China's house sales pace startles; China's bond purchases distort; China's steel growth extraordinary; US jobs growth leaves it behind; UST 10yr yield at 0.72%; oil drops and gold unchanged; NZ$1 = 67.1 USc; TWI-5 = 70.2

China's house sales pace startles; China's bond purchases distort; China's steel growth extraordinary; US jobs growth leaves it behind; UST 10yr yield at 0.72%; oil drops and gold unchanged; NZ$1 = 67.1 USc; TWI-5 = 70.2

Here's our summary of key economic events over the weekend that affect New Zealand, with news China is producing some extraordinary imbalances as it strives to avoid recession.

New Chinese home sales grew at a startlingly fast pace, up +31% year-on-year in August as their housing market continued to rebound. That was up from a +25% rise in July. Analysts expect the market to see more growth in the coming months as their economy improves further.

One large Chinese Bank (ICBC) and three regionals, are planning bond issues to shore up their capital positions that are so large, that the NZ$42 bln involved will alone amount to the second largest monthly Chinese bond issuance ever. And this is only the start of massive capital raising by Chinese banks. In fact, China’s four biggest banks face a shortfall of NZ$330 bln to meet global capital rules kicking in, in four years. It's going to be a bond-fest, and may be behind the rising benchmark bond yields in China that have been on a sharp upward trajectory since late April. It's an upward trend quite unlike what is happening in most other major countries.

And China is now producing more than 60% of the world's steel. With mills in other parts of the world handicapped by the pandemic, China is the only country where output is rising. Elsewhere it is estimated that steel production is down more than -40%. It does seem very odd that with now only one main active buyer and many sellers, the iron ore price just keeps on rising and is at a six year high.

In Singapore, their July retail sales declined less than in the prior month on a year-ago basis but this was considered a weak improvement.

In the US we should note that they are on a long holiday weekend - Labor Day - and their markets won't reopen until Wednesday out time. It is a holiday that usually marks the end of their summer vacation period and a return to 'normal' business life. What 'normal' will be this year is anyone's guess.

And the S&P500 futures suggest that Wall Street will return with about a -1.4% drop. That will be on top of last week's -2.0% fall.

American employers added a bit less than +1.4 mln new jobs in August which was almost as expected. (In July they rose +1.7 mln.) But that now leaves a net loss since February of -11.5 mln jobs so far. Their participation rate hardly changed and payroll growth in private sector firms was the weakest contributor, a full -30% less than in July. And even though total jobs have collapsed, the number of part-time jobs is now +3.3 mln more than in February.

Canadian payrolls grew less than expected in August and far less than in July. But almost all of their increase was for full-time jobs. Still, they would have been disappointed by this 'bounce-back'.

Back in the US, we should note that US coal production is down -22% over the past year to the end of August. That is the steepest annual decline ever and that industry is on track to be wiped out within a few years. Production levels are at 50 year lows and production in recent months has fallen at ever faster rates.

And it is not only the coal industry that is suffering. American agricultural exports, which peaked at the beginning of 2016, have been on a downward track since - requiring a very sharp rise in farm subsidies that more than doubled since 2017.

And imports into the US seem to be surging, suggesting that August and September could well bring a record trade deficit, fueled by imports from China.

In Germany, new factory orders declined less in July compared with the same month in 2019, than they did in June. But this was a much tamer outcome than analysts were hoping for.

The latest global compilation of COVID-19 data is here. The global tally is 26,950,000, up +531,000 since Saturday. Global deaths reported now exceed 881,000 (+10,000 in two days).

Just under a quarter of all reported cases globally are in the US, which is up +88,000 to 6,448,000 and a relentless rise. US deaths are now just over 193,000 and a death rate of 583/mln (+5/mln) and approaching Italy's level. The net number of people actively infected in the US is down slightly to 2,541,000. Testing over the weekend will go into a lull.

In Australia, there have now been 26,279 COVID-19 cases reported, and that is +143 more cases over the weekend and clearly the Victorian emergency isn't getting worse. Australia's death count is rising however to 753 (+16). Their recovery rate is now over 85%. There are 3064 cases in Australia (-170) and a turned tide and more recoveries than new infections.

The UST 10yr yield rose sharply at the end of trading last week and start today up +10 bps at 0.72%. Their 2-10 curve is notably steeper now at +57 bps. Their 1-5 curve is up even more at +17 bps, and their 3m-10yr curve steeper too at +62 bps. The Aussie Govt 10yr yield is up +1 bps at 0.96%. The China Govt 10yr is unchanged at 3.14%. And the NZ Govt 10 yr yield is also unchanged at 0.60%.

The price of gold is little-changed and now at US$1,935/oz.

Oil prices are lower today, down -US$2/bbl to over US$39.50/bbl in the US while the international price is down to just over US$42.50/bbl.

The Kiwi dollar is marginally softer today from Saturday and now at 67.1 USc. Against the Australian dollar we little-changed at 92.2 AUc. Against the euro we are also little-changed at 56.7 euro cents. That means our TWI-5 is at 70.1 and similar to this time last week.

The bitcoin price is lower again today from this time Saturday, now at US$10,218 which is another -2.0% reduction. 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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33 Comments

Another blow for coal. "The U.S. Nuclear Regulatory Commission on Friday approved Portland-based NuScale Power’s application for the small modular reactor that Utah Associated Municipal Power Systems plans to build at a U.S. Department of Energy site in eastern Idaho."
https://apnews.com/910766c07afd96fbe2bd875e16087464

Coal is continually taking a beating. I watched a recent documentary on one of the small US towns that has all the jobs centered around coal mining. Their coal mine shut down under Trump, and I expect it's a common story across the mining towns. Gas is still a better option and renewable energy in the US is constantly growing.

If the economics of reactors changes (with shorter construction time) then coal is dead.

"The first small modular reactor is scheduled to come online in 2029, with 11 more to follow in 2030.."

Not sure this is high on the worry issue list for coal companies
The issue is weaker (and weakening) commodity prices across the board - this spells big problems

https://ourfiniteworld.com/2020/09/01/todays-energy-predicament-a-look-a...

The irony of crackpot club of rome websites explaining weak commodity prices.

over your head then?
i thought you might have understood the pictures at least

Turkey's year on year steel production is also up, and the rest of the world is increasing steadily at the moment, after a big dip, I think that's why we are seeing the increasing ore prices. Question is where is all this steel going? Cars? reinforcing for concrete? military? Certainly shows Trumps plans for increased US manufacturing were just plans, nothing else.

Is it because steel is a real commodity. It is used to make lots of things.
Like real estate, it is a real tangible thing that serves a purpose.
It also has use across a wide range of sectors, making it more robust as a commodity.

Jail bars for all the lockdown rule breakers.

Stockpiling, a massive pump and dump scheme aimed at the Aussie miners?

And New Zealand production, so ultimately we're dependent on overseas production?

Jails for Uighers and HK dissidents etc

I would think the post flooding rebuild in China will have a massive demand for steel. Some of the housing demand must also coming from displaced home owners.

Did anyone catch the small but significant comment from Bloomfield the week before last where is said the lockdown proposal had been approved by cabinet?

The way this was supposed to work is that government declares both an epidemic and state of emergency to empower both acts, then they keep their grubby hands off and let the Health Ministry take over. The subtle shift of power the politicians gave themselves: http://www.legislation.govt.nz/act/public/2020/0012/latest/LMS344175.html

Too funny
Looks like the expert advice regarding lockdown is whats the health of my election chances.

As if a part time Health minister would be, could be across the issues.

In fact, China’s four biggest banks face a shortfall of NZ$330 bln to meet global capital rules kicking in, in four years. It's going to be a bond-fest, and may be behind the rising benchmark bond yields in China that have been on a sharp upward trajectory since late April. It's an upward trend quite unlike what is happening in most other major countries.

China's rising bond yields reflect a rising opportunity cost of an expanding business environment.
In contrast to our reality.

Thus, the decline of interest rates to zero corresponds with a monetary imbalance in favor of deflation, if at least an abundance of deflationary pressures. This is something that Milton Friedman also talked about, particularly in 1998 with regard to Japan. He called it the interest rate fallacy, meaning that low nominal interest rates signify "tight" money conditions, or what would be consistent with significant deflationary pressure. It is and remains a fallacy because economists like those at every central bank around the world have decided instead that low rates are only "stimulus."

To correct this view, Friedman pointed out the basic, non-trivial distinction between a liquidity effect and an income effect. Low rates can be stimulative in the short run (the liquidity effect), but over the long run their persistence means something far different. A yield curve is supposed to be upward sloping given the core time value of money and investing. That arises from opportunity cost, meaning the more plentiful the opportunities the greater the time value and the steeper the curve (the income effect). Yield and/or money curves (the eurodollar curve and even the history of the OIS curve) that collapse and remain that way unambiguously demonstrate that "stimulus" deserves only the quotation marks

Thanks Audaxes, this puts it into perspective. I have some questions about the 'issuing' of of bonds. Are they 'issued, or sold? Why under these conditions, and given the recent history would any sane person invest in a bank, particularly a Chinese bank?

Bonds are issued by an entity then sold to a buyer who monetises the IOU. Banks attract many investors - what's your problem with Chinese banks? Bank depositors are unsecured creditors.

I have lots of problems with things Chinese given the CCP and it's attitude. And to bank depositors, agreed that is a major concern that I think should be changed. Total power imbalance there.

When one see various data that are thrown everyday reminds of Good Cop / Bad Cop routine.

chinese numbers,always too good to be true.

Unlike ours, of course.

Excess deaths due to lockdowns seems to be a subject that other countries are starting to evaluate. It seems suicide and drug deaths (particular weaknesses of ours) have been found to increase, as well as those due to reduced access to medical care. It is a difficult subject.

The actual, early evidence would suggest not...
"While Covid-19 takes lives around the world, New Zealand's response has led to fewer deaths from all causes."
https://www.stuff.co.nz/national/health/coronavirus/122476223/coronaviru...
"Nearly 1200 fewer people have died this year than had at the same point in 2019, data from Stats NZ shows."

Cool. Thanks for that. Lots of interesting stuff there.

All the people that would have died of flu. Easy really, we'll just lockdown every winter.

How about producing facts instead of "seems"?

My apologies. It was in response to articles in the UK mainly, but I think the US CDC said much the same thing.

American employers added a bit less than +1.4 mln new jobs in August which was almost as expected. (In July they rose +1.7 mln.) But that now leaves a net loss since February of -11.5 mln jobs so far.

For one thing, it sure looks like that as many are coming off the regular state rolls a nearly equal number are becoming eligible for, and receiving payments from, the two big direct federal government programs. Link

https://www.resilience.org/stories/2020-09-06/do-we-have-room-for-a-bill...

Looks like we have us another Julian Simon. Just goes to show; education is no guarantee.

So much for Trump's trade war. " Imports into the US seem to be surging, suggesting that August and September could well bring a record trade deficit, fueled by imports from China."

So despite the tariffs, it is still cheaper to buy from China than set up manufacturing in the US. As has already been said, the tariffs hurt Americans, not the Chinese. But this misses the point of them too. Tariffs should be used to support indigenous industry over imports, but that industry must be efficient. Trump's Government, and any other for that matter would have been better off to focus initiatives to build and support specific industry at home. But then for the US their tax structure and other areas of regulation would probably just get in the road and make this too difficult.

You're probably right about the cost from China being lower, but also must be realistic about the timeframes involved - even if tariffs were applied that made China twice as expensive as US manufacturing, you can't just turn on a local factory overnight. It takes time to shift manufacturing.