged and newer property investors who will be desperate to sell but not want to drop their price expectation from last year.
Then we will also have the folks who simply borrowed too much and cant afford $5k+ a month mortgage, and they will become very motivated to sell ASAP before all of their equity disappears.
It looks like all of these will come together, causing a race to the bottom, at around the same time - Winter and Spring 2023
The RBNZ may/will have to head to 6% OCR, especially since the Fed is at 5% already and the inflation rate in NZ is very very sticky (over 5% since Dec 2021). If the March inflation figure comes in at 7% then we will have seen essentially 12 months of inflation above 7%.
Perfectly summed up.
The trouble (or benefit depending on your viewpoint) is that there are a decreasing number of buyers - so instead of a FOMO for buyers - being missing out buying something asap ... which was driving UP prices - it will become a FOMO for sellers which will drive down prices rapidly - seller who will drive down prices by not wanting to miss out selling asap to the few buyers in the market and if the investors can afford losses to sell then they will drop fast.
we actually want to move sideways at the mo - same value of house but in a different location (reduced travel costs/time and a reduced carbon footprint). Which is quite an interesting situation... we need to find a buyer and seller who both 'get it' and both want to move quickly but at the correct current-market price. Will be an interesting challenge for the RE agent.
I think you've got the wrong end of the stick with the Fed's messaging. It was relatively dovish, noted economic risk from the banking crisis, and signalled an earlier than anticipated end to the hiking cycle, with only one further 25 bp rise planned. The market responded accordingly.
Edit: I note the article was written before some of this info came to light.
At the end of the day what matters is the FED effectively said their primary consideration was taming inflation not the solvency of the banking system or gdp growth.
Pundits here have been saying the same thing. Plenty of comments about how the RBNZ is going to stop rising rates on account of a fall in GDP etc etc. This is outright delusional. The RBNZ's primary mandate is price stability (CPI between 1-3%) and Adrian Orr has never said anything that suggests other factors should be given more consideration than price stability. We just had another 7% CPI print so expect more OCR rates rises. Maybe these will be in .25% increments. However 6 .25% rises still takes our OCR to 6.25% by end of year which means 10% borrowing rates.
I read the opposite. True, they haven't specifically altered their messing around inflation targeting, but very importantly, they have introduced language confirming that they need to remain cognisant of the economic risks posed by higher rates. It's most definitely a dovish pivot and was entirely predictable.
There is no way the RBNZ gets to the levels you're talking. They do need to take GDP into account as one of the data points they consider, precisely because it flows through to inflation.
I think you need to re-read the RBNZ's remit. It says nothing in there about GDP growth.
https://www.rbnz.govt.nz/monetary-policy/about-monetary-policy/inflation
Just reading about the SVB 'bailout' in the States. Do people think the NZ Government would step in and cover depositors in NZ in the event of a bank failure? I ask because 2 months ago, I put half my money in 6 month Kiwi Bonds and half in a 6 month TSB term deposit. The term deposit rate was obviously slightly higher. I wonder why I put any in Kiwibonds now though as will they really be 'safer'? Will US investors be wondering why they should favour Gov bonds over private bank deposits when they can get a better return and the same level of risk? I guess with proper bonds you can still sell on the secondary market but still...
It's a moot question.
If any of the RBNZ Registered banks failed and depositors were hung out to dry, there wouldn't be a banking system left in this country to operate with the next day. No matter where your funds were parked, they'd be untransactable - worthless. As is the convention elsewhere, there'd be a forced marriage to avoid that.
Why? A smaller bank is an easier option to fix. It's not the Finance Company sector of years ago we're talking about there, but Registered Banks. "Look John. The small XYZ bank has just run aground. Can you get your chaps in Asset management to give them a call and take on an XYZ Division of your bank? Thanks"
It's all be done before, here, in Australia and everywhere. (eg. St George Bank is still a division of Westpac, as BankWest is of CBA. Both ran into difficulty at the onset of the GFC)
Out of interest, does anyone know if a bondholder can direct Treasury to pay them in cash when a bond matures? What happens if your bonds mature and there is no functioning private banking system in operation at the time (a bit unlikely I know but an interesting thought).
Pop down to your local district court and apply to have the Crown wound up.
Just keep enough cash on hand for the filing fee, represent yourself and ask for the remedy to be mandatory acceptance of the offer of Federation that the Aussies gave us in 1902. I think we can technically RSVP any time we want.
For what its worth. I keep my money across 3 banks in call accounts. I want to be in a position to move quickly if it looks like a run is imminent.
If a bank fails expect the open bank resolution to be undertaken on this bank. What you get out of this process is anyone's guess. Depends on the banks balance sheet.
You are wrong, they have to accurately provision for expected losses. They did this in the GFC, it also helps tax for current year. But of the povisions are not used they become profit in future years. There are accounting standards. Provisions are for expected defaults. Take a look at what happened in GFC
The OBR rules where put in place a looooong time ago, in response to the collapse of European banks, again GFC. I don't think they would every be used, as soon as you trigger the OBR and then reopon under stat management all other bank depoists would flee TO THAT BANK, as you cannot get haircut twice. remember most NZ banks are the same in almost everything but colour of brand...... by the time one bigger bank goes they will all be in the same situation.
Kaaaaarrrk
Plunging markets just realised the soft landing is on life support
Bond markets say the Fed will be cutting rates within months, but Jerome Powell is determined to keep hiking into a slowing economy. Equity investors must take note.
Before the Fed excitement, Morgan Stanley global head of research, Katy Hubay, noted five factors that are consistent with an economic slowdown – S&P 500 forward earnings declining relative to three months ago; an inverted yield curve; below-average unemployment, US manufacturing PMIs below a reading of 50; and more than 40 per cent of US banks tightening lending standards – are all occurring at the same time, something that happened before the big crashes in 2007 and 2000.
Whether another ugly moment is coming now is not the point. Rather, it seems important to recognise that these macro indicators are flashing red at a time that the Fed feels it needs to take interest rates higher still, and hold them there well into 2024, and at a time when contagion from serious banking sector events remains very unpredictable.
Equity investors have ignored this message for a long time. While we shouldn’t read too much into the notoriously volatile market reactions in the wake of Fed decisions and press conferences, Wednesday night may have provided the first signs investors are acknowledging the soft landing is all but dead.
IMHO YES. International demand is slowing in cross border diary, witness recent auction.
Our NZ reality is totally distorted here due to 55bil printing to push rates lower and 140bil lending....... imagine where we would be if we had higher cost of money into covid.... The mis allocation of resources is nuts, into houses no one can now afford.
deglobalisation = inflation.
No because the terminal rate of the Fed is expected to come in lower than expected/priced in.
That means the differential between the OCR and the Fed Rate now widens, which is bearish for the USD and bullish for the NZD.
That said, the NZD has been hovering around this level for a couple of weeks now.
"But the outlook was more hawkish than expected. "The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time." and "the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective."
This is hilariously wrong. If you compare to previous statements, these are sentences that have been there. In fact, the changes (in italics) made to the previous statements make it 'dovish'.
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