Economy Watch

Interest.co.nz / Podcasts NZ, David Chaston, Gareth Vaughan, interest.co.nz

We follow the economic events and trends that affect New Zealand.

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Sep 2, 2024 • 5min

Imre Speizer: What to expect from interest rates and the NZ dollar over coming months

With US Federal Reserve Chairman Jerome Powell signalling interest rate cuts ahead, the US dollar's likely to weaken with the Kiwi dollar rising against it, Imre Speizer, Head of NZ Markets Strategy at Westpac Institutional Bank, says.Speaking in a new episode of the Of Interest podcast, Speizer says although the expected central bank interest rate trajectory is very similar in NZ and the US over the next 12 months, financial markets will focus much more on the US."If the two racehorses go neck and neck, that should probably be neutral for the Kiwi dollar. [But] I don't think it will be, because the market will put a lot more importance on the US side of things. So even though the yield spread between New Zealand rates and US rates might not move too much, just the fact that the Fed is cutting aggressively will actually weigh on the broader US dollar," Speizer says."So you'll get the market selling the US dollar against all of the major G10 currencies and that will have a ripple effect into the Kiwi-US exchange rate... And therefore, if we see that US dollar weakening, which is our view over the next few quarters, you should see the Kiwi-US, all things equal, rising a bit."Speizer also expects local swap rates, already down significantly over the last couple of months, to continue falling."The swap rates are going to fall a bit further over the next few quarters, and that's simply mechanical. So even if views around the economy don't change, the markets have already priced in this whole easing cycle. So think of it as they're priced in, they know the Official Cash Rate is 5.25% today. They believe it'll be below 5% by the end of the year. And in a year's time, into the threes [3% range], that's already priced in," Speizer says."So as you move forward in time, those high OCRs drop out of the calculation of a swap rate and you just mechanically end up with a lower rate. So even if nothing in the world changed, you would see, for example, that two year swap rate moving from its current rate of about 3.85% down towards somewhere in the lower threes over time. So that's just time and the mathematics doing its work. It's not really the market moving as such.""Swap rates are very important in the New Zealand financial markets. They're arguably the most important interest rate instrument. Whatever swap rates do, other interest rates will follow. So, for example, if your two year swap rate went up by 100 basis points, you would find mortgage rates following suit, other business lending rates, bond yields, pretty much anything. They are the foundation of all interest rates in New Zealand. And the swap rates themselves are constructed by expectations of the OCR mostly," says Speizer.In the podcast audio he also talks about what in Powell's Jackson Hole comments surprised financial markets, what to watch ahead of September's Federal Open Markets Committee meeting, OCR market expectations, what the yield curve is telling us at the moment, how commodities might start to exert more influence on exchange rates, the NZ government bond market following the issuing last week of a $6 billion bond that attracted record interest of $22.7 billion, the yen carry trade, Australia, China, geopolitical risk, and where he sees the NZ dollar at year's end.

Aug 25, 2024 • 6min

Fickle markets accept a global soft landing has been achieved

Kia ora,Welcome to Monday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.I'm David Chaston and this is the international edition from Interest.co.nz.Today we lead with news it seems the global soft landing has been achieved.But first, the week ahead will feature some chunky economic data from the world's largest economies but no first-tier data. This seems befitting of the final week of the summer break in the northern hemisphere when end the week with long weekends in the US and Canada (Labor Day). Then after a northern summer of fickle markets, it will be back to normal market trading. That often sets the tone for the rest of the year.In the US it will be headlined with durable goods orders, another Q2 GDP estimate which is expected to show an improvement, and some sentiment indexes. In China, it is industrial profits data and August PMIs at the end of the week India chimes in with Q2 GDP. And Australia with its monthly inflation indicator.Japanese CPI inflation was at 2.8% in July from a year ago, holding steady for the third straight month while remaining at its highest level since February. Electricity prices jumped, and other fuel costs rose too after the full end of energy subsidies in May. However costs fell for education and communication. Meanwhile, their core inflation rate hit a five-month high of 2.7% in July. Monthly, the CPI rose by +0.2% in July, the least in three months, after a +0.3% gain in June.In his testimony to the Japanese Parliament, the central bank boss kept future rate hikes in play this year by turning a potentially messy parliamentary hearing into a relatively straightforward reiteration of policy. These were his first public remarks following recent high volatility on equity markets. Since, things have settled nicely in his favour.Taiwanese retail sales rose +3.4% in July from a year ago, a slight slowing of the pace of increase from June. Meanwhile their industrial production rose a very strong +12.3% in July on the sale basis, much of it due to strong international demand. This is a big turnaround because you might recall that a year ago it was contracting under election uncertainty and PRC pressure.In China, they have suddenly closed its process for approving new steel plants. That comes after widespread negative global reactions to dumped steel products after a deep slump in local demand. In the past required Beijing authorities required the elimination of existing capacity before approving new plants. Those rules no longer apply. No new steel capacity will be approved.China's economic stumbles are having no global impact.In the US in his widely anticipated Jackson Hole speech, Powell gave the financial markets clear signals, and they reacted accordingly. He indicated the central bank will cut its interest rate in the September 19 meeting (NZT) noting that the US labour market is cooling quickly following the softer jobs report in July and the downward revision to payrolls this week. He also said the FOMC has gained further confidence that inflation is slowing to their 2% target, warranting a clear view that it is time to adjust monetary policy to less restrictive conditions.The USD sank, equities rose, and bond yields eased a bit more than was already priced in.This week's upcoming PCE inflation gauge (expect 2.6%, down from 3.4%) is widely expected to confirm the Fed's expectation that inflation is tracking as they need it.Meanwhile American new home sales surged +10.6% in July from the previous month to an annualised rate of 739,000, well above market expectations of a +1% increase. It was the sharpest increase in sales since August of 2022 and the highest number of homes since May 2023 and the July level is +5.6% higher than the same month in 2023.In commercial property markets things are getting decidedly tough in the US. A big-money-backed commercial property fund has suffered another fierce ratings downgrade, by Moody's, in fact to the lowest junk rating possible, 'C', a fast downgrade from an earlier August re-rating.Canada's rail lockout has ended quickly with an Ottawa central government intervention to block the employer action. But just as they did the union filed notices of strike action on their part, to start Monday (Canadian time).Meanwhile after two months of dips in May and June, Canadian retail sales rose in July in a +0.6% month-on-month jump, but to be only +0.2% higher than a year ago.Canadian manufacturing sales also rose in June, better than expected.In Australia, their "right to disconnect" law comes into effect today. Employees can ignore contact from the boss outside business hours, except where that is unreasonable. The problem is, the law is silent on what is "unreasonable". So its going to be messy until that is clarified, and that will probably require expensive litigation.The UST 10yr yield is still at just on 3.80% and unchanged from Saturday. The price of gold will start today up +US$2 from Saturday at US$2512/oz. That is below its August 23 record high of US$2514/oz.Oil prices are holding just under US$75/bbl in the US while the international Brent price is now just under US$78.50/bbl.The Kiwi dollar starts today still up after its Saturday jump at 62.3 USc. Against the Aussie we are still at 91.7 AUc. Against the euro we are still at 55.7 euro cents. That all means our TWI-5 starts today at 69.9.The bitcoin price starts today at US$64,173 and up a sharpish +6.4% from this time Saturday. Volatility over the past 24 hours has been low however at just on +/- 0.7%.You can find links to the articles mentioned today in our show notes.You can get more news affecting the economy in New Zealand from interest.co.nz.Kia ora. I'm David Chaston. And we will do this again tomorrow.

Aug 22, 2024 • 5min

August PMIs mostly positive

Kia ora,Welcome to Friday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.I'm David Chaston and this is the international edition from Interest.co.nz.Today we lead with news financial markets in the US have the jitters ahead of a key speech by Fed boss Powell tomorrow at the Jackson Hole central bank shindig. Equities fell, bond yields rose, and the USD firmed and expectations grew Powell will make the case for only a gradual pace of rate cuts.Meanwhile, US jobless claims actually fell last week and by about what was expected. But the seasonally-adjusted level rose and that wasn't expected and that grabbed the headlines in the absence of any other major economic news. There are now 1.86 mln people on these benefits, also a fall.The 'flash' US PMIs from S&P/Markit shows their factory sector contracting slightly but their services sector expanding faster. New order levels are problem for their manufacturing sector. But service sector activity grew at a solid and increased rate in August, and because that sector is far larger than the factory sector, that points to robust GDP growth in excess of 2% annualised in the third quarter, which should help allay near-term recession fears.The Chicago Fed's National Activity Index for July basically confirmed the manufacturing slowdown.But the Kansas City Fed factory survey held on with an improvement in August, showing there are some regions still improving in their manufacturing sector.Also improving were the July existing home sales which rose modestly at about the expected level and that ended a four month retreat. But despite that, the sales volume levels essentially remained at the low levels they have had since early 2023. And on a broader perspective, sales volumes at this level were first achieved in the mid-1970s, and were the levels in the GFC. So July's rise is a very low bar.In Canada (and the US), all eyes are on a stoppage in their key rail network due to industrial action. It is a lockout, and it will have many spillover impacts in both countries.In India, the expansion rolls on for both their factory and services sectors in an impressive way, with them shrugging off capacity issues in their factory sector with a notable rise in job creation. 'Growth' is creating many more employment opportunities.In Japan, although it rose, its August factory PMI is still contracting, slightly. On the other had Japan's service sector is expanding at a good rate. That is the seventh consecutive expansion in their services sector.In China, Reuters is reporting that regulators there will likely impose a six-month business suspension on a big part of PwC's auditing unit in the mainland as a penalty for its work on troubled property developer Evergrande.In Europe, business activity rose at faster pace in August, but the rate of new order intake continued to ease. The uptick in business activity is largely due to the Paris Olympics however, so that probably won't last.In Australia, their August PMI's sort of mirrors Japan but at a slightly lower level. The factory PMI is up but still contracting. Their services PMI is expanding although only at a modest rate.Global container freight rates slipped another -2% is a continuation of the minor moves down from the extreme July heights, with the basic pressures unresolved. These rates are still almost three times higher than pre-pandemic and pre-canal-pressure levels. There is no real sign of a proper normalising. Bulk freight rates rose slightly last week.The UST 10yr yield is now at just on 3.86% and up +8 bps from this time yesterday.The price of gold will start today down -US$27 from yesterday at US$2482/oz.Oil prices are recovered yesterday's US$1.50 drop, now back at US$73/bbl in the US while the international Brent price is now just under US$77/bbl.The Kiwi dollar starts today down -30 bps from yesterday at 61.3 USc. Against the Aussie we are up +10 bps too at 91.5 AUc. Against the euro we are still at 55.3 euro cents. That all means our TWI-5 starts today at 69.4 and little-changed.The bitcoin price starts today at US$60,305 and up +0.7% from this time yesterday in its recent yoyo pattern. Volatility over the past 24 hours has been modest at just under +/- 1.6%.You can find links to the articles mentioned today in our show notes.You can get more news affecting the economy in New Zealand from interest.co.nz.Kia ora. I'm David Chaston. And we will do this again on Monday.

Aug 21, 2024 • 5min

NZ might benefit from an EU-China dispute

US jobs growth not as strong as first reported. Fed minutes confirm likely September cut. China threatens the EU on dairy trade.

Aug 20, 2024 • 25min

John Small: The 'faster, safer, cheaper' banking experience of the future

The process of growth will be the main benefit from a scaled up Kiwibank, while public acclaim will be a key measure of open banking's success, Commerce Commission Chairman John Small says.Small spoke to interest.co.nz for the latest episode of the Of Interest podcast, which will be published later on Wednesday. The interview came after the Commission released the final report from its market study into personal banking services. The Government says it'll act on all 14 recommendations from the report.Speaking in a previous Of Interest podcast episode, after the Commission's interim report was issued in March, Small said the most important of that report's 16 recommendations was; "The Reserve Bank should review its prudential capital settings to ensure they are competitively neutral and smaller players are better able to compete."So why is that recommendation gone from the final report?"We still feel that there's aspects of the regulatory regime that could be improved to promote competition. We've just, I suppose, got a bit more refined about how we're suggesting that that happens. And we've keyed in, particularly to a number of programmes of work that the Reserve Bank already has underway. So we've made a fairly broad overall suggestion about how the bank thinks about competition, which is essentially that we would like them to put a bit more focus on barriers to entry and expansion, so that it's more easily able for small players to get into the market, particularly the kind of players that we expect to be able to disrupt this industry who don't look like the traditional banks," Small says."Another one that applies more to the traditional banks is to think about the way that risk weights are calculated for reasonably standardised loans and make that more granular...so there's less averaging involved. It's a better, it's a more accurate, representation of risk and it gives them the ability to price loans differently depending on just how risky they are."A helping hand for community housingThe Commission's also calling for the Reserve Bank to reduce the risk rating of lending to housing co-operatives and community housing providers to lower, and more accurate, levels. This is currently treated as commercial lending rather than housing lending.Risk weightings are used to link the minimum amount of capital banks must hold, with the risk profile of the bank's lending activities."The work around mortgage advisors is also more nuanced, I should say, [is] probably the way to put it. We found out quite a bit about the mortgage advisor sector after the draft report and we had some of them around at our consultation conference... We [also] took some soundings in Australia about how their mortgage advisor sector works," Small says.'The process of growth'On the recommendation to scale up Kiwibank by getting it access to more capital, Small says the main competitive benefit "is about the process of growth rather than what happens once they're big.""So we want them to be taking chunks of market share out of the big four on their way up, and for that to provoke a competitive reaction from the larger banks.""What will really matter will be them [ANZ, ASB, BNZ and Westpac] perceiving a real threat of losing share, because that is what will stimulate them to fight back," Small says.'Interesting stuff' from Westpac NZ's CEOThe Commission also calls for the acceleration and co-ordination of progress on open banking. In the podcast Small talks about lessons from the United Kingdom and hearing "some real interesting stuff" from Westpac NZ CEO Catherine McGrath. Prior to taking the Westpac job McGrath worked for Barclays and was involved in a Competition and Markets Authority open banking committee in the UK."We're just copying what we can, ruthlessly copying what we can," Small says. "So, you know, I absolutely grant you that in terms of overall open banking as distinct from payments, it hasn't been a roaring success in either of those places [Australia or the UK]. I think we can learn from both of them and do it a lot better."Better bank switching desiredThe Commission also says the bank switching service, operated through the bank-owned Payments NZ, needs investment and improvement."We were a bit surprised, to be honest, when we visited the headquarters of the big banks and asked them about this service and asked them in particular, 'if I was to come in off the street as a customer of someone else's bank and was interested in converting to you, would you recommend that I use this service?' And generally speaking no, they wouldn't.""And they don't ask their staff to recommend that. So that tells me that it's obviously not being promoted. I think it could be improved, the actual functionality could be improved, it needs to be more visible and known and also they need to report on its usage, its success rates, what people think about it, and just that sort of basic transparency hygiene system would be very helpful indeed," says Small.In terms of how open banking's success could be measured, Small suggests public acclaim is one way."I think if ordinary people on the street see it as being useful and working for them, then that's a great indicator...I would like to see it taking market share off the banks. Definitely. I'd like to see more variety of services out there and definitely like to see government agencies using it, because I think that's an important driver of success."A message for consumersAnd what's Small's message for bank customers?"My message is you really should shop around. I don't like to just put everything back onto the consumers, but consumers can get better deals than I was aware of before I started this market study. For example, mortgages. You can usually drive a better bargain than you see on the headline [interest rate]. So shop around and be a savvy consumer.""Also stand by and keep your eyes open for the innovation that we think is going to come. Some of this, by the way, is going to require change by consumers. There are a bunch of people out there, quite a large number of people in New Zealand, that are using somewhat dangerous banking technology that involves handing over their login details to a third party provider. We think that's something that has to be phased out. It's just dangerous. It's putting people at risk. So we think that what's coming up is going to be faster, safer, cheaper. Yeah. It won't happen tomorrow, but it will be here within 18 months or two years, I think."What about splitting up the big banks?Speaking earlier Wednesday Small said the Commission had considered recommending splitting big banks up."We did think about that, but we came to the view that the structure can be changed, the market structure can be changed through the two main levers that we're suggesting. One is a growing Kiwibank, and the main point about growing Kiwibank is that it will destabilise the big four as it grows. And then secondly, with open banking coming in, behind these are new business models that are not the same as the existing [ones]. And I think our view is that that's more disruptive and more enduring disruption, and more competitive innovation."The Commission's final report is here.*You can find all episodes of the Of Interest podcast here.

Aug 20, 2024 • 5min

The global economy delivers summer gains

Kia ora,Welcome to Wednesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.I'm David Chaston and this is the international edition from Interest.co.nz.Today we lead with news the northern summer is delivering positive economic vibes.But first up today, the expected rise in dairy prices at today's full dairy auction actually came in slightly better than expected. In USD prices were up +5.5% with the key WMP price rising +7.2% and SMP up +4.0%. Volumes sold were elevated. But in NZD the gains were not as strong, up +2.3% as the Kiwi dollar has been strengthening lately.. Today's result could keep that going. China and other north Asian buyers were prominent bidders, making this the biggest rise since March 2021. But having said that, overall prices are still only back to June 2024 levels so really it is only a short-term recovery.In the US, retail sales at physical stores were up +4.9% last week from the same week a year ago, reinforcing the rise in retail confidence.In Canada, CPI inflation fell to 2.5% and a three year low. Actually there is no surprise here because that was what their central bank predicted for H2-2024 when they trimmed rates at the end of last month.Taiwanese export orders rose a very healthy +4.8% in July from a year ago, up from a +3.1% increase in the previous month and exceeding market forecasts of a +2.6% rise. The increase was driven by continued strong demand for AI chips but elsewhere demand was also quite broad. There has been a good turnaround in 2024 because a year ago these export orders were retreating.China held its Loan Prime Rates unchanged in August, as expected, after the cuts in July. The 1-year loan prime rate (LPR) is still at 3.45% while the 5-year rate was retained at 3.85%. Both rates are at record lows following unexpected rate moves down in July.And China has approved a record increase to their nuclear power plant expansion, signing off on eleven new facilities to be built. Each one costs NZ$4.5 bln. This adds to the 55 nuclear power plants already active, not including the ten approved in 2023 and not yet commissioned. They see this as a central element of their drive for "clean and stable energy sources".Turkey held its official interest rate at 50% in their overnight review. You may recall a year ago they had been battling ~70% inflation using an odd Erdogan-inspired approach. But that clearly wasn't working so a more conventional policy was adopted raising their policy rate from 6.5%. It is now bringing results with inflation easing from 75% in May to 62% in July in a notable drop.German producer prices are still deflating, although 'only' at -0.8% from a year ago, half the July rate of decline. Lower energy costs are the key driver here so actually they will like this result.Sweden cut its official interest rate by -25 bps to 3.50%, and signaled two or three more similar cuts this year are likely should inflation develop in line with the central bank’s outlook. It was the second rate cut of the cycle, easing further from the 4% interest rate first reached in September 2023.The RBA released the minutes of its August 6 meeting (what takes them so long?) and those warned of upside risks to inflation and therefore monetary policy. The risk of inflation not returning to target within a reasonable timeframe had increased, those minutes showed. The situation came amid the slow pace of disinflation, signs that the gap between aggregate demand and supply was larger than previously anticipated, and the upward revision to the forecast for final demand. Markets didn't react immediately to the 'warning'.The UST 10yr yield is now at just on 3.83% and down -4 bps from this time yesterday. The price of gold will start today up +US$9 from yesterday at US$2511/oz.Oil prices are down -50 USc at just on US$73/bbl in the US while the international Brent price is now just under US$77/bbl.The Kiwi dollar starts today up almost another +½c from yesterday at 61.4 USc. Against the Aussie we are up +½c too at 91.2 AUc. Against the euro we are up +20 bps at 55.3 euro cents. That all means our TWI-5 starts today at 69.3 and up +30 bps from yesterday.The bitcoin price starts today at US$58,833 and down -0.7% from this time yesterday. Volatility over the past 24 hours has been moderate at just over +/- 2.3%.You can find links to the articles mentioned today in our show notes.You can get more news affecting the economy in New Zealand from interest.co.nz.Kia ora. I'm David Chaston. And we will do this again tomorrow.

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