Here are the key things you need to know before you leave work today (or if you already work from home, before you shutdown your laptop).
Welcome back to 2024.
MORTGAGE/LOAN RATE CHANGES
We have started the year with the Co-operative Bank, TSB and Kiwibank all trimming fixed rates for longer terms. See here and here.
TERM DEPOSIT/SAVINGS RATE CHANGES
All three banks (Co-op, TSB and Kiwibank) also reduced TD rates for longer terms. See here.
MORE SHOPPERS, LOWER AVERAGES
Consumer spending in December ended 2023 on a weaker note, according to Worldline NZ activity monitoring of their card payments system. Although the 2023 tota value was a record for consumer spending, average transaction value was down, suggesting shoppers were more careful with purchasing decisions.
COST PRESSURE MODERATES
Infometrics reports supplier cost increases at supermarkets remained higher than a year ago in December, but there was continued moderation in the annual pace of change. In fact there was no change from November. The Infometrics-Foodstuffs Grocery Supplier Cost Index shows an average +4.5% increase in what suppliers charged Foodstuffs supermarkets for goods in December compared to a year ago.
WHAT's PRICED IN
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. That would take the current 5.50% OCR down to 4.50% by the end of the year. 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. Inflation control is now back as the main monetary policy consideration. Financial stability is the key background matter. The money markets will change their pricing as events unfold, so the "priced in" position now will undoubtedly change.
PBoC MOVES UNEXPECTEDLY
In China, their central bank did not cut its medium term lending facility rate as was expected. It held it at 2.5%. But it did add much more to banking system liquidity, a +¥216 bln (+NZ$47 bln) net injection from its overall ¥995 bln (NZ$222 bln) offering today. This was a surprise (unexpected) move. Markets are now absorbing the implications of these two policy actions.
SWAPS ON HOLD
Wholesale swap rates may be little-changed today as the year winds back into gear. However, the key reaction will come at the close. Our chart below records the final positions. The 90 day bank bill rate is unchanged at 5.64% and unchanged from yesterday (or from Christmas Eve for that matter). The Australian 10 year bond yield is unchanged at 4.08%. The China 10 year bond rate is up +2 bps at 2.54%. And the NZ Government 10 year bond rate is up also down -4 bps at 4.63%, while the earlier RBNZ fixing was at 4.58% down -7 bps from yesterday. The UST 10 year yield is now at 3.96% and up +2 bps so far today from where we opened this morning.
EQUITY WINNERS & LOSERS
The NZX50 has started its week weak, down -0.7% near its close. The ASX200 is little-changed. Tokyo has opened up +0.8%. Hong Kong has opened its Monday trade down -0.7% and Shanghai is down -0.4 at its open. Singapore has opened up +0.4%. Wall Street is closed and won't reopen until after their MLKing Birthday holiday. The S&P futures suggest it might open up +0.6% but there is a long way to go yet.
OIL LITTLE-CHANGED
Oil prices are -50 USc softer from this morning at just over US$72.50/bbl in the US while the international Brent price is still at US$78/bbl.
GOLD ON HOLD
In early Asian trade, gold is now at US$2049/oz and unchanged from this morning.
NZD SOFT
The Kiwi dollar is now at 62.3 USc and marginally lower than were we opened today. Against the Aussie we are down -¼c at 93.1 AUc. Against the euro we are soft at 56.9 euro cents. That means the TWI-5 is now at 70.7 and down -20 bps
BITCOIN SOFT
The bitcoin price has slipped today to US$42,183 and down -1.7% from where we opened this morning. Interesting that is almost exactly where we left it Christmas Eve. There's been modest volatility over the past 24 hours of just on +/- 1.6%.
Daily exchange rates
Select chart tabs
Daily swap rates
Select chart tabs
This soil moisture chart is animated here.
Keep abreast of upcoming events by following our Economic Calendar here ».
32 Comments
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
Yes. Fits in nicely with the neo-feudalism tag and worker exploitation in the industrial age. Problem as I see it is where the boomers think the moolah is coming from to buy the assets at prices they expect (and possibly need). There's only so many busloads of Chinese with suitcases for cash willing to pay a king's ransom for your humble abode. And the competition among the Anglosphere for those buyers is fierce.
At least you got a decent education. Maybe we should go back to 3% tax rates.
"Between 1851 and 1900, there was a rise in British male literacy from 69.3% to 97.2%, while for the female part of the population, the improvement in literacy rates was even more pronounced, from 54.8% to 96.8%"
Access to healthcare was around long before state got it's nose in the NHS trough.
"As medical advanced were made, hospital design became increasingly complex to include new technologies, such as X-ray machines and darkrooms (after 1895). Pathology laboratories also became a necessity. The introduction of antisepsis and anaesthesia in the operating theatre enabled improvement in surgical treatment. The larger general hospitals in central London developed medical colleges and became teaching hospitals and centres of scientific research."
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.
Why the Fed will be cutting soon:
[From a recent article on a despised financial blog]
Authored by Simon White, Bloomberg macro strategist,
Will it come in March? Or the summer? When the Federal Reserve makes its first rate cut and when it tapers or ends quantitative tightening will in the first instance be a function of reserves, not the economy. It is through this prism that the Fed’s dovish conversion in December makes sense, and gives a practical framework for understanding its new de facto reaction function.
Liquidity is everything in markets.
At the base of the liquidity pyramid are central-bank reserves.
These have always been key to understanding market functioning, but in the post-GFC regime of many central banks their volume, velocity and the variation in their ownership now play a pivotal role in driving market dynamics.
To put it succinctly, the primary binding constraint on the Fed this year – and thus a key driver of the bank’s decision to pivot and when it cuts rates – is reserves. These are the frontline defense against a sharp drop in risk assets, dysfunctional funding markets, and thus a hard landing.
A cut in rates therefore need not require a significant worsening in the economy, leaving a March rate reduction on the table...............................
re ... "I think David was trying to say that the market doesn't know anything more than we do."
I did a data aggregation project for a major bank in the UK and followed it up with another in NY. The 'market' has considerably more data available to it, and by a huge margin, than what is fed to us plebs. For example, we treat the CPI as a single number. They break it down into 20+ parts - and recombine those parts - for specific measurement as it affects various sectors. Trust me - the 'market' is far better informed than us. But they, like us, suffer from cognitive biases.
What is your agenda Longdrop?
I come to Interest for opinion, don't always agree with it but highly respect David's insights and experiance. I can easily find facts but context and analysis from an independent observer is rare. It's what I pay for.
I believe he was asking a question on what the markets may know, if you are well-informed please share it!
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.
When it comes to monetary policy, though, the real theme of the book is communication. Mr Bernanke made the Fed more transparent. In 2012 he fulfilled a long-term ambition of setting an explicit inflation target; he also introduced regular Fed press conferences. He appeared twice on “60 Minutes”, a television programme, to explain Fed policies. “Monetary policy is 98% talk and 2% action,” he argues. As the Fed tried to rev up the economy after the crisis, it came to rely on “forward guidance”—in effect, a promise to keep policy loose for a long time. Link
As the Fed tried to rev up the economy after the crisis, it came to rely on “forward guidance”—in effect, a promise to keep policy loose for a long time
In effect, a promise that debt would forever get cheaper over the long term and provided the expectation held at that, then things would always be tickety boo. We are now seeing what the end of the road for that looks like.
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.
We are all speculating aren’t we. I could see at least one 50 BP cut this year if things get really bad, but I don’t think things will get quite bad enough to do so. I think this year is steadily increasing malaise rather than a profound slump.
I think the money markets may be pretty close on those calls, although my view is that it’s more likely to be 2-3 cuts, rather than 4
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.