Here's our summary of key economic events overnight that affect New Zealand, with news central bank interest rate decisions, which are upon us this week, have a new challenge.
OPEC's unexpected decision to cut supply has changed the calculus on how to deal with inflation, which has been on a downward trend as central-bank-induced slower growth has eased price pressures despite the war by Russia. But this supply cut is again raising oil prices. It looks like we will generally keep the lower growth but the benefit of lower inflation has been pushed away.
Globally, there were many manufacturing PMI's out overnight and they paint a picture of a sector that is nether expanding nor contracting. Output is rising as new order intakes are still weakish but show signs of stabilising. Supply chain pressures ease as does inflationary pressure with both input cost and selling price inflation both pulling back. But all this was before the OPEC announcement.
In the US, there were two PMI reports out overnight and both recorded contractions and greater than the overall global rate. The widely-watched local ISM one reported a fifth consecutive monthly decline, although only marginally more than for February. New orders and production are contracting. Prices are now decreasing and export demand is lower. The internationally benchmarked Markit one is less negative seeing a small uptick in new orders and cost burdens easing noticeably.
Canada's factories slipped back into contraction in March, to about the same level as its southern neighbour.
The Bank of Canada's business outlook survey has found weakening business conditions ahead of next week’s rate decision. Price pressures are easing but most firms think it will stay well above 2% until at least 2025.
In China in a telling release, the private Caixin PMI for March revealed that the February factory expansion wasn't sustained into March. And it does call into question the official factory PMI released late last week which was quite upbeat. We don't get the Caixin services PMI until the end if this week. The official survey painted a picture of a booming economy.
India reported a good expansion in their manufacturing sector. They posted growth of factory orders and production quickening to the strongest in three months. With pressure on supply chains subsiding and raw material availability improving, input cost inflation retreated to its second-lowest mark in two-and-a-half years.
The EU PMI is still contracting but factory output rose slightly and input prices fell in March amid a survey-record improvement in suppliers’ delivery times. But there are shrinking manufacturing order books across the bloc with the volume of incoming new work falling for an eleventh month running. Greece, Italy and Spain led as the countries with expansions, but it was Germany, the Netherlands, and France who weighed on the overall result.
Later today the RBA will review its official policy rate, currently at 3.60%. Australian inflation is running at 6.8% but falling. Until the end of last week, most analysts were expecting another +25 bps rate hike even if it was to be the last in this cycle. But those analysts have flipped this week and most now expect no-change. Of course, the RBNZ will review our OCR tomorrow, and most analysts still expect a +25 bps hike here taking our rate to 5%.
The UST 10yr yield starts today at 3.43%, and down -4 bps from yesterday. The UST 2-10 rate curve is still inverted at -57 bps. Their 1-5 curve inversion is marginally more at -108 bps. And their 30 day-10yr curve is still inverted at -122 bps. The Australian ten year bond is still down at 3.25%. The China Govt ten year bond is little-changed at 2.88%. And the New Zealand Govt ten year is starting today down -9 bps at 4.16%.
Wall Street has opened the week with the S&P500 up +0.2% from Friday. Overnight, European markets closed quite mixed with London up +0.5% and Frankfurt down -0.3%. Yesterday Tokyo ended its Monday session up +0.5%. Hong Kong ended unchanged. Shanghai rose +0.7%. The ASX200 ended up +0.6% and the NZX50 ended down -0.4%.
The price of gold will open today at US$1984/oz and up +US$14 from yesterday.
And oil prices up +US$4.50 at just over US$80/bbl in the US. The international Brent price is now just under US$84.50/bbl. These rises flow from the OPEC supply squeeze coming.
The Kiwi dollar is firmer against the USD and now at 62.8 USc. Against the Aussie we are a full -1c lower at 92.7 AUc. Against the euro we are unchanged at 57.7 euro cents. That means the TWI-5 is now at 70.5 and only -10 bps lower than this time yesterday.
The bitcoin price is little-changed again today, now at US$27,987 and down a minor -0.8% from yesterday. Volatility over the past 24 hours has remained modest at +/-1.7%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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59 Comments
I've recounted before that anyone important got set, probably on Friday morning European time, before the surprise announcement came out on Sunday.
The US was given a “heads up” about the surprise OPEC+ announcement to slash oil production by more than 1 million barrels per day ...
Xi is smart, but the CCP are smarter. They plan things literally 5/10/50/100 years out, acknowledge that the first policy isn't perfect but the main part is so modify it along the way. As opposed to American/Western democracy politics which is revised, burned down or reset every 3-10 years. This incrementalism means China won't suddenly do anything stupid, but eventually they will accomplish their goals, simply by pushing a little bit more on the things they want to change every year. So far its worked, but will power go to Xi's head and make him a new Mao with the erraticism and irrational policy of a dictator?
One wonders if we will learn from them, cos it's a method to create a long term sustainable economy that is clearly working. In the West, we suffer from short termism and have for decades. I would argue the things that made America great was that they used to build everything for the future, decades out, whether it was their infrastructure (now in disrepair), industry, space programs, technology programs, education systems etc. Now those things only seem to be concerned with short term and often corrupt thinking "how can I get the most out of these things to make sure I get re-elected or my mates get rich". As opposed to "how can I make the future better for my grandchildren". Add into that the culture wars, unregulated social media and they/we are on a road to slow collapse, with China taking over as the new world order.
Is it really a problem though? With robots and AI about to come to the fore, it might be a lot less of a problem than everyone is saying. We are all just trapped in thinking that economic growth and population rise to match is what is required. Most likely we are going to have to have de-growth or a post growth period as a result of too many people, not enough resources. Besides, there are already there are millions of young Chinese unemployed, that doesn't make me think they need more people.
Chinese hourly rate not competitive in their markets (mass low quality assembly) now compared to India or Mexico. Also, robots are exceedingly expense so human labor not in danger of being replaced for now. If you use a computer maybe, but not making a sweater.
China in trouble indeed. Only chance is to expand into some empty Russian nearby territory to keep the ponzi going.
Love em or hate em, the USA will not collapse. Abundant energy, great fertile plain, no enemies and a vast country still primarily undeveloped and underpopulated. Yes the USA certainly live above their means, but NZ is no better and we do not have the cheap energy that has made the US the greatest country in the world.
What’s the ‘right thing’?
Are the supposed to be tackling inflation in the short-medium term? Yes, that is their duty.
So how would it make sense to now pause because of potential lag impact 12-18 months later, when inflation now is red hot?
That would effectively be admittance of the profound impotence of the OCR as an inflation dampening tool.
If the OCR is the main stick for inflation and the full effects of raises take some 9-18 months to come through, we are currently experiencing a falling inflation rate from the first raises of the OCR (Oct 2021). The raises from the last 9 months at least haven't even been indicated by the data yet, yet we have inflation coming off its peak. So still raising rates in that environment is probably swinging too far the other way.. Keeping them at current rates to see how the current rate setting pans out is probably the smart thing to do. They risk over reacting, over tightening, because of the lagging indicators they use to decide the OCR.
Not only that, maybe they are realising that as a price taker for international energy, the OCR can't be used to control those prices, so destroying demand locally might not be the best thing to do. Jfoe is right, they need other levers or the government to act in some way. Energy prices underpin everything from food (Haber process) to transport to manufactured goods.
The stupid thing is, there's no such thing as rates too high. Yes, perhaps, higher rates will cause a recession, but long term, that would be a good thing.
The [western] world is addicted to living beyond its means by using debt to pull finance from the future workers' labour.
Stupidly low interest rates shows a disdain for the future generations who will eventually pay for it one way or another - hard yakka, bankruptcy or conflict.
Mortgages in arrears rose 23% in February from a year earlier to 18,900, according to data released Tuesday by Auckland-based credit bureau Centrix. That equates to 1.29% of overall mortgages, the highest since March 2020.
Highest since March 2020.. so almost back to pre pandemic levels. But the sky is falling right?
And back a few months:
The number of households behind on mortgage repayments in January (2023) was up 22 per cent year-on-year to approximately 18,400 - the highest since April 2020
So 500 more households in 2 months. Its an Avalanche! Or more of a storm in a teacup?
For graphs of historical mortgage arrears:
https://www.interest.co.nz/personal-finance/119464/credit-bureau-centri…
But this supply cut is again raising oil prices. It looks like we will generally keep the lower growth but the benefit of lower inflation has been pushed away.
Reinforcing the squarely obvious point that the RBNZ cannot maintain price stability in NZ when are so reliant on the price of critical imported fossil fuel goods like fuel, plastics, and fertilisers. What do we do... crash the economy and throw tens of thousands of people on the dole every time OPEC decide to squeeze more margin out of their finite claim on world influence?
This is why I get so frustrated an the 'just dial the OCR up to 10' crowd. We are price takers. Adrian Orr giving the world a hard stare and sacrificing the precariously employed on the altar of monetarism will not stabilise global oil prices.
Some background:
The real cause of our current inflationary crisis
In May 2020, as I conducted my latest monthly analysis of the quantity of credit creation across 40 countries, I was startled to find that something extraordinary had been happening since March that year. The major central banks across the globe were boosting the money supply dramatically through a coordinated programme of QE.
This was the version of QE that I had recommended as the second policy step in Japan in the 1990s – namely, for the central bank to purchase assets from outside the banking sector. As these payments forced retail banks to create new credit in a massive burst of money supply not previously seen in the post-war era, firms and non-bank financial institutions that had sold to the Fed gained new purchasing power as a result.
Even the Bank of Japan, having previously argued for two decades that it could not possibly purchase assets from anyone other than banks, suddenly engaged in this unusual operation at the same time as other central banks, and on a massive scale.
The reasons for this coordinated policy are not immediately apparent, although there is some evidence that it was sparked by a proposal presented to central bankers by the multinational investment company Blackrock at the annual meeting of central bankers and other financial decision-makers in Jackson Hole, Wyoming in August 2019. Soon after this, difficulties in the Fed’s repurchase agreement (“repo”) market in September 2019, triggered by private banking giant JP Morgan, may have made up their minds.
Apparently agreeing with my critique that pure fiscal policy does not result in economic growth unless it is backed by credit creation, Blackrock had argued at Jackson Hole that the “next downturn” would require central banks to create new money and find “ways to get central bank money directly in the hands of public and private sector spenders” – what they called “going direct”, bypassing the retail banks. The Fed knew this would create inflation, as Blackrock later confirmed in a paper which stated that “the Fed is now committing to push inflation above target for some time”.
This is precisely what was implemented in March 2020. We know this both from available data and because the Fed, largely without precedent, hired a private-sector firm to help it buy assets – none other than Blackrock.
Having “cried wolf” about the inflationary risk of introducing QE in 2008, and following more than a decade of resolutely low global inflation, many banking and economic experts thought the Fed’s and other central banks’ similarly aggressive credit creation policy in 2020 would not be inflationary, again.
However, this time the economic conditions were very different – there had been no recent slump in the supply of money via retail bank loans. Also, the policy differed in a crucial aspect: by “going direct”, the Fed was itself now massively expanding credit creation, the money supply and new spending.
Meanwhile the COVID measures imposed by governments also focused on bank credit creation. In parallel with unprecedented societal and business lockdowns, retail banks were instructed to increase lending to businesses with governments guaranteeing these loans. Stimulus checks were paid out to furloughed workers, and both central banks and retail banks also stepped up purchases of government bonds. So both central and commercial banks added to the supply of money, with much of it being used for general consumption rather than productive purposes (loans to businesses).
As a result, the money supply ballooned by record amounts. The US’s “broad” money supply metric, M3, increased by 19.1% in 2020, the highest annual rise on record. In the eurozone, money supply M1 grew by 15.6% in December 2020.
All of this boosted demand, while at the same time the supply of goods and services was limited by pandemic restrictions that immobilised people and shut down many small firms and affected some supply chains. It was a perfect recipe for inflation – and significant consumer price inflation duly followed around 18 months later, in late 2021 and 2022.
While it was certainly exacerbated by the COVID restrictions, it had nothing to do with Russian military actions or sanctions on Russian energy – and a lot to do with the central banks’ misuse of QE. I believe the high degree of coordination of the central banks in adopting this QE strategy, and the empirical link with our current period of inflation, means their policies should be given more of a public airing. But the subsequent war has muddied the waters and deflected from important underlying questions. Link
I am aware of this school of thought, but I don't subscribe. I really don't see how the portfolio re-balancing that QE on the secondary market doubtlessly caused increased the appetite for credit - other than through the low interest rate channel, which was already in play. It is increased appetite for credit that drives increases in the money supply (not the other way round).
Rationed markets are determined by the short- side principle: whichever quantity of demand or supply is smaller determines the outcome (as it is the smallest common denominator for transactions to take place; see Muellbauer & Portes, 1978). Disequilibrium and rationed markets create circumstances that immediately bring economics and politics together: the short side of any rationed market has allocation powers. In other words, the short side has the power to pick and choose with whom it is doing business and how resources are allocated, irrespective of the transaction price. In equilibrium, it is apparently neutral market forces that produce politically palliative outcomes. In disequilibrium, the reality of discrete and arbitrary decisions by allocators (read banks) becomes visible — allocators who can, if they wish, exploit their selection power to extract non-market benefits or ‘rents’...Link
Inflation never occurs when you play monopoly.
Inflation is the increase in the amount of money and credit causing advances in the price level. More cash chasing less. If you didn't increase the cash/credit, while individual prices would rise, others would fall. i.e inflation would not occur.
When we played monopoly as kids we would bid absolutely bid up the price of things we wanted to buy from another player!
You might want to look up the velocity of money - people often miss this out when they have reckons on money supply & inflation, and it's why the Quantity Theory of Money is a a dead duck in modern macro.
Which is why we need more 'tools' across the economy than the RBNZ and the OCR. It's supposed to be called Government. And that's the problem.
So absent an effective polity (someone quoted JC Junkers apt quotation on that last week) the RBNZ and the OCR is what we have.
Whether 'they are right' - what they should do - doesn't matter. All that matters is anticipating what they ARE going to do.
Precisely. We haven't seen much organic growth impetus from fiscal policy in years.
All we've witnessed is authorities stimulating aggregate demand with the help of loose monetary policy and high migration, in an attempt to make up for deindustrialisation in NZ that has picked up pace in recent years.
Reinforcing the squarely obvious point that the RBNZ cannot maintain price stability in NZ when are so reliant on the price of critical imported fossil fuel goods like fuel, plastics, and fertilisers. What do we do... crash the economy and throw tens of thousands of people on the dole every time OPEC decide to squeeze more margin out of their finite claim on world influence?
I hear you Jfoe. But think about it. If the bubble had never existed, then there would be less pressure on the central bank to raise interest rates. And there is a distinct possibility that the allocation of credit creation to productive activity would have been greater (no guarantee of that of course and it's a hard argument in the case of NZ).
New Richard Werner opinion piece out this week. Robbo, Orr, the RBNZ, and every NZer with the ability to think about these things would be encouraged to read it.....again and again.
If new bank credit is used for productive business investments such as loans to small firms, there will be job creation and sustainable economic growth without inflation. Furthermore, this growth – if pumped into the economy via many small retail banks to even more small firms – would have the additional benefit of leading to more equitable wealth distribution for all.
By contrast, if new credit is used for unproductive purposes such as trading financial assets (including bonds, shares and futures) or real estate, this leads to asset price inflation, a form of economic bubble which can trigger a banking crisis if the boom is large enough. Similarly, if bank credit is created chiefly to support household consumption, this will inevitably result in consumer price inflation.
https://fortune.com/2023/03/20/is-federal-reserve-too-powerful-inflatio…
Completely agree - the crashing of interest rates to stimulate economic growth is a mind-boggling stupid idea. The credit money just flows into asset price bubbles and speculative investment. So, having made exactly that mistake in 2020 and 2021, should RBNZ atone for it in 2022/23 by crashing asset prices, stalling the economy, and putting tens of thousands of kiwis out of work? My view is that rate rises broadly in line with Aus / US were inevitable, but to push beyond that is just sadism.
I disagree, very low interest rates caused the asset bubble, higher interest rates will help fix the problem, lowering asset prices. Our unemployment rate is too low, we need some slack in the system. We have a wage price spiral occurring, not helped by Labour increasing the minimum wages, etc. Our high inflation was not caused by just high oil prices and will not come down to the accepted range if oil prices drop, due to other factors. Not that it seems likely oil will drop in price any time soon. I seem to remember you saying, in previous posts, there is a historical correlation between oil prices and inflation. Well I would say we are in uncharted waters and, in this case, history is not a good indicator of future performance.
Interest rate repression is running wild as US real interest rates collapse and associated curves are about to invert. A real price is about to be paid to fund government spending.
Historically, periods of high indebtedness have been associated with a rising incidence of default or
restructuring of public and private debts. A subtle type of debt restructuring takes the form of “financial repression.” Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross border capital movements, and (generally) a tighter connection between government and banks. In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, ineffect, it need not be very high (by historic standards). Link
CBDC policies in open economies
We study the consequences for business cycles and welfare of introducing an interest-bearing retail CBDC, competing with bank deposits as medium of exchange, into an estimated 2-country DSGE environment. According to our estimates, financial shocks account for around half of the variance of aggregate demand and inflation, and for the bulk of the variance of financial variables. CBDC issuance of 30% of GDP increases output and welfare by around 6% and 2%, respectively. An aggressive Taylor rule for the interest rate on reserves achieves welfare gains of 0.57% of steady state consumption, an optimized CBDC interest rate rule that responds to a credit gap achieves additional welfare gains of 0.44%, and further gains of 0.57% if accompanied by automatic fiscal stabilizers. A CBDC quantity rule, a response to an inflation gap, CBDC as generalized retail access to reserves, and especially a cash-like zero-interest CBDC, yield significantly smaller gains. CBDC policies can substantially reduce the volatilities of domestic and cross- border banking flows and of the exchange rate. Optimal policy requires a steady state quantity of CBDC of around 40% of annual GDP.
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