Here's our summary of key events overnight that affect New Zealand, with news China is cutting tariffs on nearly 2000 goods in a bid to maintain economic momentum.
But first and as expected, the US Federal Reserve governors have raised their benchmark policy rate by +25 bps to 2.25%. That's the third rise in 2018 and puts it a full +50 bps above the New Zealand policy rate which will be reviewed at 9am today and is not expected to change. This is the largest difference between these two rates ever.
Following this FOMC announcement, the USD dollar fell and bond prices rose (UST yields fell). Wall Street rose modestly. The Fed has left its monetary policy outlook largely unchanged and not suggesting the steady economic growth and a strong job market will turn any time soon. The impact of trade war concerns seem to not feature in their decision or forecasts. Markets see one more hike this year and at least two more next year.
Sales of newly built homes in the US rose in August, following two months of declines. They rose +12.7% above the level of the same month a year ago and far more than analysts were expecting.
China's corporate debt is on the rebound, rising from 160% of GDP in Q4-2017 to more than 164% of GDP in Q1-2018. That is a faster jump than expected and shows the 2017 period of corporate deleveraging inspired by Beijing policy pressure has ended. The same data shows that total debt (not just corporate debt) in China is now more than 261% of GDP. This compares with New Zealand at 202%, Australia at 238%, the UK at 280% and the USA at 251%. But none of these are moving as fast up as China.
And China says it will make more cuts to tariffs on imported goods, as it seeks to combat a slowing economy amid escalating trade tensions with the US. China’s State Council announced broad details of the cuts, without saying whether they would apply to U.S. products.
In a somewhat surprising analysis, the ECB says the United States would have most to lose if it started a trade war with other countries, while China would be better off after retaliating.
In Australia, UBS analysts expect further credit tightening there, and given the RBA's lack of willingness to cut rates, they expect to see the longest house price downturn in decades. They say there's a risk that home loans could fall by as much as -30%, potentially seeing credit growth fall to zero.
The UST 10yr is down -4 bps and now at 3.06% while their 2-10 curve has slipped as well to just under +24 bps. The Aussie Govt 10yr is at 2.74%, down -1 bp, the China Govt 10yr is at 3.68%, down -2 bps, while the NZ Govt 10 yr is at 2.71% and unchanged.
Gold is down -US$5 at US$1,196/oz in New York.
US oil prices are lower today at just over US$71.50/bbl with the Brent benchmark at just under US$81.50/bbl. An unexpected rise in US crude stocks was behind the fall.
The Kiwi dollar is firmer after the FOMC decision and before the RBNZ decision at 66.8 USc. On the cross rates we are little changed at 91.6 AUc, and at 56.7 euro cents. That puts the TWI-5 at 70.3.
Bitcoin is now at US$6,529 and +2.4% higher than this time yesterday. This rate is charted in the exchange rate set below.
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23 Comments
Interesting move by China to cut import tariffs. If they cut tariffs significantly across the board it would give them credibility worldwide, which has been rather destroyed of late, what with their stealth invasion of the South China Sea and their One Belt One Road Debt Trap For All Time policy. If they include the US in the tariff reduction it could be a masterstroke. Does Xi have the political leeway to do this, I wonder? My guess is he does not, and it is not clear that he wants to, either.
It's not just America that has difficulty controlling the hubristic ambitions of its militarists and imperialists.
Should real GDP in the US fail to reach 3.8% in 2018, this economy will have officially underperformed the 1930’s. Let me repeat that. Unless GDP grows by near 4% for the entire year and not just the one occasional quarter, we have grown by less than during the decade that followed the 1929 crash
https://www.alhambrapartners.com/2018/09/26/impossible-hawks/
You got it. My read is the RBA and RBNZ feel they now have a tight grip on credit, and can ease or tighten as required. They can thus control house price inflation with the credit control lever and the economy with the interest rate lever. The objective is to maintain low unemployment rates during the next (current in a lot of countries) global slowdown. For this to work, the currency must be allowed to go down and everyday inflation be "looked through".
https://www.smh.com.au/business/the-economy/australian-property-prices-…
https://www.businessinsider.com.au/australia-housing-home-loan-restrict… (same article but with graphs)
The upshot is no banking collapse, no house price crash and no unemployment spike. Provided they can ride the tiger of course, but they do seem confident that they can. "NOT ON MY WATCH" is their cry and they do seem pretty darned determined about it.
I am attempting to read A Template For Understanding Big Debt Crises By Ray Dalio at the moment.
I agree Roger and I don't disagree with keeping rates low for a little while longer, the trouble is that they aren't controlling credit, the Aussie banks are and its magnifying the trade deficit and underpinning the non-productive economy.
I can't see Mr Orr being able to keep the rates low for his full term as Governor as much as any future employer of his may wish it so. People are already squealing about shop and pump prices but seem oblivious to how much worse those prices will be at 50 US cents to the NZ $ and I think we could see our currency fall to levels that we haven't seen in 15 years. I have a feeling that we will see a very quick spike in rates when they do get around to it and we may end up tightening into a recession.
Just need to figure out how to profit from it!
From the RBNZ OCR statement:
There are welcome early signs of core inflation rising towards the mid-point of the target. Higher fuel prices are likely to boost inflation in the near term, but we will look through this volatility as appropriate. Consumer price inflation is expected to gradually rise to our 2 percent annual target as capacity pressures bite.
Inflation is good for us it seems, or less bad, anyway.
For me it's more about survival first, profit second, but the quest is much the same. That Ray Dalio link is long but he is both brilliant and relevant.
Nzdan, on the face of it, it certainly looks that way. Personally I foresaw this and locked in an attractive TD rate last January for five years. Being that the rates are at 60 year lows, it won't be long before the asset rich/cash poor realize they missed the boat that goes places and floats! The current spike in inflation won't last long as it's unsustainable in the post GFC new normal.
There is still that possibility that if it goes pear shaped in a big way rates might even rise. I made my judgement call in January. It's a luxury having such minor worries to be perfectly honest.
Rick, that is the shocking result of our monetary policy. It has become a system to transfer savings from the poor to the high income earners. It is why I rant and rave so much. It is anti-capitalist, anti-democratic and disgusting.
We steal from pensioners with $10,000 in the bank and give to Aucklanders on $200,000 a year by holding interest rates down. In addition we mis-allocate our precious capital, and thus create a less wealthy future for our fellow citizens, present and future generations.
Yes nymad.
It's a new trick central bankers have learnt when they can't do anything but need an outcome - in this instance the desired outcome is a gradually reducing NZ dollar to improve exports and dissuade consumers from buying too much overseas crap.
He's a bit stuffed though because he can't actually lower rates because that would collapse the dollar overnight and he can't raise rates because that would collapse the housing market and possibly a couple of banks.... So what we have is forward guidance of 'we may do this or we may do that, and doing that is a long way away.'
Translated it means, we will hold off raising rates until we really have to because the housing bust is far more dangerous to the economy than a wee bit of consumer price inflation... prices will go up so people will re-focus their spending where necessary, rather than discretionary... Then you'll have a few firms go bust, and the housing crash starts anyway with higher unemployment... He'll be aware of what's happening in Aus, he knows the recession is coming and it is now up to individuals to prepare themselves and their finances while he stalls the hangman a bit longer, but I still believe that rates will rise far sooner than the 'guidance' being given.
Wouldn't rate rises need a trigger though? Such as rampant wage inflation. I mean we can't have that now can we? What the threshold for action might be isn't clear, but maybe 5%, certainly 10% per annum. That needs full employment plus monetary stimulus plus fiscal stimulus, so it could be the result of Kiwibuild, I suppose. Strikes are new in NZ, reminds me of the collapse of seventies socialist Britain, very worrying indeed. Could the teachers be the canaries in the mine, so to speak?
The other trigger would be if no one bought NZ government debt at current interest rates. The debt levels are low enough to be very low risk, so that trigger seems unlikely.
Seems to me the strikes roll right back again to the housing crisis. Wages for a quite a number of positions (police, teachers, nurses) that are critical to society are no longer particularly viable in the face of NZ's housing crisis and the costs of both purchasing and renting.
John Key needed to take action, not just campaign on the housing crisis then pretend it doesn't exist. Now we're just seeing the downstream consequences of it.
Nic,
I don't think that is what is happening.
How is 'we may do this or we may do that, and doing that is a long way away.' changing the monetary outlook, though? That's the same line they have maintained all year under Orr. It isn't shocking the exchange rate at all - just look at the daily volatility of the NZD pairs.
If anything he is stabilising the exchange rate (and inflation expectations) by maintaining this rhetoric.
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