Breakfast briefing: Risk on as trade deal hopes & US jobs report boost financial markets

The three major US stock indexes set record intraday highs, India pulls out of the Regional Comprehensive Economic Partnership, Aussie Treasurer Josh Frydenberg eases pressure on RBA

5th Nov 19, 7:24am by Gareth Vaughan

Here's our summary of key international events from overnight that affect New Zealand, with news the three major US stock indexes set record intraday highs and MSCI’s measure of global equity performance rose to within 2% of its all-time high set in January 2018. Additionally the gold price dropped and both the US dollar and oil price rose, with the latter up US$1 a barrel.

This has all been driven by higher risk appetite. A key factor is hopes the US and China will agree a “Phase One” trade deal this month, as we reported yesterday. Gains in technology and energy shares pushed Wall Street’s three main indexes higher, with eight of the 11 major S&P 500 sectors rising.

At the time of writing the S&P 500 is up 0.41%, the Dow 30 is up 0.38%, and the Nasdaq is up 0.55%.

Another factor in the strong Monday performance by US share markets and oil was the weekend jobs report. This included improved US jobs growth numbers for October and upward revisions for the two previous months, easing fears of a global economic slowdown. US non-farm payrolls increased by 128,000 jobs in October, the US Labor Department says. Economists polled by Reuters had forecast a rise of 89,000. The US economy also created 95,000 more jobs in August and September than previously estimated.

In Australia Treasurer Josh Frydenberg has eased pressure on the Reserve Bank of Australia (RBA) to make further interest rate cuts by allowing it more time to get inflation back within its 2% to 3% target, saying there will be no change to the official agreement on monetary policy because of global uncertainties.The RBA is expected to leave its cash rate unchanged at 0.75% this afternoon.

Meanwhile India has pulled out of the Regional Comprehensive Economic Partnership (RCEP). Reuters reports that India’s Prime Minister Narendra Modi said he could not compromise the interests of Indian farmers and workers by joining the China-led regional trade pact. The RCEP also includes the 10-member Association of Southeast Asian Nations (ASEAN), Japan, South Korea, Australia and New Zealand. These 15 other countries say they have agreed terms for what could be the world’s biggest trade pact.

China’s offshore yuan has broken through a key level to approach the seven per dollar mark amid rising optimism of trade talks between China and the US. The offshore yuan strengthened by as much as 0.27% to 7.0227 per dollar.

The Kiwi dollar has weakened a little overnight against all of the greenback, Aussie dollar and euro. It was last at US64.16 cents, A93.04c, and 57.58 euro cents. The US 10-year government bond yield is up seven basis points at 1.78%, the NZ two-year swap rate is up four basis points at 1.06%. Brent crude oil was last up 1.2% at US$62.542 a barrel, and Bitcoin is up 1.57% at US$9,294.30.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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46 Comments

by Zachary Smith | 5th Nov 19, 7:39am 1572892792

All seems well with the world today.

by Advisor | 5th Nov 19, 7:57am 1572893826

Going by how volatile global affairs have been in the past 3 years, we should all be aiming for boring!

by bw | 5th Nov 19, 7:56am 1572893819

"In Australia Treasurer Josh Frydenberg has eased pressure on the Reserve Bank of Australia to make further interest rate cuts ..."
Has he? Who knows! But a quote on his performance seems very appropriate:

When he assumed the role of Treasurer, Frydenberg made a critical misjudgement that if he followed the recipe of running surpluses, cutting taxes and stuffing in migrants then he’d force the RBA to ease, and rising house prices would boost household spending via the Wealth Effect.
What’s happened instead is that households have used every penny in their possession to deleverage as they realise, quite rightly, that a housing boom generated at the monetary zero bound is completely insane since there is nowhere for it to go when it stalls.

by HeavyG | 5th Nov 19, 7:43am 1572893012

For 3 and a half years the RBA has failed to get inflation to its 2-3% target and still refuses to lower the OCR again. Time to sack the humans and roll out the computer.

by Noncents | 5th Nov 19, 8:22am 1572895376

We should have had a computer do it years ago. But unfortunately the entire theory is wrong. Interest rates have zero impact on inflation.

by HeavyG | 5th Nov 19, 9:18am 1572898733

Source for your "Interest rates have zero impact on inflation" claim please (I'm assuming you're not the source of the claim).

by rastus1 | 5th Nov 19, 9:22am 1572898958

It depends how you want to view inflation. In 2000, interest on $100k gave you spending power of $6,700. Today $2,790. The saver requires more and more savings to pay the same price for the same product. That's inflation, just disguised.

Savers are being stripped to prop up the asset owners who have created the bubble. Put the interest rates up and get on with the clean out.

by HeavyG | 5th Nov 19, 9:57am 1572901022

Why should the RBNZ "Put the interest rates up and get on with the clean out."?

You sound envious of current home owners who have mortgages and want them to fail under higher interest rates so you can swoop in like a vulture. Lizard brain much?

by Hamish | 5th Nov 19, 9:35am 1572899746

I'm a home owner and interest rates going up would be quite welcome in my own situation.

by HeavyG | 5th Nov 19, 10:23am 1572902608

I assume you have no mortgage and probably TDs so I have amended my post to refer to mortgae holders (although it should have been obvious I was referring to home owners with a mortgage balance greater than TDs but I have clarified for those who didn't appreciate that).

by rastus1 | 5th Nov 19, 10:54am 1572904467

Quite the contrary. I want to see FHB's in a position to buy. I want them to get a decent return on savings and I wont to see the asset bubble pop for them and prices return to the affordability of the average wage earner.
I won't touch rentals with a barge pole. I believe houses are for the ownership of occupiers, home ownership being a core essential for a decent society. So no, I won't be swooping in on anyone or anything. I take no pleasure in living in a society with an ever growing gap.

by HeavyG | 5th Nov 19, 11:54am 1572908066

And FHBs who have bought already and are working hard to pay the mortgage, why would you want to break them and see them and their family lose their home?

If you want a mandate for 1 house per person/couple policy where only the Government is able to be a landlord for residential property then that's a political argument rather than an inflation targeting with cash rate concern.

by rastus1 | 5th Nov 19, 1:30pm 1572913852

Its about policy and regulatory settings. The system remains biased towards investing in property - ever wondered why the investor can afford it and the renter can't?

How about we remove all tax deductions to home ownership? Let the landlords own on the same basis as the occupier owner.

You got a problem with that or do you want the system to keep the landlords at an advantage?

by HeavyG | 5th Nov 19, 2:21pm 1572916874

Depends, would you still expect landlords to pay tax on rent if you removed their right to deductions?

by brisket | 5th Nov 19, 9:47am 1572900423

So this becomes a political battle between the Savers (holders of interest-bearing capital) and the Asset Holders (in NZ, property investors)?

The problem with this framing is that they are largely overlapping groups. Predominantly older people. The other half of the population are renting and have little or no net wealth. How about we base our decision-making on what would help them, for once? (Of course, that's not a straightforward question to answer when looking at something like interest rates.)

by HeavyG | 5th Nov 19, 10:07am 1572901656

That's why OCR focuses on the CPI and not savers versus debt holders.

It's only the TD holders and wannabe home owners that are calling for OCR hikes in the face of low inflation. Their unprincipled position is driven by a desire to either bolster their interest income (the old savers) or cause a property market crash as distressed mortgage holders sell homes so they can swoop in a buy at a lower price (the young vultures). Both desired outcomes have an element of sadism to them (hence my lizard brain reference)

You should just be honest with your desires rather than trying to make up some theory that the OCR does not impact on inflation. Even if such a claim were true that would still not justify increasing the OCR (unless again your goal is to secure greater returns for TD holders or to crash housing so the vultures can move in). I appreciate honesty is probably not going to happen as it would expose a self interested sadistic tendency (i.e. a lizard brain).

by Audaxes | 5th Nov 19, 1:09pm 1572912576

An executive at a large institutional investors told the FT that what JPM did "is incredible", adding that "the scale of what JPMorgan is doing is mind-boggling . . . migrating out of cash into securities while loans are flat." Read more here, here and here.

What if ANZ, for instance, decides to migrate out of residential property mortgage lending because it considers the ~27% RWA capital commitment is too great to carry after the RBNZ raises overall capital costs, and believes zero weighted RWA sovereign debt is a better bet in a lower for ever OCR world?

New Zealand banks have already migrated away from high risk weighted business loans - two thirds of NZ households are mortgage free, thus the remaining third with mortgages, corner 60 %+ of bank lending.

by brisket | 5th Nov 19, 12:44pm 1572911096

Wanting housing affordability to improve is sadistic, is it?
Of course the ideal is to do that without punishing FHBs.

But it's very easy, while sympathising with FHBs or stretched small investors, to overlook the thousands of homeless, the hundreds of thousands inadequately housed, and the families forced to move constantly because of our broken rental market, at great cost to their education, health, and economic prospects.
I know that crashing the housing market tomorrow wouldn't magically make houses available for them, I'm not an idiot. But if it *were* going to, it would be worth it.

by RickStrauss | 5th Nov 19, 1:56pm 1572915361

Looks like projection, mate.

by rastus1 | 5th Nov 19, 8:13am 1572894822

Do you really believe gains in Wall st due to Phase One? The worse the US economy gets, the higher goes Wall St.

by Advisor | 5th Nov 19, 8:32am 1572895929

There is a similar trading platform in Australia that seems to have decoupled from their economy completely, they call it the property market.

by rastus1 | 5th Nov 19, 9:23am 1572898997

& NZ

by Boatman | 5th Nov 19, 8:40am 1572896428

Someone needs to start asking the Governor of the Reserve Bank some pointed questions about DEFLATION , what steps he will take to mitigate the effects, and explain the risks this poses to New Zealand

by HeavyG | 5th Nov 19, 8:57am 1572897433

Why? We haven't had deflation in decades and if the RBNZ does its job we shouldn't have it going forward.

by Noncents | 5th Nov 19, 10:15am 1572902118

RB Governor can't do anything about it, so why ask him?

by HeavyG | 5th Nov 19, 10:25am 1572902728

2nd request for a source for your claim (we both know the source is you and you have no basis for your claim but just need the sheeple to see your claim for what it is... BS).

by Noncents | 5th Nov 19, 10:36am 1572903362

If it is BS, then Disprove it.

Happy to have my opinion on here until you can show me the mathematical proof that Interest rates impact inflation?

by HeavyG | 5th Nov 19, 11:50am 1572907820

You the one making the claim so the onus is on you. It's a bit like saying "disprove God", that's not the job of the person who questions God's existence, it's the job of the person making the claim God exists to prove it.

Anyhow, here a re a few of the many sources that show the correlation of bank rates to inflation. I await your responding sites that claim there is no correlation with bated breath.

1. https://www.rbnz.govt.nz/challenge/team-resources/monetary-policy-and-i…
2. https://www.rba.gov.au/publications/bulletin/2017/sep/pdf/bu-0917-1-the…
3. https://www.investopedia.com/ask/answers/12/inflation-interest-rate-rel…
4. https://www.wallstreetmojo.com/inflation-vs-interest-rate/

by Pragmatist | 5th Nov 19, 11:49am 1572907785

Correlation != Causation

https://www.tylervigen.com/spurious-correlations

by nymad | 5th Nov 19, 12:04pm 1572908647

Don't confuse the poor boy with that. He has only just learnt what inflation targeting is!

by HeavyG | 5th Nov 19, 12:09pm 1572908987

Let's hear your analysis on why bank rates have no impact on inflation then Mr Know it All.

by nymad | 5th Nov 19, 12:22pm 1572909762

I don't ever recall making such a statement...

I was merely pointing out that, in general, correlation \neq causation was something you were yet to grasp.

by HeavyG | 5th Nov 19, 12:29pm 1572910159

The thread concerns me questioning noncents' claim the cash rate has no impact on inflation. You obviously took the opportunity to have a cheap shot at me without even appreciating the context of the discussion. As usual you added zero value with your drivel. Henceforth I shall refer to you as "TOAB" (tits on a bull) in recognition of your contribution to these forums.

by nymad | 5th Nov 19, 12:51pm 1572911472

hehe.
You always get so wound up about things you don't understand.

by HeavyG | 5th Nov 19, 12:53pm 1572911602

Shush TOAB, quit while your behind;)

by nymad | 5th Nov 19, 1:00pm 1572912008

You calling people names reflects more on yourself than anyone else.

Let's talk further when you understand how inflation targeting is a forward looking policy framework. To date you have not appeared to grasp that simple concept.

by Noncents | 5th Nov 19, 12:35pm 1572910528

I made no claim. I stated an opinion. But thanks anyway for the theories and opinions in your links. For a relationship to be proven, there must be a mathematical formula. As far as I am aware there is none. Only vague theories and indirect anecdotes.

Everything I have read regarding the possible relationship is based on one assumption - When rates are low, consumers borrow from banks to spend.

This assumption is categorically incorrect as I will try and explain below (but please accept this is a comments section, so some answers may not as be in depth as I could make them)

1. People mainly borrow from banks for mortgages.
First - Recent OCR cuts have not been passed on by banks. The only conclusion that can be reached is that the Domestic OCR has zero impact on actual retail rates.
Second - Housing (mortgage repayments) takes up roughly 50% of household spending, yet is specifically excluded from CPI calculations.
So the best/only chance of a valid link to back up your theory is immediately excluded on two fronts.

2. People can and do save to make a purchase. Lower rates would therefore = lower spending.

3. People "ticking" up purchases are borrowing from non bank sources. This means they are not bound by the OCR.
- In house lending (i.e. retailers)
- Peer to peer lending
- Loan sharks/independent finance companies
- Credit cards (i.e. Visa and/or Mastercard)

4. A large portion of bank lending is from Foreign funding. i.e. completely unrelated to our OCR.

5. Psychology - Rightly or wrongly, people associate low rates with bad times and high rates with good times. In bad times people have traditionally hunkered down, paid off debt, and reduced spending. So you would expect lower rates to equate to lower spending (i.e. the current scenario we appear to be in)

I can probably sum up my opinion best by asking that you answer the below question honestly.

Yes or No?
When you hear of a decrease to the OCR, is your response - "hey, that's awesome - I am off to buy a new [insert consumer item here]?

Based on your theories your answer must be Yes. A "no" would surely lend support to my opinion.

by HeavyG | 5th Nov 19, 12:52pm 1572911520

It certainly is "Yes", I have a $1m mortgage with Westpac that is currently fixed at 4.3%. Due to the OCR cuts and now lower mortgage rates Westpac is offering I hope to refinance in January to a 3.3% mortgage (ambitious I know but fingers crossed for a further OCR cut in November). That extra $10k a year that I am no longer paying in interest will be used to buy goods and services (some repairs and maintenance on the houses and maybe a holiday for the family).

In regards to your other claims (e.g. OCR cuts have not being passed on) I do not agree with them. The links I previously provided answers all those matters you have raised.

by Noncents | 5th Nov 19, 1:16pm 1572913011

Fair enough, you are happy going down the debt path. Other's far smarter than me would say you exhibit "a self interested sadistic tendency (i.e. a lizard brain)." for wanting rates to drop further. But hey, not my words :-)

They can drop rates to zero inflation wont change. If anything spending will decrease. Time will tell - I guess we find out who's right in the next 12 months.

by HeavyG | 5th Nov 19, 2:19pm 1572916751

When inflation was high and OCR was high I didn't bleat on here about how the system didn't work. The Lizard Brain analogy applies when an illogical position (i.e. yours) is taken where the only basis for that position is personal gain.

by Noncents | 5th Nov 19, 3:18pm 1572920297

My position is highly logical. I get no personal gain either way, and FYI - I am pretty consistent in that regardless of situation, I firmly believe that inflation cannot be controlled by interest rates.

Your argument on the other hand seems less logical You want rates to drop, so that you have more money to spend. But then according to your theory, the price of goods should go up accordingly.

The logic would suggest you are no better off in real terms. So why are you so happy at rate drops?

I would understand your smile, if rates dropped and prices stayed the same (or dropped) then you would be way better off. Which FYI - is what I am suggesting. A rate drop will help Mortgage holders. It will not change CPI values.

by HeavyG | 5th Nov 19, 3:34pm 1572921265

I appreciate that is your opinion but it is wrong. That's why you cannot find any support for such a claim (either on the internet or on this forum (even from those who like nothing better than disagreeing with me)). Your analysis above makes so many errors as pointed out by youngdumbandbroke below that it is no wonder you can no find no support for "your opinion".

by youngdumbandbroke | 5th Nov 19, 3:00pm 1572919200

I'm going to go out on a limb and say the general public has no idea what the OCR is but they do react accordingly as it changes. The only rate they care about is their mortgage or credit card because it dictates the cost of borrowing money. When the rate on either of these 2 drops, they make a tangible saving on their per monthly payment obligations. By the same token, savers take a tangible reduction in returns when their savings rate drops, therefore making them seek alternative investments that have better returns.
Your lower rates = lower spendings makes no sense. People borrow more money when the penalty to do so is less.
A low rate = lower cost of borrowing just as a high rate = higher cost of borrowing. People are far less likely to spend when they are paying interest 8% on a loan than 4%.
As the the price of debt falls, the demand for debt increases

by Noncents | 5th Nov 19, 3:54pm 1572922462

"I'm going to go out on a limb and say the general public has no idea what the OCR is but they do react accordingly as it changes."
Agree 100%

"When the rate on either of these 2 drops, they make a tangible saving on their per monthly payment obligations. By the same token, savers take a tangible reduction in returns when their savings rate drops, therefore making them seek alternative investments that have better returns."
This part isn't so straight forward. Some people do, and some don't. Again it is the psychology.
Many borrowers will use that tangible saving to pay off their debt faster. Net result to consumer spending = Zero.
Many savers will still continue to save as they do not want to go into debt. Net result to consumer spending = Zero.

"Your lower rates = lower spendings makes no sense. People borrow more money when the penalty to do so is less."
No they borrow more money when they need to.
Washing machine broke and you need a new one. Borrow.
Dentist bill just came in. Borrow.
Lost my job and have no income. Borrow.
Interest Rates dropped. So, what am I am borrowing for?

"A low rate = lower cost of borrowing just as a high rate = higher cost of borrowing. People are far less likely to spend when they are paying interest 8% on a loan than 4%."
That is correct. People will spend less, but why does that make prices drop?

I would argue that in the current climate - prices would increase. There is now so much debt, that any increase in corporate debt, would immediately filter through to pricing so as not to harm the bottom line.

"As the the price of debt falls, the demand for debt increases"
Debt begets debt. The bulk of people live paycheck to paycheck. They also nearly all have some form of consumer debt, let alone a mortgage. So Rates go up, the debt goes up, but they can't pay? So they get more debt. They are essentially borrowing to pay interest.

There are enough cases of this "consolidation" occurring in the "Good times" - Can you even imagine what would happen now?

by refactornz | 5th Nov 19, 4:27pm 1572924452

Sure, but you have to consider what happens at the margin.
Borrow for that average washing machine, or buy the nicer one since borrowing costs are low?
Put off the dental checkup for 6 months, or go ahead and do it now?
Holiday on Gold Coast, or holiday in Hawaii this year?
Buy a 3 year old car, or buy a new one this year since finance is cheap?

by RickStrauss | 5th Nov 19, 8:48pm 1572940133

A friend in the automotive industry told me they're seeing markedly more deferral of regular maintenance and servicing. Way more this year than in the past.