Tariffs bite harder; China factories contracting, services expanding; US data mostly negative; Canada gets strong growth; India doesn't; Aussie housing markets up; UST 10yr yield at 1.50%; oil and gold down; NZ$1 = 63.1 USc; TWI-5 = 68.6

Tariffs bite harder; China factories contracting, services expanding; US data mostly negative; Canada gets strong growth; India doesn't; Aussie housing markets up; UST 10yr yield at 1.50%; oil and gold down; NZ$1 = 63.1 USc; TWI-5 = 68.6

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Here's our summary of key events over the weekend that affect New Zealand, with news most of the economic signals aren't very positive even if there are some notable exceptions.

First however, we should note that new higher tariffs came into effect today in both the US and China on each other's goods. Beijing used to be rattled by US trade 'punishments' but now they seem to be taking it all in their stride.

But tariffs aren't helping either country.

China reported that its factory sector contracted in August according to its official survey. It is not a large contraction but it is one they would rather not have. More promising for them, their service sector expanded at a slightly faster pace in August (53.8) - and faster that its US rival's service sector is expanding (50.9). So yes, China is feeling an effect, but is far from hampered.

In the US, the Fed's favoured inflation measure, the PCE, came in unchanged at the expected rate of +1.6% pa in July. But household income gains were weaker than expected, so the good consumer consumption data we got earlier in the GDP result seems unlikely to be sustainable.

The Chicago Fed's regional factory survey shows small declines in factory activity across the region. And it is far from the only region reporting declines even if it is one of the largest. US truck makers are seeing sharply lower orders and are cutting production heavily. The reason? their customers are going out of business.

And American consumers, according to one widely watched survey, are losing some of their optimism. This survey fell by the most since 2012.

The OECD is reporting that G20 international merchandise trade continued its downward trend in the second quarter of 2019, with exports contracting by -1.9% and imports by -0.9%. Exports contracted by -5.3% in China (to their lowest level since Q4 2017) and by -1.1% in the United States (their lowest level since Q1 2018). Imports rose marginally in both countries, (by +0.6% in China and +0.3% in the United States), on the back of stockpiling in anticipation of US tariff measures.

It is not all negative. Canada reported very strong economic growth the second quarter of 2019, up +3.7%pa on the back of fast-rising exports.

But in India, their economic growth has now slipped sharply to under +5% and a six year low as doubts grow about prime minister Modi's stewardship. Growth at this level is probably too low to keep lifting large numbers of people out of poverty.

Argentina is back on the IMF's rescue agenda after reeling from voter rejection of President Macri. S&P has just cut their country rating to CCC- prompting investor flight. There is now more than US$100 bln in debt that needs resolution.

In Australia, their housing market is back with higher demand. Residential property sales in Sydney and Melbourne have risen to near boom-time peaks as buyers respond to record-low interest rates. Auction clearance rates have jumped to over 80% and multiple bidders are common. Prices rose +1% in just the past month. Concerns about a sluggish economy aren't holding these markets back.

The UST 10yr yield is unchanged from this time yesterday at 1.50% and -3 bps below where it was this time last week. Their 2-10 curve still negative, but only by -1 bp. Their negative 1-5 curve is wide at -38 bps. Their 3m-10yr curve is out to a negative -59 bps and down to where it last was prior to the GFC. The Aussie Govt 10yr is at 0.88%, down -2 bps over the weekend. The China Govt 10yr is unchanged at 3.07%, while the NZ Govt 10 yr is now at 1.10%, and also unchanged from Saturday but down -6 bps over the past week.

Gold is lower at US$1,520, down -US$5 from Saturday. July gold demand weakened substantially in India.

US oil prices are noticeably weaker today at now just on US$55/bbl and back to where they were a week ago. The Brent benchmark is also lower at just on US$59.

The Kiwi dollar holding at its lower level and will start the week at 63.1 USc. That is almost -3c lower that were we were at the start of August. On the cross rates we are down at 93.7 AUc and that dropped more than -1c in the past week. Against the euro we are at 57.4 euro cents and unchanged in the week. That sets the TWI-5 back to just on 68.6 and that takes the overall devaluation of the Kiwi dollar since the beginning of August to -3.8%, and against the US dollar it is -4.3%.

Bitcoin is now at US$9,608 and a small rise from this time on Saturday but a -7% drop in a week. The bitcoin rate is charted in the exchange rate set below.

 

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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31 Comments

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In Australia, their housing market is back with higher demand. Residential property sales in Sydney and Melbourne have risen to near boom-time peaks as buyers respond to record-low interest rates. Auction clearance rates have jumped to over 80% and multiple bidders are common.

The consequences of low interest rates driving up asset prices are not to be lauded if Lower Hutt is an example.

Emergency housing grants in Lower Hutt are at a record level, topping $1.8 million in the quarter to June.

That's up from $520,000 for the same period in 2018 and the highest in the Wellington region.

As well as 986 people receiving emergency housing, there are 404 on the waiting list and a further 166 wanting a transfer in Lower Hutt. Link

House prices in LH have posted consecutive years of double-digit growth. The asset bubble argument is legit when sellers in Wainui are demanding 700k.

Only yesterday bw insisted that dropping interest rates leads to lower asset prices.

by bw | 31st Aug 19, 9:29am
This (lower interest rates) isn't good for past, present or future debtors as it implies the value of what they have, or will buy, is about to fall....Saving on mortgage interest rates costs is good in a Fool's Paradise.
and
by bw | 31st Aug 19, 10:03am
Much better you do a Scrooge as the value of the holdings backing your debt, deteriorates! (when interest rates drop)
You might want to be able to buy yourself a better quality of consolation, liquid anesthetic.

And all probable!
By the time you realise that "My God! BW was right!" it will be too late - way too late, and you'll be marooned with what depreciating assets and the relatively increasing debt you have. But as I always say, time (that is fast running out!) will tell...
"Better 3 hours too early, than a minute too late" eh...
(NB: Did you take notice of my call to' sell everything' posted on here 9/11/18, that the coming Christmas would be a shocker for the markets? And it was a horrible end to the year. Or my suggestion that Fonterra and Fletcher could be in trouble, that why the OCR was cut? No. Well, never mind. The calls you've kindly reposted above are more certain that either of those previous two!)

Exactly:

The majority of bank credit creation in the UK is not even used for transactions that contribute to and are part of GDP, but instead is used for asset transactions. They are not part of GDP, since national income accountants require a ‘value added’ for inclusion in GDP, not just the shifting of ownership rights from one person to another. When bank credit for asset transactions rises, asset prices are driven up, because the loans do not transfer existing purchasing power, but instead constitute an increase in net purchasing power: money is being created and injected into asset markets. When a larger effective demand for assets is exerted, while in the short-term the amount of available assets is largely fixed, the price of assets must rise.

Such asset inflation can go on for several years without major observable problems. However, as soon as the credit creation for non-GDP transactions stops or even slows, it is ‘game over’ for the asset bubble: asset prices will not rise any further. The first speculators, requiring rising asset prices, go bankrupt, and banks are left with non-performing loans. As a result they will tend to reduce lending against such asset collateral further, resulting in further drops in asset prices, which in turn create more bankruptcies. When asset-based lending had become a major part of bank portfolios and when banks had already driven up asset prices by several hundred percent due to their excessive asset-based credit creation, then it is inevitable what will follow: bank equity is usually less than 10%, and thus asset prices need to fall only by a little more than that – which is not difficult, after rises of several hundred percent – and the banking system is bankrupt: losses from non-performing loans have to be made up from equity (if no other funds are available, which is usually the case in such situations).

Thus a full-blown banking crisis must follow after a bank-credit driven asset bubble. One does not need to be a central banker to know this very well. (Why, then, did the ECB allow 20% or more bank credit growth in Ireland, Portugal, Spain and Greece, for several years? Such high credit growth is clearly in excess of nominal GDP growth and hence it is clear that it must be creating unsustainable asset bubbles that result in banking crises – as the Quantity Theory of Credit has postulated since its inception in 1992; Werner, 1992, 1997; 2012, 2013). Link

Exactly, I fully agree Audaxes. Where we do see things differently is in the timing. The pivotal sentence in your quote is:
"However, as soon as the credit creation for non-GDP transactions stops or even slows, it is ‘game over’ for the asset bubble"
Has credit creation stopped? NO
Have central banks stopped lowering interest rates? NO
Has QE stopped or reversed? NO
Are central banks looking at any alternative to keep assets going? YES, MMT, helicopter money, call for Fiscal stimulus etc...
We are nowhere near the end of the asset bubble

You know we're near the end when people are calling for the Magic Money Tree to help.

We are nowhere near the end of the asset bubble

The belief in NZ and Australia is strong that the bubble can go on indefinitely through institutional intervention and market distortions. Reality is that most people, including the "smart KOLs" (usually bankers, media, and the Ashley Churchs, Hoskings, etc) have no idea where we are. Truth be known, the bubble might be well into its death throes. You're just not aware of it yet. If the price of gold and silver are any indicators of impending doom, the goose might have been cooked already.

GGP & JC, I guess time will tell, we just have to wait. My point is saying "prices will drop" without putting a timeframe is useless. Of course prices will drop and of course prices will rise but if you're a business man rather than just a spectator or a theorist, timing is everything!

My point is saying "prices will drop" without putting a timeframe is useless.

Really? I thought your point was to to demonstrate how the kitchen sink is being thrown to preservve the asset bubble. Nothing revelatory about that.

But the real point is that if you have the prop up asset bubbles, you potentially have serious problems. That is why I suggested the price of gold and silver are a reaction to what you're suggesting is the formula for the forever bubble.

If you're a business person, you would be hedging your bets.

Agreed gold going up is a reflection of risk adversity.
I'm not advocating that "the kitchen sink should be thrown to preserve the asset bubble" I'm not saying it's good either but I deal with what is rather than what should be, and it seems pretty clear to me that central banks and governments around the world are prepared to do all they can to avoid a recession and keep the crazy party going, therefore I conclude that asset price collapse is still some way off, we shall see

And my point is that asset prices may have already begun to collapse and you're not aware of it. That's typically how bubbles end. When the majority can't see it.

GGP & JC, I guess time will tell, we just have to wait. My point is saying "prices will drop" without putting a timeframe is useless. Of course prices will drop and of course prices will rise but if you're a business man rather than just a spectator or a theorist, timing is everything!

That is interesting news about the Sydney/Melbourne auction rates.

"Not every property is selling unbelievably well but when you see those clearance rates around 80 per cent and the number of registered bidders averaging almost six per auction that is starting to really fuel price rises.

"I'd be very surprised in this quarter if we don't see a significant rise in house prices."

With regards to aussie, FHBs who lose money if the bubble bursts, should be able to sue the government , especially their housing minister for setting false expectations and encouraging them to buy even though it's so unaffordable

Zachary you have to keep in mind that the Ozzy's banks have "relaxed their mortgage lending criteria" and the Real Estate Agents are still enabling money launders to purchase top end property over there. Though China has tried to keep a leash on their money laundering activity, which has quelled by quite a lot.

Property market will save the NZ economy, will that's what that industry keep reporting, surely its true.

.

Im no economist - but why do we continue to allow houses to be used as capital generating machines and not focus investment into areas that actually provide a net benefit like manufacturing, research, tech etc. Housing speculation creates no actual value to the economy, just the property merchants

Housing provides a pretty important net benefit. For a start it keeps the rain off people’s heads.

A tent keeps the rain off people's heads as well....

Building houses does that. Just trading them between each other doesn't.

The net benefit of crippling debt due to overinflated House prices caused by speculation? Got ya

Because we have a bunch of folk enamoured with easy money capital gains and far less keen to build a productive business.

I know right. Instead of producing valuable goods and services, it seems NZ are content with realising easy returns at the expense of contributing to the future of our country

Have a wee think about your comment upthread.

What do you think all the manufacturing is for?

The answer is either morte houses, or more crap to put in houses. There aren't many other end-destinations for 'stuff'. This is where Bill English went astray, talking about 'the productive economy', as if it was something different.

And consumption is plateauing - long foretold hereabouts, despite he avoidance by some.

And contributing to the future of our country - are you talking about piling up computer-held digits (bets that there will be something to recoup them) or about some sort of maintainable system that they will thank us for several generations hence?

Im talking manufacturing of valuable goods that can be traded. Not sold to domestic consumers but abroad. Rather than relying on trading homogenous raw commodities which suffer from price volatility e.g logs, milk powder, we should be focusing on producing finished products that command higher prices.
Quality not quantity - flooding markets with raw materials when prices are good only to see it crash due to oversupply is something we have done for years and continue to do

Trump apparently hadnt heard of Category Five. 'This is the second-strongest Atlantic storm on record.

But nothing to do with the greenhouse effect, and nothing to do with anthropological forcing. No, couldn't be. We are smart enough to be above physics - we are smart enough to think economic growth trumps all.

Sad.