A review of things you need to know before you go home Wednesday; no rate changes, no risk premium, negative productivity, pipeline flows, Sydney construction boom, China profit surge, swaps and NZD stable

Here are the key things you need to know before you leave work today.

MORTGAGE RATE CHANGES
No rate changes today.

DEPOSIT RATE CHANGES
We have added the NZ Firefighters Credit Union to our coverage and monitoring.

'WOT, ME WORRY?'
With a hung election result, a caretaker government, and no clear idea of where New Zealand public policy is headed, and with an interim, lame-duck central bank governor now in place, you would think that financial markets would be seeing elevated risks. But it is not clear they do. They may kind of like a 'no government' situation. Or they don't see any risks in whatever colour a new government may take. Swap rates are holding today, slightly firmer. Exchange rates are only back to where they were at the beginning of the month. Sovereign CDS spreads are still in a range around 20 bps, and that isn't outside the level they have generally been all year. The only mover perhaps is that NZGB yields have trended down and today slipped another -4 bps to be well under 3% for the ten year, under 2.10% for the 2 year. But to be fair, none of these levels is outside the range they have been at for all of 2017. New Zealand public policy has lost the power to move markets

MORE PRODUCTIVITY ISSUES
It's been widely reported that we have a national productivity problem. The official 'multifactor productivity' series was last updated as at March and this is an annual measure. It shows that we have negative labour productivity and only marginally positive capital productivity. Productivity measures the rate of output for the inputs we invest. We calculate an unofficial labour productivity rate quarterly, based on real GDP outputs and actual labour hours employed in the economy (from the HLFS). The data for June 2017 confirms the negative trend. It is charted here. (See bottom of that page.) This is a situation that sometimes happens when you have full employment - the extra hard-to-find, hard-to-encourage labour getting employed is the least efficient and needs a lot of work to train up to be productive. Is that what we are suffering from now? Apart from public agencies, it is hard to believe that businesses would hire, just to get back less than the effort they expend for that extra help. We now have had two straight quarters with declining labour productivity. Production is going up, but labour hours are rising faster than the output. That may be sustainable when it can be paid for via inflation. But we don't have material inflation.

NEXT U/L91
The Auckland fuel pipeline repairs were completed three days ago and aviation fuel has been delivered. Now we are advised that U/L91 fuel will flow on Friday. From then on all liquid fuel stocks will be replenished over the next ten days. No more airport cancellations are expected.

NO HELP COMING FROM OUR COUSINS
Auckland has a construction boom underway (except for affordable housing) that is soaking up construction resources. By our measure, there is more than NZ$35 bln in projects due over the next five years or so. But that pales compared with the AU$62 bln in projects underway in Sydney. We can expect no shifting of resources from there to ease our capacity problems.

TOO MUCH RAIN?
Don't complain. You could be in Australia, or NSW in particular. It's only September, but it is tinder-dry there already. The outlook is dire for their water supply, with almost record low (or non-existent rainfall in the whole month of September and record high temperatures - low 30°s on the coast and over 40° inland. It could presage a weather crisis of major proportions.

PROFIT SURGE
In China, data out this afternoon shows an impressive jump in industrial profits. They rose +22% in August from the same month a year ago and accelerating from the previous month in an indication economic growth remains in good heart. This is the biggest percentage jump since the January-Feb period. Profits in their textile and rail industries however were notable by their lagging nature..

WHOLESALE RATES BLIP UP
Local swap rates firmed by just +1 bp today. Update: Late in the day, swap rates rose noticeably. the two year us up +2 bps, the five year is up +3 bps and the ten year is up +4 bps. The 90 day bank bill rate is also up +1 bp and now at 1.96% and that is its highest all month. Having noted that, it is still within the very tight range we have seen for all of 2017. 

NZ DOLLAR HOLDS
The NZD has held today on the positive growth data, at 73.4 USc. On the cross rates we are at 91.6 AUc and at 61.7 euro cents, also both slightly higher. The TWI-5 is now at 75.6. The bitcoin price has slipped just marginally today, now at US$3,856.

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28 Comments

"...labour hours are rising faster than the output.."A defacto pay-rise, in other words. If The Boss won't give you more for producing the same ( or ideally, more), then sit at your desk for longer; do no more, or less, and get a larger pay-packet. The Road to Success, New Zealand, right up there with "Buy another renter!"( sarc/off)

Can anyone explain to me how we are able to count 2,000,000 VOTES in 3 hours between 7 pm and 10 pm on voting day, but it takes over 2 weeks to count just 380,000 special votes ?

This is nonsense .

Why the hurry ...seems everything is ticking along nicely (todays update above) without anyone at the helm. I think the overseas votes arrive by pidgeon mail as well.

Keep in mind you can enroll and vote at the same time with no identification. All of those votes have to be validated.

Also, you are overlooking that all the election night votes are recounted, properly this second time, with verification to eliminate double votes and other irregularities. This second count is the real count. 

Fair enough , but with modern technology and New Zealand's meticulous records of birth and deaths , departures and arrivals , passports and visa's issued, citizenship granted by naturalization or birth , we should have a very clear picture of who is entitled to vote .

It surely should not take so long to count special votes .

Even the most populous democracy in the world , India, seems to get its results out more efficiently .

Our total electorate is the size of a small Indian city , and our record keeping and systems are robust , so we should be able to do this more efficiently .

Instead , we have uncertainty and a vacuum , which is neither good for business or healthy in terms of our track record .

I voted for Winston , because he will temper the power of the main parties , but Winston seems to be messing around right now , and refusing to arrange a deal or state he is going it alone , at least openly , is not fair on the NZ Public .

The biggest dollar bond to come out of China in three years demonstrated the dominance of local demand in Asia’s booming offshore-debt market, with just 3 percent of purchases coming from outside the region.

Growth in the pool of liquidity in Asia has enabled record issuance of $221 billion of dollar bonds so far this year in the region excluding Japan, more than 20 percent greater than what was sold in all of 2016, according to data compiled by Bloomberg. Some estimates show the size of the market is already approaching $1 trillion, while others anticipate that milestone will be hit within the next three years.

Given that context, it’s perhaps no surprise that Postal Savings Bank of China Co. found smooth sailing for its $7.25 billion sale of additional tier-one securities last week, priced just hours after China’s sovereign rating was cut. The largest such sale since an Alibaba Group Holding Ltd. issue in 2014, some 70 percent was bought by Chinese buyers, with 27 percent coming from the rest of Asia. Read more

I believe that is why officials in China have turned toward a new CNY policy, or at least emphasis. It’s not a peg like the central bank had enforced before, because a peg would be both a betrayal of Xi’s agenda while at the same time, I think, practically impossible to enforce (too costly). They are trapped in a small corner but for that one mistake – believing in 2009 and again in 2012 that the global economy did, might, or could actually recover. Now China proceeds from a much weaker position, already beset by enormous inefficiencies (including bubbles) delivered by the orthodox textbook response to a recession that wasn’t a recession. Read more

Hope there are no kauri chips in the planes’ fuel when I’m flying to Sydney shortly.

Sydney is the laggard in the Australian construction cycle. because it has the worst unit value (money you can make) to land cost (fixed expenditure) ratio in Australia. There have been much more profitable construction opportunities to be found in Perth, Brisbane, Melbourne and so those cities built faster sooner than Sydney.

It is of course still lots better than Auckland.

And in other news -- is reality starting to bite climate political bandwagon on its behind?

"Computer modelling used a decade ago to predict how quickly global average temperatures would rise may have forecast too much warming, a study has found."

http://www.independent.co.uk/environment/climate-change-global-warming-p...

All those carbon taxes and trading schemes, built on models that were bollocks.

I wouldn't say bollocks - but the article does have a fair point - in reality we just don't know, but in the end the earth should err on the side of caution. I've said before, humans can't destroy the planet but we can destroy the ability of earth to support most life.

Spending money like water when "in reality we just don't know".

Must have been tax payers money.

The models are not science.
As time moves on, the worst historical models ( deviation from actual) are forgotten!

Where is the science showing the change human activity is making?.

The very nature of a computer model is to extrapolate a set of pre-selected assumptions.

When model extrapolations don't match actuals it means assumptions are wrong.

Not necessarily. Weather outcomes are probabilistic and the difference may simply be natural variation. The record temperatures over the past three years suggests that may be the case. If the models are conservative, then we still have an opportunity to keep the increase below 2C, but the window of opportunity is still less than 20 years.

Surely you are not suggesting IPCC projections are no more reliable than weather forecasts?

The models are science (to say otherwise is ignorant) and they are becoming ever closer to actual results. The recent El Nino has resulted in a series of record world temperatures which are related to the interdecadal Pacific Ocean circulation. This brought cooler surface waters, hence the so-called hiatus in world temperature increases that is probably now over for decades. Indeed, this sharp new influx of heat into our atmosphere may now bring past models much more aligned to actual measurements. Another problem with climate modelling is clouds, but much work is underway to fix this extremely complex issue.
https://www.ted.com/talks/kate_marvel_can_clouds_buy_us_more_time_to_sol....
I really wonder what world some of you climate change deniers live in. Certainly not reality.

Observation is science. This is not the first time models have been called out. "Recent observed global warming is significantly less than that simulated by climate models."

...By averaging simulated temperatures only at locations where corresponding observations exist, we find
an average simulated rise in global mean surface temperature of 0.30 ± 0.02 °C per decade (using 95% confidence intervals on the model average). The observed rate of warming given above is less than half of this simulated rate, and only a few simulations provide warming trends within the range of observational
uncertainty (Fig. 1a).

http://www.nature.com/nclimate/journal/v3/n9/full/nclimate1972.html?foxt...

and the IPCC " Most, though not all, models overestimate the observed warming trend in the tropical troposphere over the last 30 years, and tend to underestimate the long-term lower stratospheric cooling trend."

http://ipcc.ch/pdf/assessment-report/ar5/wg1/WG1AR5_Chapter09_FINAL.pdf

".. they are becoming ever closer to actual results."

Or to say that another way, the model that correctly model climate reality doesn't exist.

What a foundation to spend a lot of money on. Can't help but think we should have spent it on the poor.

' 'a' study has found'.

If 97% of the specialists you saw said your kid would die if you did not get xx treatment, would you take the treatment offered real quick, or would you mess around and seek out the 3% non-specialists who would tell you not to worry?

Such is the nonsense of the deniers.

I don't know what you are describing, but it isn't science.

"It's been widely reported that we have a national productivity problem. The official 'multifactor productivity' series was last updated as at March and this is an annual measure. It shows that we have negative labour productivity and only marginally positive capital productivity. Productivity measures the rate of output for the inputs we invest. We calculate an unofficial labour productivity rate quarterly, based on real GDP outputs and actual labour hours employed in the economy (from the HLFS). The data for June 2017 confirms the negative trend. It is charted here. (See bottom of that page.) This is a situation that sometimes happens when you have full employment - the extra hard-to-find, hard-to-encourage labour getting employed is the least efficient and needs a lot of work to train up to be productive. Is that what we are suffering from now? Apart from public agencies, it is hard to believe that businesses would hire, just to get back less than the effort they expend for that extra help. We now have had two straight quarters with declining labour productivity. Production is going up, but labour hours are rising faster than the output. That may be sustainable when it can be paid for via inflation. But we don't have material inflation."

One of the most important issues facing NZ and yet one of the least discussed. This trend will continue to lower our standard of living. But the government will only display the headline numbers and keep hoping no one wants to look under the bonnet.

Could part of the problem be that this push by the media to oust the much maligned old white dudes actually be making productivity worse?

Yes agree it is an extremely important issue, improving productivity has resulted in improving standard of living. but is that still the case?

For the last 20 odd years labour's share of the gains have been diminishing whether you live in the US, Germany or NZ middle and working class incomes (inflation adjusted) have been static while there have been enormous productivity improvements created through automation and computing.

So improving productivity may not benefit the measure of the collective standard of living, unless the top 1% gain by so much to bring the average up.

The ability to buy more stuff alone does not result in an improved standard of living. So what is the measure of a good standard of living?

We have certainly seen a fall in the standard of living for many Kiwi's due to high house prices and high food prices, as these gobble up ever larger percentages of their income. Even if your house has increased in value your standard of living may have fallen due to other factors, increase costs of rates, food etc, increase congestion, more stress around you, etc.

One measure of an improved standard of living could be having less new stuff but more free time to enjoy what you have, or to make more use the great environment we have.

Perhaps we should focus on improving the quality of life rather than strictly productivity.

Certainly.

This morning the NZD was slightly under 72US - now you say it's been steady today and trading at 73.4US. Could you please explain.

I can explain. When you looked at the exchange rate, the "risk on" factor was greater than this morning. Trust me, when the "risk off" scenario is in effect, NZD weakens. The primary reason why is that NZD is a speculative currency because of interest rate differentials.

When/if interest rates "normalise" elsewhere on the globe, NZD will be dropped like a hot potato.