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Dairy prices jump; US data strong; Boeing strike ends with big wage gains; China services rise; RBA holds; UST 10yr 4.34%; gold soft but oil firm; NZ$1 = 60 USc; TWI = 68.7

Economy / news
Dairy prices jump; US data strong; Boeing strike ends with big wage gains; China services rise; RBA holds; UST 10yr 4.34%; gold soft but oil firm; NZ$1 = 60 USc; TWI = 68.7

Here's our summary of key economic events overnight that affect New Zealand with economic news that is surprisingly positive today.

Even though there are likely large influences on New Zealand from events halfway around the world, there are some locally too. Later this morning the Q3-2024 labour market report will be released. And we will have full coverage. But before that we have had another dairy auction, and this one will have analysts reaching for their pencils. It was a good one, with overall prices rising +4.8% in USD terms, up +6.2% in NZD terms. That takes them to their best level since late 2022.

The gains were widespread, led by butter's +8.3% jump. Demand out of China is the extra push this market got, and it could well bring upside to farm-gate payout forecasts. In the background, animal health concerns in both the US and EU, and weak domestic raw milk prices in China, are driving lower production expectations globally, just when New Zealand production is in an expansion state.

But the economic good news didn't stop there.

The Redbook tracking of retail sales in the US delivered a +6.0% rise last week from the same week a year ago. That was its best since mid 2022.

The American logistics report for October revealed a small rise from a strong September, taking this index to its best expansion since September 2022. Growth is increasing at an increasing rate in all the right metrics.

The ISM services PMI for October was sharply positive too, and its most expansionary level since August 2022. Encouragingly, this sharp turnaround was driven by strong new order growth. This survey basically confirmed the expansion in the S&P/Markt services PMI version and its drive in new order growth.

US merchandise exports slipped slightly in September from August, but we need to recall that the August level was a record high - and that Boeing's strikes and production woes will have had an effect here. US imports were strong, as you would expect with most sectors of their economy firing on all cylinders.

We should note that the strike at Boeing is over, with a startling +44% pay hike over four years (+38% plus compounding). The catchup will no doubt drive future export results.

There was a well-supported UST 10yr bond auction earlier this morning, and that delivered a yield of 4.29%, which compares with the 4.01% at the equivalent event a month ago.

Not to be outdone, the Canadian services PMI turned up sharply to expansion as well, also driven by new order growth.

In China, the October Caixin services PMI largely mirrored the official version, but recording a better expansion than the official version, in a better-than-expected result.

In Australia, as expected there was no change by the RBA to their policy interest rate. But they warned that another interest rate rise was still a possibility, conceding they had been surprised by the scale of the rise in government spending. They are also surprised that housing demand is staying up, despite their highish interest rates.

The UST 10yr yield is now at just on 4.34% and up +4 bps from this time yesterday. The key 2-10 yield curve is now less positive, by +14 bps. Their 1-5 curve inversion is less inverted, now by -9 bps. And their 3 mth-10yr curve inversion is more inverted, now by -34 bps. The Australian 10 year bond yield starts today at 4.62% and up +6 bps. The China 10 year bond rate is unchanged at 2.13%. The NZ Government 10 year bond rate is up +10 bps to 4.59%.

Wall Street has opened its Tuesday with the S&P500 up +1.2%. Overnight, European markets were up about half that, except London which slipped. Yesterday, Tokyo ended its Tuesday session up +1.1%. Hong Kong was up +2.1% and Shanghai up +2.3%. Singapore rose +0.5%. The ASX200 ended its Tuesday session -0.4% lower, but the NZX50 beat that with a +0.5% rise.

The price of gold will start today at US$2738/oz and up +US$5 from yesterday.

Oil prices are up almost +US$1 at US$72.50/bbl in the US while the international Brent price is now at US$76/bbl.

The Kiwi dollar starts today at 60 USc and up another +20 bps from this time yesterday. Against the Aussie we are down -30 bps at 90.5 AUc. Against the euro we are up +10 bps at 55 euro cents. That all means our TWI-5 starts today at just on 68.7, little-changed from yesterday at this time.

The bitcoin price starts today at US$70,108 and up +3.5% from this time yesterday. Volatility over the past 24 hours has been moderate at just on +/- 2.8%.

It's election day in the US. We will have live coverage of the results later today.

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21 Comments

RBA still see potential rises. That’s crazy when compared to what’s happening in NZ. Looking at the head winds facing most industries here, especially construction thanks to our good friends at the RB (best not crack into that chestnut again). Construction companies here, from what I can see, are facing limited forward work combined with an avalanche of liability after deferring income tax from highly profitable years or from maintaining overdrafts or other bank financing facilities when they didn’t need to, and now they face not having the means to repay their liabilities.

https://www.interest.co.nz/business/130515/company-liquidations-hit-highest-monthly-level-decade-centrix-says

 

Professional advice questions should be raised like whether company accountants are prudent in pumping tax pooling schemes to hammer swinging chippies will surely be one of the big lessons from this current era. Perhaps paying the IRD early, keeping your business cashflow positive and delaying financial gratification is the only sensible option?

 

I just feel sorry for the good hardworking people who followed the advice of their “experts” down the coal mine. They are the canaries now, not the “experts”.

 

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"NZ's Economy is being smashed since the RBNZ has bizarrely admitted it is in breach of its own Remit. A former Chair of US President's Council of Economic Advisers has explained why."

NZ's Economy is being smashed since the RBNZ has bizarrely admitted it is in breach of its own Remit. A former Chair of US President's Council of Economic Advisers has explained why.

 

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Fair points in the blog.

RBNZ will find out how badly they've overdone it today. Obviously, they should have started earlier, but what choice do they have now but to manage the rate down in 50s? After all, their main customers (banks) need time to manage the transition without losing any net interest margin. Adrian knows who he really works for.

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The damage is so great I think they will need to keep cutting down to 2.0(!). If neutral is circa 3, they need to be at least 1.0 below that to resuscitate this dog of an economy.

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That was always the risk wasn't it. Orr was so worried about cutting too soon and not killing inflation that he forgot about the risk of completely killing the economy and creating the opposite problem. If they had started gradual 0.25% easing earlier in the year I think the economy would be in a much better state. It all went down hill when he ridiculously threatened to increase the OCR when it was obvious he should have been cutting. 

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Stagflation is becoming much more of a risk too. He may not be able to cut to 2% without causing inflation. 

My personal view is that 3% will revive the economy, it is a big boost in spending to those with mortgages. But there is a big risk that it wont.

They seem to be running a most regrets policy!

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3% will certainly help freeing up discretionary spending but I don’t really think it will be enough. Especially for resi construction, a big part of the economy. 3% will equal circa 5% retail rates, that means stress testing at 6.5-7%. The stress testing needs to be back to 6%.

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Yes you are probably right, we may need retail rates around 4% - 4.5% or even lower.

5% is double what we had before the RBNZ started hiking, so for many people it would still be a big cost increase compared to what they thought they were signing up to (during Covid the RBNZ told us rates will be low forever and we should borrow up large). 

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lower interest rates don't lead to more discretionary spending for long, they just lead to higher asset prices and larger mortgages for the same repayment as a smaller mortgage on a higher rate.

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Stimulatory monetary policy is pretty good at sustaining growth and confidence if there is sufficient private debt headroom, but it has proved completely hopeless at resuscitation. When we crashed interest rates in 2009 we also saw (i) a big drop in global oil prices meaning our current account deficit shrunk rapidly (so more money was spent domestically) and (ii) a big Govt spending push from the Key / English Dec 08 emergency budget. I don't see either of those factors coming into play this time.   

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Yes I agree; the old adage is 'pushing on a string'. 

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I am not quite that down on the potential of interest rate cuts to resuscitate.

if rates are cut repeatedly down to 2-2.5% then I think that the residential construction sector can recover to a moderate extent, from late 2025.

We didn’t get that in 2009/2010, however there’s a couple of quite different factors:

- we had the collapse of mezzanine finance in 06/07. That really sucked funding out of the sector

- we had much more restrictive planning rules

Don’t get me wrong, slashing the OCR will only lead to partial resuscitation and I certainly agree on the need for fiscal stimulus.

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This time around we have:

- decreasing population growth

- a previous building boom and possible oversupply

- high building costs that the market can't afford

Hard to know what will happen...

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Yes, very good points. On high building costs, that’s another reason that the OCR needs to be lower.

also on the building costs, they do seem to be pulling back a tad. But not much. And not really enough

it’s a good point on potential oversupply too. Perhaps any uptick in construction in late 2025 will be pretty minor - it could be a few years of fairly flat activity

this comes back to JFoe’s points on the need for fiscal stimulus. Now would be the time to ramp up government house building…

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I would add - we may have an oversupply of new build supply, but we most certainly have an undersupply of affordable housing

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On high building costs, that’s another reason that the OCR needs to be lower

I don't think interest costs are that big a component in building costs, compared to the obvious land, materials and labour.

My understanding is that periods of low borrowing costs distorted the market by creating a property frenzy among potential buyers and created a rush for poorly built million-dollar shoeboxes. People didn't care what they were buying and at what price as long as they could lay their hands on any structure with a roof, making even the crappiest new builds profitable.

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Its just repeating what I have been saying all along. Our central bank is too slow to react on the way up, too slow to react on the way down. Both are just as damaging as each other.

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RBA:  Professional advisors love debt just as much as the rest of New Zealand.  But being "professional" and paid for the advice they could offer the alternative view about debt and deferring liabilities.

Those are like walking over a plank with a millstone tied to your neck.  Works well until suddenly, it doesn't.

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Capital markets activity is going to pick up once US Election uncertainty is over. Early Feb onwards will be go go go and I suspect there's a lot of companies ready and waiting for equity raises to improve their balance sheets. I'd suspect most M&A involved with the US is mostly holding back for a few months as well

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RBNZ   would be happy for inflation to bounce around between 2 and 3% for the next 10 years. Assuming they have the nuts to use their tools to keep house price inflation in line with the CPI. Our large public debt malinvestment into property needs to be inflated down. If inflation runs at 3% average for 10 years your 500k mortgage will be equivalent to 372k regardless of principal payments and your 80k salary will be 107K.

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https://www.oneroof.co.nz/news/wellingtons-new-rvs-which-suburbs-are-mo…

Ye gods. The reasoning by the REAs in this article is bewildering. They acknowledge the RV isn't reflective of market value, but then say a drop in RV would be a bad thing because people are paying rates based on them and would get angry/depressed. Your RV could be a random value like 1.4, or 27.22, or 0.45 and it wouldn't make a difference to your rates, it's all relative to how much the council wants to bring in and your valuation compared to others.

Maybe it's time to completely decouple the expected relationship between RVs and market value. Maybe create a rating ratio based around a value of 1.0. The movement of your property relative to the ratio can be above or below 1.0 depending on facilities, improvements and services. You add a bedroom and en suite that sets your property above the baseline, and you go up to 1.05 (as an example). The council stops collecting rubbish in your area, you drop to 0.98, and so on.

Multiply the average rating income expected from all properties in the catchment by your rating ratio and that's what you pay. Leave a dollar value out of it and stop people expecting it to set the market value of their property.

Just spit-balling here.

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