Here's our summary of key economic events over the weekend that affect New Zealand with news we are all about to be obsessed with angst about inflation.
First we should note that over the course of this coming week the central bank news will be relentless. Final 2021 review meetings are being held at the US Fed, The Bank of Japan, the ECB, and in Switzerland, England, Norway and Mexico. All are facing inflation issues, and all need to set new defenses against that, a threat many in their countries have forgotten how corrosive it can be. But all also face huge public debt for which 'financial repression' is the standard playbook solution. Their judgements will be watched with interest.
Clearly, both supply and demand issues are occurring at the same time, and that means these policy makers face a unique set of policy circumstances their forebears didn't. In earlier times it was one or the other; now its both. One thing seems certain; faster tapering by the US Fed.
American consumer price inflation came in at the expected 6.8% year-on-year in November, and up from 6.2% in October. Their core inflation level also didn't surprise with a 4.9% rate compared to 4.6% in October. The main driver was energy costs, and the impact of these may fall away soon as crude oil's gains seem to have settled down. But other elements are rising faster too with food prices up a concerning 6.1%, clothing and apparel up 5.0%, rent up 3.8% and new car costs up 11%. Oddly, medical care costs have only changed minorly over the past year.
And we should note that the widespread tornado damage through the US Midwest will, temporarily at least, disrupt domestic supply chains, causing enhanced supply-side inflation over the next few months.
Americans haven't experienced inflation like this two generations (since 1982) so there is bound to be unease, and probably much of it partisan. Overlooked will be that average weekly earnings rose +5.6% in the year to November, more than the core CPI rise and less than the headline rate. 'Real earnings' will have declined, but there is more than enough room for consumers to make small adjustments to ride out these changes. And of course, most will.
But inflation 'shock' will be real, especially more those who didn't see this coming and others at the margins. However, so far there is no real evidence there is widespread angst, with the widely-watched University of Michigan consumer sentiment survey coming in more optimistic that analysts had expected and broadly stable over the past four months. So far, Americans seem to be handling higher inflation in a mature way.
Meanwhile, the US budget deficit is now shrinking, even if the progress is small. It came in under -US$2.7 tln in the year to November, or -12.5% of GDP. Rising tax revenues from higher activity is helping. For the first two months of their new fiscal year (October and November) federal tax receipts were +23% higher than the same period in 2020. If that keeps up (and it may be unlikely), they will eat into their deficits quickly. US federal tax levels are very low by international standards; in 2020 they were 16.5% of US GDP, 25.5% for all taxes (not just Federal) whereas the average for OECD countries was 33.5%. In New Zealand it was 32.2% and Australia 27.7%.
In China, the top brass in Beijing are increasingly concerned about stability as their economic activity slows down. In a statement after their closed-door three-day Central Economic Work Conference they declared: “Ensuring stability is the top priority for the economy next year.”
China's housing market is cooling fast. Unsold new home inventories have climbed to the highest level since August 2016. In some regions a sense of panic is growing as their home owners face steep losses. You can see why 'stability' is now the catchword.
And there are increasing concerns, even internally, that China's economic data is being manipulated again - to be relentlessly positive.
In Japan, producer prices rose more than expected in November, adding to background global costs. At an annual rise of 9.0%, and a monthly rise of +1.4%, that puts them at a 40 year high, and a very uncomfortable position for their manufacturers.
Germany also reported very high consumer price inflation for November, up 5.2% and it highest since 1992 (and up +6.0% on a harmonised basis to compare with how other countries report it). Energy costs are the main culprit there, but food prices rose 4.5%.
Brazil also reported CPI inflation over the weekend - and theirs was at 10.7%. (All these high CPI rates puts New Zealand's 4.9% into perspective and makes Australia's 3.0% seem very modest. Inflation will surely persist as long as the supply-chain pressures persist, irrespective of the oil price.)
We should also note that coffee prices are now at a ten year high and have risen very sharply since April.
India's industrial production disappointed for October, up +3.1% and much less than was anticipated. The RBI's maintenance of loose monetary policies to try and get some momentum building in the Indian economy makes sense with this data.
Locally, supply-chain pressures, especially in the house building industry, are causing extreme cost inflation. It isn't an issue only affecting New Zealand - Australia has equally severe pressure. The houses we thought we were getting via the very high consent approvals, either may not actually arrive, or if they do, they will be substantially more expense than budgeted.
In Australia, pandemic cases in Victoria jumped to 1069 reported yesterday. There are now 11,393 active cases in the state - and there were another 2 deaths yesterday. In NSW there were another 485 new community cases reported yesterday, another jump, with 4,366 active locally acquired cases, and also two deaths. Queensland is reporting zero new cases. The ACT has 1 new case. Overall in Australia, just under 89% of eligible Aussies are fully vaccinated, plus a bit over 4% have now had one shot so far.
The UST 10yr yield opens today at 1.48% and down -1 bp from this time Saturday. The UST 2-10 rate curve starts today little-changed at +83 bps. Their 1-5 curve is also little-changed at +99 bps, while their 3m-10 year curve is marginally steeper at +145 bps. The Australian Govt ten year benchmark rate has risen +1 bp to 1.65%. The China Govt ten year bond is unchanged at 2.86%. The New Zealand Govt ten year is also unchanged at 2.43%.
The price of gold will start today at US$1783/oz and down -US$3 from this time on Saturday.
And oil prices start the week a little firmer at just under US$72/bbl in the US, while the international Brent price is still just over US$75/bbl.
The Kiwi dollar opens today marginally softer at 67.9 USc. Against the Australian dollar however we are marginally firmer at 94.8 AUc. Against the euro we are unchanged at 60.1 euro cents. That means our TWI-5 starts the week at 72.6.
The bitcoin price is virtually unchanged at US$49,845 and up a mere +0.7% from this time Saturday. Volatility over the past 24 hours has stayed modest at just over +/- 1.6%.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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73 Comments
The challenge for central banks now, given that asset prices are so far disconnected from the economy, is to tackle inflation by harnessing monetary expansion without triggering a massive asset price bust that it results in the mother of all depressions.
No wonder RBNZ staff are quitting in droves.
It is average person theory that asset prices are disconnected or in hyper bubble territory but for RBNZ and Government it is party time as it represents the economy and as long as it lasts till 2023 - next election, Jacinda Arden will be happy and Orr got his new term so will rule for next four year with no accountability.
Harsh reality but in NZ only economy is housing. House prices are up in other countries also but not as much as in NZ besides their economy is diversify and big. Unlike NZ, which now is forced to support the ponzi or it will crumble and cannot afford to even think of hurting the only economy in NZ.
Hard to say J.C.
I could easily see the govt changing the RBNZ's mandate so that they can maintain the current expansionary monetary policy. Maybe removing the "1-3% cpi target" and replacing it with "general price stability".
However I can also see them raising rates and crashing the market.
I guess it may come down to what does the NZ govt/RBNZ value more the integrity of its currency or its housing ponzi?
I tend to agree. I mean the RBNZ have 3 options.
1) Raise rates to get on top of inflation crashing the property market & economy in the process
2) Ignore the 1-3% CPI mandate making themselves seam completely incompetent & losing all credibly as an institution
3) Change the mandate. By making the price stability component of the mandate more vague.
Sure the RBNZ can't technically select option 3. However they can tell the govt (out of pubic eye obviously) that if the govt doesn't change the mandate for them and allow them to go with option 3 then they will go for option 1. Option 2 is the worst of the 3 options from the RBNZ's perspective. I guess what I am trying to say is option 3 seams like the path of least resistance to me. Option 3 is the option both the RBNZ & the govt will both find politically viable.
This ^
We are already at 15% if you use the same criteria as the 1980 and 14% for the 1990 data.
https://twitter.com/zerohedge/status/1469392303886409729?s=20
There's an option between numbers 1 and 2, which is what I think they will go with, and what I have been saying for the last 6 months.
Which is to spook the market with talk, raise the OCR enough to pull the housing market back, but not enough to crash the market and the economy.
So a peak OCR of circa 1.5- 1.75 by the middle of 2022.
The Higher The CPI, The Less For Inflation
QE is not money printing, a fact of life left up to the commercial banking system which long ago (August 2007) largely abandoned the property. The global system’s actual money printers have told us all along, in increasingly urgent terms, whatever is going on with consumer prices in 2021 it has nothing whatsoever to do with excessive currency.
So, what is the deal with consumer prices? Given a single word to describe it: gasoline.
Oil producers who don’t seem very confident despite WTI’s levels it will hold up; auto producers who left themselves to the mercies of semiconductor producers, assuming that they, like in the oil patch, aren’t in reality all that optimistic, either; and the disappointingly brief imbalance earlier in 2021 the federal government (under both parties) dropped on the system which was promised to give the economy a recovery-like push when instead it just created a bigger mess already being ironed out if possibly negatively.
In short, no wonder “growth scare”:
What was it that could have spoiled the trend?
To start with, Uncle Sam; helicopter payments and other transfers were heavily front-loaded into the first few months of 2021. Ever since, they’ve been fading and falling out, leaving the underlying real state of the private economy more exposed…
Another possible factor, that very “inflation”; oil and gasoline prices, in particular. As history has shown, you want to interrupt pretty much every positive economic trend possible, merely “introduce” an oil price shock and then sit back and wait for the inevitable downturn if not full-on recession.
Many people won’t want to believe it, but, yes, even this “epic” CPI high and all its related data actually fit the profile. Thus, yield curve, Euro$ futures, rising dollar, etc.
First off oil producers should feel threatened. But they did it to themselves. The climate crisis hasn't just appeared, it's been building for quite some time, and there is ample evidence that the oil producers were active in trying to suppress that news. So instead of using their vast profits to lead the world into a new energy phase that is not reliant on fossil fuels, they just used them to pad their already over padded cushions and live comfortably in the blissful belief that somehow their wealth would protect them from the consequences of their lifestyles.
But another factor in this is the global economy which has enable China to become the world's factory, making everywhere dependent on very long logistics chains, which the pandemic has shown us, is very vulnerable to even minor disruptions. Shipping and transport companies, impacted as much by local restrictions, but also like most of us, expected the pandemic to drive a lot of economic activity down so they mothball some of their expected excess capacity. But the economic activity did not roll back as much as expected, and it takes time to re-activate that capacity. Alongside this they have been shown to some degree to be pirates, jacking prices to make the period the most profitable in their history.
Good points, well made, the amount of profit taking in this time of light governance is reaching war-time levels.
On the oil issue, certainly the first reports of climatic damage where tabled in the 70's but while they have had a long time to look at this the replacement technologies have not been available for that long. Also we tend to forget that oil enables every single (including energy-tech) product on the planet, be it the simple powering of transportation to the more insidious enabling of plastics, adhesives and lubricants used on every production line and most packaging.
Agreed oil is intrinsic to so much that we do today. But the climate crisis doesn't necessarily mean we have to stop using it. We just need to stop using it in ways that releases the stored carbon into the atmosphere. So those other products we use it for, if they can be made without releasing that carbon then why can't that continue? I do realise that this may not be possible, but has the research even been done?
In regards to plastics its keeps its form for long periods of time https://www.wwf.org.au/news/blogs/the-lifecycle-of-plastics but this is banking the problem for later generations (a theme for the last couple of generations).
The issue may be the quantum is not comparable and therefore the economies of scale not work for more investment when we remove oil from transportation.
Other uses of oil includes urea and fertiliser production. However, this also emits carbon - total lifetime Co2e is 5t per tone of urea produced.
But you have a good question there. A quick Google revealed over 6k everyday household items made from petroleum or gas. These include medicines such as analgesics, antihistamines, antibiotics, antibacterials, rectal suppositories, cough syrups, lubricants, creams, ointments, salves etc.
If all oil production ceases and alternatives aren't found going to the dentist may go back to the old days!
Formula One is apparently now more popular than ever. Top Gear is ... well it's Top Gear
In my home town "car enthusiasts" can be heard burning rubber all night long leaving evidence of their dark arts for the daylight to reveal.
Despite the high price of petrol - people seem to be driving with ever more leaden feet. There really is no way out of this
Chris Joye :
"There are two explanations for the disconnect between interest rates, on the one hand, and the inflation and wages data on the other, which both point to the Fed being behind the curve."
https://www.afr.com/wealth/personal-finance/calm-down-pay-rises-aren-t-…
If the link leads to a pay wall.... cut and paste the headline into a goggle search and the afr will allow article
"Their risk is once the inflation let’s rip there’s not a lot they can do about it without crashing the economy ".
That is the predicament. Further once that faith in the currency is lost by the general public it is hard to get back. If people move to alternative "means of exchange" probably digital currencies then it will be difficult to bring them back to NZD fiat.
Further the currency is the backbone of the NZ state as it is there means of taxation. The NZ state can't function the way it does with a dysfunctional, inflationary currency that no one wants to use.
As powerful as the property investor class is at the end of the day I don't see the Govt/RBNZ allowing the currency to become an inflationary one to save the property market.
Why inflation is headline today instead it should have been end of 2020 or early 2021 when it was happening at a pace unheard in long time and Reserve banks were defending by coining the word TRANSITORY INFLATION and flogged it till it was too obvious that no longer will they be able to use it to cover themselves.
"Breakfast briefing; 'Inflation' to be the summer barbeque topic"
It will be interesting to see now what narrative will fed use for next year or two to cover their butts and will be picked by RBNZ.
If you say so. Just like hurricanes, typhoons & cyclones, death tolls on their own though, are a rather limited comparison. On the smaller scale of NZ, those that experienced for instance the Wahine storm of 1968, are I would suggest, somewhat skeptical concerning the claim then that many events have, according to both authorities & media, surpassed its severity in the subsequent 50 years.
Foxglove,
State of Climate in 2021_ Extreme events and major impacts _ World Meteorological Organization.pdf
You might want to read this.
I wish these climate nerds would just shut up. The US and China are trying to resolve something important - who get's what share of super power status over the next century. They can't do that if we keep bothering them with this sciencey mumbo-jumbo and taking up their time flying to climate summits and working out what to promise and all that crap.
Time to get our priorities straight.
/sarc
Since climate panic got fashionable US tornadoes have got a lot more boring. It's not easy being a chicken little.
'It's been over eight years since the last catastrophic EF5 tornado struck the United States, occurring in Moore, Oklahoma, on May 20, 2013.
This is the longest-streak without an EF5/F5 tornado since records began in 1950.
The previous record streak without such an intense tornado was an eight-year period from May 3, 1999 (Moore/Bridge Creek, Oklahoma) to May, 4, 2007 (Greensburg, Kansas).
https://weather.com/safety/tornado/news/2021-12-11-ef5-f5-tornadoes-str…
On Inflation manipulation / CPI numbers (Even average American with basic understanding can see through, how come experts and economist fail - evyerone agrees that end of 2020 or early 2021 was the time when reserve bank should have stepped in instead of Wait And Watch and have not heard anyone highlighting it here in NZ, no wonder like of Orr's are confident that will get away with anything without being asked or held for accountability) :
Pitty Fed Governor in a way that he will take the blame unlike RBNZ who by parroting fed will pass the buck that if fed can err so can we and politicians too will understand and accept that line of defence.
The price of gold will start today at US$1783/oz and down -US$3 from this time on Saturday.
No inflation in the gold price. You would think it would get a point when people start to question why the price has been so heavily manipulated and why the likes of JP Morgan are allowed to get away with it. I guess most people don't care and don't perceive gold as a store of value anymore.
https://images.app.goo.gl/tUWyzNDyu3A4EUrK8
What stage of the narrative have we now reached?
Will Jacinda Arden be relevant to NZ in 2025 except people remembering her for....
Climbing the ladder of political aspiration to some leading role at the UN. Occasionally media footage will show her travelling in Africa and peering out the back of a armored SUV at poor African children.
No wonder current Democracy set up - vote bank politics is at stake.
Politicians ( not leaders) can harm the society along with other power thirsty like minded politicians, bureaucrats, agencies and get away with plum posistion after losing election. Unlike earlier - minus democracy, where so called leaders in the end have to face the tune and not comfortable retirement.
Current democracy set up protect / immune the corrupt......as only accountability in worse scenario is loosing election but who cares as by that time have made enough to settle for life for themselves, if not for generations to come.
Time to change the current democratic system otherwise why the talk as when ship is about to sink...it is rat who gets the sense first.
https://www.interest.co.nz/public-policy/113729/insurmountable-problem-…
Other elected politicians too are talking as worried and can sense it.
It would be really interesting to know what sort of wage increase employees and employers are planning for heading into next year. Given the tight labour market and rising inflation it might be double digit.
From what I can see PCI indicates there's a lot more in the way of cost increases to be passed through just to restore margins.
Inflation!! is obviously the topic de jour.
But that's easily solved, and at no cost to any employer. No wage rises even needed to keep the staff from mutiny...
Just close the office. We've had a trial run over the last 2 years, and it's been shown to be a roaring success.(hasn't Covid19 been such a boon to the failing global economy?)
Workers; just stay home; save yourselves the commuting costs and time ("There's your pay rise fellas!"). Oh, and register as a sole contractor to look after your own tax and financial affairs - or not.
If we thought The Gig economy was just for our evening meal deliveries, then think again. Coming to a (ex)workplace, near us all....
You save in the long term, but bear the brunt of these extra costs. Although you should be able to claim IRD's $15 a week bonus for working at home expenses.
Problems is, my employer just writes it off as too much hassle, where as an extra $15 a week is another 1.9% for me lol.
I think you see my point. To answer your question, it won't be the employers. - probably renamed Outsourcing Agents. That's how prices will be kept down to defeat "Inflation!!!!"
And.....what work there is will be tendered out to those now at working from home.
"Here's our schedule of what work that need doing, and our suggested rate. Now. Who wants to pay what for that work?"
Nah just pointing out the goings on. Now saying how boring it is between this 40-60k range...that would be gloating :P Coupled with our recent drop to 16 on the Fear and Greed index and the low Bitcoin on exchange balance (Bitcoin Exchange Balance Hits Three-Year Low | Nasdaq) I think the fireworks are just being reloaded.
Will be interesting to see what the RBNZ do. Now that National are finally applying pressure to both government and governor (Bridges saying he would not employ Orr again), the government will have to work out whether inflation or high interest rates will lose them more votes.
Inflation can be viewed as a good phenomenon as it values future goods higher than today.
So this speeds up people’s purchases of goods - cars, furniture, etc - as it’s cheaper to buy these today than next months. Which stimulates the economy. “Nothing wrong with a bit of inflation” - Bob Jones.
Deflation is surely a worse condition.
Fiat thinking. The whole purpose of money is to preserve your purchasing power so that you energy you spent today can be preserved and spent on goods that you desire in the future. You should not be forced to have to spend you currency as fast as possible before it looses its value and you an only purchase less goods for your energy in the future.
It is not the value of the goods going up, but the value of what you are measuring them (your NZD) going down.
Deflation is what we should be getting. Technology is inherently deflationary as we increase productivity so we can produce more goods for the same or less input costs. So you money that you earn today might buy you one chair, but in 5 years it should be able to buy you 2. We don't need spending on crap to drive the economy, we should be saving and only spending on things we need, not worthless junk.
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