Here's our summary of key economic events overnight that affect New Zealand with news global interest rates are on the move up and the US rate inversions have now vanished. Except in China where there is a rush on for the safety of Government bonds which is driving down yields to record lows. And positive-sloping yield curves are returning.
There was a US Treasury 30 yr bond auction yesterday, well supported but less so that the last event. The yield slipped to 4.48% from 4.57% at that prior equivalent event a months ago.
The US Fed balance sheet was little-changed last week from the week before, but it is down to May 2020 levels, and has fallen -US$2.1 tln from its peak in mid-2022.
The US Fed is expected to cut rates by -25 bps at its December meeting next week on Thursday NZT, bringing the benchmark range to 4.25%-4.50%, and a full percentage point drop since September. Economists anticipate slower cuts ahead, with only three reductions projected for 2025. Those cuts will come if inflation remains above the 2% target.
As the Trump team prepares for the transition, it's anti-regulation focus is coming into view. They are seeking candidates to eliminate or eviscerate the FDIC (sought by big banks), and rid themselves of car-crash reporting (as sought by Elon Musk). The billionaire sharks are going after consumer protections.
Canadian manufacturing sales were up strongly in October, their best growth spurt in nearly two years. That made them +1.4% higher than the same month a year ago. While that isn't quite besting inflation, the recent moves up will be encouraging them.
Across the Pacific, Chinese banks extended just ¥580 bln in new yuan loans in November, less than half the same month a year ago, and nearly half of what was expected. This is the lowest new lending for a November since 2012. The decline took place despite the aggressive monetary stimulus measures from the PBoC in late September in an attempt to halt the property market downturn. There have also been much higher levels of local government debt issued in that time too. Poor credit demand in China is saying a lot about Beijing's management of their economy and its prospects.
President Xi and his top team have been meeting in their big set-piece Central Economic Work Conference, and what is glaringly obvious from this so far, is that they don't know what to do, and financial markets are sensing that with their pullbacks.
EU industrial production is still in its decline phase, now stretching to 18 consecutive months. It will be little comfort to them that the October decline was smaller than the prior month.
In the UK, their economy shrank for a second month in a row on a per capita basis.
The UST 10yr yield is now at just on 4.39%, up +8 bps from this time yesterday. That is quite a move for the week, up +25 bps. The key 2-10 yield curve is more positive, now by +16 bps. Their 1-5 curve inversion has vanished. And their 3 mth-10yr curve inversion has also disappeared to now be positive at +8 bps. The Australian 10 year bond yield starts today at 4.39% and up another +6 bps and up +10 bps for the week. The China 10 year bond rate is now at 1.78% and down another -7 bps. A week ago it was 1.96% so a huge -18 bps fall since then. The NZ Government 10 year bond rate is now at 4.52% and up +4 bps. This is up +6 bps for the week.
Wall Street is unchanged on the S&P500 in Friday trade, and down -0.5% for the week. Overnight European markets were all little-changed. down about -0.1%. Yesterday Tokyo closed down -1.0% for a weekly rise of +0.4%. Hong Kong fell -2.1% on the day to limit its weekly rise to +1.2%. Shanghai was -2.0% on Friday for a weekly -0.3% dip. Singapore ended unchanged. The ASX200 ended its Friday session down -0.4% on the day and down -1.5% for the week. Buyt the NZX50 was up +0.5% on Friday with a positive afternoon session, limiting its weekly slip to -0.4%.
The Fear & Greed Index ends the week still in the 'neutral' zone as it was last week.
The price of gold will start today at US$2658/oz and down -US$22 from yesterday, but up +US$23 from this time last week.
Oil prices are up +US$1.50 to just over US$71/bbl in the US while the international Brent price is just on US$74.50. A week ago these prices were -US$3 lower.
The Kiwi dollar starts today at just under 57.6 USc and down -30 bps from this time yesterday, down -70 bps from a week ago. Against the Aussie we are unchanged at 90.6 AUc. Against the euro we are down -30 bps at 54.8 euro cents. That all means our TWI-5 starts today at just under 67.6 to be down another -10 bps from yesterday, and down -40 bps from a week ago.
The bitcoin price starts today at US$101,536 and udown -0.2% from this time yesterday. A week ago it was at US$101,044. Volatility over the past 24 hours has been modest at +/- 1.2%.
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43 Comments
I think the recent fall in interest rates has been a bull-trap for borrowers. Next year we are likely to learn the hard way that the world doesn't revolve around Adrian Orr and the OCR, but that we're very much subject to global influences, just like everybody else.
Last week we noted that a lot depends on SocGen’s Albert Edwards not throwing in the towel on bearishness, which really would be a sign of end-of-times that the top was in. Fortunately his latest note is true to gloomy form, and features his award for the most “bonkers-on-stilts” chart of 2024: (zoomable version) Edwards argued that this huge surge in corporate profits as a percentage of GDP — even after a 20-year secular increase — is partly due to “greedflation” (with corporate pricing outpacing labour costs) but is mostly attributable to America’s “fiscal dysentery”: . . . It is easy to rationalise the US valuation excess. We all know the arguments because we hear and read them almost every day. In essence, the argument is that US stocks deserve a huge premium because profits are growing much faster in the US than in any another major economy, a trend likely to continue given its dominance in tech related companies. That makes some sense — even to a bear like me! But one simple driver of the success of US inc is often overlooked. The US government deficit since Covid has remained super expansionary at around 7.5% of GDP in 2023, 2024 and forecast for 2025 (IMF data). This compares to the eurozone and even Japan (for example) with deficits of ‘only’ 3% of GDP. That’s a big gap. We think many investors widely under-appreciate how crucial US fiscal dysentery is as the propellant of far superior US profits growth which in turn ‘justifies’ far higher equity market valuations. It is much ‘sexier’ to latch onto a story around US corporate exceptionalism in tech. Understanding the true (fiscal) source of US corporate superior profits growth gives us a handle on figuring out just how sustainable the US equity bubble is. Naturally Edwards thinks the end is nigh — highlighting how the US unemployment rate this year moved above its 36-month moving average, a reliable indicator of an incoming recession, he reckons. Be alert: a recessionary crossover occurred in May 2024 but to add to the caution, the 36m mav (dotted line) just started rising too in November, which usually only ever happens deep into a recession. Either this time is different, or the US might just be slip-sliding into a profits crushing recession.
Pretty much everyone coming off now will be on a lower rate. Something in the 5's is a whole lot better than 7%. If you were able to survive to this point, then its only going to get easier from now. ANZ is currently offering 5.49% on a 2 year fixed. You could be looking at a 4.99% special come February.
Our 'inflation' recovery has always been vulnerable to an increase in oil prices. We get two-thirds of our energy from oil and we rely on loads of oil-related products in our supply chains (e.g. plastics).
Now, if oil prices go / stay up, that cost increase will propagate through our ecomomy into other prices. This will add to the inflationary pressure we are already seeing from insurance (climate risk-related), local Govt rates (infrastructure catch-up), and a weak NZ dollar. Now, with the economy on it's knees, how would RBNZ justify increasing interest rates (or even holding them at the current contractionary level)? Might they have to accept that their model of the economy is nonsense? That inflation is not actually the result of us running out of productive capacity?
Hell, maybe we will get a sensible discussion about we better manage global energy price shocks - it's not like this will be the last one. I am not sure how many times we can throw 50,000 kiwis on the dole and drive many tens of thousands more overseas? Seems like a pretty crap approach to me.
Hell, maybe we will get a sensible discussion about we better manage global energy price shocks
The choices are fairly limited, when cheap fossil fuels underpin a huge amount of our lifestyle.
We either take the current option of the overall cheapest route which is continuing to have fossil fuels underpin our energy and consumables.
We use more expensive alternatives, which would carry a higher cost. You'd get more insulation, but you'd also be permanently paying a higher tab.
We do less stuff.
Price of refined fuels fell in November on SGX but is now on a sustained march upwards.
In NZD, we're looking at a 7-8% increase in contract price over the next 6 months compared to the last 3 months. This means pump prices for 91 could rise to $2.5/litre or higher after the holidays.
Add another $10-30 increase in monthly power bills, big jump in piped gas prices, further double digit increases in rates nationwide, higher ACC levies, etc. - you can bet that much of the savings from lower mortgage rates won't make it to retail services unfortunately.
Except that's usually the last thing people let go of.
Evidence how there were very loud noises on here when interest rates went up, and people were thinking everyone would soil themselves and ditch their properties for almost nothing. The reality is people will go without almost everything else and still pay their mortgage, it's really only those who's incomes take a severe whack and are forced to sell.
That and our central bank spent a decade or so trimming out the more marginal mortgages with lower deposit and weaker servicing costs. Assuming not much else changes, much lower chance of upside down mortgages.
No, we don't.
We have a globally connected manufacturing system that's dependent on exploitation and cheap fossil fuels. If we want to play, have this life of material exuberance, then we're also exposed to shocks.
There's not an easy substitution, that's also palatable.
"Actual sustainability, includes all of us taking less, not just the Uber wealthy."
Actual sustainability is not what I was talking about....that is obviously widely unpalatable (and likely undoable)....but as noted before we can make the bad situation less bad if we address distribution. The 'uber wealthy' you refer to are not exactly keeping their end of the bargain....growth is over, and the 'uber wealthy' are pissing our declining resources up the wall, so a new contract is required.
Its coming in any case, but it may be less messy if we attempt to manage it.
The Uber wealthy are the Uber wealthy because they're clipping the ticket on most of what the rest of us are doing.
There's a yawning chasm between the efforts we're attempting to make, and what we'd actually need to do. Materially, most people in the developed world live daily lives well in excess of Renaissance era royalty.
But return on capital!!!....and so we will ensure that the small scale manufacturer who relies on quality/reputation cannot compete, and as we find the spending power of the masses declines in relative terms we remove choice/innovation and chase existing assets in a bidding war amongst the well heeled....nevermind that the bulk of (any) community are excluded from the necessities or that required products/services are neglected due to that diminished spending power.
It will not end well....but it will end.
Well, price is most people's determinant of value. Very flawed, but most of us don't have the knowledge to determine other qualities at the time of purchase, like reliability, durability, better performance, etc.
But our homes are filled with ever more "stuff", so there's a mindset there that has us like hungry ghosts, consuming all we can, that would have to change. Ultimately evolution will decide whether an animal such as us is capable of existing, while holding so much destructive knowledge.
Every ending comes with a beginning. The optimist in me would like to think whatever model comes next will be a hell of a lot wiser. The realist in me identifies that in most instances of societal upheaval, desperate people often don't make the best decisions.
"The realist in me identifies that in most instances of societal upheaval, desperate people often don't make the best decisions."
The realist in me identifies that in most instances of social upheaval the desperate elite do their best to limit the options of the people.
Of course their economic model is nonsense.
It's not just the energy price though is it? We've had higher oil prices between '07 and now.
We've also functioned perfectly well with mortgage rates in the 7's that weren't recessionary.
The drivers come from both the bottom and the top.
Domestic electricity prices aren't all driven by oil costs.
Cheap imports aren't so cheap anymore (forget the crap on temu), and adjusting for hedonistic inflation values is nonsense. It's a loss of purchasing power fullstop.
None of the experts can admit that rentierism is the number 1 driver. From land lording to finance. Excess money at the top chasing more money and higher returns. More debt at the bottom (FHB'S, rent, education). Consumer debt gets spent into the economy but if you're using it for the basics, there's something wrong.
Is this why the call to leverage KiwiSaver funds? Everything and everyone else is tapped out. Is it going to solve any of the issues?
Starting to see some real weakness in the NZD. And the long end of the yield curve is holding - not sure how many more rate cuts we have ahead of us - or if we do keep cutting we may see the NZD back down at 0.5. I thought this may have happened about 12 months ago but was wrong and too early in my thinking. NZD has been quite resilient around 0.6 but it now looks very fragile.
The dollar fall is completely consistent with what happened with the Tories policies in the UK. Truss's mini budget resulted in an immediate crash. The coalition have not been as dramatic in one hit but their direction is similar and as expected the NZD is falling.
The markets have wise'nd up to the trickle down economics fallacy and can see that a government that pursues greater inequality leads to worse 'economic performance.
It's only Luxon/Act fanboys that believe anything else could have happened.
Let's keep to the facts.
Trump is a convicted felon, adjudicated rapist and proven compulsive liar.
Musk has several conflicts of interest with the Federal govt he is about to work for.
https://www.google.com/amp/s/amp.theguardian.com/us-news/2024/dec/13/el…
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