Here's our summary of key events over the weekend that affect New Zealand, with news of slower economic activity and higher debt.
Firstly, the final American 2018/2019 budget deficit result has been finally released, and it is a whopper. The final deficit was -US$984 bln, and -US$206 worse than for the previous year, a +26% increase. That takes the annual deficit up to 4.8% of US GDP. It is unprecedented to be this high in "good times" and leaves only dangerous options when the current expansion ends. If the October monthly deficit comes in at -US$116 bln, which seems likely, that will push the US Federal deficit over $1 tln. And that will take the Federal debt to external creditors up to just under US$17 tln. When it matters to markets, it will really matter. They are in a policy box with a non-recession deficit level at 5% of GDP.
Later this week, the US Federal Reserve will meet to review rates and there is an expectation of another -25 bps rate cut there, taking it down to 1.75% to bolster their economy in the face of its slowdown.
In Australia, it appears that house auctions and house sales this weekend have been unusually strong, led by first home buyers. Those with big deposits are creating something of a buying frenzy. Helping is the Australian Federal Government who released a scheme to allow buyers to have only 5% deposit, although there were some serious limits that mean FHBs will get pushed to the outskirts and margins to qualify.
In China, profitability at industrial firms shrank for the eighth straight month in September. Factory revenues were up +4.3% year-on-year but costs were up +4.8%, leading to a -3.8% drop in profitability.
In the US, the car union workers approved a new contract, and the GM manufacturing facilities are about to re-open. But now the unions will be trying to get other manufacturers to adopt the gains they won at GM. Ford is next.
Here are some brief economic updates from over the weekend in case you missed them on Saturday.
First, American consumer sentiment was little-changed in the latest survey. But it is still lower than this time last year.
And Moodys is pointing out that some large securitised 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 delinquencies 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 last week (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.
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.
The UST 10yr yield is at 1.80%, and +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%, and a weekly fall of -4 bps. The China Govt 10yr is now at 3.25% and a +5 bps rise for the week. The NZ Govt 10 yr is now at 1.21%, down -3 bps for the week.
Gold is up +US$1 overnight to US$1,504/oz.
US oil prices are a little firmer at just over US$56.50/bbl. The Brent benchmark is just on US$62/bbl.
The Kiwi dollar is still at 63.5 USc. On the cross rates we are softish at 93 AUc. Against the euro we are unchanged overnight at 57.3 euro cents. That puts the TWI-5 at just on 68.6 and little different from where it was at this time last week.
Bitcoin has built on its strong rise on Saturday and is again sharply higher this morning at US$9,675, another gain of +12% overnight on top of Saturday's +15% jump and a +30% jump since Thursday. 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 ».
Daily exchange rates
Select chart tabs
15 Comments
Subprime mortgages got cleaned up during the GFC. Unethical or fraudulent lending on cars and credit cards has never changed. Student loans are mostly unethical and just too large with too many for profit institutions selling worthless degrees. All three loan types are rolled into securitised products. Those products are far worse than junk bonds.
If you aren't familiar with how bad things are in the US loan market. You can get a car loan, say the person is 3 years into payment on a 5 year loan (the average car loan length now) but they can't afford to replace the broken engine in their car what do they do? They buy a new car (it's easier to get a car loan than a loan to fix the car) and the debt on the other car is rolled into the next car. Many loans are larger than the value of the new car (especially after rolling in the balance 2 or 3 times) and some car loans are now 7 years just to keep the monthly payments down.
At the peak of the GFC it was common to help people seeking advice on how to pay off their 9-12 credit cards with a balance of $100k to $120k. People end up trapped paying penalty fees and interest rates. Very profitable for the credit card companies but hardly sustainable and better off securitised so that some other sucker can hold the worthless debt.
The worst student loan balances in the US are $100k or higher. They are often a mix of Federally subsidised 3% loans and unsubsidised loans at 6%. There are various repayment schemes that are not unreasonable provided that the person ends up with a job paying above minimum wage. Of course the debt servicing sucks the cash flow out of the US economy making the credit card and car loan repayments likely to end up in default (people need to pay the student loans as they cannot be written off via bankruptcy).
The default rate in car loans is because people are tapped out with debt obligations too high to ever repay. There isn't a segment of fraudulent loans, most of the US loan market is fraudulent on the lending side and involve lending to people who cannot afford the loan.
And the answer to all that is? Take on more Debt; buy a house or two and discharge those existing onerous loans with the guaranteed Capital Gains that must accrue! That's what the Aussies are doing; dragging in those last Marginal Buyers ( sorry, First Home Buyers) that otherwise couldn't afford the purchase price; Government Guaranteed to boot.
...details of its first-homebuyer deposit scheme that stands to benefit up to 10,000 Australians each year. The scheme will kick off from January next year. First home buyers will only have to save 5% of a deposit under the plan, with the federal government to guarantee the difference of a standard down payment. Eligible buyers will be able to enter the market without having the standard deposit of 20% under the scheme. Price caps for support through the scheme, which is $700,000 for a house in Sydney.....
Haven't had the chance to download the csv..
https://www.stats.govt.nz/information-releases/subnational-population-e…
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.
A higher level of interest rates claim otherwise:
What Friedman told his stunned audience in 1967 was that the central bank cannot peg either interest rates or unemployment beyond the short run, and that what had occurred between the Great Depression and that time was the pendulum had swung too far in the other direction. If the central bank was thought useless or at best secondary in 1930, by 1960 it had been revived as a powerful agent to try and control those main factors.
That’s the set of assumptions we recognize today. But they still proceed from a faulty basis. He said:
“Let the Fed set out to keep interest rates down. How will it try to do so? By buying securities. This raises their prices and lowers their yields. In the process, it also increases the quantity of reserves available to banks, hence the amount of bank credit, and, ultimately the total quantity of money. That is why central bankers in particular, and the financial community more broadly, generally believe that an increase in the quantity of money tends to lower interest rates.”
But all experience shows this is not so. As Friedman detailed, that’s only the beginning of the process rather than its end. There are feedback effects, very positive ones that in the end leave interest rates moving higher; to the extent that the initial policy actually does stimulate investment and spending, it will also mean rising incomes and liquidity preferences, maybe even the price level (inflation), all of which should combine to pressure interest rates into going only upward.
The result of successful stimulus is higher rates. As back then, today everyone including central bankers seem unaware of the multistage processing. Or they are insidiously disingenuous; they know higher interest rates would confirm their success with monetary policies but in their absence keep calling low interest rates “stimulus” so as to stave off questions about their performance. Link
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.