Here's my summary of the key events over the long weekend that affect New Zealand, with news China's growth returns.
First up, in the US ports there are reporting a strong rise in trade. The California ports of Los Angeles and Long Beach, each said they imported a combined a +26% increase over the same month last year and a +13% rise from February. Together, these are the largest seaport system in the country and focus on the China trade.
However, American retail sales fell for a second straight month in March and consumer prices dropped for the first time in just over a year. You have to wonder if the Americans are picking up the effect of the online shift in their retail sales - or whether the stall is more to do with evaporating margins from traditional retailers, rather than a volume fall. But with their labour market near full employment, these weak reports failed to change views that the Federal Reserve will raise interest rates again in June. Economists expect a rebound in both retail sales and monthly inflation.
American demand may be one reason the Chinese economy is humming along. It grew officially by +6.9% in the first quarter from a year earlier, slightly faster than expected. Other supports are a government infrastructure spending spree and a frothy housing market that is showing signs of overheating. Electricity production was up +6.7% (with more brown coal mined), and retail sales rose +10.9%. (The online component was up a staggering +32% year-on-year.) The new aspect here is the surprising strength of the Chinese consumer.
But the costs are high. Beijing was hit by the rare combination of a sandstorm and smog on yesterday, creating a cocktail of air pollutants that shrouded the city’s skyline in a thick brown haze.
In Australia, it is becoming clear that the RBA is lining up with ASIC and APRA, increasingly worried over bank lending standards. Their Financial Stability Review also made a point of the special risks their banks have in New Zealand (p 11). They also point out that in Australia, around one-third of borrowers have built either no financial buffer or a buffer of less than one month’s repayments (p 21) and this group will quickly become a financial system problem if stresses rise.
In New York, the UST 10yr yield is lower again at 2.26%. However it did get down to 2.20% over the weekend and is back rising this morning.
Oil prices are down a little today and now just over US$52.50 for the US benchmark, while the Brent benchmark is now just under US$55.50 a barrel. They fell after the failed North Korean missile test, And new data that showed a higher US rig count
The gold price has pushed up even higher to US$1,290/oz.
However the New Zealand dollar will start pretty much unchanged at 70.2 USc. On the cross rates the Kiwi dollar is at 92.3 AU¢ and against the euro we are at 65.9 euro cents. The NZ TWI-5 index is now at 75.1.
If you want to catch up with all the changes yesterday, we have an update here.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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They also point out that in Australia, around one-third of borrowers have built either no financial buffer or a buffer of less than one month’s repayments
Anyone else get a horrible chill up the spine as they read that? Then turning to page 10...
New Zealand housing prices now average about 6½ times annual average household disposable income, which is very high by international standards (Australia’s internationally comparable ratio is currently
around five, though making international comparisons can be difficult; Graph 1.8).
Be afraid - very afraid. I recommend anyone of a nervous disposition avoid Graph 1.8.
OU... I agree .. price to income is a very loose metric...
I think it is nonsense when people say it should be this or that.
I think it is a nonsense to suggest it is akin to "gravity"
It is just a metric amongst many others..
There is no economic law that says it should be 3..4...or 5...???
Maybe, in a global world ... 6 is normal, in a city like Auckland ..?? who knows..
First, the graph is not Auckland, it is all NZ. Second, regardless of whether there is a "new normal" or a permanently high plateau (https://en.wikipedia.org/wiki/Irving_Fisher), what possible justification is there for NZ to be higher on this metric than all other developed economies?
Where is the RBNZ's DTI limit proposal? It was due in March!
The RBA says about NZ: "the investor share of all new loans has been high (peaking at just under 40 per cent in mid 2016). This presents additional risks, because high DTI borrowers are less resilient to income or interest rate shocks".
You have to wonder if the Americans are picking up the effect of the online shift in their retail sales - or whether the stall is more to do with evaporating margins from traditional retailers, rather than a volume fall.
Possible. And yet:
The acceleration in sales through online outlets seems also to have plateaued if not peaked. Retail sales to non-store retailers were up almost 15% in January, but just 7.3% (revised) in February and 11.4% in March. Department store sales fell 5.2% last month, which was actually a good month for the segment. Overall, non-store sales plus those through general merchandisers rose just 4.6% in Q1. Like retail sales overall, that is only about half of the growth rate we would expect to find where consumer spending wasn’t an immediate problem.
Without any measurable (calendar effects aside) change in the condition of US consumers, it can only contribute to the rethinking of “reflation” optimism that was summoned on something being different (or at least the hint of it by now). More and more without meaningful improvement actually showing up, it falls to nothing but projections of the expected positive effects of still non-specific policies that may not have had much of a chance to succeed in the first place.
That is because the economic rut is not just this year as compared to last year, or even the last three years of the “rising dollar”, but one that goes on for almost a whole decade backwards in time. And without truly radical action rather than the cosmetics of “rate hikes” or even tax reform, there is a far, far better chance that it continues for another decade than it doesn’t. Read more
Interested to know what you made of that lumber/Eurodollar chart. You may have missed it, it was buried in a reply to your post here:
http://www.interest.co.nz/opinion/87053/david-hargreaves-would-seen-any…
Hi Roger, I have never traded lumber in my life, but previously had a seriously large trading relationship with Eurodollar futures in the form of creating synthetic FRA stacks to arbritrage OTC IR swap positions and straight out hedging against Treasuries, thus exposing myself and the bank to massive basis risk but nonetheless, a better offset than none over a few hours.
I cannot perceive a rising net long Eurodollar open interest position, which is presumably indicative of falling future short interest rates and more negative IR swap rates, as a precursor of higher economic growth and hence demand for lumber other than for speculative overbuilding projects using cheap cost of capital as justification. Falling forward interest rates generally signify poor forecast opportunities to employ capital beyond financial instrument investments to generate productive growth.
Another possible factor to take into consideration is the trading volume differences between Eurodollar futures and commodity derivatives.
COMMODITY $ VALUE OF TOP FIVE BIDS
Feeder Cattle $1,000,000
Live Cattle $2,000,000
Corn $20,000,000
Eurodollar [interest rates] $100,000,000,000
(HT to another comments participant.)
Got a great investment for your 1.6 mill.
http://i.stuff.co.nz/business/91510916/golden-bay-couple-transform-thei…
I am still struggling to get a handle on whats really going on with regards to China's economy .
One week we see negative news that seems ominous , this week we see a huge growth in domestic consumption spending .
One must just hope and trust the CCP knows what they are doing , and so far they seem to have got things right ............. or have they ?
It's a command economy with no checks and balances.
The judiciary is appointed by the party, the companies are owned by the party, the currency is controlled by the party, all land is owned outright by the party, all layers of government are appointed by the party.
And those tasked with "economic reporting" exist at the largesse of the party.
The whole thing is very opaque.
Wow have you see n the Graph 1.8 ( Page 7 ) in the Financial Stability Report , NZ is in the same sour spot as Ireland was in 2008 .
Lest we forget , the Irish housing crisis did not end well at all , even though the circumstances were very different ..
Whatever the outcome , we cannot carry on the way we are right now , without some unpleasant consequences
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