Summary
• Deja vu - global equities weaker, global rates higher and USD stronger
• US 10-year rate cracks the 3% mark
• NZD down to fresh near 2-year low; Hanging in there above 0.64
• RBA (Reserve Bank of Australia) likely to become the latest central bank to kick off a rate hike cycle later Tuesday
Events Round-Up
EC: Economic confidence, Apr: 105.0 vs. 108.0 exp.
US: ISM manufacturing, Apr: 55.4 vs. 57.6 exp.
Good Morning
By recent standards it has been a quiet trading session with little news, with the UK and some key Asian markets on holiday. But the new month has begun with the same trends as we saw through April – weaker equities, higher rates and a stronger USD. The NZD has traded at a fresh near 2-year low. The US 10-year Treasury rate cracked the 3% mark for the first time this cycle.
After a horrible April for bonds, equities and all major currencies against the USD dollar, the month of May has begun on an ominous note with more of the same. Media have made a big deal of the US 10-year rate trading at 3% for the first time since late 2018, but a Rip Van Winkle waking up from a 20-year slumber would be wondering what all the fuss was about, given that the 10-year rate has traded above 3% for most of the past 50 years. That’s a reminder that while the rate of change in the yield has been brutal this year, a 3% rate isn’t particularly high.
The yield curve has slightly steepened to start the new week, with the 2-year rate up 1bps to 2.72% and the 10-year rate currently up 5bps to 2.99%. European yields were higher across the board, with Germany’s 10-year rate up 3bps to 0.96%. We’re not expecting much fireworks from the bond market ahead of the FOMC’s next update Thursday morning, NZ time, where a 50bps hike and a signal that quantitative tightening will soon begin are widely expected.
Yesterday the domestic rates market outperformed against the backdrop of much higher global rates. NZGB and swap yields were up “only” 4-5bps across much of the curve. Since the NZ close, Australian 10-yrar bond futures are up about 5bps in yield terms, which implies some further upside pressure to rates on the NZ open today.
Equity markets continue to trade cautiously against the backdrop of higher rates. The S&P 500 is currently down over 1%, adding to near-9% loss last month. The Euro Stoxx 600 index closed down 1.5%.
In economic news, the US ISM manufacturing index unexpectedly fell by 1.7pts to 55.4, its lowest reading in over 18 months. The survey continued to show ongoing and widespread supply-side issues, with a lift in the “supplier deliveries” gauge, and lengthening lead times to source materials. The euro area economic confidence indicator – a mix of business and consumer confidence – fell by slightly more than expected to a 1-year low of 105.
The USD has shown broadly based gains, trading close to the 20-year high on the DXY index seen towards the end of last week. The NZD is down 0.6% to start the new week to 0.6420, having printed a fresh near 2-year low a little below that level earlier this morning. There has been less movement on the crosses, as all majors continue to struggle against the power of the USD. The AUD is down to 0.7040, EUR is trading just below 1.05 and GBP is below 1.25. USD/JPY is just above 130.
With China on holiday, CNY hasn’t traded but USD/CNH starts the week 0.6% higher at 6.68, following the poor set of Chinese PMI data released over the weekend. Traders will be watching the COVID situation in Beijing closely, with restrictions imposed during the holiday period as authorities try to avoid a repeat of what we saw in Shanghai as case numbers got out of control. Given what we know about the transmissibility of Omicron, the signs remain ominous that China will face ongoing lockdown restrictions, with negative Chinese and global growth consequences.
In the day ahead, only second-tier economic data are released. The key focus is the RBA’s policy update. The Bank is widely expected to deliver its first rate hike of the cycle. The consensus is for a small 15bps lift in the cash rate to 0.25%, while a small proportion of economists is picking a larger 40bps lift to 0.5%. The market is well priced for a series of rate hikes through the rest of the year and into next year.
It would be the first RBA official interest rate increase since 2010.
*Jason Wong is Senior Markets Strategist at BNZ. BNZ's full Markets Today report is here.
David Chaston is away on holiday.
41 Comments
I caught up with some Aussies on the weekend, their jaws dropped when I mentioned our interest rates in NZ, like it could never happen there.
Not only has Australia been flooded with cheap money like here, but the government also directly subsidised building, and made mutterings low interest rates were going to be somewhat more medium term than here.
It'll be a bloody outrage, mate.
In comparison, Aussie housing bubble is worse that ours here. Cheap money in NZ has resulted in higher valuations for existing properties and granted more swaps have happened at higher prices, however supply constraints have locked a big portion of aspiring buyers out of the market.
Cheap money coupled with greater supply has led Australians on insecure incomes to buy multiple homes cheaply. Their market looks dangerously similar to the pre-2008 US housing market.
NZ household debt to GDP 97% vs Australia's 130+%. Also, relatively lower mortgage rates in Aussie and the expectation of lower for longer has led to higher mortgage stress risk there.
Dollar goes up, prices go up.
Dollar goes down, prices go up.
The walkback of the NZD will be the final nail in the coffin. You won't see a drop-off in spending as people will need to keep spending the same amount of money, but they'll just be getting far less for it.
How true ! Excerpt / sentence :
"Australia now finally is captive to real estate. We aren't the only country to have allowed this to happen. But we are one of the most egregious examples."
If Australians can say this, what should be said about NZ, where DTI is higher than Australia :
https://www.abc.net.au/news/2022-05-02/rba-will-raise-rates-but-not-to-…
Central bank and politicians have willingly allowed themselves to be in a situation, where it seems that are being forced to promote the housing bubble but in reality are loving every moment of being black mailed.
https://fred.stlouisfed.org/series/HDTGPDAUQ163N
The Aussies had a pretty high household debt to gdp ratio, but the last quarter of 2021 saw it drop dramatically. I guess selling all those commodities help.
Over 30 years ago it seems to me is when Housing in NZ began its divergence from being "shelter" to "shelter and Investment". The reason for this is unlike 1st tier economies there was no safe place for Kiwi's to place their retirement savings but in rental houses,and rental houses were the only game in town, as the emergence of Build to Rent Apartment Buildings has come very late to NZ. Overseas investors are more prone to buy multi unit buildings purpose built for long term tenancies. So Auckland now has 40% of its single family houses held as Retirement Savings for those mainly in the upper 25% of the income strata, while those in the middle pay for the decades long policy error of not having a Kiwi Saver scheme until 2007-40 years too late to save Housing from being turned into "investment". IRA's/ 401k's were set up at the beginning of the Baby Boomer's rise to adulthood in the US, and consequently there were disincentives to grab Single Family Homes for Retirement Savings-and very few did, whereas in NZ it was only rational to do what has been done, since Government policy allowed it to happen. The result is Median Priced Homes in most major cities in the US are still within reach of the Median Family. Sooner Kiwi's are dis-incentivised to buy and hold Single Family Homes for investment the better it will be for the "common man" growing a young family and wanting to own their own home.
There was a Kiwisaver type scheme in the 1970's, but the cohort of voters decided that it was communism and voted Muldoon to scrap it. There was a whole tv ad campaign dedicated to it.
https://nzhistory.govt.nz/media/video/dancing-cossacks
Here we are today, those very voters are now pensioners still expecting everybody else to pay via taxes and in many cases topped up via rental income.
In the meantime, GR has just reimagined how much we can borrow, and guess what? It's lots more!
nzherald.co.nz/nz/politics/watch-live-grant-robertson-delivers-new-debt-ceiling/3DW2EFYZQXF6BIWBCB5QZGOATA/
In other reporting the motels of Rotorua are still brimming with people at $200 per night per room, waiting for a free brand new house to be built for them.
Inflation eroding our debt IS the only hope this lot has.
But attempting to "inflate our way out of it" is just going to accelerate our cost of living crisis. Do you want to pay $4.00 for a litre of 91?
We can go round in circles but the core issue with our economy is stagnant or falling real incomes. The only way that incomes can be improved is to improve the competitiveness and efficiency of our real economy. However this can't happen as our monetary and taxation system is geared towards generating a quick buck out of house price appreciation (aka the NZ money tree) and not the production of goods and the provision of services.
https://www.cnbc.com/2022/05/02/citi-behind-trade-that-caused-brief-eur…
Bit of a flash crash overnight in the EU.
Media have made a big deal of the US 10-year rate trading at 3% for the first time since late 2018..
As a sidenote, based on average Treasury yields at the various points that the Fed has expanded its balance sheet, we estimate that the Federal Reserve’s $9 trillion balance sheet is now underwater. If the Fed was an actual bank, and if banks marked their assets to market value, the Fed would be insolvent. Of course, the Fed doesn’t mark to market, nor have banks done so since the early-2009 market low, when the Financial Accounting Standards Board relaxed FAS Rule 157 (which is actually what ended the global financial crisis – by making bank insolvency opaque). In effect, the Fed has created liabilities for which there is now no corresponding asset, and now finds itself wandering into fiscal policy, which is the sole domain of Congress. Needless to say, nobody cares.
Even without capital losses (which can be recovered by holding the bonds to maturity), the Fed will also go underwater if the interest it pays on reserve balances exceeds the interest it earns on the bonds it purchased. In this case, the Fed can be expected to book any loss as a “deferred asset.” As Ben Bernanke explained before Congress years ago, when the Fed books a loss as an asset, “it is an asset in the sense that embodies a future economic benefit that will be realized as a reduction of future cash outflows.”
What Bernanke meant with that hand-waving gibberish is this: Fed normally returns the interest received on its asset holdings back to the Treasury, for the benefit of the public. If the Fed’s bond purchases lose money, that interest will instead be used to cover losses. See, “it is an asset in the sense that it embodies a future economic benefit [to the Fed] that will be realized as a reduction of future cash outflows [to the public].” Yay. Link
Yes rates have been at 3% historically, but they have never had this much debt to pay interest on at 3%.
https://twitter.com/MikeStroup10/status/1508130708086157312?s=20&t=clyj…
This is a chart of the maturity date of US bonds. 9 TRILLION or 44% of all US debt matures within 2 years, this will have to all be rolled over at massively higher rates.
Great thread!
Option B: issue more short duration bonds. To simplify, lets assume that this was all 1 & 2 year debt issued at about 0.10% and 0.20%. The 1Y is now trading at 1.66% and 2Y at 2.27%. The annual interest on $9T worth of short term debt has increased by ~$155B.
$155B sounds like a huge increase, then you look at the US Federal govts Tax receipts, at $7,000B in the last QUARTER (q4 21), and you realise its not that significant. 2.2% of one quarters revenue, or about 0.6% Annualised. Not saying its good, but its not anywhere near as bad as it might sound.
US House Speaker Nancy Pelosi:
We stand with Ukraine until victory is won. And we stand with Nato."
Against Russia? Has WW111 been declared?
He and others said that such talk from Washington plays perfectly into Mr Putin's narrative that Nato is waging war against Russia, and that Russia is fighting a defensive war for its survival in Ukraine. Link
It has been the the most open and clear example of a proxy war I can think of. It is essentially WW3 in everything but name, Almost the entire world is involved, it is just the actual fighting is limited to a very select geographical area.
The question is, will Putin look to expand the theatre of war?
This is just rubbish and has been much discussed. Putin declared war on the west. There has been no NATO or western aggression against Russia, only against its corruption as happens most places. Putin has had a program to entrench his own personal power which has included the elimination of all possible opposition. His claims are clear BS and proven as such since his invasion of Georgia in 2008 and annexation of Crimea in 2014. NATO to no action in either of those events or since despite Russia's clear aggression. Now Putin has proven that if he is not pushed back hard, then the who;e of Europe come under threat.
No you're stretching the bounds of what 'proxy' means. There is no proxy operating on behalf of Russia, and nor is there one operating on behalf of NATO or Europe. Ukraine is defending itself, and as time goes on Europe and the US are providing more support. But it is not a proxy war.
You are taking the piss Murray its a Proxy war. The "War" would have already been over had it not been for the USA pouring in shipments of arms costing $800 million a shot. The Ukrainians would have simply run out of ammo by now. Not sure who is paying for the arms, my pick is that its not Ukraine and its all supplied free of charge because the USA has such a massive hang up when it comes to communism since Kennedy took office..
Bit of a stretch to call Russia Communist these days - looks like it's just the West taking the opportunity to cut an aggressive military down to size and try out their toys. Russia forgot the important step of nominating their own proxy, so it's largely Russian soldiers that are showing up in body bags (and Ukrainian civilians, of course)
Not really. The US has passed a bill to 'lend lease' military supplies to Ukraine, so the support will not be free. i also think at this stage that although the term "proxy' is wrong it is actually getting closer to it being one for the Europeans as they belatedly realise just how dangerous Putin really is, and that if they just hand him Ukraine then there will be nothing to stop him going further.
That in part will be why the western rhetoric has changed and is talking about "rolling Russia back to Moscow". In reality what it will mean is establishing a non militarised buffer zone along Russia's borders, in Russia. this has already been specifically mentioned at least once. But weapons aside, Ukraine has to be running short of bodies to throw into this, so sooner or later, more likely sooner someone will have to step up on that front to support them, and then it gets tricky. Putin has already rattled the nuke sabre, and if he was prepared at the beginning to employ nukes, i believe he will still be even to the point of an all or nothing gambit.
Russia's military capability has been exposed as lacking. Many of the military units deployed to Ukraine are no longer effective, so to all intents they are paying hugely in attrition, but what price can Putin afford to pay? I still cannot understand why he is still in power. Is he so ruthless that he has literally eliminated any potential rivals? Russia cannot win in this now. The price they pay will be huge and it will cost them for decades to come. No one will trust Russia unless there is a radical change inside the leadership and how the country is run.
fighting a defensive war for its survival in Ukraine.
That sentence alone points out how illogical their reasoning is. You cant fight a DEFENSIVE was (definition is to protect your land inside your boarders) while being IN UKRAINE ie an offensive war because you have violated their soverign boarders.
No body is going to invade Russia lol.
Russian apologists expect Ukraine to forever tread on eggshells to avoid insulting Mother Russia - no defending their territory, no engagement with the West, no joining the EU. Why don't they do the decent thing and prostrate themselves before Putin and offer him whatever territory he desires?
Meanwhile Russia can hardly be blamed for launching a full invasion into a neighboring country, levelling cities and killing tens of thousands of civilians.
Good morning from Germany, where financial repression is destroying much wealth b/c Germans have a lot of money in their checking accounts. Retail deposits rose to €2.64tn, which is close to a record. With an inflation rate of 7%, the loss of purchasing power amounts to €185bn. Link
Winston Peter's has been banned from the grounds of parliament for 2 years ... yet again , the worlds worst speaker of parliament Trevor " bully boy " Mallard has struck ... regardless that Winston only visited the protesters to chat with them...
... and , Queen Jacinda washes her hands of it , by saying it's up to the speaker to dole out punishments as he sees fit ...
Worst government ever ! ... they'd better not need NZF's support after the next election ... they'll have to helicopter drop Winston into the building ...
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