90 seconds at 9 am: World factories mired in weakness

US factory expansion ends; new house sales rise; China property developers squeezed, Japan and Europe factories suffer; equities show gains; APRA pay rules flawed; UST 10yr yield at 2.05%; oil down & gold up; NZ$1 = 67.1 USc; TWI-5 = 72.2

25th Jul 19, 7:18am by David Chaston

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Here's our summary of key events overnight that affect New Zealand, with news key aspects of the US economy seem mired in weakness.

The latest factory PMI's for the US show their expansion has ended, with this index level dipping to a stagnant 50 between expansion and contraction. That is a ten year low. Their service sector is still showing a modest expansion however.

New home sales in June came in +4.5% above the level for the same month a year ago, better than the year-to-date rise of only +2.2%.

In China so far this year (to the end of June), almost 300 property developers have declared bankruptcy as tighter regulation bites. Tighter financing rules aimed at preventing excessive investment is squeezing cashflows. Development in the wrong places is also an issue.

Not everything in China is suffering. Beijing has reported its cleanest air quality in 35 years of record-keeping.

In Hong Kong, the Chinese military has said that it can be deployed to Hong Kong to maintain social order "at the request of the city’s government".

Japan's July PMIs are similar to the US, but their services PMIs are expanding stronger.

In Europe, their July PMIs show the contraction in their manufacturing sector is deepening.

But despite all this core weakness, equity markets are generally near their all-time highs. The S&P500 is up +0.3% today even though some iconic listings are delivering weaker than expected profit results. European markets are up a similar amount. Yesterday, Shanghai was up +0.8% and the ASX200 was up a similar amount. The disconnect with the real economies in all places is hard to fathom. Long term low interest rates have generated a desperate hunger for any yield, juicing multiples to the stratosphere. The resulting imbalances are stark.

In Australia, both their factory and services PMI's are still expanding even if the rate is slowing. The New Zealand equivalents all look much better than these other benchmarks.

And the new APRA rules on banker compensation are already being declared a failure, even before they start. Industry insiders say they are likely to incentivise even higher pay for incumbents.

The UST 10yr yield is marginally lower at 2.05%. Their 2-10 curve is unchanged at +24 bps and their negative 1-5 curve is still at -16 bps. The Aussie Govt 10yr is down -4 bps at 1.28%. The China Govt 10yr is also up +2 bps to 3.18%, while the NZ Govt 10 yr is up +1 bp at 1.59%.

Gold is up +US$2 overnight to US$1,421/oz.

US oil prices are soft today, down more than -US$1. They are now just over US$55.50/bbl. The Brent benchmark is also softer at just over US$62.50.

The Kiwi dollar is unchanged today and still at 67.1 USc. On the cross rates we are much firmer at 96.2 AUc which is a +½c gain and a four month high. Against the euro we are up slightly to 60.2 euro cents. That firms the TWI-5 to just on 72.2.

Bitcoin has been much softer overnight and now down to just US$9,656 and a -4.5% drop since this time yesterday. Volatility has been +/- 3.3%. The bitcoin rate is charted in the exchange rate set below.

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24 Comments

by theglc | 25th Jul 19, 7:56am 1563998198

"But despite all this core weakness, equity markets are generally near their all-time highs. The S&P500 is up +0.3% today even though some iconic listings are delivering weaker than expected profit results. European markets are up a similar amount. Yesterday, Shanghai was up +0.8% and the ASX200 was up a similar amount. The disconnect with the real economies in all places is hard to fathom. Long term low interest rates has generated a desperate hunger for any yield, juicing multiples to the stratosphere. The resulting imbalances are stark."

Summarized - A crash is imminent

by printer8 | 25th Jul 19, 8:37am 1564000661

theglc
NZX, ASX, Dow, DAX all up over 20% since beginning of the year/December (albeit partly a late year recovery). Even the FTSE and Shanghai up strongly despite Brexit and trade wars respectively.
As previously posted, at a personal level, I have shifted td simply to exposure to equities through KiwiSaver (+65 so can withdraw) because of falling yields. However, knowing the 1987 crash I am well aware of an over inflated share market so I am keeping a weather eye open. I think that there is a little way to go as most central banks talk (including RBNZ and FED) is still for further cutting interest rates and that seems to be the driver. However the traditional September/October period will be interesting.
So I agree; increasing risk of crash due to poor fundamentals but not sure how imminent.

by theglc | 25th Jul 19, 8:54am 1564001655

Ive put all my Kiwisaver into low yeild cash as it seems that Wall St is now purely speculative.

Worldwide GDP & inflation is struggling to hit 2% yet since 2017 the Dow is up 50%, ASX 30%+, NZX50 50% etc

If all these businesses are booming so much then the economies would be similar but they are not, everyone is cutting rates to stimulate.

For me its not a matter of if but when and then by how much...

by The Person | 25th Jul 19, 8:47pm 1564044469

If the pound goes down, the FTSE goes up, given the dominant role global earnings play on UK listings

by easymoney | 25th Jul 19, 8:45am 1564001107

No....as the article state's.....interest rates down...equity markets up...(for sometime yet).

by Audaxes | 25th Jul 19, 8:58am 1564001905

The rescue measures pumped most credit creation into asset markets, creating asset bubbles.

by RickStrauss | 25th Jul 19, 10:36am 1564007774

The model unfortunately gives money to the wrong people, not the ones who would actually consume and drive economic growth. As you note, cheap credit and QE has only pumped up asset prices, resulted in stock buybacks etc. In the meantime, wages have been comparatively stagnant.

The people who would spend and power growth in the economy haven't seen an increase in income that would enable them to.

by Yvil | 25th Jul 19, 9:00pm 1564045218

I didn't know there were "right" and "wrong" people. I assume you would put yourself in the "right" category?

by printer8 | 25th Jul 19, 11:38am 1564011508

Agreed Audaxes
I think that the next five years are going to be interesting.
The GFC and consequently cheap money through QE led to a strong boost for asset markets and in particular housing. The share market also did quite well.
With continuing further cuts in cash rates, the question is which assets are going to be attractive. To me, I think many will see that housing has run its course and falling prices in many countries and flattish market in New Zealand means that there is unlikely to be a further significant boom (although some modest gain in NZ over the next five years).
For this reason, the share market could possibly be the new "housing market of the past decade" - driven by demand and potential capital gain rather than the underlying fundamental value.
Where is all this eventually headed? Basically, it does concern me that for the past decade cheap money has been the solution to downturn, and with the future global economy looking constrained, even cheaper money still seems the continuing solution. Cant remember which but there are some strong economic developed nations already with negative cash rates.
So in the short term I see increasing equity markets but cheaper cash still cant be an indefinite solution and has inherent risk.
Totally agree with Rick's comment above.

by theglc | 25th Jul 19, 9:51am 1564005072

That would be sensible if dividend yeilds were better that TD rates but reality is even the biggest companies like apple 1.5% pa, microsoft 1.7%pa, visa 0.6%, GM 4.4%, J&J 2.7%

Hardly worth the risk

by Audaxes | 25th Jul 19, 7:57am 1563998253

New home sales in June came in +4.5% above the level for the same month a year ago, better than the year-to-date rise of only +2.2%.

In the world of assets classes, I don’t believe it is equities which hold the Federal Reserve’s attention.

From the general public to politicians, don’t screw up housing.

It’s also the one asset class which seems to point the arrow right back at the FOMC. Rate hikes and housing busts have historically been clustered together. Right or wrong, most people see it as causation, and even though it isn’t the perception does matter.

The latest data all suggest a real problem here. From resales to construction, it has become a bust. It’s not nearly what the last one was; how could it be? The housing market has never recovered from it despite all the MBS purchases buried in three of the four QE’s. It’s not more people/more new houses, it’s fewer jobs/fewer new houses. There’s a direct connection between employment and homes. Link

by Andrewj | 25th Jul 19, 8:15am 1563999316

A friend of mine was talking to his bank manager this week, he has a lot more debt than me so talks to someone higher up the food chain than my lowly manager, his is closer to god so to speak, mine can hardly afford his Hyundai.
Anyway, his manager ,the one closer to god, and he knows it, told him we are in recession and it's been going for nearly a year.

So why do we do this when it obviously isn't working, do we know what we are getting into? Things were going pretty well up to 2008, then we blew asset bubbles while hollowing out the real economy.

https://www.rbnz.govt.nz/statistics/key-graphs/key-graph-90-day-rate

by Audaxes | 25th Jul 19, 9:16am 1564002994

PMI data from IHS Markit, released today, builds upon the latter theme. The Composite Index, covering both manufacturing and services, hovers at just above the recent lows of 50.9. The latest value is just 51.6 – which is pretty consistent with current estimates for Q2 2019 GDP being between 1.5% and 2.0%. We’ll find out GDP on Friday.

Inside Markit’s numbers, there were a few parts that stand out with relation to fundamentals and the balance of risks to them.

Manufacturers are shedding workers at the fastest rate since 2009 and service sector job creation is now down to its lowest since April 2017. Future prospects have also darkened to the gloomiest since comparable data were first available in 2012, suggesting that companies may look to tighten their belts further in coming months, dampening spending, investment and jobs growth. Link

by Advisor | 25th Jul 19, 9:24am 1564003441

NZ and Australia seem to be inching towards a political dilemma.
With employment sub-indices flashing a dipping job creation warning, while migration and natural population growth continue to add more than 1.5% to our working age population each year, the call to reduce migration numbers could be louder than ever.

by RickStrauss | 25th Jul 19, 11:18am 1564010292

Migration is a funny one. Politicians seem to love to indulge in it for the sugar rush effect on nominal GDP, and they keep indulging in it even when the local populations they purport to represent do not want them to (at least, to the extreme extent they do). Has happened over and over in Europe and the UK across the last three decades, and in New Zealand in the last 10+ years. Politicians seem to believe that any reluctance in the local populace over the matter is simply a negative attitude that needs to be cured.

Heck, even the last election in NZ saw any suggestions that migration volume should be viable (e.g. in the face of requisite infrastructure to support) dismissed as xenophobia.

by mikekirk29 | 25th Jul 19, 9:18am 1564003107

World stock markets are now a joke. NYSE and S & P most particularly are now permanently addicted to lower rates with which they borrow cheap to buy back their own shares. They then sell them at juiced up rates, because they rise on back of having fewer holders of shares. I have read authors online (not idiots) who cite an 80% rate for cause of recent new highs in USA: as in 80% of share rise is due to buybacks. These buybacks are highest in history. Borrowing to buy shares is the newest Ponzi and biggest. This is partially why US corporate are loaded with BBB+ debt waiting to implode. Meanwhile in the real world, factory output (ie real production) is going down the toilet. Indicating that consumers are not wanting stuff and have not confidence to buy it (see falling car sales everywhere.) So, share prices used to be based on rising profits due to rising consumer spending and industry investment. Now the rise is based on borrowing and offsetting borrowing against tax. Bread and circuses eternal

by dunnock | 25th Jul 19, 9:19am 1564003192

At some point someone in news management needs to do something about untrue statements about gold. Yet again the heading says gold down and the body text says gold up. Clearly nothing that this writer does is trustworthy .

by mikekirk29 | 25th Jul 19, 9:22am 1564003348

Auckland sales over $2.5m will probably now start recovering because v well off folk know full well that land and houses can be retained when shares lose 70% of their value and that will happen. Meanwhile, currency devaluations, especially of the US dollar, will destroy real return (dodgy word) on bonds that is basis for all this borrowing. Not losing money is going to be the new (not really new, just needs dusting off) mantra. This is the final bow-off top, where all those in the know get out and only the twerps coming in late get stuffed.

by rastus1 | 25th Jul 19, 10:54am 1564008895

You realise that shares represent real assets? Why would you think that a basket of well diversified shares across a range of countries and asset classes will decline more (more being the emphasis) than your moldy rental in NZ?

by Shoreman | 25th Jul 19, 11:10am 1564009830

Mikekirk29 - I think your 2 comments are accurate and true. Couldn't have put it better myself Cheers

by mikekirk29 | 25th Jul 19, 3:55pm 1564026924

Cheers!

by Andrewj | 25th Jul 19, 9:46am 1564004767

Real Vision
https://www.youtube.com/watch?v=a4_U6bS-cU4&feature=youtu.be

by Andrewj | 25th Jul 19, 10:28am 1564007338

https://pbs.twimg.com/media/EAOW91AW4AAQB4i?format=png&name=900x900

by RickStrauss | 25th Jul 19, 10:37am 1564007848

In Hong Kong, the Chinese military has said that it can be deployed to Hong Kong to maintain social order "at the request of the city’s government".

Bet Taiwan is watching this all very carefully.

Heck, China's behaviour may even be enough to turn lapdog Duterte off.