Here's our summary of key economic events overnight that affect New Zealand, with news financial markets are struggling to respond to the enhanced geopolitical threats and are doing so by "not over-reacting". In the background, volatility was lower and earnings reports were positive. A speech by Fed boss Powell is due soon.
But first up today, the release of the important US Federal Reserve's Beige Book was an irrelevant affair, reporting little change in October from September. All the usual strengths are on display (labour market, for instance) along with all the usual threats (the housing market, and inflation, although that is broadly easing in these reports).
The American mortgage market hit a new low last week. Mortgage applications fell by -6.9% in the week ending October 13, the sharpest decline since April. Volumes are now their lowest since 1995. Refinancing applications plunged -9.9% in the period, while applications to purchase a home dropped by -5.6%. Meanwhile mortgage interest rates touched 7.7% plus points for their standard 30 year loan, a 23 year high.
Meanwhile housing starts picked themselves up off the canvas in September from August's unusual low, but are still quite groggy. They are -7.2% lower than year ago levels which themselves weren't a high standard. Building consents don't give any indication their residential new-build market is about to recover.
Canada however is posting a good recovery in their housing start and residential construction data for September.
Data out of China yesterday was quite positive. The Chinese economy expanded by +4.9% in Q3-2023 from a year ago, slowing from +5.3% in Q2 but beating market forecasts of +4.4%. For a country as large as China, that is a big up surprise. Retail sales climbed by +5.5% in September from a year ago (remembering they essentially have zero inflation), accelerating from a +4.6% rise in the prior month and exceeding market estimates of +4.9%. It was the largest increase in the pace of trade since May. Electricity production rose +7.7% from a year ago, suggesting the headline growth may in fact have some substance behind it. It is the first time in quite some time Chinese growth data has been led by electricity production.
Housing market data in China however, wasn't a positive with their property investment slump deepening in September. However, it is actually quite positive that the growth they did record was consumer-led, and without property. This de-emphasising is a heathy sign.
In Europe, they confirmed its September CPI inflation rate at 4.3% for the Euro area, unchanged from its 'flash' report. A reminder, that is down from 5.2% in August, so good progress there even if core countries like Germany and France aren't quite back at those levels yet
In Australia, there are more reports of farmers desperate to quit stock ahead of the expected El Nino droughts looming. Some are even prepared to give them away as prices collapse to less that the freight to move them off farms. Even then, there were few takers. To be fair, these are only tiny pockets of desperation at this stage, but the trend is clear and market prices are diving, especially for sheep. No farmer wants to be stuck with livestock they can't feed or sell. In addition to the obvious animal welfare concerns, the legal liability is severe.
The UST 10yr yield in volatile today. At one point it was as high as 4.93% but has eased back to now be at 4.88% and up only a net +2 bps from where we started yesterday. Still, this is a new modern post-GFC high. Their key 2-10 yield curve is less inverted at -33 bps. Their 1-5 curve is also less inverted at -56 bps. Their 3 mth-10yr curve inversion is less inverted as well, now at -52 bps. The Australian 10 year bond yield is now at 4.70% and up another +8 bps from yesterday and as new 12 year high. The China 10 year bond rate is up +2 bps at 2.74%. The NZ Government 10 year bond rate is +7 bps higher at 5.55%.
Wall Street is lower today, with the S&P500 down -0.6% in its Wednesday trade. Overnight European markets all ended down about -1.0%. Yesterday, Tokyo ended its Wednesday session unchanged. Hong Kong fell -0.2%, and Shanghai fell -0.8%. The ASX200 ended its Wednesday trade +0.3% firmer and the NZX50 rose an insignificant +0.1%.
The price of gold will start today at US$1952/oz and up +US$27/oz from this time yesterday.
Oil prices have risen +US$2.50 to be now at just over US$87.50/bbl in the US. The international Brent price is now just over US$91/bbl.
The Kiwi dollar starts today at 58.6 USc and down -½c from yesterday. This is its lowest level in almost a year. Against the Aussie we are softer at 92.4 AUc which is down more than -1c since the start of the week. Against the euro we have eased lower again to 55.6 euro cents. That all means our TWI-5 starts today at just over 68.7 which is down another -40 bps from yesterday.
The bitcoin price starts today at US$28,361 and down -0.8% from this time yesterday. Volatility over the past 24 hours has been modest at +/- 1.4%.
The easiest place to stay up with event risk is by following our Economic Calendar here ».
62 Comments
https://dothemath.ucsd.edu/2023/10/cheaters/
One for the math-aficionados.
'Just remember: the market and its proponents do not have our long-term best interests in mind, and will tolerate all manner of cheating—no matter the “externalized” cost to the planet.'
Ha. If you've been watching markets and economic for any period of time and hadn't figured that one out for yourself, you really need to check yourself into Disneyland as a live in resident of Fantasy Land.
"Market" pundits want Governments to back off (The 'light hand of Government') but the base truth is that it is Government's role to regulate markets. If they don't it effectively becomes the lawless wild west.
Obvious, really. Capitalism always descends into Crony Capitalism unless forced not to.
They only want governments to back off until hard times hit and its time for them to be bailed out by taxpayers.
The Kiwi dollar starts today at 58.6 USc and down -½c from yesterday. This is its lowest level in almost a year.
I had hoped we'd see a lift at some point but it's not unreasonable markets think inflation will remain higher for longer.
Isn't the USD / NZD basically a function of the difference between current and forecast US and NZ bond yields - with the forecast being based on what the markets think the Fed and RBNZ will do next?
My guess is that its also a function of the "Global Carry trade"....
The $US pervades the World....and maybe many holders of $US dont want it held in USA assets ??
Eurodollar mkt is a beast... ( at least in my limited understanding of it )
"financial markets are struggling to respond to the enhanced geopolitical threats and are doing so by "not over-reacting"." Maybe but the falling dollar still suggests that people are retreating to 'safe' currencies, e.g. the US$?
Very possibly but its hard to pick that signal out as the high bond rates are the main attraction.
10 year T bills over 4.9. Anyone who thinks nz rates are going down soon needs their head examined.
Historically what sort of a margin would you expect between the Fed and NZ bank rates? 2%?
Agreed, I actually think the housing market is about to trip over itself with these rates staying around for at least 8-12 months.
A good amount of the direction will formed from how much influence ACT can have on Nat to increase the rate of roll-back on the interest not being an expense charade. If ACT have their way the housing market will get a para-glider from investors, if not then it will be a small blanket with string instead.
A lot of stock is pouring onto the market, trying to get the summer trade, feeling positive about NACT in Govt, or simply can't afford it at these interest rates. Buyers beware, don't get in early and choose discerningly, I am picking June as potentially 1-3% down from here.
I have worked hard to get to a financial position that means I can weather this period come what may, but despite preparing I am still in the hole ~$2k a month. There will be many who have not got the means to continue to support their portfolios I would suggest.
It really is crazy that that is the case, not just for yourself, but so many. A cashflow negative business essentially. Speaking to my accountant he stated he has many clients like this, none of who want to liquidate anything to reduce the pain. I dont understand the attraction to this.
There is a belief (backed up by a lifetime of evidence) that inflation will reduce your mortgage as a ratio of value in the equity of the house. I can stand to operate the business at a loss (as I have in other down periods) as the money I put in goes against my Capital Account and can be drawn against once the business is back making money.
Liquidating the assets is the right move if you cannot afford to support the business and I think many will be approaching or at that stage. It does however bank in a loss if you brought the house at higher valuations and that will give some the reason to hold on for as long as they can.
Some people in our housing market will have to sell, as interest rates change, and as time goes by. It will happen bit by bit, and quite gradually. The other factor is probably how long banks will let them hang on when their situation is hopeless. Lots of opportunities. Just a question of not going back in too soon.
Investing for capital gains while pretending for tax reasons not to be has been the name of the game for many in the last decade.
I wonder how many are hoping for the brightline rollback so they can sell with a gain.
The driver of the recent residential rental frenzy was capital gain. Borrow and hope was the business model. Rental income did not support it. That was then. That era is over.
Landlording without a mortgage is different. That's called investing.
Building or creating something new is investing. Buying an existing asset - with or without a mortgage - is trading.
Agreed it is absurd that interest isn't deductible. It is equally absurd that "gain on sale of asset" is not treated as income when it comes to residential investment property. Income is income. An expense is an expense. Enough of this charade.
Agreed, I have always supported a CGT with appropriate calculation. My view, original price + CPI over time is the price of your asset, gains over that taxed at PAYE rates.
What other asset do you get to buy and sell and not pay tax on the CPI adjusted price? Should houses be immune to inflation for tax purposes? I think not.
Is that were the case, then you should be paying tax on the capital gains each year (similar to the tax rebates on deprecating assets but the opposite).
Agree with taxing at PAYE rates - but only if secondary income for a person - if structured into a business, pay your business rates please.
Perhaps you are right, there are not a lot of appreciating assets, sale of shares might be the closest but there are no holding costs or provisioning costs so not exactly the same.
To build my apartments I have to spend money on due diligence, financing and conveyancing, then I have to maintain and upgrade the property over time and finally the same costs on the way out, that is the main difference but I take you point, perhaps that is just a cost of business.
When though? There really in no income until so,ething is done such as the house is sold or a loan is raised against a change in value. So when would you levy the tax? Be specific.
On the sale Murray, I thought that was a given otherwise what income are we taxing?
The problem is that in discussions a couple of years ago, it was seriously suggested that home owners would get a tax bill on the capital value of their house, based on market valuations. Not when the house was sold. That proposal has tainted every other discussion since.
Some people do argue that a change in capital value of your home is 'income'. The clear assumption is that it is appreciation that is being discussed. When Michael Cullen discussed it, he suggested taxing an appreciating valuation but a depreciation should not be counted towards a loss of 'income'.
LVT has been well discussed ever since Henry George, and probably well before that. Milton Friedman also highlighted the merits of it, and it being less bad than taxing productive work.
You'll need to find a CPI that includes all housing. The CPI the RBNZ uses does not.
You may find that with an appropriate CPI the gains don't look anything like as good as much more will be subject to a CGT.
Exactly, it's the fakery of the business model that's been a huge problem over the years.
We have bought and sold a few properties. When done as our business it did not occur to us not to pay tax on realized profit. Just as all or any expenses must be tax deductible. Only an economic illiterate would try to boondoggle not allowing this.
I need my head examined then.
10 T bill yields have been on a massive tear-away in the last 6 months. Unsustainably so given inflation is moderating. Lots of technical indicators (and historical precedents) suggests that tear-away is about over. I expect expect a minor reversal, then maybe double-top, and then very gently down hill from then on. Probably 3-4 months between tops.
Returns this year in the S&P500 have been driven entirely by returns in 7 biggest stocks, and these 7 stocks have become more and more overvalued, Apollo's Slok says. P/E ratio for the S&P493 has fluctuated around 19 in 2023 while P/E ratio for S&P7 has increased from 29 to 45. Link
Value-conscious, historically-informed, full-cycle investors place a great deal of emphasis on the relationship between the price an investor pays today and the cash flows they can expect to receive in the future. The reason is simple. For any given stream of future cash flows, the higher the price you pay today, the lower the long-term return you can expect, and the greater your downside risk. The lower the price you pay today, the greater the long-term return you can expect, and the smaller your downside risk.
It seems counterintuitive, but it’s true – lower expected market returns go hand-in-hand with higher risk of loss; higher expected market returns go hand-in-hand with lower risk of loss. That proposition seems to run counter to what’s taught in finance, but speaking as a former finance professor, that’s because the concept of “inefficient risk” isn’t discussed carefully enough. As I wrote in Return-Free Risk at the January 2022 market peak: Link
The real challenge in managing these fantastical P/E ratios is the management of upside not downside. The upside has already largely been priced in, Apple, Alphabet, Meta, Microsoft, NVIDIA, Amazon and Tesla all have technology and/or market monopolies that the are clearly and overtly leveraging for future technology dominance.
" Without these seven stocks, which make up nearly 26% of the large-cap index's total weight, the S&P 500 would be down 0.8% on the year, through May" are the others down due to the draw of these high performers, are they the curtain hiding a failing wider economy or are they result of a retail investor renaissance?
Jamie Dimon is sounding the alarm on a potential surge in interest rates. Meanwhile, in a stark contrast, JPMorgan's asset management is doubling down on bond purchases… Link
Banking on a crash? Managing their existing portfolio downside? What's your view Audaxes?
Lets all hope it all doesn't evolve from HFL to HFMML!
Or HFWL
In a rational world it would already be WTF.
Housing is going to be the weak spot globally.. it has been a hedge for a long time, which will start to unwind
I've never dwelt in a hedge; interesting concept.
But I did sleep a frosty night in one, several K's south of Timaru, hitch-hiking south on a frosty night and running out of rides. Walked for hours, realised I couldn't keep that up till dawn, knew the frost was severe, slipped in feet-first. Woke up, stumbled to the road, and immediately got picked up by a trio of old ladies heading for a Flower-Show; me still picking foliage from my clothing...
Wouldn't mind being that young again...
Hedge.."way of protecting oneself against financial loss or other adverse circumstances."
Humour.. "Tendency of someone to point out and emphasize the comical nature of something."
Your comment brought to mind mine, last night:
by powerdownkiwi | 18th Oct 23, 5:41pm
None of you seem to be factoring in the exponential function, or anything to do with physical stocks, It must be like staring through the bottom of a bottle in the dark, half-cut. How can you do it?
In 1965, the global population was 3.3 billion, in 1980 4.4 billion, in 2008 6.8 billion - it's now 8 billion.
Same paddock, but we've chewed the grass down at ever-increasing rates.
Do you really think that a collection of absentee farmers - who cannot see, therefore cannot measure, the paddock - making short and long--term bets on how many animals will be carried in the future, means anything? That it can predict when the paddock turns to dust? Surely that is better done on a 'how long is the remaining grass/how many animals/what rate of consumption' basis?
Somebody please explain to me (maybe I'm just missing some essential point) how reading bets differs from reading tea-leaves?
by Independent_Observer | 18th Oct 23, 5:58pm
Good points pdk - perhaps our egos like to think that we know more about what is going on than what is really the case.
After dealing with spruikers, it's hard to differentiate humor to glamor......
I take your point:)
..sounds like a bad 'trip' pdk. Eaten by a hedge feet first and rescued by a trio of old ladies....scary.
Nobody wrote a book about 'how I went to the office every day for 40 years'.
https://genius.com/Carpenters-mr-guder-lyrics
Life.... is to be lived.
Nobody wrote a book about 'how I went to the office every day for 40 years'.
Best bit of advice I was ever given was by a Hospice worker. Her words were roughly
In all the regrets I have ever heard, None of them were "I wish I had worked more"
Slept a night in a little railway hut near Kaikoura once, with my Mini 850 parked outside. About a dozen trains went past, all loudly hooting. Happy days.
Rail platform outside Wanganui. About 6am diesel locomotive came coasting through. Then hit the throttle with a huge roar as it passed me. Woke me up. Bastards.
Waterloo station after Guns n Roses 1991 (train from wembley late so missed last one out of London), slept on cold hard floor with a plastic milk crate for a pillow while, bizarrely, a tramp threw coins at us (maybe we were in his spot...?). Best gig ever though...
Paradise City? ;)
Gaza hospital: What video, pictures and other evidence tell us about Al-Ahli hospital blast
Just going to wait patiently for Albert2020, HouseMouse, Foxglove, and the others in yesterdays breakfast briefing to apologize for taking a literal terrorist organisation's claims that it was an Israeli airstrike at face value, without any supporting evidence, and parroting Hamas talking points.
Agreed and crickets from our media.
Reportedly 3500 dead in Gaza so far, still no power, water, supplies or food allowed in. No letting up of the bombs expected any time soon.
Gaza is an overcrowded city that Israel won't let anyone leave or visit. Israel controls everything coming in or out. The median age is 18, so most living there have never known freedom. It is a huge intergenerational concentration camp really.
To be clear, I don't support what Hamas did to Israel and those Israeli victims didn't deserve it. Terrorism is never OK. I would class what Israel is doing in retaliation as terrorism also however, and it is at a much greater scale.
But yeah, that one attack might have not been Hamas. In war it is hard to know the truth. The truth about Israel's illegal treatment of Gaza over decades however is not disputed by anyone, and is the ultimate cause of the hostilities.
Israel won't let anyone leave or visit.
Gaza also borders Egypt but we shouldn't let facts get in the way of a good monologue.
That border is also closed. Israel and Egypt did a deal.
So, yeah, don't let facts get in the way of a good monologue.
The border crossing a Rafah is a target of Israeli air strikes.
Irrespective if this issue - which I will keep an open mind about - the BBC has been down a rabbit-hole for a long time (alle same RNZ, somewhat different hole).
The bigger picture remains: Israel has practiced apartheid, in a way that make South Africa look like a Scout jamboree. In that situation, I blame the primary aggressor.
Careful of betting the house on state media, bias runs two ways, from the article you are linking to -"So far, the findings are inconclusive."
The findings are inconclusive because no one is able to do a scene examination and piece together the fragments of the explosive to figure out what it was. Every one of the independent experts said that the explosion was inconsistent with an Israeli airstrike.
Careful of betting the house on state media
Kind of hilarious given the context - I'll take the BBC any day of the week, you guys can stay informed watching Al-Aqsa TV if you want.
Laugh all you like (and bless) but the BBC bias has been debated in the UK and there is bias.
https://iea.org.uk/wp-content/uploads/2016/07/BBC%20Bias%20Chp%203.pdfs…
I don't get how it's all 'it couldn't be an israelli airstrike as it doesn't look a typical israeli crater' and 'oh it looks like it malfunctioned in the air'
surely an Israeli rocket that malfunctions in the air would not leave a crater typical of an Israeli rocket that didn't malfunction in the air?
No good evidence either way until there is independent analysis (I wouldn't trust US to do so, only clearly independent parties looking at missile/bomb fragments). Claims from either side are pretty meaningless until independent verification comes in, only can deal with the consequences.
That article does not conclude anything except the BBC can't come to a decision. It contradicts it's self on almost everything (eg "explosion was caused by a failed rocket section hitting the car park and causing a fuel and propellant fire" and "The overall pattern of scattered injuries is what would be expected from shrapnel resulting from an explosion,"). Only some of the available video footage is supplied in this article.
The Hamas missile the IDF suggested caused it in the video was going in wrong direction and even if it was an already exploded tiny missile with a 10-25kg warhead do not kill people in the 100s. The explanation with corroboration from other footage is an air-burst JDAM bomb dropped from F16.
Without being completely convinced you are genuinely convinced of the missile story and being objective this becomes way to morbid to discuss further. The Hamas did this narrative just has too many holes.
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