Here's our summary of key economic events over the weekend that affect New Zealand, with news this week, all eyes will be on the Wednesday RBNZ Monetary Policy Review, and especially the regulator's forecasts (even if no change in the OCR is anticipated).
Elsewhere, potential market moving data might come from the US Fed's release of the minutes of is July meeting, or US retail sales, or US industrial production data updates.
Or market movers might come from Japanese growth and CPI data, or Canadian CPI data, or EU GDP and CPI data. Who knows?
Or more likely from Chinese retail sales or industrial production data. They could be weak. Investors are watching what is unfolding in their economy with growing alarm. Maybe it isn't a "ticking time bomb" yet but stresses are building and not being dealt with. An economically struggling one-man-ruled situation is also politically risky because a military adventure might seem like a distraction worth trying.
China's banks lent ¥346 bln in new yuan loans in July, the least since November 2009 and well below analyst expectations of ¥800 bln. In June this new loan value was ¥3.05 tln; a year ago it was ¥679 bln so by every measure the July level is very low. If clients now won't take on more debt, it is something of a watershed moment (perhaps) and suggests it will be very hard for Beijing to use its usual levers to overcome the lackluster economic recovery. Household lending, mostly mortgages, was down to ¥201 bln, while corporate lending fell to ¥238 bln in July. Remember it was ¥2.3 tln in June. Meanwhile, outstanding yuan loan balances rose +11.1% in July.
Calls for more decisive action are growing more strident.
Meanwhile, vehicle sales slipped in July to just under the 24 mln/year pace in China, the world's largest vehicle market - by far. They fell -1.4% from the same month a year ago and this was the first decline since January. It was maybe a bit worse than it appears because the base a year ago was low too, but July is the off-season of their car market. Local sales went down -6.3% to under 2 mln units in the month, while export sales increased +35% to 392,000 units, some of which ended up here, especially EVs like Teslas and BYDs.
And property developer Country Garden signaled it will be reporting a very large loss soon, maybe as much a -NZ$12 bln. In the same period a year ago it said it made a profit of +NZ$440 mln. It might be going down and like its larger rival Evergrande, its fall is causing fury on social media. And there are signs of liquidity problems in the wider funds management sector.
Elsewhere in the region, Singapore cut its economic growth expectations for this year to "0.5% to 1.5%", down from "0.5% to 2.5%" in an earlier assessment. They see a weak global economy and low demand from key trade partners like China.
And we should note that the Russian ruble has taken a sudden turn lower. A year ago, it was 60 to the USD, now it takes 100 to buy a greenback. That is a grim -40% devaluation - and -11% of that has happened in the past three weeks. Over the same time the Chinese yuan has slipped only -1%. Russians will be finding it very tough buying from their new best friends and having to pay in yuan.
Across the Pacific, annual producer price inflation in the US rose to +0.8% in July from +0.2% in June. A rise was expected but this was higher than those forecasts. Still it is quite a low level and doesn't really alter the downward trend that started in July 2022 when PPI was rising at more than an +11% annual rate. It's been slowing since.
Americans seem to be starting to acknowledge the gains being achieved in the battle against inflation. First the July, and now the August University of Michigan survey records a significant improvement in sentiment from a year ago, and this is really around 'current conditions'. This is a widely-watched and influential survey. Interestingly, this survey shows consumer inflation being felt at 3.3% which is almost exactly what the official data shows.
Meanwhile in the background, the US Fed is back reducing its balance sheet. From its peak in April 2022 at US$8.965 tln, it has now reduced by more than -US$750 bln to US$8.2 tln, and putting the temporary regional banking stress well behind it. But there are some who think the pace of this retreat is behind the rise in long-term UST yields - and it probably is. It is another effective lever the Fed has to weigh on a resilient US economy to keep inflation restrained.
In Australia, RBA Governor Philip Lowe has told a Canberra parliamentary hearing that there would be major ramifications if productivity did not return to pre-Covid levels. Inflation will stay high and interest rates would too, unless this problem can be solved. It is doubtful he got much sympathy from that audience. But he will be proved right in the long term.
The UST 10yr yield will start today at 4.16% and little-changed from Saturday and still near its October 2022 highs. A week ago it was 4.04%. Their key 2-10 yield curve inversion is little-changed, now at -73 bps. Their 1-5 curve is still at -105 bps. Their 3 mth-10yr curve is still at -123 bps. The Australian 10 year bond yield is now at 4.17% and down -1 bps from Saturday. The China 10 year bond rate is little-changed at 2.66%. And the NZ Government 10 year bond rate is holding at 4.90%.
The price of gold will start the week at US$1913/oz and unchanged from Saturday. But they are -US$28 lower than a week ago (-1.4%).
And oil prices are little-changed at just on US$82.50/bbl in the US. The international Brent price is up slightly at just over US$86/bbl. These levels are almost exactly what they were a week ago.
The Kiwi dollar starts today essentially unchanged at just on 59.8 USc. This is its lowest since November 2022. Against the Aussie we are holding at 92.2 AUc. Against the euro we are marginally firmer at 54.7 euro cents. That all means the TWI-5 is now still at 68.7 and only +10 bps firmer than Saturday. A week ago it was 69.4.
The bitcoin price is also virtually unchanged today from this time Saturday and still at US$29,374 which is up +US$52 or +0.1%. Volatility over the past 24 hours has been very low at just on +/- 0.2%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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54 Comments
It the modelling that estimates it will save the average person is $5/week (and this seems reasonable - our biggest fruit and vege spend for a week ever was $80 for the 5 of us) then you factor in moving the bottom 10.5/17.5% tax split at $14,000 -> it's the equivalent of shifting that tax bracket ~$75/wk - or to $18,000. Or shifting the 17.5/30% split @ $48,000 to $50,000. Or you could go $16,000 and $49,000.
The 'saving' of $5 per week is not the full measure.
Our GST system is the envy of that tax world as it is simple and highly efficient. Most issue gst issues have been resolved and there is very little confusion over how gst rules are applied.
Tax lawyer and accountants nightmare (or dream $) as expensive litigation explodes. Your $5.00 gone in a blink..
I don't believe loose change worth off savings a week is going to motivate people with poor diets to eat heathier.
The typical NZ household spends only about 13% of its food budget on fruits and vegetables, and twice of that on eating out. This is despite the fact that eating out at a fast-food joint is also often more expensive than cooking a healthy meal at home.
Kiwis were consuming 2-3 kgs of fast-food per person per year in NZ even back in 2013 ($2.5k a year per Kiwi) and that number has also grown rapidly ever since.
I suppose if you were using tax as a tool to influence dietary choices and reduce the burden on the public health system, you'd have to go more radical (e.g., sugar tax, Japan's fat tax, etc.).
I agree, but price has to have some influence. For example I am sure if the price of fruit and veg went up by 15% compared to everything else then people would eat less fruit and veg, so likewise if it goes down by 15% you would have to assume people would eat more.
Then the other question is do we want people to eat heathier and live longer? Can we support everyone living to 100? Maybe we should subsidise the fast food!
Just noticed that as well. Also keep an eye every now and then on the GBP (should be BP now!) and very surprised its slipped from around 0.52 last year about jun/jul22 to a touch above 0.47 now. I thought the UK economy was going backwards compared with NZ. Just shows you how poor the NZ economy is doing.
UK has seen a strong improvement in its current account situation, recovering from an 8.3% deficit of GDP in Q1-22 to a 1.7% deficit in Q3-23. Those improvements came from significant increases in exports of both goods and services as well as a positive turn in primary income.
Things still look awful here in NZ and the worst is yet to come with export prices falling fast and more migrants flowing into NZ continues to push up demand for imports - not that the government or the Opposition cares about these stats.
We've got big reasons to worry now that the mothership is also seemingly steadying itself.
Raise the OCR he will regret it, leave it as it is he will regret it, lower it he will regret it. What option will Mr Orr pick?
For what its worth I have noticed that Mr Orr has become more legalist in his approach to the OCR. In that he is sort of retreating into a strict adherence to his legal mandate.
I briefly mentioned this risk at the last monetary policy decison by the RBNZ.
That it may find that the NZD/USD is back into the .50's at the next decision.
It just happened that global equity markets were booming at the same time, which meant currency investors were risk on and buying NZD - and so we saw a beneficial rise in the strength of the NZD after that decision (which was very fortunate timing from an RBNZ perspective - even though wholesale swap markets appear to be demanding a rise to the OCR at the time).
Now that it appears we are heading into risk off environment, NZD is falling in tandem with risky assets, and we may see ourselves importing more inflation from overseas.
RBNZ may choose to leave OCR were it is at this next meeting, but only to find itself with a NZD/USD down in the mid-low .50's at the following meeting and inflation back on the rise again - meaning even more rate rises further down the road.
(again not a forecast, just an analysis of potential risk)
Yes so at the next decision we may see, rising inflation (rising oil prices, no more fuel subsidy, impact of falling NZD), rising wholesale interest rates, falling NZD. Which would be about as bad as it could get for the RBNZ.
They would be forced to start hiking again, with the risk of making a recession even worse/deeper/painful.
At a guess (and this is not a prediction but just a risk analysis) that there is around a 30% chance of this happening, so it can't really be completed ignored as a possible outcome.
They will most probably keep rates flat at this next decision, but as ever, it is a decision they could regret down track.
Expect the left to weep their eyes out calling it a racist tax targeted towards Maori and Pacific people.
I worked as a data analyst for HQSC back over a summer in my university days. Their complaints inboxes were often full of offended patients whose GPs/midwives/obstetricians/cardiologists asked them to make slightly less worse choices with their eating.
Why are the OCR and short term deposit rates below the recently declared CPI metric?
This is something that Milton Friedman also talked about, particularly in 1998 with regard to Japan. He called it the interest rate fallacy, meaning that low nominal interest rates signify "tight" money conditions, or what would be consistent with significant deflationary pressure. It is and remains a fallacy because economists like those at every central bank around the world have decided instead that low rates are only "stimulus."
To correct this view, Friedman pointed out the basic, non-trivial distinction between a liquidity effect and an income effect. Low rates can be stimulative in the short run (the liquidity effect), but over the long run their persistence means something far different. A yield curve is supposed to be upward sloping given the core time value of money and investing. That arises from opportunity cost, meaning the more plentiful the opportunities the greater the time value and the steeper the curve (the income effect). Yield and/or money curves (the eurodollar curve and even the history of the OIS curve) that collapse and remain that way unambiguously demonstrate that "stimulus" deserves only the quotation marks.
Policies that continue to be categorized in that fashion while the interest rate fallacy remains are devoted to the economy that "ought to be", not the economy that is. The danger comes as Keynes warned, in repeating mistakes rather than learning from them. The result is a trap of exactly what Bernanke described as never being able to happen here: recession, rising unemployment, and financial stress.
Heard today about a self employed family that is putting their home on AirBnB each weekend for a little extra cash and staying at parents on weekends it rents.... Times are getting tough and politically the Labour gov wants to paint a rosy picture.... once National gets in I can see the truth emerging on just how out of cash NZ is....
Zwifter - can we please raise the standard a little?
And perhaps stick to truths.
Western 'economies' were based on the exponentially-increasing of a linear extract/consume/discard process. Clearly that was a temporary era, clearly it is coming to a close; the Limits are starting to manifest.
Blaming - and blame-shifting - are red-herring wastes of time at this juncture; we need to be addressing a different paradigm.
An interesting chart of the 10 year / 3 month US yield spread (and inversions) over the last 100 years.
The author of the tweet notes we are at the same level of inversion as 1928, just prior to the great depression. (But I note its also the same as the 1970's-1980's recessions)
https://twitter.com/GameofTrades_/status/1690754785472086016?s=20
"Why the next 40 years in real estate might not look like the last. 1. From at least the 1970 - 2008, the US ADDED a NET 2.5m/yr people to the working age population (incl immigration), now that number is 300-500k. 2. Since 1981, mortgage rates have fallen 15%. Keeping payment the same, this equates to an artificial price increase of roughly 375%. Median home prices are currently PRICED for sub 4% mortgage rates. Even if eventually we get to 0%, thats only a 50% increase from here ignoring #1. 3. Globalization meant 40 years of exported slave labor bringing down prices, but also American quality of life. Now the opposite happens"
https://twitter.com/GRomePow/status/1690761989512163328?s=20
The chart in this tweet is a great way for people to understand the impact that higher interest rates may have on asset prices when using higher discount rates to future cash flows (e.g. shares, houses, bonds etc).
Obviously assumes flat income. But to offset rates rising from 2% - 6% and expect prices to remain flat, then income for those assets needs to rise dramatically, and if that eventuates over time, it will show up as extremely high consumer price inflation, which will result in rates needing to above 10% +, which will destroy asset prices even further.
Thus the risk of dropping interest rates too low, too quickly, becomes very apparent. And despite preventing pain at the time of dropping rates (to prevent asset price falls and to encourage the wealth effect by pumping asset prices..), all it does is increase the probability of even more pain in the future.
...all it does is increase the probability of even more pain in the future. Exactly:
In March 2017, former Treasury and Federal Reserve (Fed) official, Peter R. Fisher, delivered a speech at the Grant’s Interest Rate Observer Spring Conference entitled Undoing Extraordinary Monetary Policy.
Wealth effect or wealth illusion? The other therapeutic effect of lower-for-longer interest rates is the wealth effect. By driving up the value of future cash flows with lower rates of interest, all manner of assets – stock, bonds, and houses – increase in value and, thereby, can stimulate our marginal propensity to consume. More simply put, the imperative was to make rich people richer so as to encourage their consumption. It is not so hard to imagine negative side effects.
There are the obvious distributional effects between those who have assets and those who do not. Returning house prices in California to their 2005 levels may be good for those who own them, but what of those who don’t?
There are also harder-to-observe distributional consequences that flow from the impact of lower-for-longer interest rates on the value of our liabilities. This is most easily observed in pension funds.
Consider two pension funds, one with a positive funding ratio and one with a negative funding ratio. When we create a wealth effect on the asset side of their balance sheets we also drive up the value of their liabilities. Lower long-term interest rates increase the value of all future cash flows – both positive and negative. Other things being equal, each pension fund will end up approximately where they started, only more so.
The same is true for households but is much more ominous, given the inequality of wealth with which we began the experiment. Consider two households: one with savings and one without savings. Consider also not just their legally-defined liabilities, like mortgages and auto-loans, but also their future consumption expenditures, their liability to feed and clothe themselves in the future.
When the Fed engineered its experiment to promote the wealth effect, the family with savings experienced an increase in the present value of their assets and also an increase in the present value of their liabilities. Because our financial assets are traded in markets and because we receive mutual fund and retirement account statements, we promptly saw the change in the value of our assets. We are much slower to appreciate the change in the present value of our liabilities, particularly the value of our future consumption expenditures.
But just because we don’t trade our future consumption expenditures on the stock exchange does not mean that the conventions of finance do not apply. The family with savings likely ends up where they started, once we consider the necessity of revaluing their liabilities. They may more readily perceive a wealth effect but, ultimately, there is only a wealth illusion.
But what happened to the family without savings? There were no assets to go up in the value, so there is no wealth effect – real or perceived. But the value of their future consumption expenditures did go up in value. The present value of their current and expected standard of living went up but without a corresponding and offsetting increase in assets, because they don’t have any. There was no wealth effect, not even a wealth illusion, just a cruel hoax.
https://www.grantspub.com/files/presentations/FISHERGRANTSREMARKS15MAR17.pdf
I think he has it backwards - reducing interest rates lower the value of future cashflows - but those with assets are insulated from this, and it is those without who reveal the system as it truly is - devaluing your labour to produce a psychological effect amongst those who don't understand (or don't care about) this long-term effect.
The present value of a cash flow is defined as the sum of individual payments, each discounted at the current rate of interest for the period between now and the time when it falls due. Paradoxically, a decrease in the rate of interest will increase the present value of the cash flow for the simple reason that whenever we discount by less we end up having more! Link
Yes, I understand. But increasing the present value comes at the cost of devaluing the future, and is typical of people who disdain the value of labour.
So, low interest rates encourage using these future cashflows when they are most valuable (now) in order to put them into vehicles which will grow (or at least hedge against inflation). This increased demand causes the prices of said vehicles to increase, devaluing the future cashflow of the future purchaser (compared to now), hedging the current purchaser against this inflation, and devaluing the future value of labour (or energy).
This may or may not be a significant problem except for one detail - we gatekeep out significant blocs of the population by either price or criteria, meaning lower interest rates heavily favour those who already have investments - all while those without see the value of their labour proportional to said vehicles decrease.
Great for those who own, terrible for those who don't.
Guess I'm a weirdo who wants to see everyone prosper, and their future work valuable. And us such, consider interest rates the measure of how much we value our future labour (which admittedly is different to the future cashflow).
I'm also the idiot who has used this discounting to purchase nice consumer goods at times in my life .. so not everyone buys assets with it!
The scary math behind the world’s safest assets: Washington has laid the seeds of a crisis that Wall Street can no longer ignore. Around three-quarters of Treasurys must be rolled over within 5yrs. Say you added just 1ppt to the avg interest rate in the CBO’s forecast and kept every other number unchanged. That would result in an additional $3.5tn in federal debt by 2033. The govt’s annual interest bill alone would then be ~$2tn. For perspective, individual income taxes are set to bring in only $2.5tn this year. https://wsj.com/articles/the-scary-math-behind-the-worlds-safest-assets-a22069f9?st=jsu9oqrxi2j6o2e Link
This is a very interesting concept !
Its because subconsciously people see a BIG Ute or their Land Rover Discovery as being a "Safer Car", its a mines bigger than yours mentality if you crash into me. To be fair its drivers attitudes towards cyclists and bikes that make it even more dangerous over here and I guess our roads are relatively less congested allowing higher average speeds. Scooters would be really safe if our roads were so jammed the top speed was like 30kmhr.
This time bomb ticking louder every day
https://maritime-executive.com/article/russian-warship-fires-shots-to-s…
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