Weekend briefing: Uncertainty rises, but sentiment holds

US sentiment holds but faces poor jobs report; car loan threats; trade talk optimism; China and India face hurdles, more central banks cut; equities hold high; UST 10yr 1.80%; oil and gold up; NZ$1 = 63.5 USc; TWI-5 = 68.7

26th Oct 19, 8:41am by David Chaston

Here's our summary of key events overnight that affect New Zealand, with news a number of data indicators are pointing to a turning point to lower economic activity and more monetary authorities are cutting rates to try and stem the souring sentiment.

First, American consumer sentiment was little-changed in the latest survey. But it is still lower than this time last year.

This may get tested next Saturday, when we will get the October non-farm payrolls report and it isn't expected to be very positive. Some analyst surveys see the jobs growth at just +90,000 although most see a low +130,000 level. Not helping will be the GM strike affecting 46,000 workers which remains unresolved. It is also affecting factory output data.

And Moodys is pointing out that some large securtised sub-prime car loans are turning bad at an alarming rate, so fast that fraud is suspected. And we are not talking about a small portfolio; this is an infection in a single US$26 bln book where deliquencies are up to 15% of it.

On the trade negotiation front, the US and China are close to finalising some sections of a trade agreement after a phone call between top negotiators, the Americans claim. This comment has raised hopes that a deal will eventuate. But it does seem a flimsy basis on which to buy stocks.

In China, another large private industrial company has defaulted on bond interest payments, reinforcing debt stress fears. Chinese companies defaulted on a total of ¥80 bln of onshore bonds in the first nine months of the year, 36% more than for all of 2018.

And the Chinese central bank has added a total of ¥560 bln to China's banking liquidity this week alone (NZ$125 bln), supposedly to cover the liquidity stress of their tax season. But you can't help but wonder if more is involved in this juice.

In India, they are facing a toxic regional growth problem. While the country’s southern and western regions are resilient amid the slowdown, the central and northern regions - home to nearly half the population - are languishing. If it isn't addressed, there are warnings the situation could "become a nightmare".

A pair of German confidence surveys, one by IFO, the other GfK, found little improvement in their negative sentiment, but at least things didn't get worse. Both however continue to show German business and consumers under stress.

Russia has cut its benchmark interest rate to 6.5%, a full -50 bps cut that reinforces official fears of a quickly slowing economy - one that was growing very weakly in the first place.

And Indonesia has also cut its benchmark interest rate for the fourth month in a row to the lowest level in 17 months, also saying it needs to do something to protect economic growth amid rising risks. It is down -25 bps to 5.0%.

In the EU, diplomats have agreed to another extension to the Brexit deadline but won't set a date for it as the UK prime minister continues to try to force an early December election. The EU wants to keep up the pressure in an attempt to force the English to make up their mind - on anything related to Brexit.

On equity markets, the S&P500 looks like it will end up +0.9% for the week. That is enough to take it back close to its record high that was reached in July. The German DAX is up +1.8% for the week, and the London FTSE is up +2.4% for the week on Brexit hopes but it is still well off its high. In Shanghai, they ended the week up +0.7% for the week, and Hong Kong was down -0.2%. Tokyo was up +1.2%. The ASX200 was up +1.3% and just a whisker off its all-time high. The NZX50 however had a uniquely bad week, what with the electricity majors and the Fletcher/SkyCity mess, closing down -2.5% for the week and that is now -3.8% below its all-time high in early September.

The UST 10yr yield is up +5 bps overnight 1.80%, and is also +5 bps higher that this time last week. Their 2-10 curve is positive at +18 bps. Their negative 1-5 curve is firmer for the week at just +2 bps. Their 3m-10yr curve is a positive +7 bps. The Aussie Govt 10yr is up at 1.09%, an overnight rise of +3 bps and a weekly fall of -4 bps. The China Govt 10yr is now at 3.25%, little-changed overnight and a +5 bps rise for the week. The NZ Govt 10 yr is now at 1.21%, down -5 bps overnight, down -3 bps for the week.

Gold is up +US$2 overnight to US$1,503/oz.

The VIX volatility index is just over 13, and lower than this time last week. Its average over the past year is 17. The Fear & Greed index we follow has moved slightly to the 'greed' side.

US oil prices are a littel firmer again at just over US$56.50/bbl. The Brent benchmark is just on US$62/bbl. The US rig count which surprisingly rose last week, dropped sharply this week wiping out the eralier gains. It actually hasn't been this low since April 2017.

The Kiwi dollar is down -¼c from where we left it last night, now at 63.5 USc. On the cross rates we are -½c lower at 93.1 AUc although that is unchanged from this time last week. Against the euro we are unchanged overnight at 57.4 euro cents although that is +¼c higher in a week. That puts the TWI-5 at just on 68.7 and little different from where it was at this time last week.

Bitcoin is sharply higher this morning at US$8,544, a gain of +15% overnight and +8% for the 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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29 Comments

by Dgm | 26th Oct 19, 8:59am 1572033554

"In China, another large private industrial company has defaulted on bond interest payments, reinforcing debt stress fears"

Well well well... DEBT, DEBT, DEBT... seems to be the unlikely villain in recent articles...

I bet all those speculators piling on debt with cheap money will realize the chicken has to come home to roost..

by antonymouse | 26th Oct 19, 1:41pm 1572050472

It's not just China, it's the ECB and the Fed.
Regarding the Fed, read this:

Fed Ups Its Wall Street Bailout to $690 Billion a Week as Media Snoozes
https://wallstreetonparade.com/2019/10/fed-ups-its-wall-street-bailout-…

by Hardly | 26th Oct 19, 4:10pm 1572059404

Is it fair to say we still don’t know why this is necessary?

by powerdownkiwi | 26th Oct 19, 9:18am 1572034730

Debt rattle usually has some good content:

https://www.theautomaticearth.com/2019/10/debt-rattle-october-25-2019/

by Audaxes | 26th Oct 19, 12:00pm 1572044424

And the Chinese central bank has added a total of ¥560 bln to China's banking liquidity this week alone (NZ$125 bln), supposedly to cover the liquidity stress of their tax season. But you can't help but wonder if more is involved in this juice.

Indeed there is - a dollar shortage:

China is manipulating its currency, alright, but as a passenger on the eurodollar train. The fact that it keeps to a regular schedule doesn’t suggest control; quite the opposite. Link

Moreover, The Fed's Not Pegging Bond Yields, the Yields Have the Fed Pegged

Jay Powell is telling you he’s pretty sure there’s a monetary shortage, too.

He doesn’t know why or where, but it doesn’t take a genius to properly interpret current money market signals. The real crux of the matter, though, is that he only needed bond market yields to warn him the system had been heading toward this state (again) for quite some time. They had signaled throughout 2017 and 2018 that globally synchronized growth was a farce, the inflationary pressures he envisioned that comported with Milton Friedman’s view of them just never materialized – all because no money had ever been printed.

That’s why rates stayed low, the curve flattened, and are now lower still with the curve inverted – at an incredibly low nominal level. The federal government doesn’t need any help at all to sell its debt. It’s perverse, sure, where the monetary reality is there are too many buyers. It gets better for everyone, including the federal government, when demand for the safest, most liquid instruments goes way down.

In the aftermath of all this renewed activity with 21st century bank reserves, it needs to be pointed out, yields, of course, haven’t budged. Not because the Fed is buying T-bills, but because of the reasons behind the Fed thinking it should buy T-bills. “The broadest facts of experience run in precisely the opposite direction from that which the financial community and academic economists have all generally taken for granted.”

by scarfie | 26th Oct 19, 11:02pm 1572084152

Yields have pegged the FED. I've been saying that for 61/2 years, but economists know better.

by Audaxes | 26th Oct 19, 11:59am 1572044353

SUVs second biggest cause of emissions rise, figures reveal

by bw | 26th Oct 19, 3:19pm 1572056366

Bitcoin hit $US$10,191 this morning, up 20% from David's earlier commentary....What a stable 'investment'!
https://www.telegraph.co.uk/markets-hub/currency/Y31

by Henry_Tull | 26th Oct 19, 3:28pm 1572056912

James Shaw is up early with the Peter Pan routine:

BREAKING: We’ve just increased NZ’s contribution to the Green Climate Fund fivefold from $3m to $15m. This fund supports developing countries in the battle against climate change, which is critical if we are going to keep a safe planet for future generations.
https://mobile.twitter.com/jamespeshaw/status/1187828914413953024?ref_s…

I know he is talking to his way left base, but this is language goes right in the heads of the kids. They get worried and anxious, they are kids, they don't know any better.

Wanting to make a contribution, there is a large list of issues ahead of UN program solar panels. Why the UN. The United Nations. Why.
UN programmes are not covered in glory. Refer the
United Nations Population Fund, they were wrapped up in population control. Dreadful business.

Here at home, we have our own to look after, we need build stronger, resilent and caring communities. For example. Rooting out this Zombie stuff!

https://i.stuff.co.nz/business/116804041/the-working-dead-zombies-of-th…

Add the drug business culture spreading out of Auckland, spreading to rural & regional nz.

by Lapun | 26th Oct 19, 4:40pm 1572061203

The working dead zombies: simply we import 3rd world wages and employment practices. The delibearate policy of our elite whatever their political party. If instead we imported Swiss or German or Taiwan or Singapore work practices we would be doing fine - religion or skin colour don't matter and you can find a diverse mix in most European countries - just the modern 1st world wages and skilled jobs.

by Henry_Tull | 26th Oct 19, 4:59pm 1572062376

Elite whatever their political party....
is no argument or reason to allow Shaw & Co do nothing, and/or give non critical and non local items priority on any list.

They govern for all, not to free wheel pet projects.

by Lapun | 26th Oct 19, 4:47pm 1572061665

You are right about alarming kids. I'm as convinced of climate change as I am of the danger of cigarettes but I've seen young kids who thought their smoking parent would die within the week. Time we taught school kids that even the worst climate change scenario would involve several very pleasant years for NZ with Auckland's weather moving to the South Island and Auckland getting Brisbane weather - so our kids will survive to be adults. However then they may face serious issues.
BTW I'm generally impressed by Shaw and I'm definitely not in any 'left base'.

by Henry_Tull | 26th Oct 19, 5:17pm 1572063461

How does he impress you?.

Scan IPCC literature.
The economic impact of doing nothing;

For most economic sectors, the impact of climate change will be small relative to the impacts of other drivers (medium evidence,
high agreement). Changes in population, age, income, technology, relative prices, lifestyle, regulation, governance, and many other aspects of
socioeconomic development will have an impact on the supply and demand of economic goods and services that is large relative to the impact
of climate change. {10.10}.

Maybe I was wrong. Wrong to say Shaw is Peter Panning us.

Reading IPCC, it's more doing a Pied Piper routine stealing our kids.

by Lapun | 26th Oct 19, 10:05pm 1572080713

He impresses me by attempting to get a concensus - what ought to be avoided is policy flip-flops every time govt changes. He also seems to spend more time talking about the environment and climate change than he does about social justice. Note when I say impress I really mean doesn't depress me as much as most politicians.

by Henry_Tull | 27th Oct 19, 9:33am 1572122027

Priorities, what do you make of the priority of the issue Shaw & Co are purporting.
IPCC lists 9 policy areas, 9 issues that have greater economic influence over us than climate change.
IPCC item 9 is a consolidated group of many, all of greater relevance / larger than climate change.

by powerdownkiwi | 27th Oct 19, 8:43am 1572118989

Actually Henry, our generation is stealing from our kids.

Some of us don't mind trying to do something about it.

by Henry_Tull | 27th Oct 19, 9:39am 1572122367

We've been talking about how the Shaw & Co language is making kids frightened and anxious.

by Gummy Bear Hero | 27th Oct 19, 4:32pm 1572147121

... I grew up during " the cold war " era ... the constant threat of nuclear war , of a nuclear winter lasting years ... the fear of the " iron curtain " .. fear of the USSR , of China ...

It fizzled out ... a generation of kids having a blanket of doom hanging over their childhood

.. now ... if we dare call the IPCC a useless crock of doom mongering sh*t-heads , we're labelled " deniers " ... and shrieked at ...

Let the kids have a worry free childhood

by Henry_Tull | 27th Oct 19, 6:45pm 1572155143

It's a thing with the young, young of mind.

My clinical colleagues report seeing depressed young people who don’t think there’s much for them to live for if the world is doomed. Some young people are committing to not having children because of concern about the world they would be born into. People who are fatalistic about something are less likely to do anything about it and feel distress at feeling powerless...

https://www.noted.co.nz/health/health-psychology/climate-change-anxiety…

This is a problem, and it seems to me an urgent argument to change the way commentators and activist groups go about encouraging climate action. For adult audiences, it made sense to get attention through stories that emphasised the consequences if we did nothing. But I hope the time has passed for that kind of framing and the focus can be shifted to positive action, particularly for young people who’ve been collateral damage in the disaster narrative.

by MAH | 27th Oct 19, 9:18am 1572121091

No that’s not the worst climate change scenario. That’s the best scenario and one based on your personal wish rather than modeling.
Even if your dream came true and Auckland inexplicably ended up with Brisbane’s weather, a lot of the issue is that we’re not adapted to it. Think our power generation in all its forms, preparation for the new style of extreme weather events Auckland’s new climate would bring (say, the sudden Queensland-style storms), our water catchment, the insulation and air conditioning of the buildings we occupy, the new creepy crawlies that will proliferate and the organisms including ourselves that will find it tougher in higher summer temps. Some native animals will migrate away from their traditional homes or die off. Farming will have to change and play it by ear rather than rely on decades or centuries of data and experience: productivity down, change in crops and therefore our diet.
You imply higher temperatures, which means faster arctic, glacial melting and sea level rise leading to land loss and fresh water contamination by brine. It also means more water evaporation so more cloud, mist and stronger storms and less settled weather.

by Henry_Tull | 27th Oct 19, 9:34am 1572122092

Please refer to IPCC documents.

by scarfie | 27th Oct 19, 4:15pm 1572146125

I see this belief a bit Henry, and I don't buy it. I think it does the young ones a disserve to allege they are that gullible (anymore so than any other generation anyway). Put yourself in their position and try to view the world. Lack of meaningful well paid work, over priced houses, stressed infrustructure and services. If they are fearful it is because of what the see and experience of the world, not what someone tells them.

by powerdownkiwi | 27th Oct 19, 5:07pm 1572149270

The youngsters can see right through the Henry Tulls. They don't need a Shaw to tell them to be scared - in their situation I'd be extremely p---ed.

by Henry_Tull | 28th Oct 19, 9:04am 1572206698

I note your capitulation.
And I will take the win.
Cheers

by Lapun | 27th Oct 19, 9:07pm 1572163635

It depends on the speed of change - my fear is accelerating global warming and the political problems it will cause world wide. The experts say it is possible but not probable but it seems reasonable to plan for the worst. As I write this the news is about children depressed by 'eco-anxiety'! Now talking about 'emergency mode'!
Where I do disagree with you and most of our media is the deduction that global warming will lead to 'less settled weather' and they usually then discuss hurricanes and forest fires. I am skeptical because although there is a theory (more energy in the atmosphere = more extreme weather) there is no evidence (to date) All the publicised reports cherry pick their start date. Nobody seems to notice extreme storms seems to apply to the cold Antartic not the warm Pacific; measuring from absolute zero a 4 degree temperature increase is only 1% more energy. We should be worrying about the fertile countries which will become deserts and the low lying lands that will swamped by salt water (Shanghai, Bangladesh,etc) and the obvious political issues with climate refugees not getting too worried about storms, wild fires, droughts - they are simply a problem because of population growth not climate warming.

by frazz | 27th Oct 19, 8:31am 1572118278

Potentially historic': dangerous winds expected as fires burn across California, ,

by youngdumbandbroke | 29th Oct 19, 9:12am 1572293535

Potentially historic? Doesnt california burn every year?

by bw | 27th Oct 19, 8:48am 1572119337

Unlike the Cold War years, in this ( New World) order there will be no “Third World.” Every country will have to adopt either US or Chinese technology standards, then align its entire economy around them. That’s going to put some governments in tough spots. Japan, the EU, UK, and others will want to have a foot in both camps. That’s not going to be possible.
This will force a serious re-engineering on the multinational companies who heretofore thought they could serve both worlds. They can’t. They will have to choose...

https://ggc-mauldin-images.s3.amazonaws.com/uploads/pdf/TFTF_Oct_25_201…

by Zachary Smith | 28th Oct 19, 7:34am 1572201298

Oswald Spengler foresaw all this in his short book Man and Technics published in 1931:

The exploited world is beginning to take its revenge on its lords. The innumerable hands of the non -white races — at least as clever, and far less exigent — will shatter the economic organization of the whites at its foundations. The accustomed luxury of the white workman, in comparison with the coolie, will be his doom. The labour of the white is itself coming to be unwanted.

Emphasis mine.