Here's our summary of key economic events overnight that affect New Zealand, with news its the same story continuing, benchmark yields are still pushing higher.
But first, after the prior week's rather unexpected surge, American mortgage applications fell last week, reverting to the negative trend we have seen since May 2023. The usual culprit was responsible; mortgage interest rates rose again, this time to 7.41% plus points, their highest level since December 2000.
And staying in the US, new orders for durable goods rose +0.2% in August from July, a minor recovery from the -5.6% slump in July. But the result was better than market forecasts of a -0.5% fall. This leaves overall August orders +3.0% higher than a year ago. Capital goods orders are +2.5% higher than a year ago on the same basis, but they did slip -1% in August from July.
Meanwhile, American household bank deposits fell for the first time in data going back to 1994, according to FDIC data. Total deposits slipped -4.8% in the year through June to about US$17.3 tln as customers pulled out money to invest in higher-yielding alternatives. In a country as large as the US, that involves a movement away from banks of -US$900 bln. The main beneficiaries were money-market funds.
In China, they released August industrial profits data yesterday. That shows profits fell by -11.7% from a year earlier in the first eight months of 2023, amid weak demand at home and abroad and persisting margin pressures. The decrease followed a -15.5 % slump in the prior period and a -4% fall in 2022. In August alone, profits rose +0.8% from the same month a year ago, far less than inflation, but the first such rise in three months. In July, they fell -1.4% from a year ago, so things may be bottoming out.
China has put the boss of Evergrande under effective house arrest. Evergrande is teetering on bankruptcy, so this may be a move to prevent him fleeing when that comes. Its restructuring plans look like they will fail, so a full formal collapse seems the next step.
In Europe, bank lending to households rose just 1% in August from a year ago, the lowest growth rate since 2015, as a result of the continued slowdown in credit demand from the ECB's policy tightening measures. Lending growth to companies slowed sharply to just +0.6%, representing its lowest level since December 2015.
Australia has a monthly "CPI indicator" series, tracking inflation between their main quarterly assessments. For August that came in at 5.2%, up from 4.9% in July. In June the rate was 5.4% although the overall Q2 official Aussie CPI was 6.0%.
Australia released job vacancy data but it is on a delayed basis and the latest is for May. That shows job vacancy levels slipping away - quite quickly, and down -10% from a year ago. It would have been worse without a +14% rise in public sector job vacancies. The private sector saw their vacancies fall by more than -12% from a year ago in May. With their labour market softening, perhaps it is no surprise that Australia's retail turnover is very lackluster, hardly growing in current dollar terms and nowhere near enough to account for inflation.
But the main overnight news continues to be the rise and rise of benchmark interest rates. The UST 10yr yield starts today up another +9 bps from yesterday at 4.64% to yet another recent high. Curves are flattening. Their key 2-10 yield curve is less inverted from yesterday at -52 bps. And their 1-5 curve is now at -84 bps and marginally less inverted. Their 3 mth-10yr curve inversion is less inverted too, also at -79 bps. The Australian 10 year bond yield is now at 4.46% and up +4 bps from yesterday. And the China 10 year bond rate is unchanged at 2.73%. But the NZ Government 10 year bond rate is -3 bps lower at 5.25%.
Wall Street's Wednesday session is lower again on the strong bond market signals, with the S&P500 down -0.5% to a new three-month low. Overnight, European markets were all down with London down -0.4%, Frankfurt down -0.2% and Paris just fractionally lower. Yesterday, Tokyo ended up a minor +0.2%, and Hong Kong roise +0.8% but Shanghai only rose +0.2%. The ASX200 ended its Wednesday session down -0.1% and the NZX50 was down -0.2% with a late recovery.
The price of gold will start today at just on US$1875/oz and down -US$26 from yesterday. This is its lowest level since February 2023, all driven by the sharply rising yields.
And oil prices are moving up today, +US$3 firmer at just under US$93/bbl in the US. The international Brent price is just over US$94.50/bbl. This takes them back to levels we last saw in July 2022.
The Kiwi dollar starts today at 59.2 USc, down -¼c from this time yesterday. But against the Aussie we are up to 93.1 AUc. Against the euro we still at 56.4 euro cents. That all means our TWI-5 starts today at 69.4 and down just -10 bps.
The bitcoin price has moved fractionally lower from this time yesterday, and it is now at US$26,216 and is down only -US$31 from then. Volatility over the past 24 hours has been modest at just under +/-1.4%.
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72 Comments
U.S treasuries and Oil suggests the mother of all stagflation events is underway. I trust everyone has planned accordingly.
What I am really curious about is how will Powell respond when something major happens. Will he be like Ben Bernanke/Yellen/Greenspan and open the spigots, inflation be damned or will he be the Paul Volcker people claim him to be. This more than anything he has done yet will determine his legacy and, of course, the future course of world economy
They will open the spigots - there is no other 'tool' in their 'toolbox'.
But that isn't what will determine the future course of the world 'economy'.
The reduction in resource availability - both per-head and outright - and the reduction in energy-input ditto, are what is/will do the determining.
https://ourfiniteworld.com/2023/09/25/can-india-come-out-ahead-in-an-en…
Note the OECD energy-take, first graph. Tells us all we need to know; sure, some will have forced efficiencies; some will represent offshoring of real activity, but the percentage is telling.
I feel NZ in particular is venerable to this new world of high energy prices. Our city designs are built 99% around the use of the automobile. The RMA prevents us from adapting our cities to make them more multimodal like European cities. Basically petrol prices are incredibly inelastic to the average New-Zealander. Doesn't matter what the price is $3 or $5??? You still have to drive.
The RMA also prevents the building of large scale, mixed use apartment developments. So we end up with horrible urban design where living areas are completely separated from work & retail areas. Once again this means to get from Home to work you need to drive.
Don't worry National have a plan to fix that, make medium density housing illegal and turbocharge suburban sprawl over the farmland at our cities fringes.
You have a very valid point of course. I have read your thesis here on interest.
I wonder that in a society already in some pain and with promise of more pain to come, how much fortitude will remain to tackle this most important issue of all.
Indeed. This has been coming with increasingly greater chance for some time. Recession like effects thru rising unemployment plus lower asset prices, and higher cost of everything.
A worst outcome for our financial overlords to have navigated us to.
HFL.
https://www.newstalkzb.co.nz/news/welcome-to-zb-plus/
https://www.newstalkzb.co.nz/zb-plus/
Philip Crump/Thomas Cranmer, Muriel Newman, Fran O'Sullivan...this may be worth the subscription.
One can only guess as to the reasons it didn't happen in the last 3 years until the PIJF ended.
You'll find no mealy-mouthed, non-committal utterances here. Newstalk ZB gets straight to the point with the best opinion writers and exclusive news you can always trust.
Subscribe today. You won't regret it.
Yer/Nah
sounds a lot like $tuff
No No .Stuff is woke remember, you can have it both ways
You too can pay to hear the mouthpiece of the National party in all of their glory.
I'm in Switzerland watching "Le grand débat" on TV about "Is Switzerland getting too expensive ?" and i'm amazed that the issues are the same as we have in NZ, namely:
The population getting poorer and the squeezed middle class
Government spending to support the people in need vs some austerity to contain inflation.
Red tape stifling building of new dwellings and the constant rise of rents
The increasing difficulty paying superannuation for the over 65's
Interesting. I feel that sometimes (often) in NZ we're a little insular in looking at issues that are impacting us.
Yes. It's global, but we can only manage our small part. Gotta act as best we can for New Zealanders.
Is the "squeezed middle class" really a thing (in NZ)? For example a couple of teachers earning $190k combined, living in an average house in Palmerston North they bought for $615k, are they struggling? Is struggling defined as only going on an overseas holiday every two years instead of every year?
Maybe not that scenario.
But if you transfer the same couple to Auckland, with two school age children, and a 700-800k mortgage- different story!
So when they say squeezed, the don't mean low income, they mean big mortgage? Why would that "squeezed middle" vote National for a tiny tax cut and higher house prices?
Also what percentage of the middle class have a $700k mortgage? Shouldn't we call this the "squeezed recent house buyers"?
Most smart people in their late 30's & 40's have it sorted. They bought a house between 2010 - 2018 & rode the property wave. Those suffering are people in their late 20's early 30's who are unable to buy on account of high interest rates, high prices & high income taxes. I'm 37 & most of my friends got on board the property train. I have a younger cousin who is 29. Talking to him there is wide spread disillusionment and contempt towards the system by his pairs. Many of them will be renters for life unless something changes with the system. As they can't afford to both start a family and buy a home. They have to pick one or the other.
Ok
Don’t know how many have a 700k mortgage. But a pretty large number of people who bought in the last 5-6 years would have a 500-700k mortgage.
Even a 500k mortgage, re-financed at 7%, is a pretty big weekly cost.
Frankly Jimbo the thought of a $700k mortgage is terrifying to me. Translated back to when I was in that stage of my life, I would have probably balked at that. Which just goes to show the degree of where we have got to.
I have to add you are asking and postulating around some really good and important questions here. This whole mess has to change and be fixed so our kids have some sort of a future. Keep pushing!
I think what has happened is that the middle class is now actually two classes - the long term house owners and the non-owners / recent buyers. The first group can live a good life off 2 median incomes, the second group are screwed. Everyone keeps talking about incomes and tax etc when the real social divide is house prices.
I agree, but then I'm not sure what to say when I meet someone who has owned their home for 20 years and remarks how tough it is to get along now.
(accepting that special circumstances, buying or selling at the wrong time, redundancy etc of course set families back)
I think the default for many people is their spending will increase to match their income. Then, when they get hit by some increase in costs the balance just flips negative, or they 'suffer' by giving up the last few luxuries they have added to the budget. Even high earners can live precariously if they don't know how to budget and/or are unable to restrain their spending.
Yep well put
So all just a matter of timing (luck)
Maybe its a "stretched middle", here and in Switzerland etc
- previously comfortably middle class
- kicked down a notch by the covid era (in comparison to the rich who got richer)
- stretched between desire for upper class things - EVs, concert tickets, holidays and instagram moments... while relying on underfunded and crumbling public services
I think it's partly a political invention to get people on board with things like tax cuts, because obviously anyone who knows a family who is truly middle class knows there is a lot of wasteful spending that can be cut back on easily enough. I think there is a truth to it when looking at people who should be in theory 'middle class', such as those with decent degrees but still starting out their careers who are finding it hard. There is a psychological element too, because housing has become such a daunting and all consuming aspect of peoples' lives and at least over the last decade moved away from being perceived as something attainable through regular and diligent saving.
Things don't always go smoothly too. Not everyone holds down steady jobs with good salaries forever. I've been supporting my partner through several years of studying and we have basically been breaking even in terms of household finances. It's honestly been a humbling and somewhat rewarding experience living within tighter constraints. It definitely makes you appreciate everything more and to be selective with how you treat yourself (and makes you want to vote for a party proposing income splitting, because it sucks giving up 33% of your wages when you take an extra job over summer).
$95k is the most a teacher can earn. Most are on less with the median around $60k.
The median wage in NZ is $1,273 per week ($66,196 per year) according to stats nz.
After tax and Kiwisaver, that is $967.66 a week each or $1,935 for a couple. Assume they pay the median rent of $575 a week, spend $300 a week on food, $100 a week on petrol, $70 a week on power, $70 a week on insurance, $50 a week on car maintenance, they have $770 a week left over. Not that bad is it?
Yes if they have young kids they would probably struggle, that is a small section of the middle.
I was referring to your example of two teachers earning $190k/year. This is not the norm. If those two teachers earn the median teacher salary of $60k then this is $1,813/week after tax and Kiwisaver. Let's assume (likely incorrectly) that they don't have student loan repayments. The $615k house they bought at $615k in your original example (20% deposit so $492k mortgage) will cost them $755/week at 7%.
Less your numbers above then we are down to $468/week. This has to cover rates / child care / school fees / after school fees / broadband / mobile plans / clothing / furniture / house maintenance / garden maintenance. Does not leave much/anything to actually enjoy living on or save for the future.
Who said the average teacher earns 60k? If you have a degree for example you start on $59,948 and after enough experience get up to $95,400. Even without a degree you start on $55,358 and max out at $90,619. The average must be a lot higher than 60k.
Compared to Renters that teacher couple is saving for the future as every year there equity increases as they pay down their mortgage.
Pity instead the Renters who can only look forward to their Housing costs doubling in 20 years at 3% annual increases, versus the savers who are paying down there mortgages.
Teachers are earning 95k + got 7k cash, so are effectively on 103k now. Many do extra duties and marking and are earning 107k now. 68% of NZ teachers are on the top 2 steps of the scale.
A teacher progresses up the scales simply through time, so the longer you stay the more you are 'promoted' in terms of salary. I guess it makes sense you are going to have a big bunch around the bottom (new teachers, many who leave after 3-4 years) and the top (10 yrs+ service).
Kiwimm. Dodgy to claim $60K is the median, when the starting, the minimum, is $60K.
All developed countries are having the same issues. The common theme is that politicians and central banks have been pumping the system and now inequality has become too problematic to ignore.
I doubt there will be too many places to hide.
Fix the money, Fix the world. Fiat money is destroying our purchasing power.
Global GDP is now 101 Trillion -- wowwee
But interest on Global GDP is now 22% -- boooo
Debt leveraging for "wealth" creation requiring more credit creation is destroying the purchasing power of fiat currency, plus usury.
Fiat currency itself isn't the issue, it's only a medium of exchange. How we create it and the fear that encourages us to "store" it is the problem.
Warm up for 5% on the 10yUST.. interesting times ahead for those with high debt
Yes banks funding costs are rising strongly. More will be passed on soon..........
Take a look at the junk bonds default rates. A new 'credit event' is beginning.
I had a sudden thought this morning; Google helped me out.
I thought I must have missed something important - haven't heard a peep for ages.
https://www.google.com/search?client=firefox-b-d&q=is+nanaia+mahuta+sti…
something something internal polling suggests Labour keep her hidden away until after the election?
Tribal democracy put on hold then?
Here she is 23rd September at UN in New York :
Nanaia Mahuta, Minister for Foreign Affairs of New Zealand, addresses the general debate of the 78th Session of the General Assembly of the UN on September 23.
Here is a challenge, name three ACT or NZ First candidates likely to be in parliament next (not including the leaders) without looking it up.
Brooke Van Velden, Nicole McKee, Karen Chour
Easy.
At some point central banks might realise that wiggling the interest rate up and down has far less of an influence on the general price level than they thought. Prices are driven by costs and speculators these days and we are now seeing a rising prices (thanks oil) and rapidly falling demand... one would hope that this finally convinces the medieval monetarists that they are very wrong. If everyone in NZ was broke, petrol prices would still be $3 a litre.
"If everyone in NZ was broke, petrol prices would still be $3 a litre" which is part of the reason they don't include petrol in the US CPI.
However the OCR does effect petrol prices: if our OCR was still at 0.25% our currency would be worthless and petrol would be $4 or more a litre.
Yes, and given that two-thirds of our energy supply comes from oil, those high oil prices push up the cost of basically everything we do. There is no better leading indicator of CPI than imported diesel prices (for example). Our mistake is thinking that we control prices in NZ to any significant degree (and that we have independent monetary policy).
An economy is a complex system.... with many different markets interacting.
My preferred way of looking at it is the way Ray Dalio describes it.. He uses a transactional approach , in regards to supply and demand.
Demand is essentially a function of money + credit... All the different players, in any particular market , use money + credit to bid up prices.
Medieval monetarists were not wrong.... They saw that credit creation creates "bidding power".
In a fixed monetary system ( say...bitcoin )... if prices went up in one sector, it would be offset by prices falling in another sector... ie. the total aggregate price level would not change.
Weve had 40 yrs of excessive credit creation that is now bidding up consumer prices...and oil. ( My view is that most Non renewable natural resources are in a secular bull trend ).....
Of course wiggling interest rates was never going to be an easy fix... Inflation was never going to be transitory.... Our troubles will not be that easily solved !!
On our planet earth – as opposed to the very different planet that economists seem to be on – all markets are rationed. In rationed markets a simple rule applies: the short side principle. It says that whichever quantity of demand or supply is smaller (the ‘short side’) will be transacted (it is the only quantity that can be transacted). Meanwhile, the rest will remain unserved, and thus the short side wields power: the power to pick and choose with whom to do business. Examples abound. For instance, when applying for a job, there tend to be more applicants than jobs, resulting in a selection procedure that may involve a number of activities and demands that can only be described as being of a non-market nature (think about how Hollywood actresses are selected), but does not usually include the question: what is the lowest wage you are prepared to work for?
Thus the theoretical dream world of “market equilibrium” allows economists to avoid talking about the reality of pervasive rationing, and with it, power being exerted by the short side in every market. Thus the entire power dimension in our economic reality – how the short side, such as the producer hiring starlets for Hollywood films, can exploit his power of being able to pick and choose with whom to do business, by extracting ‘non-market benefits’ of all kinds. The pretense of ‘equilibrium’ not only keeps this real power dimension hidden. It also helps to deflect the public discourse onto the politically more convenient alleged role of ‘prices’, such as the price of money, the interest rate. The emphasis on prices then also helps to justify the charging of usury (interest), which until about 300 years ago was illegal in most countries, including throughout Europe.
However, this narrative has suffered an abductio ad absurdum by the long period of near zero interest rates, so that it became obvious that the true monetary policy action takes place in terms of quantities, not the interest rate.
Thus it can be plainly seen today that the most important macroeconomic variable cannot be the price of money. Instead, it is its quantity. Is the quantity of money rationed by the demand or supply side? Asked differently, what is larger – the demand for money or its supply? Since money – and this includes bank money – is so useful, there is always some demand for it by someone. As a result, the short side is always the supply of money and credit. Banks ration credit even at the best of times in order to ensure that borrowers with sensible investment projects stay among the loan applicants – if rates are raised to equilibrate demand and supply, the resulting interest rate would be so high that only speculative projects would remain and banks’ loan portfolios would be too risky.
The banks thus occupy a pivotal role in the economy as they undertake the task of creating and allocating the new purchasing power that is added to the money supply and they decide what projects will get this newly created funding, and what projects will have to be abandoned due to a ‘lack of money’.
It is for this reason that we need the right type of banks that take the right decisions concerning the important question of how much money should be created, for what purpose and given into whose hands. These decisions will reshape the economic landscape within a short time period.
Moreover, it is for this reason that central banks have always monitored bank credit creation and allocation closely and most have intervened directly – if often secretly or ‘informally’ – in order to manage or control bank credit creation. Guidance of bank credit is in fact the only monetary policy tool with a strong track record of preventing asset bubbles and thus avoiding the subsequent banking crises. But credit guidance has always been undertaken in secrecy by central banks, since awareness of its existence and effectiveness gives away the truth that the official central banking narrative is smokescreen. Link
“Money was intended to be used in exchange,” Aristotle explains, “but not to increase at interest.” Since money’s function is to serve as a way to facilitate exchanges whose end is the trade of useful and necessary commodities, those who exchange it not for goods, but instead for more money, pervert the end that money was created to serve, and so engage in “unnatural” exchanges “of the most hated sort.” “[U]sury, which makes a gain out of money itself, and not from the natural object of it,” is “of all modes of getting wealth […] the most unnatural”
The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural object of it. For money was intended to be used in exchange, but not to increase at interest. And this term interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Wherefore of all modes of getting wealth this is the most unnatural.
Mortgages are about to go NORTH BIGTIME.
The USA are assuring this.
Big borrowers and future mortgage resets will face "shock and awe" at the cash required to reset borrowings, as NZ is locked into only: a short term killer Debt period vice.
There is no soft landing, in the new: Higher and Higher and Holding interest rates world.
Agree this is what should unfold. Thought it would happen post GFC but the financial masters pulled all levers and put printing into overdrive to ensure reality did not apply. And here we are today, with a much higher cliff to ride/fall down depending on your position.
Yeah
The big difference is now we have high inflation
It’s a much more wicked problem now than in 2008-2009
Fomos should be very careful before they buy, and ask themselves can they afford 7.5% interest. Many of the 2021 Fomos are in big sh#t now.
And the fix long interest only tax avoidance crowd. A double whammy for them.
That GFC bailout by the Federal Reserve -lower for longer -helped American families who had bought houses in the past 5 years and were in 2009 to 2012 still "underwater". Don't look for a bailout of dropping interest rates this time as house prices in the US are holding and the average fixed for 30 years interest rate by mortgage holders there is 4.5%--probably 50% or more with lower long term fixed rates like my son with 2.65% fixed until 2051. Whether the FED acts to help other nation's mortgage holders will be an open question.
Rates at this level in USA will drain bond funding from rest of world
That and debt deflation in China spells big trouble for banks and the rest of us.
National will get poisoned chalice
I think we're in a bit of a 'Phoney War' type situation at the moment where many economies are meandering toward the inevitable, but no one is quite acknowledging it.
Recent signals out of USA confirm the inflation (or stagflation) and higher interest rates are here for much longer. This is clearly evident in New Zealand but with only Quarterly Inflation reads, and an election distraction, people are burying their heads in the sand.
Then we have have self-interest groups with high media profiles pushing agendas (i.e. housing spruikers). It's almost like when inflation was deemed 'Transitory', yet no would define how long 'Transitory' is/was. Perhaps like 'Transitory', 'Higher for Longer' will turn out to be 'Even Higher for Even Longer'.
Will we be putting Eric Watson under house arrest?
Do we know where he is? Can we find him? Does he ever come home to visit his mum?
Someone pointed me to this RBNZ explanation of inflation, which (oddly) totally ignores the importance of entrenched inflation expectations. If they are entrenched high, we'll have high inflation even if demand and supply are roughly in balance. https://rbnz.govt.nz/monetary-polic Link
Interesting. I find that explanation overly simplistic, as inflation can be driven by a number of influences.
In other news, bad result for The Warehouse Group today. And the NZX50 drops further…
Yes alot of this im guessing is from Noel Leeming, alot of people will keep their old phone or TV for now with the cost of living at the moment.
Yeah and probably Torpedo 7
Also have you been into a Noel Leeming recently?
Poor selection, poor pricing (and extremely deceptive specials pricing especially on big ticket items like TVs) and presumably because sales are slow you can't so much as let out a breath without a salesperson trying to sell you an extended warranty on your lungs.
This has certainly helped keep Aussie wine prices super competitive at the supermarket. One of the few things that’s hardly shifted higher in price over the past three years:
https://www.nzherald.co.nz/business/china-leaves-australia-drowning-in-…
US 10 year Treasury now approaching 5%, levels not seen since 2001.
Except back then US national debt was $3.3 trillion. Now it's over $33 trillion.
The question is, what breaks first?
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