US productivity unexpectedly falls; China announces trade deal with the US; Japan and EU economies stall; Australia posts huge trade surplus; UST 10yr yield at 1.94%; oil firm but gold drops again; NZ$1 = 63.5 USc; TWI-5 = 68.6

US productivity unexpectedly falls; China announces trade deal with the US; Japan and EU economies stall; Australia posts huge trade surplus; UST 10yr yield at 1.94%; oil firm but gold drops again; NZ$1 = 63.5 USc; TWI-5 = 68.6

Here's our summary of key events overnight that affect New Zealand, with news the Chinese see a real prospect of a trade deal with the Americans.

But firstly in the US, productivity unexpectedly fell in the September quarter and by the most since 2015, as output increased by much less than the number of hours worked. Their expansion has turned unproductive, which is a somewhat ominous sign.

The latest data on US mortgage applications has them slipping -1%, and mortgage interest rates also fell marginally.  But given the recent sharp rise in UST benchmark rates, American mortgage rate hikes are a real prospect now and that won't help their housing market.

China announced that it and the United States have agreed to cancel in phases, the tariffs imposed during their months-long trade war, but they didn't give a timetable for the rollback.

That has helped Wall Street post gains today with the S&P500 up +0.5% so far. European markets were up a little more overnight. Yesterday, Shanghai and Tokyo were flat, but Hong Kong was up a healthy +0.6% on the trade rumours. The ASX200 rose +1%.

In Japan, the recent typhoon has knocked their service sector, with it's expansion suddenly stalling in October. Their recent GST price hike probably didn't help either as many purchases were brought forward. A bounce back in November is likely however.

The latest EU PMI survey shows that the bloc remains stagnant withy no expansion. Germany is the drag with industrial production there falling faster than expected, and even the German services sector has stopped expanding. France is the bright spot. EU retail sales are still growing faster than +3% pa however.

In London, England, their central bank kept its benchmark policy rate unchanged at 0.75%. But two voting members broke ranks and voted for a rate cut in a sign worries about recession risks are rising there. And there are signs the UK Government is about to release huge fiscal stimulus with some serious deficit spending.

Australia has posted a better-than-expected trade balance on the back of high iron ore volumes. The +AU$7.2 bln surplus in September took their annual trade surplus to more than +AU$63 bln for the year (+4.4% of GDP), and way above the +AU$12.5 bln surplus in the equivalent previous 12 months. But iron ore prices are now falling back, and some analysts are warning the boom is over.

The UST 10yr yield is has risen further, now at 1.94% and its highest level since July. Their 2-10 curve is positive at +26 bps. Their 1-5 curve is now +16 bps. And their 3m-10yr curve has jumped to be at +41 bps. The Aussie Govt 10yr is following the USTs up, now at 1.31%, a rise of +4 bps. The China Govt 10yr is doing its own thing, down -1 bp at 3.28%. The NZ Govt 10 yr is also not following the Wall Street trend, now at 1.32% and down -4 bps overnight.

Gold has slumped further, down more than -US$19 today so far to US$1,465/oz which is another -1.3% dive in a day and takes the fall in just the first week of November to -3%.

US oil prices are firmer again, now just over US$57.50/bbl. The Brent benchmark is just over US$62.50/bbl.

The Kiwi dollar has slipped back a little further to 63.5 USc. On the cross rates we are another -½c lower at 92.1 AUc and that is actually its lowest level in a year. Against the euro we are little-changed at 57.5 euro cents. That puts the TWI-5 down at 68.6. We should also mention that the Chinese yuan is rising fast in the past few days, pushed by Beijing authorities back to the 7-to-the-US-dollar level and probably part of their 'negotiation' to get a tariff deal over the line.

Bitcoin is -1.5% lower overnight at US$9,193 and that is its lowest level for the month so far. The bitcoin rate is charted in the exchange rate set below.

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Ust10y nearing 2%, when there was talk of negative interest rates

The prospect of continuous central bank largesse has short term consequences of perceived potential growth opportunities, hence term tenor UST hedges placed to offset mortgage pool prepayment risk are largely being reversed and some.

CoreLogic's latest release estimates construction costs grew 1% in the quarter ended Sep-19 and 4.5% YoY (3x CPI), mainly off the back of higher labour and material costs.
Construction costs have risen by more than 16% since Sep-16. As the industry continues to run hot with a long pipeline of new orders, there are no signs of cost pressures easing here.

A building boom is great. More houses, higher wages leads to yet more houses and even higher wages. Lots of fancy new builders' utes around. We may slay the housing dragon yet. Sometime the party has to end, of course, as eventually we go from housing shortage to housing surplus and then overshoot to abandoned projects. Interesting times ahead, maybe, but for now it's party on. Let's raise a glass to cheap money and drink our fill.

And we have gone as cheap as we can with materials.

According to this article cladding and joinery that last 15years

https://www.stuff.co.nz/business/114268653/new-houses-have-cladding-and-...

It's called 'affordable housing' in a country where building supplies are grossly overpriced.

It's called 'affordable housing' in a country where building supplies are grossly overpriced.

Yes, it really is a joke. One I have debated before on Interest.

House is meant to last 50 years. (Most builders only give a 10 year warranty)
Now according to this article window Joinery is likely to only last 15, and even worse is only guaranteed for 5 years.

How long would anyone bet on the house actually lasting?

Basically the water tightness of a modern house is 5 years.

Yep 5 years sounds about right.... with todays overpriced housing and high mortgages, what’s the bet that people affected won’t be able to get additional finance for the essential repairs! Also, those same building materials are being used to reclad the leaky buildings and also in those expensive renovations!

Exactly, I can see why Insurance companies are getting nervous.

'Little boxes on the hillside, Little boxes made of ticky tacky', housing economics. They should be given away, never mind a lifetime of mortgage payments. TPTB obviously think we are stupid or to be terminated.by diktat of the new climate change dogma.

Re thinking buying a new build now after reading that article. Might have to stick with the 100 year old modernised villa - at least I can sleep at night knowing there is no black mould growing in the cavities. And after experencing a earthquake in one trust them even more.

Yet people a still clamouring to buy new builds. They come and look at our 40 year old house and say " it's a bit dated I was wanting something more modern" yes it is dated but it still weather tight with very little maintenance after 40 years. And they could drop 100k Reno's and it would still be 100k cheaper than a new build and with twice the land.

But it seems image is everything now. Personally, I'd rather look like an egg and retire at 40.

100k on reno's does not go far. Most old stuff is not up to code, so touching it quickly snowballs.

Some examples I have seen:
Broken light fitting - nope, turns out the wiring is not up to scratch to simply replace, so need new wiring. Wiring goes back to switchboard - so bang need a new one of them too. Replace all wiring.

Leaking pipe - nope, duxquest splt. No longer insurable. Replace all plumbing.

Leak hits the subfloor (Particle board, i.e. weetbix) can't replace the patch, need to replace whole panel, up comes cabinetry.... but wait can't have particle board in wet areas, now entire floor now needs replacing.

Internal paint? don't bother - Gib is toast, so just redo. Good opportunity to add in insulation you say... Oh sorry external cladding is now compromised as there is no cavity. Reclad entire house to add in cavity.
Bonus points where:
- Cladding was asbestos board
- Framing has rotted out

Repaint weatherboard? Not so simple old paint had lead it in. Bonus point when boards are rotten.

New roof - oh hang on, old standers and foundations on decking/veranda were never done correctly - replace all decking first before roof.

Replace cooktop/shower/dryer - now you need ducted ventilation.

Is it any wonder we live in hovels?

The above all assumes that one tells the local Council....shurely everything is like-for-like....I seem to recall pontificating aboot exactly this over a decade back....

Yes well you can always half-ass it and leave it for the next poor sap to uncover. That appears to be the kiwi way.

Great!

In our disposable world where electrical appliances are cheaper to replace than have repaired we are now building disposable houses.

So much for human progress.

Interesting view on the skulduggery of banksters and the repo rate -

https://ellenbrown.com/2019/11/07/is-the-run-on-the-dollar-due-to-panic-...

It gets better:

Basel rules were doomed to failure, since they consider banks as financial intermediaries, when in actual fact they are the creators of the money supply. Since banks invent money as fictitious deposits, it can be readily shown that capital adequacy based bank regulation does not have to restrict bank activity: banks can create money and hence can arrange for money to be made available to purchase newly issued shares that increase their bank capital. In other words, banks could simply invent the money that is then used to increase their capital. This is what Barclays Bank did in 2008, in order to avoid the use of tax money to shore up the bank's capital: Barclays ‘raised’ £5.8 bn in new equity from Gulf sovereign wealth investors — by, it has transpired, lending them the money! As is explained in Werner (2014a), Barclays implemented a standard loan operation, thus inventing the £5.8 bn deposit ‘lent’ to the investor. This deposit was then used to ‘purchase’ the newly issued Barclays shares. Thus in this case the bank liability originating from the bank loan to the Gulf investor transmuted from (1) an accounts payable liability to (2) a customer deposit liability, to finally end up as (3) equity — another category on the liability side of the bank's balance sheet. Effectively, Barclays invented its own capital. This certainly was cheaper for the UK tax payer than using tax money. As publicly listed companies in general are not allowed to lend money to firms for the purpose of buying their stocks, it was not in conformity with the Companies Act 2006 (Section 678, Prohibition of assistance for acquisition of shares in public company). But regulators were willing to overlook this. As Werner (2014b) argues, using central bank or bank credit creation is in principle the most cost-effective way to clean up the banking system and ensure that bank credit growth recovers quickly. The Barclays case is however evidence that stricter capital requirements do not necessary prevent banks from expanding credit and money creation, since their creation of deposits generates more purchasing power with which increased bank capital can also be funded. Link

Barclays avoids trial over £6bn Qatar rescue package

Gold has slumped further, down more than -US$19 today so far to US$1,465/oz which is another -1.3% dive in a day and takes the fall in just the first week of November to -3%.

While a UST will rise in value during a liquidity event partly or even mostly because of its status in repo, the opposite happens in the gold market. Though gold is a collateral of last resort, too, it isn’t as flexible and so it gets dumped whenever deployed that way. Very negative for its price.

So, it ends up in a tug-of-war between what I’ve called collateral gold (negative price) and fear gold (positive price). What ultimately might determine which one wins out is hard to predict, and it’s not a precise and straightforward mix at least inferring ahead of time.

As I wrote last December during the landmine:

"Gold may be collateral of last resort but many still treat it as a hedge against everything going wrong – including central banks and their numerous big errors (forecasts). Therefore, even with renewed deflation and market liquidations tied right into collateral problems gold has been moving in that other direction – UP…

In other words, if there wasn’t this fear bid, gold would probably be down huge likely more than it was after April 18. That it’s not and is in fact at multi-month highs is a testament to the level of anxiety permeating global markets right now."

In 2008, for example, collateral gold was unleashed in the immediate aftermath of Bear Stearns – which makes sense given what Bear taught the marketplace about illiquid securities and the need for repo reserves. Gold was down sharply as collateral became very hard to source. Link

It's not as if the Fed is confident about the reason it keeps injecting cash into the repo market and undertaking outright Treasury Security purchases.
Transcript of Chair Powell’s Press Conference - October 30, 2019 –page 13 of 23

There are also, it may be, one thing that was surprising about the episode was that liquidity didn't seem to flow as one might have expected. We had surveyed the banks carefully about what was their lowest comfortable level of reserves, and many banks that were well above that level did not take that excess cash and invest it in the repo market at much higher rates. They just, they didn't do that, and so the question is why, and are there things that we can do that would, adjustments that we could make, that would allow liquidity to flow more easily in the system without in any way sacrificing safety and soundness or financial stability? So, we're looking at those. Those are not things that can happen, that can really address the situation in the short term, but those are a range of things that we're looking at as well.