Breakfast briefing: Cooling US inflation likely ends Fed hikes

Economy / news

US CPI inflation eases more than expected; this draws outsized market reactions; China mulls more housing assistance; EU GDP lame; NAB sentiment falls; UST 10yr 4.47%; gold and oil firmer; NZ$1 = 59.9 USc; TWI-5 = 69.2

15th Nov 23, 7:19am by David Chaston

Here's our summary of key economic events overnight that affect New Zealand, with news markets sense the US Fed is about to say it is done raising rates.

In the US, their annual inflation rate slowed to 3.2% in October from 3.7% in both September and August, and below market forecasts of 3.3%. Core inflation retreated to 4.0%, also a touch less than expected. Even the month-on-month data came in lower than expected. These are all small moves, but they had a large impact on financial markets, who took them as a signal that the Fed is done raising rates in this cycle. Equities raced higher, bond yields fell sharply, and the USD weakened sharply.

The American Redbook index of retail sales rose just +3.0% last week over the same week a year ago, and hardly keeping pace with inflation.

Despite that, the NFIB SME optimism index came in better than expected for October, even if it did edge marginally lower than in September.

In China, they are contemplating a release of ¥1 tln in low cost debt funding for urban village renovation and affordable housing programs, in its latest effort to bolster the struggling property market.

Markets are sensing something bigger is coming because iron ore prices are now rising and back near Mar 2023 highs.

EU GDP was unchanged in Q3-2023, but edged a touch lower (-0.1%) in the euro area from Q2. That means the annual year-on-year expansion hardly exists now. But this happened as employment rose slightly, ameliorating the impact.

But in Germany there was a surprise jump in economic sentiment, as measured in the widely-watched ZEW survey. Both the business and financial sectors drove the rise. Firms are indicating the bottom has passed.

In Australia, the widely watched NAB business confidence index fell to -2 in October from a downwardly revised flat reading in the prior month, pointing to the lowest level since May. However business conditions did edge up.

Australia released its September short-stay visitor arrivals data yesterday and they are still not back to 2013 levels yet, struggling to get to levels that existed a decade ago. They were 584,000 in the month, and the largest source was New Zealand (22%), followed by China (10%), then the USA (6%).

In a new embarrassment for PwC, the ICIJ has released a hoard of documents that shows the firm actively aided Russian oligarchs in Cyprus to avoid Western sanctions.

The UST 10yr yield is down a very sharp -17 bps from yesterday, now at 4.47%. And their key 2-10 yield curve is now slightly less inverted by -38 bps. Their 1-5 curve is now more inverted by -81 bps. Their 3 mth-10yr curve inversion is now -92 bps and much more inverted. The Australian 10 year bond yield is now at 4.57% and down -11 bps from yesterday. The China 10 year bond rate is unchanged at 2.67%. The NZ Government 10 year bond rate is down just -1 bp so far, at 5.26%.

Wall Street started its Tuesday session much higher, energised by the inflation data and up +1.9%. Overnight, European markets closed up about +1.5% except London which only managed a modest +0.2% gain, Yesterday, Tokyo ended its Tuesday session up +0.3. Hong Kong fell -0.2% however, and Shanghai ended up another +0.3%. The ASX200 ended Tuesday up +0.8% and the NZX50 wasn't far behind, up +0.7%.

The price of gold will start today at US$1963/oz and up +US$18/oz from yesterday, mainly on the USD change.

Oil prices have firmed about +US$1 overnight, to be just under US$79/bbl in the US. The international Brent price is up a bit less to just on US$83/bbl.

The Kiwi dollar starts today at 59.9 USc and up a full +1c from yesterday. Against the Aussie we are unchanged at 92.2 AUc. Against the euro we are also unchanged at 55.1 euro cents. That all means our TWI-5 starts today at just on at 69.2, and a net +30 bps higher.

The bitcoin price starts today at US$36,871 and down -0.7% from this time yesterday. Volatility over the past 24 hours has also been modest at just on +/- 1.1%.

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Source: RBNZ

Source: CoinDesk

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72 Comments

by powerdownkiwi | 15th Nov 23, 7:40am 1699987252

Firms are indicating THE bottom has passed?

Seems to me they're indicating they HOPE the bottom has passed, surely?

What happens when you run a society on assumptions: https://jonathanturley.org/2023/11/13/the-new-barbarians-pundits-raise-…;

and an interesting take: https://strategic-culture.su/news/2023/11/13/the-unspoken-elephant-in-t…

by Jonny.Foe | 15th Nov 23, 7:34am 1699986881

Bbbbbut how can inflation in the US be down at 3.2% when govt deficit spending is 6% of GDP (about the same as NZ during peak Govt COVID spending), consumer spending is robust, interest rates are high and unemployment remains low?

For economists this must be like watching Newton's apple float upwards into the tree! For people with sense, this is entirely explainable - the medieval monetarist models are nonsensical.

by JimboJones | 15th Nov 23, 9:30am 1699993810

For economists it is entirely explainable - the fed increased the cash rate and inflation reduced.

by Yvil | 15th Nov 23, 9:49am 1699994958

Fair reply !

by Jonny.Foe | 15th Nov 23, 10:06am 1699996002

Lol, and with every other channel disproven, economists are genuinely saying that inflation has come down because businesses and consumers expect (believe) that inflation will come down if the Fed hikes rates so they adapt their behaviours accordingly. It's voodoo. Even the (good) Fed economists know that this 'expectations' channel is BS.

by JimboJones | 15th Nov 23, 10:10am 1699996223

Have you reduced your spending since the OCR went up in NZ? We sure have...

by Jonny.Foe | 15th Nov 23, 1:12pm 1700007156

A little bit, yes. But what assumption are you making there? That if people spend more money, prices go up? That is not a truism. Consumer demand in the US, Denmark, Switzerland (etc) have barely moved (relative to NZ) but inflation has tumbled down.

by Yvil | 15th Nov 23, 1:50pm 1700009450

Switzerland never had a problem with inflation.

by Jonny.Foe | 15th Nov 23, 4:21pm 1700018515

Switzerland had an increase of 400pts (pretty similar to NZ) and then a drop back of 300pts..

by AshwinRai1488 | 15th Nov 23, 9:35am 1699994128

I don't think anyone is particularly perplexed that inflation has come down. What has perplexed people (including economists) is that nothing major has broken. No big banking crisis, no stock market crash, no corporate real estate bubble popping, no housing market crash. Even unemployment has not risen considerably.

I recall absolutely nobody who claimed that this will be the case.

by JimboJones | 15th Nov 23, 9:42am 1699994554

This is mainly in hindsight, but I am certain it was Covid that caused inflation (decreased supply, pent up demand, loose monetary policy) and inflation was always going to reduce once those three things were addressed.

by Yvil | 15th Nov 23, 9:52am 1699995131

Great point Ashwin, I certainly predicted something to "break" in the second half of 2023. Is it a matter of delayed effect though ? I still think that 2024 will be a very tough year for NZ, I will have to admit being wrong and eat a lot of humble pie, if NZ is still doing fine by the end of 2024!

by JimboJones | 15th Nov 23, 10:02am 1699995727

NZ is already breaking, but not so long ago it looked the US that were in the most trouble, amazing how they are doing so well. Of course it can all implode pretty quickly, it just takes one big bank to fail.

by AshwinRai1488 | 15th Nov 23, 10:34am 1699997666

If you end up eating that humble pie Yvil, then you will be sharing it with a lot of well informed and experienced individuals.

by JimboJones | 15th Nov 23, 10:53am 1699998813

Who would have thought 3 years ago that the OCR could go from 0.25% to 5% in 2 years and has so far not caused a recession. The TAB would have had $100 plus odds on that.

by M0ralHazard | 15th Nov 23, 2:34pm 1700012062

I still think something is going to break next year. There is still a lot of debt in NZ and around the world that is still to roll over to much higher interest rates. Plus savings buffers that were built up over covid has delayed the pain a bit. If we get are still talking about a "soft landing" at the end of 2024 will be very surprised.

by ChrisOfNoFame | 15th Nov 23, 9:52am 1699995150

Many economists were crystal clear that they believed inflation would be transitory. No body listened to us. Probably because we're not employed by big banks. Big Money is always right, don't ya know?

by Jonny.Foe | 15th Nov 23, 10:10am 1699996209

Things did break - a couple of regional banks, and the commercial real estate industry doesn't look pretty either. But, the US Treasury spent big on getting things built and directly financing new industries, and the Fed backstopped the finance sector (and then some).

by AshwinRai1488 | 15th Nov 23, 10:26am 1699997199

Yes. But imagine going from 0 to 5.5 and that is all you got.

Looks like the financial equivalent of a little slap on the wrist.

by rastus1 | 15th Nov 23, 10:43am 1699998198

You really think the storm has passed and the seas are now calm?

Calm before the storm I say.

by riffraff | 15th Nov 23, 11:39am 1700001573

... and so runs the cycle.

by John from Bunnings | 15th Nov 23, 10:45am 1699998302

It's called a soft-landing, which many here will not even entertain the possibility of such an absurd outcome. It's either 20% inflation forever or the great depression v2, no in-between.

by ChrisOfNoFame | 15th Nov 23, 9:39am 1699994389

Not so!

When the monetarist models have the sun in the right place, with the wind exactly right, in exactly the right season, with every camera poised correctly, and shutter speeds adjusted exactly right ... The models work beautifully. The rest of the time? Not so much.

Joking aside - when models are created, but they only work some of time, or even most of the time, then the model is clearly not correct and needs to be revised. The biggest problem is that too many monetarists play down the need for revision and accept that "no model is perfect". When one investigates where their motivations are coming from, all too often we find "big money influence". It seems they are quite happy to have their models "fail" two or four times each economic cycle. And when these failures occur, it seem the same people make out like bandits. (I can't think why that happens. /s)

by tim52 | 15th Nov 23, 9:52am 1699995135

What's your underlying thesis here? I thought it was high interest rates are inflationary and deficit spending is good. Are you proposing this is a stable situation that US population and workers are benefiting from?

The US do have a contracting broad money and credit supply (where as ours is flat) to help soak this extra spending up. The US figures look not horrible but I would not call them good.

by Jonny.Foe | 15th Nov 23, 10:30am 1699997430

I don't have a 'increasing A leads to more B' thesis. The economy is a complex system and higher interest rates in one scenario can crush demand, but stimulate it in another. Similarly, a temporary burst of deficit spending can kickstart an economy to full employment or lead to inflation.

The reduced credit supply in the US (house market very limp) is causing the broad money contraction - debt is being paid off faster than new loans are being granted. Again, worth noting that many US businesses finance their investment with cash / reserves (or Govt grants at the moment). Also worth noting that broad money has gone from $15 trillion pre-COVID to $21 trillion now (40% increase). NZ broad money has gone from $326bn to $405bn (24%).

by J.C. | 15th Nov 23, 10:52am 1699998772

Thanks Jfoe. You get it. Unlike many of the water cooler set who seem captured by lazy thinking and mediocrity.

by tim52 | 15th Nov 23, 11:08am 1699999725

So your first comment is nothing more than you noting: that inflation is currently out of sync with what the "generally accepted" narrative would tell us to expect with that amount of deficit spending? (With some opinion.)

If we are looking at delayed effect of up to 3 years for broad money would we not also assume it will take years for the effect of deficit spending to have have an affect on inflation as well?

by Jonny.Foe | 15th Nov 23, 1:16pm 1700007366

Analysis of govt deficit spending and inflation show no correlation in the medium- or long-term. The casual chain that the economists construct to suggest that deficit spending will lead to inflation is deeply flawed, with flawed assumptions at various stages in the logic model.

by tim52 | 15th Nov 23, 1:55pm 1700009732

Where and when was the data used from and how was this analysed? (Is this result meant to disprove the Weimar, Zimbabwe and various South American countries narrative? also deficit spending is not the only cause of inflation.) Your supplying a factoid rather than answers. (Those questions in the previous post can be answered yes/no)

Was your initial post just MMT stuff posted out of context or is there something coherent there?

by Jonny.Foe | 15th Nov 23, 4:30pm 1700019040

What do Weimar, Zimbabwe, Venezuela, Argentina, Turkey (etc) all have in common? They ended up owing shed loads of cash in a currency that they could not print. That's an inflationary deathtrap typically used by the IMF to force global south countries into the servitude of the global north..

In terms of a coherent framework for understanding the US drop in inflation without an increase in unemployment or reducing consumer spending, I think I would probably apply kiwi economist Bill Phillips's framework for understanding the mechanisms at play when import price shocks hit economies - and the conditions under which they subside. Read the third and fourth paragraphs of Bill's famous paper. Those are the paragraphs that the monetarists ignored when they bastardised his work to create the Phillips Curve and use it to smash organised labour in the 1970s.

by ryanjames | 15th Nov 23, 7:48am 1699987689

Additional OCR raises from here look increasingly unlikely. Condolences to those who had hoped the RB would be forced to 'follow the Fed' and keep pushing ever higher.

by Piggy | 15th Nov 23, 7:49am 1699987757

The fed is done and so is the RBNZ - next move is cuts and it could be early to mid 2024.

by HouseMouse | 15th Nov 23, 8:09am 1699988971

And Yet, people shouldn’t get too excited. Even if there are OCR cuts in ‘24, there are unlikely to be more than 2 or 3 - unless the economy gets really bad.

so every chance that retail interest rates are at least 6% this time next year

by Jonny.Foe | 15th Nov 23, 8:44am 1699991041

Really bad is coming towards us quickly.

Historically, our economy has ticked on with stimulus (net bank lending + govt deficit spending) at around 8% of GDP per annum - $30bn in today's money. First quarter of this year we had about $5bn of stimulus so we are well short.

I suspect that getting out of this recession will require a combo of lower OCR to get the housing ponzi and business lending started and major govt spending. The trouble is the incoming govt will find it really difficult to open the spending taps - and they will try and do it via private financing schemes, which take ages to get in place and are very expensive in the long-term.

by HouseMouse | 15th Nov 23, 8:54am 1699991650

You are probably more pessimistic than me! I see NZ only slightly dipping into recession in 2024, and unemployment going to circa 5-5.5%.

by The Person | 15th Nov 23, 9:07am 1699992421

> getting out of this recession will require

It's hard to get out of something that doesn't exist. Last recession in NZ was it 2008/9 ?

https://www.stats.govt.nz/indicators/gross-domestic-product-gdp/

by Jonny.Foe | 15th Nov 23, 10:04am 1699995854

I'd recommend this article: https://www.interest.co.nz/economy/124432/we-asked-twenty-economists-ho…

by Hamish | 15th Nov 23, 9:13am 1699992787

Tax cuts coming.

That'll fix it.

by ChrisOfNoFame | 15th Nov 23, 9:48am 1699994931

Tax cuts in this environment and at this time in the cycle will be slightly inflationary.

(An increase in tax - for the ones spending in inflationary ways, or businesses setting inflated prices because they can - way back when the RBNZ started raising the OCR, or even before, would have seen our economy settle much earlier, so cuts now back to previous levels or below would entirely appropriate at this time.)

by Hamish | 15th Nov 23, 10:31am 1699997492

National's slogan was something about getting us back on track. And campaigned on tax cuts.

Are these incompatible?

by ChrisOfNoFame | 15th Nov 23, 10:45am 1699998359

That depends what track you believe is the right track.

Given the massive support National got from property interests, those who own property clearly believe policies that benefit them is the right track.

by RickStrauss | 16th Nov 23, 9:00am 1700078440

Welfarism for property speculators, the rest can muddle on. Back on track-ish.

by Jonny.Foe | 15th Nov 23, 10:47am 1699998474

I am all for that - put whopping great taxes on the purchase of luxury imported goods and bring back staged corporate taxes.

by JimboJones | 15th Nov 23, 9:27am 1699993665

Depends how long you fix for. It isn't only the current OCR that affects fixed rates, it is future predictions too.

If you fix for 2 years and the OCR is heading down, the 2 year rate will be based on market assumptions of the OCR over that 2 year period. I think fixed rates will start decreasing now based on that US data and could be a lot lower by mid next year unless something changes.

by ChrisOfNoFame | 15th Nov 23, 10:28am 1699997311

re ... "... the 2 year rate will be based on market assumptions of the OCR over that 2 year period. "

Whose assumptions? The buyers? Or the sellers?

If the sellers (banks) have convinced buyers, through repetitive infomercials and statements eagerly poured over by the press and pundits (here for example) repeat it ad nauseum, that it'll be HFL and that HFL is accepted economic authodoxy, then the buyers will accept a higher price without question ... and sellers get to cream it in.

ComCom has much work to do. (And kiwis need to wise up, study economics, and realise who employs these soothsayers.)

by Foxglove. | 15th Nov 23, 7:52am 1699987971

PwC. Corporate greed unabated even after GFC 2008 exposures and the like of Enron beforehand. Takes me back the first QC I encountered (in those days the city only had two or three) who advise that in law there is much that is legal but immoral and much that is moral but illegal.

by Yvil | 15th Nov 23, 9:05am 1699992350

For our own sake, it's best to listen to knowledgeable posters like "Jfoe" and his explanations on inflation and intetest rates, and dismiss ignorant commenters like "DGM" and his repetitive acronym HFL (higher for longer).

by Flying high | 15th Nov 23, 8:09am 1699988961

Ahem, I recall you in the DGM camp yourself just months ago...

Is this another of your bash up your mates moment.

"repetitive acronym HFY (higher for longer)." HFY or HFL??

by Yvil | 15th Nov 23, 9:08am 1699992523

I'm referring to the commenter calling himself "DGM", not DGM people, I thought you would have understood that FH.

by Flying high | 15th Nov 23, 10:01am 1699995704

How are your own extreme negative 30 percent doom and gloom forecasts, have they changed much or at all.

Changing ones view of the future is normal imo as the landscape transpires.

by Yvil | 15th Nov 23, 11:00am 1699999235

What about your own prediction of a 30% rise in house prices in NZ, this year FH ?

by HouseMouse | 15th Nov 23, 8:16am 1699989367

And yet interest rates are likely to be quite high for quite a bit longer

by vman | 15th Nov 23, 8:24am 1699989861

@Yvil,probably best to listen to all posters,form your own opinion with the knowledge that most folk have some vested interest or confirmation bias going on.I prefer not to have some one tell me who I should listen to.

by Yvil | 15th Nov 23, 9:54am 1699995279

Indeed !

by JimboJones | 15th Nov 23, 9:37am 1699994276

You don't find Jfoe repetitive? I like his commentary, but there does seem to be a very repetitive theme that interest rates can't reduce inflation (even though they have). It does feel a bit like sour grapes from someone overloaded with debt.

by Yvil | 15th Nov 23, 9:46am 1699994763

Yes Jfoe stands by his opinion and I guess he is therefore repetitive but he's intelligent, unlike the commenter who calls himself "DGM"

by Dgm 3rd Oct 23, 2:07pm

There will be many angry and repulsive folks for a couple of years to come.. until rates drop..... HFL... HFL... HFL...

by JimboJones | 15th Nov 23, 9:58am 1699995507

Agreed - assuming being anti monetary policy is based on his opinion and not his personal debt situation.

I disagree with him but I don't come here to read a bunch of comments I agree with!

by Jonny.Foe | 15th Nov 23, 1:19pm 1700007592

Nor me my friend. I know I am a broken record on it, but then every article on here makes the implicit assumption that higher spending inevitably causes inflation, and that he only way to tackle inflation is by increasing the cost of credit. That's the broken record that winds me up!

Oh, and I've been right place, right time on 4 housing booms across three countries so don't worry about my personal debt situation!

by HouseMouse | 15th Nov 23, 9:49am 1699994950

I like the repetition. His points are so valid yet so contrary to the narrative we constantly here ad nauseum from the economists.

by JimboJones | 15th Nov 23, 10:04am 1699995879

He's a bit like PDK. I like the general narrative, but I am starting to skip reading his comments because I can normally predict the content simply by reading his username.

by ChrisOfNoFame | 15th Nov 23, 10:40am 1699998045

I don't think you're summarizing Jfoe correctly when you say: " that interest rates can't reduce inflation (even though they have)."

Like me, Jfoe believes RB set interest rates are a very crude weapon that has inflationary effects (that is indisputable) and its acceptance (especially by vested interests) is based upon extremely shaky ground.

I don't think anyone disagrees that bludgeoning the economy with higher interest rates won't drive down inflation.

But is it the best way given the massive damage it causes to many sections ot society (while enriching the rich)? Or put another way, if you're starving, is slaughtering your milk producing cow (the economy) the best way to stay alive (drive down inflation)?

by RickStrauss | 16th Nov 23, 9:03am 1700078605

In the end, many seem to hope for lower interest rates and erosion of the wealth of the poorer in society as a necessary sacrifice to preserve property wealth. It's certainly not unlikely - given how many politicians are heavily invested in property. (E.g. see the pushing of taxpayer money the RBNZ's way to try to defend the currency in ways other than rates.)

by Flying high | 15th Nov 23, 8:05am 1699988724

Going higher... but not interest rates

by powerdownkiwi | 15th Nov 23, 8:29am 1699990187

Think it through, you lot; money is debt-issued. It expects something to be done, to repay that debt. Actually, more to be done, to repay the interest also. This gets lost in the mess of speculation, rentier-ing, and the holding-of-parcels-until-the-music-stops (sometimes addressed as: the velocity of money).

But the whole depends on the flows - and therefore ultimately on the remaining stocks - of key items; I call them energy and resources; Smil defines them as: cement, steel, plastics, and ammonia https://consciousnessofsheep.co.uk/2023/11/13/these-people-arent-seriou…

The problem is that the issuance needs to grow, the stocks are depleting; the graphs cross (regardless of nonsensical surveys of sentiment, which then get used as justification...). So the cost of materials/energy is greater at the supply-point, the competition greater too; which we in the West have addressed by offshoring production, and pretended we could buy the result by increasing the numbers we associated with out existing houses. It was all a bluff; everyone else (Russia, China, BRICS, 3rd World) is now calling that bluff.

The debt can only be increased so far, before nobody wants to be associated with the overhang (US the poster-child). But energy and resources are still essential - even if there is room to discard the discretionary. So we will bid. Which will require proxy - ever more of. Which puts the problem squarely in the issuance-of-proxy court; if they charge interest in a squeezed (or negative) space, they have to be displacing someone else - which has to be the borrowers; poorest first. But ultimately, you cannot reduce real scarcity by controlling the scarcity of money-availability.

Peter Turchin's 'End Times' is a fascinating read, as to how this evolves, and what signs to watch for (increasing wealth disparity being one).

by MikeM | 15th Nov 23, 9:12am 1699992772

The Fed looks finished. Time to open a sweepstake on when our RB will make the first cut. I'm picking mid 2024.

by HouseMouse | 15th Nov 23, 9:23am 1699993423

May

by Zwifter | 15th Nov 23, 9:44am 1699994687

14th August. Problem is people think rates are high and they are not, in fact only a bit above the historical average so maybe a couple of 25bps drops in 2024.

by HouseMouse | 15th Nov 23, 9:52am 1699995138

Yeah, I think 2-3 cuts max in 2024. Retail rates about 5.75-6% this time next year. Won’t be enough to get construction or the housing market cooking again. That’s a story for 2025/2026.

by Rob Reid | 15th Nov 23, 12:54pm 1700006075

I dont see any cuts in 2024. Todays minor shifts are little blips in data captured from a world chewing through its resources for bau + wars.

We have 20 years ahead of boomers in numbers happily spending their free gifts from monetary policy.

I'm with pdk, focused on the big picture.

by ChrisOfNoFame | 15th Nov 23, 9:27am 1699993629

HFL was crap, is crap, and is now dead. (LOL)

And where did HFL come from?

Golly! Was it those bank economists again? Why are they wrong so often?

by Baywatch | 15th Nov 23, 9:28am 1699993706

NAT/ACT/NZF...NZ's answer to the GOP

by Audaxes | 15th Nov 23, 10:16am 1699996609

U.S. federal tax receipts (trailing 12mos) have declined on a yearly basis for seven consecutive months, a dynamic only seen in prior recessions. This time is probably not different.

@LukeGromen here's the visual Link