By Jason Wong*
Yesterday’s notable fall in US equities has been sustained with an attempted recovery failing. US Treasury yields have pushed a little higher, unwinding some of the sharp falls seen earlier this week. The NZ dollar (NZD) and Aussie dollar (AUD) are languishing after the soft Australian CPI (consumers price index) print, even against backdrop of a weak US dollar (USD), with the Euro powering up to its highest level in over a year.
In the US, First Republic Bank remains in the headlines, with its stock price down another 20% as it battles to survive – its likely ultimate demise a reminder that conditions remain fragile in the US banking sector. Of some relief, smaller regional bank PacWest Bancorp, which has also been on the watchlist, is up over 10%, after reporting stable deposits in late March and a rebound in April. Following the 1.6% fall in the S&P500, US equities attempted to stage a recovery, but unsuccessfully, with a solid open giving way and the index showing a modest loss for the day, even with behemoth Microsoft up over 7% following a strong earnings result.
US Treasury yields are up modestly, with the 10-year rate 3 basis points (bps) higher to 3.43%, unwinding some of the 17bps fall seen over the first two trading days of the week.
In economic news, US durable goods orders rose 3.2% month-on-month (m/m) in March, much stronger than expected after a surge in orders for commercial aircraft. However, the data had a weak underbelly, with non-defence capital goods orders excluding aircraft down 0.4% m/m after a downwardly revised 0.7% in the prior month. Core shipments also fell for a second consecutive month. The data points to a weaker trajectory for US business investment.
Germany’s economic ministry raised its 2023 GDP growth forecast for a second time, now 0.4%, up from 0.2% three months ago and the 0.2% contraction expected six months ago. The economic minister said “we now see that a gradual recovery is underway, despite a persistently difficult environment”.
Yesterday, Australian core CPI data were at the bottom end of market estimates and below the Reserve Bank of Australia’s projection, with the trimmed mean at 1.2% quarter-on-quarter (q/q) (0.2 percentage points below the median) and 6.6% year-on-year. The data extinguished the possibility of the Reserve Bank of Australia hiking next week, extending the pause in the tightening cycle. But with inflation remaining uncomfortably high, it kept alive the possibility of some further tightening later in the year. Still, bond futures rallied after the result, with the 3-year and 10-year rates falling 6-7bps in yield terms, but unwinding much of that move overnight.
Domestic rates were much lower across the curve, playing catch-up to the notable fall in US Treasury rates since Monday’s local close before the ANZAC holiday, and with lower Australian rates post-CPI thrown into the mix. Swap rates were down 12-13bps, with the 2-year rate closing the day at 4.92%, its lowest close in a month and back below the rate prevailing before the RBNZ’s shocking 50bps rate hike earlier this month. NZ government bonds saw similar moves at the short end of the curve, but with smaller 9-11bps falls at the longer end of the curve, ahead of today’s tender. The 10-year rate closed the day at 4.04%. Slightly higher US and Australian rates overnight set the scene for slightly higher rates on the open.
In currency markets, the AUD weakened after the soft CPI print and has fallen further overnight to trade at its low for the day around 0.6595. The NZD has followed a similar path and trades this morning at 0.6115, with NZD/AUD at 0.9275, little changed from this time yesterday.
As well as the soft CPI print, weaker commodities have also been at play, with oil down over 3%, with Brent crude trading below USD78 per barrel, the oil market ignoring a notable drop in US crude inventories that would have normally supported prices. Weaker oil prices also see CAD on the softer side of the ledger.
The USD is actually modestly weaker on the day on the key indices, with EUR and British pound (GBP) making ground. EUR traded at 1.1095 overnight, its highest level in over a year, before sliding back to 1.1035. The USD was at its nadir after CNBC reported that there doesn’t appear to be a willingness from the White House or Treasury to pressure banks to try to formulate an asset sale plan from First Republic. GBP traded above 1.25 and currently sits around 1.2450. NZD crosses against these are notably lower, with NZD/GBP just above 0.49 and NZD/EUR at 0.5540, a fresh 2½ year low.
In the day ahead, the ANZ business outlook survey is released where we’d expect to see still-weak activity indicators and hopefully further falls in the pricing indicators. The key release tonight will be the first reading of US Q1 GDP, with the market consensus at 2.0% annualised for the quarter.
The easiest place to stay up-to-date with economic events is by following our Economic Calendar here ».
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*Jason Wong is BNZ's Senior Markets Strategist. David Chaston is away this week.
78 Comments
A problem for the RBA (and us?) is that their CPI figures show that price rises are escaping into the service sector. That's much harder to reign in than the cost of goods.
"prices accelerated for health (5.3% vs 3.8%) and insurance & financial services (6.5% vs 5.0%)...growing cost of medical services, tertiary education, and domestic holiday travel."
The other, harder thing to measure here is the winding back by customers and by companies. Car insurance, for instance I've seen a 40% increase in policy costs AND a walkback in agreed values on renewals. A holiday at one place instead of another. A trip to the doctor every year instead of every six months. A missed blood test here or there. It all looks the same, across any 12 month period, until there is a consequence no one thought of previously.
Sure, you're still engaging with those industries and in some cases your overall 12 monthly spend is the same. But what you're actually getting for it in those industries is far far harder to quantify. I am starting to think this is as much a case of willful blindness from central bankers and those who are responsible for calculating inflation as it is a practical issue with the measurement itself.
British people "need to accept" they are poorer to bring down inflation, says Bank of England Chief Economist Huw Pill https://trib.al/5nrj59D Link
H/T Snider
It struck me the other day while mumbling my way through the half remembered words of the Australian anthem at the Dawn Parade on ANZAC Day that we are irrevocably tied to Australia as our big brother and closest ally. I just wish we could somehow leverage more from the relationship than we already have economically. 700,000 of our citizens live there and 70,000 live here. We have clearly lost the battle of attractiveness and ended up becoming a training ground for their workforce. It has always been this though. How much of our much vexed word sovereignty and become some in between state/sovereign nation in order to gain some parity and level out the playing field of attractiveness? Maybe even cast the net wider to the South Pacific Island nations to join the group. A South Pacific Euro Zone maybe?
I was more thinking along the lines of free movement of labour between the nations for the purposes of education and filling labour gaps from the lower GDP countrie in the Pacific. The teaching and training of these people being the biggest challenge of who foots the bill at their destination countries. Much like in NZ currently we spend huge amounts of money training nurses etc to the advantage of Australia. How can we equalise all this to the advantage of the lower GDP countries where Australia does not feel it is not being disadvantaged.
Nz has no attractìon for young professionals vs au our salaries are lower, taxes higher, cost of living and housing more expensive. Jobs are far less interesting here.
You can do everything we can do here in aus for leisure and have better climate, cheaper travel and bigger cities.
Nz would need to pick an industry .. prob a niche in tech and get very good at it.. to attract those specific workers here.
In my mind NZ is like a big farm and nice place to finish working or retire 0 a career
Jenny Shipley once commented that NZ needed to do just this, least we become a bach destination, where expats return at Xmas and when they retire..... Obviously we decided we where good at selling houses to each other, meaningless reno's etc etc...
Naturally we did this as the capital gains where tax free.... was a great party it was, one to remember for the rest of our lives, now the hang over.
And in the process we've undermined the main attraction of NZ: that despite the lowest salaries it was a good lifestyle and a good place to raise kids, and doctors, nurses and other critical workers would come here despite the salaries.
Our last few decades of pandering to those feeling entitled to tax-free capital gains has completely undermined those reasons to come here. Now folk see far better equations elsewhere.
If this were a true statement then NZ would experience negative net migration.
It'll still be a highly desirable place to move to for the foreseeable future. People are just getting confused by the fact NZ has a much wealthier neighbour, and forgetting (or are just oblivious to) the fact that much of the rest of the world is a far less attractive proposition.
It is true, we are struggling to retain nurses and other skilled staff who can get better elsewhere. Health workers were discussing online recently how the attractions NZ used to have, have been massively eroded.
The fact we can still attract high volumes trying to escape third world conditions doesn't negate that. But merely allowing the existence of even worse conditions in the highly populated third world to excuse our worsening conditions would be foolishness.
It is true, we are struggling to retain nurses and other skilled staff who can get better elsewhere.
You know who else is struggling to find Nurses, 3 years after a global pandemic? Everyone.
Health workers were discussing online recently how the attractions NZ used to have, have been massively eroded.
People online being upset at things? Well I never.
What you don't hear, is the majority of people who are fine with things, because they don't need to go on the internet to vent.
We're definitely more desirable to someone with a mediocre skillset living in Mumbai or Manila, and will remain for the foreseeable future. The real question is whether we are able to attract the people we need and not economic refugees.
High numbers alone don't mean policy success, we have to check these against qualitative aspects as well. A close look at INZ stats shows cooks, chefs and tour guides still receive the bulk of work visas in NZ.
NZ has never attracted a large proportion of highly successful, comfortable and satisfied types. Those sort of people usually aren't motivated to emigrate. We're a destination for people wanting better living conditions, whether it's income, lifestyle, religious or political freedom, etc.
Our migrant numbers are also going to reflect the nature of who's more mobile. People with mortgages in highly tenured positions are less likely to arrive than people with fewer ties, like chefs and hospo workers.
Colonists moaning about other colonists is an ultimate form of irony.
There was a representative from the games IT industry recently saying that if NZ supported their industry a bit then they could stop the drain of games developers to Australia and turn that industry from a $400 million industry into a $2 Billion industry. The suggestion has disappeared like a pebble into a stagnant pond. I personally thought that that was quite a good area to put resources into.
It's really got nothing to do with a capital gains tax and everything to do with the neoliberal outlook of NZ society. How many years is it since Muldoon, think big and the unwillingness of neoliberal govts to 'pick winners'.
Politicians are too scared to 'pick winners' but very brave when it comes to selling off state enterprises or giving council infrastructure to iwi.
Then when there are no productive assets left to get revenue from they go for the only thing left - people's land and their homes.
We are where we are due to a lack of courage, imagination and foresight.
Tend to agree and would add that there seems to be an old, very outdated, possibly socialist mindset that remains pervasively that holds us back. At the highest levels of Government and society there seems to be a belief that wages cannot be allowed to climb, even just to keep pace with inflation. This attitude is confounding as it holds back the whole country, not just the wage earners.
I was told the other day that in the 70's a teachers pay was the same as a Government back bencher. Today they are very widely apart. The question is why? I'd suggest a teacher has much more responsibility than a back bencher in parliament?Just proves the self interest and greed of the politicians.
I recall they were on very good pay and allowances that put them pretty high on the wage scales where I grew up. But I also note that the work was physically very hard and many ended up with health issues as a consequence. Even today I know youngish people (in their forties) with most of their life working at a freezing works and dealing with joint and other issues
The reason teachers get less pay than back benchers now is real simple. Most teachers' union reps are wannabe Labour Party candidates. When I was on my kids' school Board of trustees, the teachers complained that their union rep had told them to accept a really crap Government pay offer. I had to point out to them that their rep was a perennial Labour candidate in a safe National seat and was on the Labour party list, quite lowdown. She actually became a list MP for a bit when a few people resigned and died. The union reps look after their future employers, not those people who pay them to look after them. Backbenchers look after themselves. As a result, they get paid far more nowadays, than teachers.
I note that today still. Most union reps that I know are beyond utterly useless at representing staff. I have suggested for quite some time that staff and the unions need to grow some 'mongrel', but wallies keep getting elected and then get captured by the organisational claptrap. It is extremely frustrating!
Labour stoped respresenting actual labouers some time ago...
This week we have leart rich pay 9% tax rate, 50% of nz get more back then they pay...
That means us few in the middle are carrying a lot of weight , some are choosing to goto Aussie.....
A Day of reckoning is coming, it will be forced on us by international rating agencies.
The socialist mindset can be summed up in one word. 'Bureaucracy'. There are more bureaucrats, experts, consultants, environmentalists, etc. than workers. NZ is like living in a giant penitentiary and to try to do anything you are totally controlled; from the clothes you wear to the places you can go. Democracy is gone, replaced by a fascist system of control.
I reckon for NZ to succeed we need Auckland to succeed. Unfortunately Auckland is going backwards these days, the car obsession we have does not gel well with young professionals. A walking and cycling bridge over the harbour is considered the most ridiculous thing in the world, meanwhile other cities are taking leaps and bounds in these areas especially after Covid showed the way. We have a mayor who wants to fix Auckland through even more car dependence and closing the cheque book. Building cycling infrastructure invokes hatred. Our biggest political party hates the idea of any kind of rail. So NZ is doomed to be a farming and retirement village unfortunately.
Fixing Auckland is easy. We must be the only city in the world that can't fit trams down streets that used to be narrower but were literally designed to accommodate trams in the 1900s. You just have to be prepared to tell people they don't own the space in front of their street/shop/house and to store their private property on... their property.
Until that happens, and until you accept you need to do it, you have to have things tunneled or grade-separated which is expensive, and then someone latches onto a project and then tweaks it until it becomes a sunk cost of their own pet project that they actually want to build. Classic case of this is the Harbour crossing. There's no need for it to be a tunnel. For what a tunnel will cost us, you could have a rapid transit network covering the entire region.
But yea, move the Port, raa raa raa, there's too many cones on the road! Baldrick's poem summed it up well: "Boom. Boom. Boom. Boom."
Not sure. Let all local government keep GST, for example generated in their areas, and see how prosperous, and GDP productive areas like Auckland and Wellington are. They suck money left, right, and centre from those areas actually running at a profit, and then pay some clown to say how well they are doing compared to those areas that actually make us a bit of money.
I concur and that's the point I am making as well. For a small nation in the South Pacific, we need high-value service exporters to support high-paying jobs in our cities.
The majority of large corporate employers in Auckland are focused on domestic markets (Fletcher, Mainfreight, Spark, Mercury, etc.). meanwhile much of our export value is generated in regional NZ (agriculture and tourism).
You've highlighted a fundamental issue:
- NZ has environmental advantages that allow it to compete globally in agribusiness and other sectors that can exploit these natural advantages.
- NZ has such a tiny capital and labour market that it's unable to compete globally as a service exporter.
At best, our cities can provide value add to our rurally derived industries.
I have mentioned this before, but there are two small companies I'm interested in here in Christchurch, both traded on the Unlisted market, Syft and Pharmazen. Both are niche tech firms reliant on exports. Both recently raised capital and had to look outside of New Zealand to do so. NZers are apparently too busy buying rental houses to support our local exporters who want to grow.
I am not necessarily talking about transport, I am talking about making Auckland a city that young go getters want to come live in or don't want to leave. The main reason that skilled NZers go places like London and Sydney isn't wages (in fact I know a lot of people that earn less in London), it is to live in a real city that has a good vibe. And the main reason skilled people will come here is because of the lifestyle, not to increase their wages. Auckland is great in terms of natural beauty, but in terms of it being an interesting liveable city there is a long way to go. The right side of NZ politics want Auckland to fulfil the 1960's dream of motorways and car parks, but other cities are actually ripping those mistakes out.
I think it's not out of the question that the South Island will be a separate country within 50 years. The speed of change in NZ it could happen much sooner. Why?...because the South Island exports more than it imports and so would enjoy a higher standard of living. Also it generally has a more traditional set of values than what the North are rapidly moving to. Eventually some populist figure will point these out to Mainlanders and it will be all on.
It hasn't always been like this though. Traditionally Australian living costs for every day items like food and other things were higher. That changed slowly about 15 years ago when it was like-for-like and now NZ has high living costs, high prices on comfort living items like TVs etc and on top of that, our wages are being rapidly undermined by changes in living costs and the inflation component we aren't adjusting income taxes for.
We shouldn't kid ourselves, this is an extremely recent development. It has also come with a prolonged period of gaslighting whenever you bring up this change in relative economic affairs. We're in this mess because we chose to keep letting governments get away with the path of less resistance. But let's all enjoy our 3% matched Kiwisaver when we retire in a high-cost country when the Australians are angling at 12% in a country where the basics are cheaper and cheaper by comparison with each passing month.
Treasuries yielded around 3.66% on Wednesday, about 70 basis points higher than equivalent swap rates.
The fixed-rate payer receives floating interest, and is said to be long or to have "bought" the swap. The long side has conceptually purchased a floating-rate note (because he receives floating interest) and issued a coupon bond (because he pays out fixed interest at periodic intervals). On the other hand, the floating-rate payer is said to be short or to have "sold" the swap. The short side has conceptually purchased a coupon bond (because he receives fixed interest) and issued a floating-rate note (because he or she pays floating interest).
The principal or notional amount is never physically exchanged (hence the term 'off-balance sheet') but is used merely to calculate the interest payments.
So an IR swap is an agreement between two parties to exchange a stream of cash flows calculated as a percentage of a notional sum calculated on different bases.
Liquidity in this case means lack of market maker commitment to engage balance sheet capacity to execute the price making function. If balance sheet capacity (the real money in the system, therefore liquidity) is systemically impaired, as in a crisis, or a crisis that doesn’t really end, then to get dealers to give up their precious balance sheet capacity and engage on the other side of a swap someone would have to pay a hefty premium to make it worth it (risk-adjusted) for the dealer to do so.
Heard from a mate that a building apprentice at her place just lost his rental to social housing and the mob have been moved in. Parties and burnouts. The young man is now planning to go to Australia.
Intended consequences.
Hopefully the journalist I called can get the story printed.
In slightly less sad news, Peter Zeihan is still promoting NZ on YouTube
Is it just me or does Mr Zeihan come across as quite ignorant of the NZ dairy industry in that, nz domestic market aside, we have failed to move much value add, hence his inability to buy Kaipiti (a fontera aquisition) cheese in USA. And the vast bulk of NZ diary is infact sold as comodities; milk powder, butter etc, just like his USA counterpoint?
I know I posted it yesterday but it’s still on my mind….
how nuts is this….who is lending $500k for someone to lose money.
from yesterday fb property page
”Hi fellow investors! I've just bought a new build townhouse which will get me an annual rent of $25k. My annual interest only expense will be $35k. So I'm assuming I don't have to pay any taxes, can someone please confirm? Is there any value in still hiring an accountant?”
Can Simon Bridges at the Chamber explain modern business theory to me….I’m so bloody lost as to how this works? Maybe Michael Riley at the EMA can explain. Or Kirk Hope….?someone must know because so much has been lent on this basis. And many of the businesses that belong to these organisations rely on this working out.
Is interest only just another name for insolvent! Do you still have to pay creditors back?
None of the spruikers will argue you here, this is the quiet bit that we are not ment to say out loud!
The only way this investor gets out with a profilt is capital gain.
Made a lot of sense back in the LAQC days while you could bank cap gains with no brightline, and offset losses against PAYE tax...
also forgetting
- Rates
- water bills
- maintenance
- tenant damage
- property management fees
- insurance of house and possible damage
Now the business is technically insolvent without owner topping things up, I do not get subsidising the tennant for capital loss.... this business is going to simply build an ongoing tax loss until the property is sold at a capital gain (Which may not happen and will need to be shared with IRD if inside brightline).
Residential Investment IS DEAD with either good capital gains or positive cashflow after tax.
So lets say he needs to top it up $20k a year after other expenses. And lets say the brand new house depreciates at $20k a year as it ages. He basically needs the land value to increase by $40k a year just to break even - before inflation! And that is assuming he doesn't have to pay tax on the rent (does anyone know if he does being a new build?).
I guess the future is a bit rosier (if he makes it), interest rates will probably go down and rents will probably go up. Over a very long time frame he could do OK without significant capital gain.
I know that post. He signed up to buy a place off the plans a couple of years ago. Since then building costs went up $50k, interest rates doubled and rents have flatlined because they built a shedload of townhouses in Christchurch. He just got caught by sillily buying at the peak and extrapolating current costs and interest rates forward. Lucky for him he has a job and will pay the property off as soon as he can. The losses will eventually turn in to rental profits, particularly as building crates and immigration continues and his mortgage goes down, and for a few years he will get to offset past losses.
Anywho, this new normal is why nobody else is building now, except for KO, who don't have to make commercial sense because you and I pay the shortfall to house the 3.x% unemployed.
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