S&P warns on ratings downgrades; China reduces UST holdings; China blocks cotton from Australia; US retail better, factory production worse; UST 10y at 0.75%; oil firm and gold lower; NZ$1 = 66.1 USc; TWI-5 = 69.6

S&P warns on ratings downgrades; China reduces UST holdings; China blocks cotton from Australia; US retail better, factory production worse; UST 10y at 0.75%; oil firm and gold lower; NZ$1 = 66.1 USc; TWI-5 = 69.6

Here's our summary of key economic events overnight that affect New Zealand, with news the pressures of weighing against the pandemic is about to bring a 'blizzard' of sovereign ratings downgrades.

Standard & Poor's is saying that the immense costs of supporting health programs, businesses and workers through the pandemic was fundamentally undermining most countries’ finances. And so there are about to be a raft of ratings downgrades to be announced, with most major nations at risk.

One of those downgrades won't be China. They are set for a bumper grain harvest will leave the nation with more than a years consumption in inventory, and cap the recent rise in grain prices, they claim.

After barley, wine, beef and coal, the next trade China is punishing Australia with is apparently going to be cotton, as farmers there brace for a Chinese announcement of a 40% tariff imposed by Beijing. The screws are tightening and Canberra has become much more circumspect very recently. Two thirds of all Aussie cotton is exported to China.

South Korea has posted a worsening jobless rate in September, but it is still a low 3.9% even if it isn't improving. Many countries will look with envy at that level.

And Singapore's exports fell sharply in September, in an unexpected worsening of their trade balance.

In a positive surprise, American retail sales for September ended a bit better than most analysts were expecting. They rose from August and were up +5.4% from the same month a year ago. On-line (non-store) retailing is powering the gains, up +27% from a year ago. Used car sales powered the vehicle retailing industry, up +14.4% year-on-year.

But those gains are not being seen in American industrial production. The latest data fell more than expected in September when actually a rise was expected. This production is now -7.3% lower than in the same month in 2019. Imports (from China) are filling the product demands in a spectacular failure of their avowed industrial strategy.

Consumer sentiment doesn't seem to care. It is up in October from September, although still a massive -15% lower than this time last year. Maybe the 'don't care' description isn't entirely fair - the views on 'current conditions' declined in October from September. But future expectations rose. So perhaps American consumers are just waiting for a leadership change.

And it is now official; the US posted a -US$3.1 tln budget deficit in their fiscal year ended September 2020 - three times more than for the previous year's terrible outcome.

And international holdings of US Treasuries fell for the first time in four months in August, with China's holdings of American government debt falling to the lowest in nearly four years.

The latest global compilation of COVID-19 data is here. The global tally is 39,792,000 and up an average of +356,000 per day. The case growth is concentrated in Russia, the UK, Iran, France and Italy. Global deaths reported now exceed 1,111,000 (+5,000 per day) but clearly many are going unreported.

The largest number of reported cases globally are still in the US, which rose +106,000 in two days to 8,354,000. They are clearly now in a third wave (initial was in April, then a larger one in July, and this new one threatens to be larger again). The number of active cases is at 2,690,000 so as many more new cases as recoveries. Their death total is over 224,000 and still rising at +1000 per day. By the end of 2020 their death toll will top 300,000+.

In Australia, there have now been 27,390 COVID-19 cases reported, and that is just +19 more cases than we reported on Saturday. Most states reported new cases. Deaths are unchanged at 904 however.

The UST 10yr yield is little-changed this morning at just on 0.75%. Their 2-10 rate curve is unchanged at +60 bps, their 1-5 curve is a little steeper at +20 bps, while their 3m-10 year curve is also marginally steeper at +66 bps. The Australian Govt 10 year yield will start the week unchanged at 0.73%. The China Govt 10 year yield is also unchanged at 3.25%. The New Zealand Govt 10 year yield remains at 0.54% as well.

The price of gold is down -US$2 from where we left it Saturday at US$1900/oz even.

Oil prices are marginally firmer to start the week, now just under US$41/bbl in the US, while the international price is still just under US$43/bbl.

The Kiwi dollar starts today little-changed at just under 66.1 USc. Against the Australian dollar we are also unchanged at 93.3 AUc and holding on to the recent gains. Against the euro we are holding at 56.4 euro cents. And that means our TWI-5 is still at 69.6 and little-changed over the past seven days.

The bitcoin price is +1.1% higher today than this time Saturday, now at US$11,469. 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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61 Comments

17
up

After RBNZ now even RBA has come out in open to support rise in house price. Even they have made it clear of their intention of doing everything to keep the ponzi alive just like RBNZ. As they all have run out of ideas and the new mantra is not economy fundamental but is inflation vs deflation.

https://youtu.be/EchRrjuPTvU

Interesting Interview on Housing Market and role of reserve bank, government and media - Good watch for insight which though many have commented on this website.

https://youtu.be/1SYjYahSIPI

This sudden rise, which many were confused is now clear that is by reserve bank and this rise is just the beginning. Where will it all ends, if it ends, as now no reserve bank or government can allow it to burst in fact will be forced to continue to support by stimulus and printing of money all to boost asset class - mortage holiday which ends next year in March will have to be extended.

Interested in Stock Market should watch;

https://youtu.be/uk9J_80UFAc

Everything indicates that though risky but reserve bank will only be inflating housing and stock market for years to come, a a result distorting the real economy and widening the inequality and somewhere in future reset will be disasterous.

"When the last bear turns bullish is it time to get out?"
Written in 2006, and writes that the same call came from the same person in ...1999. And we all no know what came soon after those dates.

After several years of dire warnings about global trade imbalances and the US current-account deficit, signs that central banks are adjusting liquidity and the IMF and G7 are serious about tackling imbalances have won him round to a semi-bullish position. "I am now feeling better about the prognosis for the world economy for the first time in ages," says Roach in his latest research note. But not everyone is encouraged by this sudden conversion. "You have to admire the bravery of the call, given that Roach admits the last time he was so optimistic was 1999," says Pratley.

https://moneyweek.com/7303/when-the-last-bear-turns-bullish-is-it-time-t...

If the reserve bank decides that now the only hope in saving the economy is rising house and stock price - that will be as you cannot fight reserve bank and reserve bank can go on printing abd distribution of money along with other measures - all under fight against coronavirus and the more they go out in extreme to support, deeper the hole they are digging for themselves to come out and this can continue for six months to six year or may be who knows this may be the new norm and the way economy works has to be rewritten.

Ultimately all that money will find it's way into private bank profits.

As you suggest, the irony is that "the only hope in saving the economy is rising house and stock price" is the very thing that will destroy our economy if that comes to pass.
I remain optimistic! that economic sanity will resurface. It has to at some stage, and NOW is the best time for that to happen, becasue if it doesn't, everything is going to be worth nothing except barter value.

Everyone talks about reset but afraid, so now following herd mentality. If one reserve banks does it all other folows to be in the same boat and be free from the liabilty of any adverse consiquence by pointing finger to others.

Everyone is accepting whatever reserve bank does under the impression that they are experts and know what they are doing but DO THEY ?

Classic herd mentality, lots of lemmings running off the cliff, all looking at each others fevered eyes, too scared to be the one who changes direction. It's similar behaviour you see from lots of "unintelligent" species, maybe that's what we should call Reserve Bank leaders/economists.

"It Is Difficult to Get a Man to Understand Something When His Salary Depends Upon His Not Understanding It"

Yes interest rates are low and going lower
Yes asset prices are responding and increasing.
Yes there will be resulting carnage in markets when the debt fueled bubble falls over .... NO stop right there. The thing you miss bw is that banks and rbnz are controlling the availability of credit. By 1 setting a stress test rate of over 6 percent and 2 being sparingly stingey with loans if my recent experience is anything to go by. We hold 95 percent of the funds for a bl**dy good home we already bought at auction. We just need minimum 80k. Will add at least 50k of rental income. After 6 weeks one trading bank turned us down and another offered max 250k mortgage on a business interest rate but still won't say its definite even though settlement is this week. We have been with both banks over ten years. Its enough to make one take up smoking the dope.

What was that "business interest rate"? Just curious to learn what they've sunk or risen to.

The offer of a business interest rate is interesting. I suppose that gives a -ROI for the property?

They have not told me the interest rate yet just said 'business rate'. Not negative gearing when we have between 80 and 90 percent equity.

For my sanity sake we have decided to go with a mortgage broker who has approved and confirmed they will have the mortgage docs in time for settlement. With slightly less favorable terms but what the hell.

Interesting story. Thanks for sharing it with us.

16
up

And so the equity gap will continue to expand as the young and low income workers are further trapped into a cycle of poverty and dependence. Gross neglect by their Governments to address housing costs as landlords are subsidised.

That's right.

Investors jacking up rents, high migration pushing down wages and banks cutting deposit rates - securing a roof over your head shouldn't be such a major life challenge.

Agreed - but a major life challenge for 1 billion or 9?

It's a lot less challenge with 1 .

'Interested in Stock Market should watch;

https://youtu.be/uk9J_80UFAc '

Expertsmay be right with all indication / data / charts (as in abive video) *pointing towards fall but they have not yet realised that the defination of Economy is changing and is been rewritten by reserve bank so no more PE, Debt free company.......etc matters.

May be in new economy the more the debt one can borrow better that company will be if can borrow n borrow and invest n invest (not doing business or production is also fine as asset will give more returns than doing actual business).

Good or bad only time will tell but definitely defination of economy is being changed by reserve banks and for now the only solution they have is by running the ponzi.

21
up

Number of New Zealand journalists who actually asked what the future will be, and therefore what Parties/policies might have been appropriate?

Nil.

Hang their heads in shame.

I have been following Chris Cook for a while now, sometimes a gem pops up,

https://www.lowimpact.org/chris-cook-oil-markets-from-nixon-to-trump/

IMF signaled a Bretton Woods moment on October 15. Most NZers would have been too absorbed with the election and the rugby to notice. (https://www.imf.org/en/News/Articles/2020/10/15/sp101520-a-new-bretton-w...).

Sounds oblique, but this is all about Central Bank Digital Currencies in the biggest overhaul of the global financial system since Bretton Woods. The debt-based monetary system has been sunk. Ultimately, this will absolve any spending responsibility in a crisis from governments. After 2008 and 2020, they are desperate for something like this. Not sure what this means for retail banks in the long run.

Absent collapse, the only form which fits is zero interest-charging and something which fits zero physical growth.

Can banks adapt to that?

If they don't, they will be creaming-off at the expense of 'someone else'.

" they will be creaming-off at the expense of 'someone else'." They've been doing that for years PDK. They don't care, it is only their profit that counts. It is foolish to think they suddenly will care. The RBNZ doesn't care, so much so I wonder if Orr is being paid by them. Our last hope for ordinary Kiwis is the Government, and our best hope here is the current situation with Labour with a mandate to rule. The question is now that they have the power and opportunity, will they truly act to transform the economy? Or will the cynics be right?

There was a fly-speckled poem by the clock in my old man's University office, penned by (the prolific) Anon:

Who seeks to please all men, each way
And not himself offende
He may begin his work today
But God knows where he'll ende

That will be the downfall of this Govt. I predict that global events will overtake us in this term, though, rendering much of this morning's discussion irrelevant. In that light, I'd rather this lot in power than status quo types.

Agreed.

This lot are the status quo types.

That sounds huge. Hopefully Interest could run an article on it.

This from Richard Duncan. Mainly targeting Audaxes here, but anyone sharing the view that QE is just an asset swap. Andrewj's link to Chris Cook also worth a read for the parts of that article also relating to QE:

"Many people believe that when the Fed creates money through Quantitative Easing, that that money simply gets stuck in the banks as Bank Reserves and does nothing to help the economy.

That idea is incorrect.

The money the Fed creates is injected into the economy and stimulates economic growth. The latest Macro Watch video clearly demonstrates how that process works.

During the first half of this year, the increases in Government Debt, Disposable Personal Income, Household Bank Deposits, Personal Consumption Expenditure, Money Creation by the Fed, and Bank Reserves were all extraordinarily large. That was no coincidence.

The surge in Money Creation by the Fed financed the unprecedented jump in Government Debt, which, in turn, funded the record-breaking jump in Disposable Personal Income and Household Bank Deposits, as well as the enormous rebound in Personal Consumption Expenditure that drove the partial economic recovery during the third quarter.
The Fed created the money it used to buy the government bonds by making deposits into the Reserve Accounts at the Fed belonging to the banks from which it bought the bonds. Consequently, Bank Reserves expanded sharply. However, the increase in Bank Reserves in no way limited the enormously positive impact that Quantitative Easing had on the economy.

The bottom line is that the Fed created an extraordinary amount of money and that money ended up in the hands of the Households, the SMEs and the Corporations. When those sectors spent the money that provided a tremendous boost to the economy.

This presentation debunks, once and for all, the idea that the increase in Bank Reserves means that QE is ineffective.

It is important that everyone recognizes that Quantitative Easing is the country’s most powerful economic policy tool. It is impossible to understand the forces driving the economy and the financial markets without accepting that fact."

This from Richard Duncan.

No source provided so it's difficult to understand the context. Plenty of evidence to suggest that QE is ineffective.

It's an interesting view, and reinforces the MMT perspective about Governments issuing new funds. Managing the economy downstream of that is the trick. Are the Yanks doing it well? I don't know, I'd like some informed and expert opinions please?

But that's wrong Scarfie.

They pump digits in one end of a flexible tube (fibre, nowadays). That used to make borrowing available to extract, process, consume and discard, parts of the planet. At exponentially-increasing rates. Finite planet, temporary arrangement. But they have gone on pushing '1's and '0's down the fibre, because 'it worked before' and because 'that's all we've been taught'.

With no physical doubling-time remaining, everyone around the planet has been putting the numbers against existing 'assets'. Houses and shares were the only fields capable of carrying the injection without people saying 'hang on'.....

The 'spending' is just increasing debt now - to the point where nobody has a plan to repay it. Just like they have no plan - or physical ability, increasingly - to redress the environmental/resource draw-down issues. So the only question in town is: When will the disbelief set in? Supplementary question: How fast will it be?

"The 'spending' is just increasing debt now" - yep
It used to be, can you afford to buy a house?
Then it became do you have the ability or resources to successfully obtain a mortgage that realistically can be paid off?
Now it's can you service a mortgage, no real expectation of paying it off.

Thank you PDK for taking the time to spell out in plain English the current state of play...

Different angle PDK. Duncan's talking about the economy from within the existing model. Like most economists and Governments, he hasn't realised the growth thing cannot continue. So he is saying that QE resulting in consumption is a good thing.

Almost no one is saying how do we reshape the economy to save the planet? The talks on GHW still focus on how to achieve growth in a finite system, but they don't offer alternatives. It's almost like they are all waiting for the Messiah, a Messiah or Muhammad to lead us all to Paradise while we all cling to our looted wealth. Dumping money into an economy without some form of transformative change to how we do business only prolongs the pain, and staves off the crash.

Oh I agree Murray, I've gone off Duncan for this reason. He become popular because he predicted the GFC, but he is just looking at the numbers and not sustainability unfortunately. His view is that USA should borrow to fund tech development. I was listening to Eric Weinstein last night and he has a bit to say on the future of tech. Actually the recent history of tech, which isn't good.

However for a purely academic exercise into the mechanisms of how this plays out, it is good to look at the technical side. Two opposing camps on that one, I'd like to see a more robust analysis that follows the money.

Where it is relevant is that I see three phases to go in terms of money. We are perhaps nearing the end of the first, which is low consumer inflation but still an inflationary environment that is boosted asset prices only. I think we will see a more hyperinflationary phase as money is printed to deflate the debt (since production can't pay it off). Finally a deflationary collapse and perhaps a reset, or maybe chaos.

That is where I am interested too Scarfie - the technical side of the analysis.

'The bottom line is that the Fed created an extraordinary amount of money and that money ended up in the hands of the Households, the SMEs and the Corporations. When those sectors spent the money that provided a tremendous boost to the economy.'

Keep on printing money and distributing .......and will keep on spending to run the economy - who wouldn't :)

Keep giving money to me to spend and will help you run the economy is the new mantra so everyone is happy. Wow ...is this the new economy that reserve bank and govrrnment distribute money to spend is this the win win situation that reserve bank is aiming at.

Andrewj's link to Chris Cook also worth a read for the parts of that article also relating to QE:
He utters a lot of nonsense - for instance:

First of all, the US outsourced its industries to China. The Chinese were building on a massive scale, but the dollar being the currency of trade, and whenever dollar loans are created – in Eurodollars – you get dollar reserves at the Fed. People think that the money belongs to China and they can do what they like with it – but it’s not quite like that.[emphasis mine]

Eurodollars are ledger credits created by banks beyond the borders of the US and beyond the control of the Fed. They remain there until the borrower pays back the debt and the issuing bank extinguishes the created deposits.They (eurodollars) may find their way back into the US banking system via an array of inter-related payment systems but not as reserves at the Fed - only the Fed can create reserves and they are never offshore and remain on the Fed's liability ledger until the offsetting ledger asset is redeemed.

There is more but I cannot be bothered to point it out. Try reading this and this.

Glad you commented, I'd better get some work done so will read that link later. Looks intereting. FWIW I think lots of people have a window into parts of the system, not many have a more global perspective. I think Jeff Snider is one that does when it comes to money, and Richard Werner when it comes to Banking. I'd rate them both as the leading authority in their area of expertise. I think another really sharp guy out there is Kyle Bass.

Interesting video analyising as how and why banks are making huge profits and rising bonds and stock price

https://youtu.be/2rYwTMwFd1E

This panademic has been a jackpot for many

If you're going to post YT videos, give it some context as to why people should watch this guy Kerry Grinkmeyer. Knowing that the pandemic is a jackpot is kind of old news.

It is up to you.

You got to do better than that. Too many of these guys are only interested in selling their books. Sounds a bit like the Tiger King.

May be he is selling but one should listen to different views. Even here in media we listen to and duscuss diffefent views many of them are biased but still we read.

Aussie cotton could, with some rebuilding, stay in Oz and become another mainstay of textiles. My fave pair of jeans is a late-90's NZ-made orange-tag Levi's - thick fabric, beautifully put together, very comfortable. So glass half full, the CCP's brute-force exertions could well boomerang back on 'em.....

Edit and addition: picked these up at a local seaside market - I reckon they'd sat in a wardrobe for fairly much the whole time since the make date of 1997. It's possible to get perfectly good pre-owned jeans for $15-40 and that's all I've bought for years now.

I agree - but the problem with that, as with Make America Great Again, is that you cannot 'pay' for locally-waged manufacture anymore. We traversed that threshold a long time ago, trending down towards slave wages ie zero via big-box buying power. Society can no longer 'afford' itself, hence we turn a blind eye to under/un paid migrant workers, fishing-boat crews etc. Hence we accept low-wage products.

We are already in unrepayable debt. Paying 'more' means either adding to that debt, or triaging what we purchase. The latter is the 'go', but 'our economy' doesn't survive that. Interesting times.

Coming from a design, and perhaps philosophical perspective, I've made comments here before about our pretty poorly designed "low wage" houses. But this tranverses all design, all the products we use on a daily basis. We've come to accept junk as the norm, rather than quality products that are well built and will last. For me the way forward is to do things, make things, myself.

I'm lucky I have the skills, we are not teaching the skills. Take a survery of solo mothers, or most family households, and see how many have a shed in which the kids can tinker. I've noticed not many.

see how many have a shed in which the kids can tinker. I've noticed not many.

Or a garage - they aren't even able to house the car(s) these days given all the unused junk that must be stored in them :-).

you cannot 'pay' for locally-waged manufacture anymore
It is more a matter of unwillingness on the part of businesses rather than unaffordability.
Take iPhones for example, labour costs on the assembly line makes up ~2% of the retail price of the handset, while Apple creams a whopping 51% on each handset.

Wages in India are lower than the same in China but the latter has the ability to mobilise and train a large workforce and centrally design the production ecosystem ad infrastructure for foreign companies choosing to shift manufacturing within their borders.

Meanwhile in much of the West, we believe a pro-business government is one that supports profiteering through any means possible.

I got onto Selvedge Denim last year and purchased jeans online that are made in the USA. 14-15oz, and a couple of pairs in 22oz. Like you I'll have those in 20 years time. They are US cotton that is woven on mills in Japan, as Japan bought up their machines. Knowing the Japanese they've probably made new machines that are better. You are quite right, Aussie could fill this space can cut out the shipping to Japan and Back. I wonder if New Zealand can do the same with wool, although that is out of fashion right now.

[GT's national director of tax] said the present personal tax rate, which was cut by National in 2010 from 38 per cent to 33 per cent had been considered fair by the business community. Business owners had shifted their focus away from structuring and saving their tax, to growing their businesses.

So cutting tax rates at the top of the pile make businesses more productive. What a load of BS!

https://www.stuff.co.nz/business/123131106/tax-advisers-split-on-effect-...

interesting, they are generally not labour voters anyway, but i tend to agree that our tax rates are set wrong, if they made the first 10k tax free it will help those same business owners as we know that money gets spent in the economy

Making the first $10K tax free for everyone creates a huge hole in revenue because everyone qualifies for it. Either you find that money somewhere else, cut spending or rack up more debt. I'm informed by the last 12 years of discourse that borrowing while cutting taxes is 'bad' and cutting services is 'bad' and blowing out debt even in the case of massive emergencies is 'bad', so I'm not sure what the non-bad outcome is here.

Simple just asset test super - problem solved!

...no it's not. You would need an army of accountants and lawyers tracking trusts, gifts and the like. Not to mention how are you going to asset test offshore assets? It is a very difficult and manual task.

UBI is the answer. Only a matter of time for UBI to be adopted in some form.

It could be made very simple by way of the assumption that if an individual superannuitant is a director or a trustee they are automatically disqualified - only to be reinstated if re-applying and deemed qualifying via that audit. Very few of will re-apply, why would you bother with the accounting hassle when you don't need/qualify for the meager amount paid annually?

maybe social credit has the answer

Australian pop forecast to be lot less than expected
Meanwhile China hitting them with tariffs and reductions in trade re coal and iron
Looks like inflation and housing over supply?
Of course a la another article on interest today, economists never see inflation becoming a problem
Forgetting that debasing currency by printing IS inflation not the CPI

In the confusion I think fonterra got temporarily mixed up in the Australian company ban. NZ companies that relocated their head offices to Australia will be pulling them back here soon which suits me fine as I think they should have never moved offshore originally. Sailing for another syndicate is bad enough but I don't like those companies that changed allegiance

Good! that very fact that Australia has a cotton industry is ridiculous.

Debt is future consumption brought forward.
Like at xmas.
And in Feb the visa bills come in.
Are we of the view that we can constantly increase debt without increasing wealth via productivity improvement or production someone wants to buy.
Delusion