A review of things you need to know before you sign off on Monday; both home loan and term deposit rates slip, grocery price pressure eases, markets price in -1% 2024 OCR cuts, swaps on hold, NZD soft, & more

Good FT article on the property ponzi across the Anglosphere. Most eye-opening takeaway being that UK house prices relative to earnings is now the same as in 1876. You would think that shelter as a basic need should be more affordable in the developed economies over time. Not regressing. As the relevant graph show, the ponzi really takes off in the early 90s.



For a long time, it held true. Between the end of the first world war and the turn of the millennium, rates of home ownership climbed rapidly in both Britain and the US, topping out at about 70 per cent as young adults flew the parental nest and set up homes of their own.

But in recent decades, that trend has not only stalled but reversed. In 1980, almost half of 18 to 34-year-olds in Britain and America lived in their own property with children of their own, making this the most common arrangement for young adults. Today that is true of only about one in five, and the most common set-up for 18 to 34-year-olds is now to be living with their parents.

https://www.ft.com/content/f21642d8-da2d-4e75-886e-2b7c1645f063

David, the market pricing of cuts is exactly what it is, market pricing based on data and informed positions. 

You cheapen the quality of your analysis with opinion and not facts, especially when you attempt to discount the market pricing with  somehow saying it is ill-informed. I’m disappointed and now clearly see the bias in the reporting on this website.

 But what do financial markets know that you don't? Arguably, not much. In the end it will be the RBNZ governor and his advisers who will make decisions at each OCR review - and they will be guided by factors that are probably not even known yet.

Central Banks Don't Do Quantities of Money Because They Can't

When you break down QE in this way, its results, lack of results, really shouldn’t be surprising. In study after study, performed by the friendliest cheerleaders for the technique, the conclusions are framed as if “inconclusive” when by being inconclusive they conclusively show the trick doesn’t work. Ever.

There are dozens of these, and they all sound the same. Here’s one from the IMF published back in 2012 which merely mimics the original objections put forward at QE’s very beginning:

“Research on the effectiveness of earlier quantitative easing has yielded mixed results, with most pointing to limited effects on economic activity. While most papers found evidence that quantitative easing helped reduce yields, its effect on economic activity and inflation was found to be small. The reasons cited included a dysfunctional banking sector, which impaired the credit channel…” [emphasis added]

The most that can ever be tied to QE is “helped” “reduce yields.” That’s a curious way to sound about what’s supposed to be its chief (meaning only) contribution; helped?

In other words, falling rates correlate with QE’s if only because rates are already falling by the time central banks get around to conducting these programs. And if yields are already dropping as things get bad enough to convince central bankers to unleash their psychology, what good are even lower interest rates than the low rates bad things have already brought up?

Circling back to New Zealand, this is just their argument for the idea in 2021:

“The evidence shows LSAP proved effective in providing much needed support, lowering long-term interest rates and exchange rates, and underpinning economic growth and inflation. Studies found the government bond purchases worth 10 percent of GDP have, on average, lowered 10-year government bond yields by around 50 basis points.”

Understand what, after two decades of experience, central banks worldwide are attempting to claim here. I recently summarized this view in this way:

“The official response – in public – is that, yes, rates have dropped on their own but QE made them go (a relatively tiny bit) lower than they otherwise might have. This is the monetary policy equivalent of ‘jobs saved’, a manufactured counterfactual attempting to salvage something more relatable (to the average person) than the even-more-made-up term premium argument.”

As I also noted, in private they wonder aloud why the central bank is buying government bonds that the market is already bidding up. The only answer is to signal some sort of made-up accommodation somehow supposed to cancel out the negative factors already driving up those market bids for the same assets; that rates going lower because of troubling monetary viciousness are magically transformed into virtuous stimulus because a central bank (arguably) made them go a tiny bit lower than they would have anyway.

It's not circular logic; just plain illogic, flat out stupid.

Wholesale money markets have price in a -25 bps rate cut on May 24, another -25 bps on August 14, a third one on October 9, followed by a fourth on November 27

I'm not so sure the RBNZ will cut in 0.25% increments as the NZ economy tanks.  I would not at all be surprised to see larger cuts.

I would be surprised if the RB cut in May. I'm going with the first cut in August, then October and 50 points in November as the economic slump begins to bite.