A review of things you need to know before you go home on Friday; plenty of rate changes, PMIs improve, KiwiSavers take a hit, lakes refill fast, petrol prices drop, swaps soften, NZD rises, & more

Here are the key things you need to know before you leave work today.

MORTGAGE RATE CHANGES
NZCU South has cut its one year fixed mortgage rate by -30 bps, now at 4.90%.

TERM DEPOSIT RATE CHANGES
BNZ has reduced its one year 'special', trimming it from 3.45% to 3.40%, NZCU Baywide has cut its call rate. NZCU South has cut a set of TD rates as well, -5 to -10 bps.

FACTORY EXPANSION PICKS UP TO 'AVERAGE'
There was a glimpse of better trading conditions in October for New Zealand’s manufacturing sector. This follows a few months of slower, constrained expansion.The improvement was not large but is probably a little more than the normal seasonal upturn so it is notable. Small lifts for employment an d new orders are intriguing signs, especially if they carry on into November. The PMI is now back just below at its 2018 average,of 53.7 although it is still noticeably below its 2017 average of 56.2 (so lower business confidence is a 'real thing').

KIWISAVER SOBRIETY TEST
KiwiSaver returns dropped sharply in October according to our interim analysis. This is a direct reflection of the international equity and bond market sell-off in that month. Some of the drops are substantial. Overall default funds fell -0.3% in a month (or at a -4.4% annual rate - three rose, six fell in value) while all growth funds fell in value, averaging a drop of -4.2% in one month (the range was -2.9% to -6.5%). Be prepared for a sobering review when we bring it all together in our Q4-2018 assessments. But hang in there; this is just markets doing its correction thing. No-one knows what 2019 will bring but as a KiwiSaver your focus should be long-term and history shows that patient long term regular savers are ultimately rewarded for risk. There are bumps along the way, and we have just been through one (or are in one).

AUSSIE BROTHERS VS KIWI COUSIN
In the year to June, New Zealand recorded the size of actual economic activity (nominal GDP) as NZ$289.3 bln, a nominal rise of +5.4% and a real rise of +3.1%. Today, Australia released the data on the size of each of their State's GDP activity for the year to June and that helps put the New Zealand economy into perspective. NSW GDP is AU$604.4 bln nominal, up +4.5% nominal (up +2.6% real). Victoria GDP is AU$430.5 bln, up +5.1% (+3.5%), Queensland GDP is AU$349.0 bln, up +6.2% (+3.4%), South Australia GDP is AU$107.4 bln, up +3.3% (+2.0%), and Western Australia GDP is AU$259.4 bln, also up +3.3% (+1.9%).

OUTAGE
We had an outage in some our our currency calculators today. We apologise. They should be back working again soon.

RETURN TO NORMAL I
There has been a swift refilling of our hydro lakes recently, bringing lakes back to their long run levels (and rising at this time of year). Wholesale electricity prices are certainly back down from their dramatic spike, and at levels similar to what we had at this time last year.

RETURN TO NORMAL II
The same is happening with petrol prices, with prices retrenching fast after the recent spike. Outside of Auckland, the discounted pump price ws back down to $2.057/L and in Auckland down to $2.189/L, falling as fast as it rose. Actually to be accurate, it has fallen faster than it rose. The only thing that did not fall is the Governments tax. By our monitoring even the oil company component (the portion of the price that is not crude oil or tax) has dipped recently to be below its three year average. Tax is the only thing that never seems to go down or respond to market signals. (Politicians love tax and have exempted it from price manipulation and anti-monopoly rules. "Do as I say, not as I do.")

SWAP RATES SOFT
Swap rates are down -1 bps for all durations of 2 years and longer. The UST 10yr is holding at 3.12% today. The 2-10 curve has slipped to just under +25 bps. The Aussie Govt 10yr is at 2.69%, down -4 bps, the China Govt 10yr is at 3.41% and down a large -9 bps, while the NZ Govt 10 yr is at 2.76% and that is down another -3 bps today. The 90 day bank bill rate is unchanged at 2.00%.

BITCOIN HOLDS LOWER
The bitcoin price is now at US$5,555 and down less than -1% in the past 24 hours. Analysts say the next test is the US$5,000 level and it would be grim if it fell below that. The upside isn't significant until it breaks through US$6,000, or so they say.

NZD HIGHER
The NZD has had a net rise today and is now just on 68.4 USc. On the cross rates we are up to 93.9 AU, and up over 60.3 euro cents. That puts the TWI-5 above 72.9 and a new five month high. The greenback, the euro and the yen all have their own issues, so our 'strength' is more a matter of being the tallest dwarf.

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NZD
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Source: CoinDesk

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35 Comments

TWI - 74.79, Treasury BEFU assumption 'The trade-weighted exchange rate is assumed to remain broadly stable around 75 over the forecast period'
WTI - 56.87 Treasury BEFU assumption 'West Texas Intermediate (WTI) oil prices fall from US$62.9 per barrel in the March 2018 quarter to US$60.0 by mid-2018 and remain stable thereafter'.

This is a marked turnaround: both indicators used by Treasury in the BEFU had up till very recently both been tracking well outside forecast.

The HYEFU (due December sometime) will be Interesting indeed....

KS Cash Funds are all good.
Slow and steady wins the race.

Agreed
The fall that more aggressive funds - especially growth funds - was on the cards prior to the event.
As noted in the article:
1. Currently there is uncertainty as to where equity markets are headed (there has been a bit of a plateau of late with Asia, European and US markets fluctuating and not consistent with one another).
2. Agreed - given the uncertainty that exists in the future direction of the equities markets (and especially the current uncertainties over trade war talks, Brexit, the true state of the Chinese economy etc) it is not the time to be changing funds now.
There were a number of indications of increasing risk prior to this event, however, now that inclement weather is here and lots of uncertainties over its extent, it is just a case of riding the storm out and hope for better weather to take advantage of it when it does arrive.

If you've been in cash for much of the last decade, or even the past few years, you'd need a hell of a drop in stock prices to get anywhere close to catching up.

I think I recall MB commenting on a shift to cash not long prior to the fall. He/she may be able to verify this.

To not have shifted out of growth funds in the last few months is really stupid in my view. After this fall, it may be appropriate to start shifting back into them now though. To a small extent.
Personally I adjust within the more conservative funds only. (cash, cons, mod) Its steady Eddie stuff for me.
But I think the market can be predicted to a small extent given the widely acknowledged historically high valuations that the funds have had, in recent times. Nowhere is there any published fund performance of anyone doing what I do. I don't care. I make my own decisions independent of all those in the finance industry.

agree ish. My son is now 18 away at uni doing a music degree. I signed him up for KS in 2007. He is in a good fund n high growth, but that is fine for his age. By crickey tho, can I get the boy to line up all the "new" ducks to consider understanding his investment? Nope. He works part time, so is contributing. One of his parents is an accountant, but so so many people don't understand what profit, dividends n interest is, let alone tax. Heads in the sand. We should surely be teaching all this real stuff at intermediate school

NZ is really dumb, education wise in pre uni schools. As an adult I did uni and was shocked to know there was more than one Treaty of Waitangi. I also became aware of the levels of government and basics there in. Education is crucial for kids. But faark, have teachers that are free to tell the facts.

National unsold housing stock has risen to 38,208 (realestate.co.nz)
Auckland Unsold housing stock has risen to 14,321 (realestate.co.nz)
Auckland Rentals have broken through 4500 (trademe) to stand at 4517.

It would appear that the only thing that is 'Always going up' is the availability of property to rent or buy...

Yes. The undersupply narrative is exaggerated.

Yes, but the homelessness side and their numbers however is probably very real though... and where the tax breaks cushion an artificial market.

Interesting stats about GDP by Aussie state, but what happened to the forgotten cousins, Northern Territories and Tassie, or have they been sold off? Figures for North and South Island might be good so we can do a proper comparison with the different tribes on the West Island.

Well, they did it on the way up, now it looks like they'll do it on the way down:

https://www.news.com.au/finance/economy/australian-economy/viral-graph-s...

news.com.au's current head line is "AUSSIE NIGHTMARE: Horror graph proves our economy is truly screwed." sensationalist yes but as we know, these kind of markets are substantially supported by confidence.

I don't want to sound like another 'Doomster Brit' but are there similarities to the UK's boom and bust? A few lessons from the UK's experience of a credit bubble that maybe relevant to the current Australian experience and possibly NZ too, from Martin North at Digital Finance Analytics.

https://www.youtube.com/watch?v=a-fgQ_RaySM

One can hope. It might bring some reality back to the market or at least push for change of some sort.

Nic Johnson - LOL, you dont sound like a Doomster Brit . You sound like the leader of the Truth and Reality Merchants. (TRMs). Keep up the good work old chap.

When everyone was colluding to mutually deny the problem, it was easy to laugh off the risks and now that reality is sinking in, they can't look away. Which is why the graphs have gone viral. It's classic car crash rubber necking.

Interesting to note that NZ is next after Oz (on the 3rd graph) showing house growth price vs income growth.

Agree. Coincidentally I was mucking around on the RBNZ inflation calculator the other day. Since 1971 house prices up 6036%, wages 2026%.

Holycow Batman! And of course, the only thing filling the distance between those two figures is debt, mounds and mounds of debt.

Normally the phrase would be mountains of debt, but with your obvious fascination with Batman, mounds may have sprung to your mind for a certain reason?

Haha. Thanks Freud!

Agree again. To whose benefit as well? Funnily enough, from 1961 (as far back as rbnz go) to 71 - house prices up 54% wages up 74%. Just as well we choose to “stimulate” the economy by lowering rates now...

And coincidentally what happened to the tax rate after 1971? It’s almost as if a whole generation has profited from their parents’ sacrifices and made it exponentially harder for younger generations...

I would more blame the US depegging from gold and us too by proxy. Off to the races for asset inflation after that as the last restriction on money creation was lost.

And they wonder why younger generations have such a growing negative sentiment towards them. Not helped with the "lazy, avocado eating iPhone using" rhetoric that gets bandied around.

Withay

Have you thought about sending that research to Joe Wilkes or Martin North?

I haven’t but it would be interesting to know their thoughts. I kind of think they would know that but then again one shouldn’t assume?

Just like in NZ, the Aussies have been saying 'forever' that house prices could not drop significantly. Well they are. How far is the big question. The government will pull out all stops to limit the damage.

Farage hit's out at Merkel, two days ago.

https://www.youtube.com/watch?v=eWSvFBLhamA

"In May this year, the US media was filled with stories about how the American economy had surpassed a similar milestone. The current “expansion” is now the second longest on record, and if it lasts two quarters more it will reach the one from the nineties.

And just like in Japan, this current economy will be nothing like the prior version in every way that counts. The frequencies might match up, but that is all."

https://www.realclearmarkets.com/articles/2018/11/16/global_economic_reb...

"American industry is neither borrowing nor building (nor paying labor) like there is robust opportunity in front of everyone. It’s just not there. But for that one statistic, the unemployment rate, the opposite case is made, another form of an “L.” The US economy nearly fell into recession in 2015 and early 2016, and it has not recovered from it. That’s exactly how businesses are acting.

And now the global economy begins to see the re-emergence of minus signs – which may be what US commercial interests have been fearing for these last several years despite all the incessant mainstream assurances. Banks, as they are wont to do, extend credit terms based on Economists’ predictions and the always positive views of central bankers. The SLOOS estimates for credit demand, as of the latest quarterly data in November, are going lower still.

Commercial and Industrial firms are clearly reluctant to make the same mistake as the last cycle. If there really was a robust economy these past few years, borrowing wouldn’t be seen as a risky, potentially very costly mistake."

https://www.alhambrapartners.com/2018/11/15/in-a-booming-economy-you-bor...

Oh dear, oh dear *sad trombone*