90 seconds at 9 am: Weak data as the trade impasse shows no sign of ending

China profits drop; PBoC struggles to hold yuan rate; trade war skirmishes continue; key US data weak; EU sentiment weak; UST 10yr yield at 1.69%; oil and gold lower; NZ$1 = 63 USc; TWI-5 = 68.6

30th Sep 19, 7:20am by David Chaston

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Here's our summary of key events over the weekend that affect New Zealand, with news that we are heading into the fourth quarter of 2019 with plenty of big economic headwinds.

First up, remember China is on holiday this week, it's their Golden Week break that includes the 70th anniversary celebration of the CCP. The only news that will be flowing out of China this week will be heavy doses of propaganda.

But late last week they reported a sharp fall in industrial profits in August, down -2.0% year-on-year after a +2.6% rise on the same basis in July. Not a great way to celebrate the 'success' of the CCP rule.

One tight control they have is over their exchange rate, and it has been virtually fixed now for all of September. To help keep it that way, their central bank issued 10 billion yuan (NZ$2.2 bln) of six-month bills in Hong Kong on Thursday at 2.89% and that is a substantial premium to get them sold.

Over the weekend, there were reports that the US was moving to expand the trade war into capital markets, fearful it can't compete there either. That didn't help Wall Street market sentiment on Friday. The White House was reported as considering forcing Chinese companies to delist from Wall Street and prevent American companies investing in China. But the market reactions have brought a backtrack, and the US Treasury Department has denied such plans exist.

The Chinese have confirmed the senior chief Chinese trade negotiator is off to Washington as soon as the Chinese holiday is over.

More fundamentally in the US, durable goods orders in August were down a rather startling -4.2% from the same month a year ago. Typically this data is reported as a change from the prior month, but the depth of the annual fall is a somewhat hidden surprise. The important capital goods component has dropped more than -9% on the same basis. With trends like this, no wonder most of the regional Fed factory surveys are glum.

And American consumer spending slowed more than expected in August, signaling a key pillar of their economy is losing momentum as the global economy wobbles and trade tensions remain high. Personal incomes rose in August 2019 from August 2018 by the slowest rate rate of the year, while consumption growth tailed off slightly more. The real weakness in these year-on-year trends is in services.

Also, their consumer sentiment is sharply lower on a similar year-on-year basis (-6.9%) even if it actually rose in August from July in one of the two widely-watched polls. Perhaps that is because PCE inflation dipped slightly in August.

Still, an increase in the American private domestic investment has tipped the latest estimate of US growth up to +2.1% in Q3; still lowish by their standards but up from Q2.

In Europe, consumer sentiment may be negative but it is stable. However industrial confidence is still falling and is also now negative.

In Hong Kong, the weekend street protests are getting a harder edge and far from going away. Now they are inspiring similar protests in Malaysia and Taiwan, even Australia.

The UST 10yr yield is unchanged from Friday at 1.69%. Their 2-10 curve positive at +5 bps. Their negative 1-5 curve is unchanged -21 bps. Their 3m-10yr curve is slightly narrower at -26 bps. The Aussie Govt 10yr is now at 0.95%, an overnight fall of -1 bp. The China Govt 10yr is unchanged at 3.16%. The NZ Govt 10 yr is at 1.13%, a -2 bps dip from Friday.

Gold was down -US$2 to US$1496/oz.

US oil prices are lower today at now just under US$56/bbl. The Brent benchmark is just under US$62. That is a -4% fall for the week.

The Kiwi dollar is little-changed today, now at 63 USc. On the cross rates we are firm at 93.2 AUc. Against the euro we are at 57.6 euro cents. All of these are firmer than this time last week. That puts the TWI-5 back up to just on 68.6 and a +70 bps gain for the week.

Bitcoin is now at US$8,016 and while that is marginally softer from where we left it on Saturday, it is more than -20% down from this time last 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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37 Comments

by bw | 30th Sep 19, 7:49am 1569782961

The turmoil in Europe is threatening to break out into open 'warfare', both international and domestic, in addition to the Consumer Sentiment negativity...
When Nigel Farage was interviewed and it was suggested he'd contributed to a potential for Hong Kong-style violence to break out in Britain by saying he'd "take a knife to the public service to get change swiftly enacted" and "was he not wrong thing to say that?" he replied "Yes I was! I should have said - take an axe to them, that's a more easily understood expression."
and....."UK interest rates may need to fall further regardless of what happens over Brexit.... This runs contrary to the official line, which is that even in the event of a no-deal Brexit, interest rates may have to rise to deal with the inflationary consequences of any shock to output capacity.” (today's Telegraph)

by profile | 30th Sep 19, 8:33am 1569785637

That nasty man Nigel using words like "axe". Did you miss this? - "A sickening banner threatening to 'level the playing field' after '130,000 deaths' under Conservative rule has been unveiled on a bridge in Salford, with effigies hanging below it.

The message was revealed ahead of the Conservative party conference in Manchester which starts today."
https://i.dailymail.co.uk/1s/2019/09/29/12/19070064-7517377-A_sickening…

by mfd | 30th Sep 19, 12:45pm 1569800720

Neither is ok, but those who have a public profile should be particularly careful about their language.

by profile | 30th Sep 19, 1:48pm 1569804516

You will find politicians have been figuratively taking the axe to things for millennia. You know you are winning when your political opponents feign distress by a metaphor.

by mfd | 30th Sep 19, 1:55pm 1569804955

Fewer have spoken of 'taking the knife to pen pushers'. Personally I'm quite concerned about the way the UK is going with politicians and media failing to respect the judiciary and openly discussing how best for Johnson to disregard the law. Whatever happens with brexit many millions will be aggrieved, and we need calmer language to have any chance of moving on from that.

by profile | 30th Sep 19, 3:42pm 1569811367

I'm more concerned about power being taken away from Parliaments and being replaced by un-elected activist lawyers and environmentalists. Democracy is by the people not by professional politicians and lawyers. If you can't vote out the power-at-be regularly they shouldn't have power over you. The axe should be taken to list MP's and the NZ Supreme Court.
And for the faint hearted - http://www.politicalmetaphors.com/2013/05/05/rattling-sabers-and-other-…

by The Person | 30th Sep 19, 5:37pm 1569818277

What? voting out list MPs is easy, don't vote for the party

by profile | 30th Sep 19, 6:10pm 1569820245

Last time I looked list had a 5% threshold vs. a 50% threshold for a constituent MP.

by mfd | 30th Sep 19, 8:04pm 1569827097

Yes, this worries me too. It has been a relief to see the supreme court in the UK being able to stand up for parliament. The next concern is how Boris is apparently attempting to get around laws passed by parliament. His attempts to get around all the checks and balances on his power are extremely concerning, and I hope he continues to fail. If brexit is going to happen it cannot be like this, it's incredibly devisive.

by RickStrauss | 30th Sep 19, 10:05am 1569791101

Hong Kong style violence?

Interesting new releases of photos and video footage showing police dressed as protesters, then using their truncheons and pistols toward the protesters.

by Glitzy | 30th Sep 19, 8:23am 1569784995

I watched the Austalian 60 Minutes show which had a piece on Aussie banks moving customers from interest only to repayment mortgages and the financial stress this is causing. Is anyone aware of the big 4 enforcing similar moves here? They are after all the same banks.

by CJ099 | 30th Sep 19, 8:38am 1569785896

Yes the big four Ozzy banks are doing the same here, moving home owners off their interest only mortgages to repayment of capital and interest which in the majority of cases will double their remortgage payments. If you bought a house in an expensive area such as Auckland since 2012 when property prices were massively increasing, then it's likely that the wage earner / local land lord would be on an interest only mortgage so they could get the maximum they needed to compete with foreign buyers. Most of these would have had a five year "interest only" period until they move you on to repayment mortgages. This is why the Ozzy banks have been rapidly dropping their mortgage rates to stave off negative equity and a property crash.

by Audaxes | 30th Sep 19, 9:40am 1569789603

I thought the central bank cutting official short term interest rates, without visible inflation impact, was the main reason a bidding war was initially sustainable in the Auckland residential property market.

Nonetheless, a pious, but remorseless RBNZ had this to say:

The proportion of risky borrowers in the household and dairy sectors appears relatively high. Around two-thirds of households have no mortgage debt, but nearly 40 percent of new mortgage loans are to borrowers with DTI ratios above five. In the dairy sector, 35 percent of debt is to highly indebted farms, defined as farms with more than $35 of debt per kilogram of milk solids produced annually. However, less than5 percent of loans to the commercial property sector are to particularly risky borrowers,1 suggesting debt is fairly evenly distributed across the sector. Link-page 7 (13 of 48) PDF

Moreover, households with mortgages the DTI ratio increased marginally to a record high of ~320 percent at the end of 2018 (figure 2.3). Link-page 8 (14 of 48) PDF

by CJ099 | 30th Sep 19, 9:46am 1569789964

Dropping interest rates particularly for mortgages is a bit of an band aid and an exercise in damage limitation. I'm mainly referring to the residential property markets. Though I do see Australia being particularly at risk with wage earners / Landlords coming off "interest only" mortgages, which could impact us. Question is; will the continued lowering of mortgage rates be enough to help this situation? Exposing Australia's housing crisis | 60 Minutes Australia https://www.youtube.com/watch?v=AB6yM9puTY0

by Audaxes | 30th Sep 19, 10:01am 1569790873

Lower mortgage rates helps those with high incomes to support repayment mortgages underwriting extremely elevated property price speculation practices - an increasing number of citizens are ineligible due to their low income status.- we are heading rather quickly towards a feudal state, without a backward glance to our previous notions of an egalitarian society.

by murray86 | 30th Sep 19, 10:25am 1569792346

Successive Governments who have sucked up to the money and who don't have the courage to implement meaningful reform that actually benefits the people!

by J.C. | 30th Sep 19, 12:26pm 1569799585

we are heading rather quickly towards a feudal state, without a backward glance to our previous notions of an egalitarian society.

Yes, neo-feudalism that has been enabled by the ability of the banks to 'lend money into existence.' However, it's becoming clear that the power of magic money tree is having unintended consequences. Anyone who challenges me on that would have to explain why the whole developed world is heading towards ZIRP / NIRP. I think that the primary reason for that is that income levels have not kept up with asset price inflation and there are no signs that will be changing in the near future.

by ham n eggs | 30th Sep 19, 1:17pm 1569802660

"income levels have not kept up with asset price inflation.."

The debt associated with asset price inflation IS our income ....
We are cannibalizing the balance sheet until we cant
Then we will cannibalize Govt balance sheets until we cant
There is NO POSSIBLE way of raising interest rates when income is now totally dependent on new debt
So we get more and more debt claims over a (essentially) fixed level of output
Soon Debt = Equity, Money is free and totally worthless
Then capitalism cant exist

by J.C. | 30th Sep 19, 1:26pm 1569803212

Yes HnE. I agree with you. Let's stick with houses as "assets." The general belief is that house prices will continue to rise at a pace greater than the ability to generate personal income, therefore it's seen as "income" or "savings." I think that is the stickability of the "asset prices double every 7-10 year" meme.

by RickStrauss | 30th Sep 19, 5:52pm 1569819150

Rather than "work hard and save money", it's now a Trumpian world...live off debt until you can't, then rinse and repeat.

by Audaxes | 30th Sep 19, 1:53pm 1569804787

Government enactment of regulation determining that a large percentage of bank credit creation underwrites GDP qualifying endeavours, would go a long way towards rectifying the issues you note.

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. Link

by bw | 30th Sep 19, 8:49am 1569786553

The local banks will ( or did) extend the Interest-Only period for those that couldn't afford to go onto Scheduled Repayment. It's not for long ( a year?) to allow 'arrangements' to be made. I guess that's code for 'breathing space' to either come up with the repayment cash after that grace period ends or sell the property without having to be mortgageed.

by Advisor | 30th Sep 19, 9:20am 1569788410

Looking at the deteriorating state of the Aussie economy, its wage situations could worsen further in a year's time.
Credit growth is still rampant in Australia; most of the cheap money is still being funnelled into asset transactions propping up prices. With productive business already facing higher costs and lower returns as a result of the intense competition from speculators and zombie companies for limited economic resources, wage growth seems unlikely.

by J.C. | 30th Sep 19, 12:27pm 1569799670

Credit growth is still rampant in Australia; most of the cheap money is still being funnelled into asset transactions propping up prices

Not just that, the govt is screaming that it needs to happen.

by Nzdan | 30th Sep 19, 4:14pm 1569813247

I recall Yvil and The Man 2 mentioned on here some time ago that they have a great "business relationship" with their bank manager, and that their swathes of Interest Only lending is guaranteed to be refinanced as Interest Only without hesitation.

by Casual Observer | 30th Sep 19, 12:10pm 1569798626

This was started for rural lending some time ago.

by The Person | 30th Sep 19, 9:27am 1569788833

Turmoil in Europe? Turmoil in the UK I think you mean. Europe is doing well thank you very much

by profile | 30th Sep 19, 10:03am 1569791024

Please. Teargas in Toulouse this weekend. The media ignore the yellow vests in France but deem to report on Hong Kong. "The French government presented a 2020 budget to deliver the tax-cuts President Emmanuel Macron promised to the Yellow Vest protesters, marking a shift that strains the public finances and gives the economy a boost as the outlook darkens. ...“We want to respond to the social crisis France has been through, and we want to respond to the marked slowdown in global and euro-zone growth,” Finance Minister Bruno Le Maire said."
https://www.bloomberg.com/news/articles/2019-09-26/macron-loads-2020-bu…

by Audaxes | 30th Sep 19, 10:11am 1569791472

You may need to expand your news sources? - https://twitter.com/sahouraxo/status/1178015241378107392

by The Person | 30th Sep 19, 11:23am 1569795807

Democracy in action, all is well.

Hong Kong is more interesting, how long till Beijing sends in the tanks to steamroller them?

by Audaxes | 30th Sep 19, 3:01pm 1569808915

Rather than aerial bomb them as US and allies inflicted upon the citizens of Yugoslavia, Iraq, Libya, Syria and Yemen? Might-makes-Right surely cannot be reserved for those that believe themselves to be exceptional, hence beholden to their rules-based order operating beyond the limits of international law.

by RickStrauss | 30th Sep 19, 3:54pm 1569812069

What about what the Persian empire did too??? Or the Ottoman Empire.

Are we comparing to all, just for fun, or only a select group of united states?

by Audaxes | 30th Sep 19, 5:48pm 1569818888

There was no fun involved with the destruction of Mosul and Palmyra, or annexing Kosovo with Camp Bondsteel and unilaterally declaring it an independent territory. These realities happened in my recent lifetime.

by RickStrauss | 30th Sep 19, 5:54pm 1569819267

The point was more about raising unrelated comparisons.

by The Person | 30th Sep 19, 11:53pm 1569840805

Wow, disagreeing with the statement that europe is in turmoil in 2019, means I support American carpet bombing and invasion of the Middle East.

Well, the citizens of Iraq did not vote for President Bush, just as those of Laos, Vietnam and Cambodia did not vote for President Johnson and his successors, so no that is not democracy in action

by theglc | 30th Sep 19, 12:13pm 1569798811

"The only news that will be flowing out of China this week will be heavy doses of propaganda."

So Lies??? Can someone remind me why we pretend they are a real economy....

by Glitzy | 30th Sep 19, 12:19pm 1569799172

I think it has something to do with Chinese capital propping up everything from bond markets to residential and commercial property across the Western world... somewhat like the Japan phenomenon in the late 80s.