For more than a year ‘Team Transitory’ – i.e those like me who see the long term trend of ever-lower (or at least low) interest rates and inflation – have been in retreat under a constant barrage of inflation surprises and central bank rate hikes.
But this week the tide turned, at least for a week, including:
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commodity prices fell sharply towards their pre-Ukraine war levels of late February on signs the spikes in March, April, May and June had created ‘demand destruction’ and were likely to cause recessions in the United States and Europe later this year or early next year;
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US inflationary expectations for the next five years continued dropping below 2.5% and the US 10 year Treasury yield dropped solidly 3% for much of the week, albeit it closed above 3% on Friday night
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US 30 year mortgage rates, which drive a lot of activity in the world’s largest economy, fell to 5.3% from 5.7%; and,
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ANZ, BNZ and Westpac and finally ASB cut their two year mortgage rates around 30 basis points to around 5.4% after NZ’s wholesale interest rates followed the global trends and fell 50-80 basis points over the last three weeks.
In my view, it’s probably too early for ‘Team Transitory’ to declare victory, but some faith is being restored in my long term view that low inflation and interest rates will reassert themselves after the Covid and Ukraine war shocks because of fundamental global macroeconomic forces that include;
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ongoing globalisation of manufactured goods supply chains, which is still largely intact despite the exit from Russia and fears about China;
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the evaporation of services industries globally into AI-driven and jobless clouds;
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the continued weakness of labour negotiating power with increasingly large (and monopsonistic) companies; and,
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the widening of the gap between the extremely rich and the ever-poorer poor in developed countries is continuing to generate growth-sapping wealth gluts and restraining productivity growth as the poor’s kids get sicker and less productive as adults.
Really?
Falling inflation and interest rates again put upward pressure on asset prices and rentier incomes, creating a feedback loop that worsens inequality and adds to the political pressures eroding democracies and undercutting efforts to fight climate change. New social contracts and political change to redistribute income and wealth are needed to reverse these awful and perverse feedback loops, in my view.
79 Comments
Hmm it does feel like the fed and the rbnz may overshoot again on fighting inflation as they did on monetary support during COVID.
it does seem like what used to take 18 months to play out traditionally, now takes 4 months.
Is the ocr too much of a slow reaction tool for these times? Is there a better tool?
The system is too complex to measure and react to in real time.
Central banks can see more data than the "money printer go brrrrr" crowd which is why theyve been reluctant.
End of the day it's likely impossible to have a central bank and government that can save us from every eventuality.
Yes I am still seeing inflation and activity in the economy (you can see it on the roads in Auckland) and people are still spending. It all comes down to inflation, the central banks will not allow 5% plus inflation, end of. Oil will play a big part in this. You can tell by the volitility in the bond markets and range of economists views that no one knows.
Anyone involved in producing anything should be able to identify how much supply side inflationary pressure has been in the economy over the past 24 months. Hell, anyone going to a supermarket or Kmart or ordering anything online should have noticed a substantive difference in product availability and delivery times.
Whether it's "transitory" or a "transition", only time will tell, if it's the latter a lot of people are going to be awfully sad the problem wasn't just resolved by upping rates.
Throwing eggs at Battery Chickens isn't going to do much, the farmer just collects more eggs.
Throwing money at Battery Tenants isn't going to do much, the landlord just collects more rent.
The RBNZ is NOT taking inflation seriously and the Labour Government has cooked the housing market, true story.
NZ might be toast.
It's probably getting difficult for some in the real-estate/rental industry.
Best to cut loses where practical and play to ones' strengths. If industry players work hard and do well the market will reward them, otherwise victimhood waits at the door.
I don't have a horse in the real estate race, so I try hard to look at things from multiple perspectives.
If the RBNZ is behind our inflationary issues, and the current government caused our recent house price increases, then I suppose abolishing or reducing them would seem like a possible solution to those two issues.
Probably a perspective that'd need a bit more information. And ironically a good case for individuals being problematic arbiters of larger problems.
Hard to say where we are going from here, but I think are just getting started honestly.
We have just had too much monetary stimulus for too long. We still have too many overinflated frothy asset bubbles worldwide.
Inflation is feeling pretty ingrained right now all through the economy. War in Ukraine still has a long way to go. I can’t see inflation falling back lower for awhile.
totally agree - for all the talk about rates peaking, overshoots and commodity prices -- the inflationary pressure in goods and services have a huge way to go - most businesses have not fully priced in all their extra costs for a start - and will continue to lift prices
The impact of the war on grain, oil and other products has yet to really be felt -- and its not just this years crops -which are being burnt or not harvested -- its the following years that won't even make it into the ground -
Then there is he cost of climate change - that will also grow expoentially as its impact is felt more and more -- and i doubt even the greens have truly estimated what this will be -- but thats going to add to inflation for the next 20 years at least
Does anyone seriously believe that councils, utility companies shops anbd businesses are gogint o be reducing prices in the next 3 years ??? Yeah but Nah!!
There are two things you can take from the above article that few commenters are understanding.
1. High Oil prices cause demand destruction. Demand destruction kills growth and inflation.
2. Interest rates are set in the international bond market. If the international bond market decides there is demand destruction then interest rates will fall everywhere in the world.
If interest rates fall everywhere in the world, asset prices will go back up.
The 5 bidders on this place in Papatoetoe must think rates are on their way down again. More than 50% over reserve! https://www.oneroof.co.nz/news/41806
So a place selling for just over its Jun 2021 CV now warrants tears of joy and a OneRoof article?! How times have changed.
The only news here is that vendor was willing to accept $750K for a house with a $1.2M CV. Good on the vendor for selling now, rather than hoping prices will somehow rocket upwards again in the next few months.
If you look at REINZ prices, houses in Manukau had to fall 13% from their November peak to be back at their Jun 2021 CV. Nice to see this kind of fall being celebrated.
On the other hand, this house's CV looks insanely high so one can see why that is an unexpected outcome - or was that a realistic price for land in Papatoetoe in 2021? Anyway, even more amusing is the agent's blatant attempt on homes.co.nz to push up the houses' value (haha, as house price gets referred to in NZ) to 1.4 million: https://homes.co.nz/address/auckland/papatoetoe/173-portage-road/rg4g
Mind-boggling.
Inflation might retreat due to base effect but the global labour market should tell you inflation will require ongoing management. For the first time in two decades we are actually experiencing a competitive labour market that's starting to meaningfully push up wages.
Try going food shopping. Inflation is still high even if it is staying stable, petrol still over $100, NZD under .62 against USD this will keep inflation high. I don’t think FED will go back to money printing as US debt over 30 trillion they will probably run with hot inflation for number of years as good way for them to lessen debt burden. Rates will as stay around 3% in US for a number of years. Going back to low rates would just be end for USD a reserve currency.
Exactly!
Prices are high right now, they are the product of high inflation over the past 12-18 months. They could remain high, even increase a bit further over the next 12 months, but inflation from here could be low-moderate.
That's my pick - prices won't go down for most things, they will go up a bit more, but not much more.
Let's unpack this a bit more:
Rents - likely to be flat
Construction costs - unlikely to rise much more, it can't be sustained and construction likely to slump
Food - moderating
Fuel costs - moderating
Plus we haven't seen much wage inflation yet. Probably because we're only 12 months or so into increased inflation, with the first 2 quarters being below 5%.
Depending on how big the brain drain is, and how many migrants we bring in, will likely determine what wages do in the next 12 months. If we cant fill the holes, then wage price spiral?
Inflation is like at large ship you can try and stop it but it just keeps going, lots of people saying it was transitory we’re wrong hard to believe some people still believe it’s transitory. The FED admitted it was wrong about inflation now playing catch-up no way are they going to lower rates for a number of years even if we hit a recession.
Yes I think if rates do come down in 18 months it will be to OCR of about 2. I get the impression that some people think the OCR will go back below 1 again, this is very unlikely. The Covid emergency rates were a 1 in 50 years event and should not be expected to be within the normal range of rates. The discussion should be 'what will the OCR be between 1.75 and 4. A stable OCR of at least 2 would help avoid asset bubbles happening again.
Yes, he certainly is vested in more ways than one
I would say the 'rates have peaked' narrative is something he HAS to peddle now - especially to the "scores" of FHB that are 95% in debt thanks to Squirrel
I would imagine that all of these FHB's that are refinancing are facing some very hard debt affordability decisions and wondering how the let themselves get into this mess
https://www.stuff.co.nz/business/126088195/house-price-drop-may-test-ho…
'Squirrel’s chief executive John Bolton says he is unconcerned about how a potential house price drop could affect first-home buyers who have taken up his company’s offer of loans with 5 per cent deposit.
Mortgage broking firm Squirrel launched Launchpad in April, aimed at first-home buyers with good incomes but small deposits. It said this week it had helped “scores” of people on to the property ladder so far.
Loans are split into two parts – a 15 per cent loan financed by Squirrel’s peer-to-peer lending platform at a rate of 9.95 per cent, and an 80 per cent loan from non-bank lender Resimac at anything from 2.99 per cent to 3.39 per cent. The larger loan is kept interest-only at first to allow borrowers to pay off the more expensive loan first.'
Yvil - you're a commercial guy, so would you let your FHB child sign up to a Squirrel launchpad loan in a market that is now consistently falling?
5% deposit (from their Kiwisaver)
15% @ 9.95%
80% at choice of:
Floating: 5.09%p.a.
1 year fixed: 6.54%p.a.
2 year fixed: 6.44%p.a.
3 year fixed: 6.98%p.a.
The 80% is interest only for 5 years - so what have they achieved after 5 years of debt servitude?
He maybe an honest guy and doing nothing illegal but don't you think this is going to seriously end in tears?
He may have been able to claim last year that he didn't believe house prices would fall but to be still doing these loans is not responsible lending.
Why's he still doing it? Because he makes $$$k+ in commission each time.
I'm not accusing Bolton of dishonesty, Yvil. He is probably really smart and I'm glad to hear that you can vouch for his integrity.
The issue is that we all believe what we want to believe and hear what we want to hear. That is why understanding someone's vested interests are so important as it heavily influences his/her 'truth'.
No way
Deglobilization is building
AI solves nothing & is largely an ass
Job growth remains strong in the US hence the FED will continue to tighten
The geopolitical situation is woeful with Russia & China combined in an offensive against the west
If the above doesn't undermine the western economy then the earth's increasing methane retention will
There is no such thing as transitory inflation if the prices don't then come way back down to where they started from. If anything above the target band gets baked in then it wasn't transitory. I just cannot see prices dropping again at the end of this and is the end even in sight yet ?
Well it's not. I'm used to a transient in electronics terms and that's a spike and a return to normal. If you get 10% inflation and the band is 2 to 3% then you going on need inflation back to 1% to 2% for a hell of a long time to kill what damage that's done or else prices will remain permanent and that's not transitory. It's a bullshit metric in the economy so you can say after massive price increases its now okay because it's down to 3% again so it's all good now ? Bullshit.
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