Here's our summary of key economic events overnight that affect New Zealand, with news high interest rates are becoming the new normal, even as benchmark rates keep in rising fast. Where will it end?
But first, the overnight dairy auction was a good one again, a third consecutive rise, this one by +4.4% in USD terms, up +5.0% in NZD terms. That takes the year-on-year change to -20.6% and an improvement from the -25% change at the last event. And today's gains only take things back to where we were at the start of August. But it is much better than more retreats. A very good sign is that SMP rose +6.6% indicating the foodservice market demand is returning in China. But EU buyers have been active too. We should note two more things; volumes sold at this auction were high, the most in three years. And worth noting is that milk production in both New Zealand and the US is down, and a decline is anticipated for China soon too, encouraging buyers to secure supplies now. NZ production is down -2.1% and American production down -0.2%. Luckily prices are up more.
In the US, more strong labour market indications. Their August job openings rose by +690,000 from the previous month to 9.61 million, well above the market consensus of 8.8 million.
The American LMI (Logistics Managers Index) rose more than expected too in September, indicating stronger distribution activity.
The US retail Redbook survey rose +3.5% last week above the same week a year ago and still good enough to indicate better-that-CPI growth in retail bricks-and-mortar retail sales.
But the big news continues to be the intensifying bond selloff. The capital losses are going to hurt big-time, remembering there is US$140 tln in global bonds, and more than the market cap on equity markets. And equity markets are retreating now too; the giant US equity markets are down more than -6% in a month although to be fair they are up +15% from a year ago. But mark-to-market bond valuation changes will flush out huge losses.
But the sharp jump in yields isn't worrying Fed officials at this point; they see it as what would happen "in an ordinary tightening cycle."
But real American interest rates are soaring, attracting foreign investors big time, and turbocharging the US dollar. The yen is touching 150 to the USD as it did in November. But it is much tougher on others like the Russian ruble and the Turkish lira. The NZD is getting off lightly so far. But the AUD is now down to an eleven-month low.
In India, new orders, production and employment all expand further in September in their factory sector and their factory PMI is still expanding fast, even if not quite as fast as in August. This is in clear contrast to China.
In Australia, new housing loans rose marginally in August from July, but remained a steep -12.3% lower than the same lending a year ago. Meanwhile, Australian building consent approvals for housing also rose in August from July, but these too remain lower than last year and by -9.4%.
And staying in Australia, the RBA kept its cash rate target unchanged at 4.1% during the first meeting under new Governor Michele Bullock, extending the rate pause for the fourth straight month.
Globally, air cargo demand rose in July, its first gains since February 2022.
The UST 10yr yield starts today up another sharp +13 bps from yesterday at 4.81%. It was last at this level in August 2007. Their key 2-10 yield curve is less inverted from yesterday at -35 bps. And their 1-5 curve is now at -71 bps and also much less inverted. Their 3 mth-10yr curve inversion is much less inverted as well at -59 bps. The Australian 10 year bond yield is now at 4.63% and up +6 bps from yesterday. But the China 10 year bond rate is unchanged at 2.71%. The NZ Government 10 year bond rate is up +6 bps at 5.51%. Overall very big movements here again.
Wall Street is sagging under the weight of the bond market revaluations with the S&P500 down -1.6% in Tuesday trade. Overnight European markets closed another -1.0% lower. Yesterday, both Hong Kong closed down a very sharp -2.7% and Shanghai was lucky to be closed for their National Day holidays. But Tokyo didn't escaper, down -1.6%. And the ASX200 ended down -1.3% in its Tuesday trade. The NZX50 ended down an insignificant -0.1% having escaped the carnage so far.
The price of gold will start today at just on US$1824/oz and down another -US$8 from yesterday. This is another new low since February 2023, all driven by the sharply rising yields.
Oil prices have stabilised lower at just on US$89/bbl in the US. The international Brent price is just on US$91/bbl. Both are +50 USc rises from this time yesterday.
The Kiwi dollar starts today at 59 USc and down another -½c as the greenback surges. Against the Aussie we are firm however, now up at 93.7 AUc and a new four month high. Against the euro we have slipped -¼c to 56.4 euro cents. That all means our TWI-5 starts today at just under 69.5 and down -30 bps.
The bitcoin price has moved lower today from yesterday, and it is now at US$27,393 and back down -2.1% and taking the top off yesterday's jump. Volatility over the past 24 hours has been modest at just on +/-1.6%.
The easiest place to stay up with event risk is by following our Economic Calendar here ».
67 Comments
Bond rout, is now official? 30 bps more and the 10yUST will be the highest in 23 years..
Long bonds are a bet on future interest rates. If you saw "Dumb money" last week, there will be those that saw this coming, and those who sat on their hands for too long. You can be sure there's plenty of shorting going on in the bond market right now
Central bankers are about to have 15 years of mutated monetary policy blow up in their faces. Like reading the old book in “Evil Dead”, zirp and QE were very bad ideas. They needed to have raised cash rates above inflation to prevent this bond move , now there is nowhere left to hide
It's starting to look scary. 15bps on the 10y is a huge move, and it seems to be happening every day.
Yep, agreed. Convexity hedging on US mortgage books creates a short vol effect like wind to a bush fire.
Talking of bush fires, I saw on the tv news last night that there are currently over 100 bush fires raging in Australia that fire-fighters are desperately trying to control......and It's only early October!
Also, there is an unprecedented drought in the Amazon rain forest affecting resident animals on a large scale. For instance, they've just discovered that 120 of a rare species of river dolphin were found dead their bodies strewn over a dry river bed.
Right now there are unprecedently-large chunks of ice breaking off the Antarctic ice sheet.
It's really not that bad. Australia has had bush fires for may 100's of thousand of years. Yes, they have had some hot weather off the interior that usually comes with a lot of wind and flies.
October.
Australia has 45,000-60,000 bushfires a year. In the 2019-20 season the fires started in June, and were out of control by early September.
https://disasterphilanthropy.org/disasters/2019-australian-wildfires/
Orr should just go on holiday, markets are doing all the work for him.
I think we could just replace him with Chat GPT4, nobody would notice and we'd save $900k on not having to pay him.
Something is going to break soon....
I think the NZ system will start to show cracks if the NZ 10 year bond hits 6%. At 7% we are in trouble.
Normally this sort of global economic environment would see a collapse in energy prices. Which would allow us to lower interest rates. The world has changed though...despite economic turmoil in the West, oil prices are stubbornly high. Lowering interest rates now would see $4 a litre of 91 & another 20% rise in food prices so isn't really an option.
There isn't a lot of drilling being done at the moment, investors are demanding capital discipline from producers.
October 19th (Black Monday) not far away
emotion will trump logic
"emotion will trump logic" always does, even without pressure.
Despite all the hype, most markets are still about emotions.
The comment function is missing on the IMF article?
Godwins Law. Comments go into the sewer as soon as someone invokes Nazi references. So they were turned off. We will turn them back on for you (and remove the Nazi comment).
https://surplusenergyeconomics.wordpress.com/
'For investors, that would be somewhere safe to park their money when the “everything bubble” in asset prices bursts, as, of course, it will. For many more, the “elixir of alternative” would be the discovery of replacements for the tired, self-serving, failed incumbency systems that have been making the wrong decisions on our behalf for a very long period of time.
These issues are, of course, connected – a financial crash will have profound effects on the distribution and nature of wealth and power.'
Prebbles column is pushing the ardern factor influencing the election with her 1.6m instagram followers
Sorry but 10 year olds cant vote
Still taking up a large piece of your head I see ...let it go..let Winnie fill it up if not all ready?
Trouble is if the media scramblers haven’t got a headline out of something they invent one out of nothing. Ten days of it left unfortunately.
Perhaps its your media channels you are tuning into...
I can't wait for it all to be over, never been so sick of an election so early on in the piece.
An American, an Iranian, and a Mexican walk into a Bar.
They find a table in the corner and discuss imposing a Wealth Tax on New Zealanders.
Meanwhile some segments of society get very upset at the prospect of no longer living beyond their means by foisting ever larger debts on following generations.
Meanwhile some segments of society get very upset at the prospect of other people longer living beyond their means by foisting ever larger theft of other peoples money on earlier generations.
Now that's a word salade, everyone try and say that quickly 10 times!
LOL!
I am just trying to ignore it as much as possible. I must say I feel like smashing Labour’s ‘In it For You’ sign each time I pass it. Haven’t watched or listened to any of the debates.
Matthew Hooton has written a very good piece in the latest Metro magazine, outlining why Labour and National are equally awful.
Some of them are so ill informed it’s shocking. Some time ago banging on how Chloe retaining her Auckland Central seat will generate more list seats when the Greens are easily over the 5% threshold and therefore it won’t make any difference. First of all the reporter is ignorant and secondly the editorial staff are either lazy or incompetent, probably both.
I have to put up with a smiling bald man telling me he will get the country back on track?
We are all going to be pulling our hair out if Chippie gets back in.
Well at least Chippie is not quite as lippy as he used to be, or is he?
Well the Luxy is dodging him...chook chook
I keep wanting to ask him what track is that? I can think of a few which i don't think we want to be on, at least one of which we already are.
My thoughts exactly. I am streaming movies, watching rugby, NFL, etc until it's all over (life is bliss in my bubble). The media have a huge part to play - instead of in-depth interviews, they want clickbait and 'I gotcha' moments).
Thats exactly the reaction they want from you. That way you'll place a lazy vote just so you can tune out and make it stop.
Why is the UST yield rising?
Why is this such this such a bad thing - don't most holders (pension funds etc) of these bonds keep them to maturity or is vast majority held by short term traders?
Last time treasury yields were this high, US debt was something like 35% of gdp. (Rather like nz now, incidentally). Now it's north of 120%. If rates stay this high, debt service will head toward 6% of gdp, which is going to cause some serious issues, especially since the US govt is still running a 7% deficit.
And before somebody jumps in claiming that the orange one is the solution, all he's going to do is cut taxes on top of it all without dreaming of touching entitlements.
UST yields are rising in part because US government is issuing it in extremely large quantities. They will be issuing 1.9 Trillion $ of UST in the 2nd half of this year alone.
Rising interest rate and the perception that inflation is here to stay have also contributed.
Why is it a bad thing? You are correct that those people who purchase it for yields only and hold them till maturity will be happy. But a vast number of institutions hold it for its value, often as collateral. David Chaston wrote a very good article on this some time back.
Anyway, those big institutions who are required to hold say 500 million $ worth of investment grade bonds as collateral, will find that the market value has fallen to 350 million $. This creates a big hole on the asset side, thus causing a lot of trouble.
There are more complex and more precise explanations than this but you get the gist.
The yield curve is bear flattening because investors have lost confidence in central banks resolve to finish the job (RBA cash rate 4.1% vs Inflation at 5.2%). Interest rates needed to be above inflation to engineer a short sharp recession, but in 2023 there is no longer the stomach for the difficult decision. Say what you want about older generations, they at least had the minerals to do what was required and would never have blown up their balance sheets for Covid.
Capital losses on bonds, again there are no longer any consequences for poor investment decisions. Whoever owned long duration bonds below inflation really should exit the building.
UST yields are rising in part because US government is issuing it in extremely large quantities. They will be issuing 1.9 Trillion $ of UST in the 2nd half of this year alone.
The BOJ had to defend JPY last night as it approached 150. People may think why should we care about Japan and the BOJ? Because they're by far the largest holder of US debt and equities - over 1.1 Trillion US dollars worth of debt.
US on track to add $1T in debt per month at current rates
https://twitter.com/KobeissiLetter/status/1709323926860694004?t=pHOt2AA…
Yes most pension funds hold bonds to maturity so will never make a loss on them if the financial system remains stable. But every financial crisis is caused by a liquidity event - meaning some people start demanding their money back, and in order to give it, the funds have to sell assets to raise cash to pay them.
I have a pet theory that the next major financial crisis will actually be a run on pension funds. Not something the mainstream media have thought about. But many of them have a ton of illiquid, unlisted assets on their books (especially the Aussie Super Funds) and any increase in redemptions from these funds will force those funds to sell off their liquid, marketable assets first = ie. stocks and bonds. Is the "smart money" simply getting ahead of the curve?
Its not going to take long before people start looking at their pension fund statements and start asking "am I better off in a term deposit" and the run will start. Those that are still locked in a super fund by not being retired already, will simply switch asset allocations to cash. Same result.
Pays to remember that the Baby Boomer generation are 57-77 years old now, a very large cohort in the retirement phase and planning on living another 20 years at least. What happens when they make a run for the exits en masse?
There is a difference between yield and coupon, we are talking yeild here, which directly impacts face value, thats the problem face value, not yield
In the US, more strong labour market indications. Their August job openings rose by +690,000 from the previous month to 9.61 million, well above the market consensus of 8.8 million.
And while the number of job openings was farcical and clearly politically mandated, one certainly could not see a similar euphoria in the other data points tracked by the JOLTS reported, starting with the number of quits, which barely increased in July, rising by just 19K to 3.638 million, effectively remaining at the lowest level since May 2021.Furthermore, while the DOL goalseeked job openings sharply higher, it forgot to do the same to not only quits but also hires; in fact, hires rose a tiny 35K to 5.5857 million, also just barely above the lowest level since March 2021. Link
While everyone is chasing the squirrel of Job Openings - that even Economists recognize is a bunk number - meanwhile consumer confidence has completely crashed. Americans are this pessimistic because the labor market is burning red hot? Link
More Zerohedge/Snider conspiracy promotion. It is amazing people still fall for it, but then maybe not, given Trump can still grift off millions of suckers.
Zerohedge is okay occasionally, you just have to wade through the trash for the data points.
Conspiracy you say? Rather amusing when you see them revise the labour market numbers down each subsequent quarter of late.
IKR, labeling it conspiracy theory stuff when he's just pointing out whatvis actually happening behind the scenes is a bit of a cop out.
US Speaker voted out of office! McCarthy looked to the Dems for support in this, but got some payback for screwing them over. Some important lessons here.
But this is big with ramifications that may reverberate around the world.
"If we nominate Trump, we will get destroyed ... and we will deserve it" - Republican Senator Lyndsey Graham, 2016
This seems like a natural evolution of their embracing what they have in preceding years.
I would suggest that reference would be about the people destroying the Republican Party, not about internal, power hungry factions ripping the party apart.
But the critical question will be how bad must it get before the people stop voting Republican? Will they swing to the other major party or start considering independents or second tier parties?
Lets hope they swing away from the majors.
Democrats are more likely to vote independent, which arguably cost Al Gore and Hilary Clinton the elections against Bush and Trump (ie Ralph Nader and Jill Stein).
Republicans that still vote republican these days will hardly be swayed. There’s a bit of tribalism that’s made worse by polarising social media (the documentary ‘Social Dilemma’ talks about this).
Kang and Kodos summarise it up pretty well in the Simpsons Treehouse of Horror VII: https://youtu.be/w7NeRiNefO0?si=fXnebUng2UH0cXOU
Probably quite true. Just ended up being unintentionally apt.
Forcing a few votes and filing a few motions is not chaos. If we continue to have $2 Trillion annual deficits, you won’t know real chaos until you see where the Swamp and this uniparty are bringing us. Link
Matt Gaetz did a good job ousting him. Stuff that RINO.
Every American politician, of every stripe, that gets the tall poppy treatment is worth a loud enthusiastic clap IMHO.
Gaetz is much worse than McCarthy. I don't think any Republican has much merit, but the fact that a person like Gaetz can stand up and point the finger and get away with it, is concerning as to the state of the media over there. As an avid Trump supporter he too must be a threat to their democracy, but the media seem blind to that bit? Or are they just reporting what they call "facts" without any analysis?
Now what then..seems like an own goal?
Don't you just love the wording...blame...like they are doing something wrong...like they aren't allowed to look out for their own sovereign economic interests, instead of supporting America's economic hegemony. *SMH*
NZX50 is now -3.7% YTD and yesterday the ASX200 turned negative YTD. Looks like my bearish views at the start of the year were justified. Got a call from my Kiwisaver provider yesterday pushing their growth fund, I said ‘no thanks’ and gave them a 2 minute spiel as to why not, I am sure it was way above their heads. I concluded with telling them I will move to a growth fund at some point in the future (probably a 2025 action, as there’s plenty more stocks carnage to come, but will obviously monitor)
Yep. Stocks, bonds and NZD (cash) are all taking a huge hit. No winners here.
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