90 seconds at 9 am: Big week, key data

US credit card delinquencies rise; Canada house sales fall; China banks stem rise in bad loans, struggle with deposits; India FX reserves jump; eyes on NZ data; UST 10yr yield at 2.20%; oil up, gold down; NZ$1 = 73 US¢, TWI-5 = 74.9

18th Sep 17, 7:00am by David Chaston

Here's my summary of the key events over the weekend that affect New Zealand, with news ahead of a big local week.

Firstly in the US, banks who are already under pressure from slower loan growth and low interest rates, could be facing yet another challenge as a rising number of Americans fall behind on their credit card payments. (p3)

In Canada, August residential house sales were down -10% year-on-year (compared with our -20% drop).

In China, their banking regulator said the bad loan ratio of Chinese commercial banks stood at 1.86% at the end of August. That is the first decline since 2012, and is something they need to repeat to get on top of their excessive debt problem. (In New Zealand, that ratio is very much lower at about 0.6%.)

However, Chinese banks face a growing challenge in attracting deposits, forcing them to resort to less stable and more costly interbank borrowings as well as off-balance wealth management products. Deposits have been steadily falling and now account for just 61% of banks’ total liabilities and equity as at June, down from 78% in 2008. (In New Zealand that ratio is also 61% as at June 2017 and has held steady at that level over the past few years.)

We all know about China's US$3 tln foreign currency reserves which have fallen from US$4 tln, but have been holding stable at the lower level for most of 2017. But the up-and-comer is India, whose foreign currency reserves are growing quickly and have just reached US$400 bln for the first time. Ten years ago, it was half that level, and in 2017 it has risen fast, up from just over US$350 bln.

In Russia, their central bank has cut its key policy rate again as inflation hits a record low, of +4%. That is the fourth rate cut this year, to 8.5%. The country's economy is struggling as their recession lingers on, with a lack of structural reforms making recovery uncertain.

In Argentina, they have just approved a new government budget, and that is targeting a surprisingly strong real growth rate of +3.5%. They have done some hard, painful yards there recently after an embarrassing default in 2002 which wasn't resolved until last year. But growth is definitely back on the agenda in Argentina. However, inflation is still a big problem - it is still expected to be about +16% next year.

This coming week will be a big one for economic data and signals in New Zealand. We have another dairy auction on Wednesday, NZ GDP data on Thursday along with the next US Fed policy review, all right before Saturday's election. Markets are expecting solid New Zealand growth of +2.5% in the June quarter, although there may be some upside here. Westpac is picking +2.8%, as is ANZ.

In New York, the UST 10yr yield held on Friday and is still at 2.20%.

The price of crude oil has risen again and is now just slightly under US$50 a barrel, while the Brent benchmark is just over US$55.50.

The price of gold is down -US$3 at US$1,321/oz.

And the Kiwi dollar rose as last week ended in New York, and now just under 73 US. On the cross rates we are at 91.1 AU¢ however, and 61 euro cents. And the TWI-5 index is now at 74.9.

If you want to catch up with all the changes on Friday 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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Source: RBNZ

Source: CoinDesk

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16 Comments

by Stephen Hulme | 18th Sep 17, 9:04am 1505682272

While the continued growth in debt in zero interest rate world is hardly surprising, what was notable is that debt within the developed world appeared to have peaked, if not declined modestly in the latest 5 year period. However, it now appears that contrary to previous speculation of potential deleveraging among EM nations, not only was this conclusion incorrect, but that developed nations had been stealthily piling on just as much debt, only largely hidden from the public eye, in the form of swaps and forwards.

According to a just released analysts by the Bank of International Settlements, "FX swaps and forwards: missing global debt?" non-banks institutions outside the United States owe large sums of dollars off-balance sheet through instruments such as FX swaps and forwards. The BIS then calculates what balance sheets would look like if borrowing through such derivative instruments was recorded on-balance sheet, as functionally equivalent repo debt, and calculates that the total "is of a size similar to, and probably exceeding, the $10.7 trillion of on-balance sheet dollar debt", potentially as much as $13-14 trillion.

The BIS then provides substantial background data on who, where and how uses FX swaps (as both a lender and borrower), as well as where this "missing debt" can be found when looking away from the balance sheet. Here are the details:

Could NZ Treasury involve itself in such activities? It's time to open up the government's off-balance sheet exposures so the citizens can review what they are actually underwriting with their taxes today and in the future.

by David Chaston | 18th Sep 17, 8:39am 1505680750

We chart that for New Zealand here.

What that shows clearly is that 2017 levels are less than half the levels they were prior to the GFC (when interest rates were very much higher). So, in NZ lower interest rates have brought substantially lower exposure to forwards and swaps, not more.

by Stephen Hulme | 18th Sep 17, 9:01am 1505682091

I am only interested in specific counterparty details. That is why the off-balance sheet books have to be opened.

by bw | 18th Sep 17, 8:42am 1505680973

" stealthily piling on just as much debt, only largely hidden from the public eye, in the form of swaps and forwards."
This has been going on, to my knowledge, since the early '80s. That it hasn't been accounted for/ reigned in is astounding. Back then the tax incentive was the motive ( interest was taxable; forward margins weren't ). I'd wager the motive is just the same.....

by Stephen Hulme | 18th Sep 17, 9:52am 1505685167

I'd wager the motive is just the same.....

Similar motive, different currency and client.

To avoid the strictures of Sharia Law Middle Eastern clients bought spot gold and sold it forward

by Stephen Hulme | 18th Sep 17, 8:36am 1505680575

In Scramble To Explain Bitcoin, BIS Unveils "A New Taxonomy Of Money" In Three Charts

by dictator | 18th Sep 17, 10:30am 1505687403

This is the chart that explains bitcoin most effectively (from the perspective of another online community).

http://ep60qmdjq8-flywheel.netdna-ssl.com/wp-content/uploads/2013/11/bi…

by Conrad | 18th Sep 17, 11:15am 1505690130

Magnificent, although I'm guessing there's a whole bunch of people who sit in the overlapping central bit.

by dictator | 18th Sep 17, 11:47am 1505692051

Bitcoins and the like attract some of the worst people on top of those that have no idea what they are doing. The main forum bitcointalk is full of people pumping up crypocurrencies and have done so for years. It's somewhere between pump and dump, and a bubble with large numbers of clueless people getting involved.

There's a lot of trust involved when there shouldn't be.

by Stephen Hulme | 18th Sep 17, 9:35am 1505684148

Firstly in the US, banks who are already under pressure from slower loan growth and low interest rates, could be facing yet another challenge as a rising number of Americans fall behind on their credit card payments.

Hmmmm....maxed out?

Retail sales were again very concerning in August. The problem is that sales have lagged for much more than just last month. Year-over-year unadjusted total retail sales rose by 3.53%. The 3% level is more recession than recovery, and 6% used to be something of a floor for conditions consistent with regular and healthy economic growth. That low growth rate in August follows a significantly lower revision to July (mostly autos) where the Commerce Department now thinks retail sales expanded by less than 3% (2.90%). Read more

by dictator | 18th Sep 17, 10:41am 1505688087

When I first started helping people online with their debt problems was around the time when a lot of problems started appearing. That was around 2010/11. We probably have another year before I start helping a lot of people in the US again.

That said people are pretty bogged down with debt in the US. Between their 3-6% student loans, car payments and 6-12 credit cards they are buried. The new version of the MBS is based not just on mortgages but on car loans, student loans and credit card debt. While people maintained credit card payments and chose to default on their house this time around might not be so good. If the investors buying these securities think they are diversified they are wrong. These debts are not independent and despite the fact that their student loans cannot be written off via bankruptcy that doesn't mean people will be able to pay.

Good luck to whoever's pension fund is buying those securities.

by murray86 | 18th Sep 17, 10:31am 1505687489

The deposit issue in China - doesn't that affect most banks? If people aren't saving, where do they get their money from?

by dictator | 18th Sep 17, 10:43am 1505688224

Slightly different in China. People like to save 30-50% of their income as they don't trust the Government to support them. They also don't trust the Government and suspect that it could take away their money at any time. With all the bad loans they are making (based on social standing or connections rather than ability to pay) why would anyone trust their bank?

by murray86 | 18th Sep 17, 11:32am 1505691134

Ironic that they don't trust the Government but need to put their money in the PBOC? Opens the door to a rampant black market?

And for below thanks Stephen. It seems the Chinese are still diging themselves a hole one way or another.

by dictator | 18th Sep 17, 11:49am 1505692172

There's a reason why you can get a good deal at a shop if you pay in USD.

by Stephen Hulme | 18th Sep 17, 11:15am 1505690133

The past few months have seen the PBOC’s balance sheet still bleeding forex assets (“dollars”). Since the end of April (through the end of July), another RMB 102 billion has left the central bank’s books. That’s a far lower rate of decline, of course, but hardly what one might think of in light of CNY’s rocket appreciation during that time. It’s the primary clue that the currency move is artificial, an attempted manipulation rather than “dollar” market healing.

It is almost certainly the case where policy is attempting to lead the market where it wants the market to go. If currency instability to the downside was the measure and signal of “outflows” and the risks related to them, then shoving the exchange rate upward in a vulgar display of power might do well to convince “dollar” lenders that it’s safe to go back into to China. It’s certainly meant as an enormous “we’re back open for your business” gesture.

The reason the Chinese want more “dollars” is that they have pushed the limits of current internal policy. Starting in early 2016, the central bank shifted to cushion the downward monetary effects of “dollar” outflows by opening several liquidity conduits available largely to the largest banks. It was never quite enough, especially in the back half of last year when money rates started to rise.

There is nothing of actual practice that prevents the PBOC from simply “printing” RMB in greater amounts than they have done. Should they wish, they could. The fact that they haven’t, however, demonstrates fully that the Chinese remain tied to the “dollar” no matter how many times they might make noises about getting away from it.

Rising CNY as a “dollar” tactic in theory if it worked would mean “dollar” inflows again, likely heavy, which would then expand the PBOC’s asset side as a matter of natural flow. The increase in forex assets would therefore give it the flexibility on the money side (liabilities) to achieve calmer, less blatantly problematic RMB conditions both inside and outside of the big banks. Read more