90 seconds at 9 am: FTA with EU gets official go-ahead

Deutsche Bank to cut 35,000 staff; FTA talks with EU to begin; China ditches one-child policy; US GDP growth slows; UST 10yr yield 2.16%; oil up, gold down; NZ$1 = 66.9 US¢, TWI-5 = 72.2

30th Oct 15, 7:57am by Jenée Tibshraeny

Here's my summary of the key events overnight that affect New Zealand, with news a free trade agreement between New Zealand and the European Union is officially on the cards.

Prime Minister John Key and European Union leaders have agreed to start discussions on an agreement "as soon as possible". Key says the EU is a key trading partner for New Zealand, with two-way trade totalling over $19 billion. The EU is also our second-largest investment source and largest research and development partner. Key's commitment to the EU comes further to the Government this year signing a FTA with Korea and concluding Trans-Pacific Partnership negotiations.

Deutsche Bank is cutting nearly a third of its staff and closing its operations in New Zealand. Germany's biggest lender has announced it'll slash 35,000 jobs, shut operations in 10 countries, close 200 branches in Germany and halve the number of its investment banking customers by 2020. The overhaul, aimed at simplifying Deutsche Bank and improving its returns, comes as it reported a 6 billion euro loss in the third quarter.

China's ditching its one-child policy as it tries to alleviate demographic strains on the economy and spur growth. The Communist Party eased restrictions in 2013 to allow people who met certain conditions to have two children. After decades of restrictions, it'll now allow all couples to have two children. China's working age population fell for the first time in 2012, with around one in three Chinese people expected to be over the age of 60 in 35 years' time.

Economic growth in the US braked sharply in the third quarter, as businesses cut back on restocking warehouses to work off an inventory glut. Gross domestic product (GDP) increased at an annual rate of 1.5%, after expanding at 3.9% in the second quarter. Economists say the inventory drag is likely to be temporary, and expect growth to pick back up in the fourth quarter. Keeping interest rates on hold, the Fed yesterday described the economy as growing at a "moderate" pace and hinted at a December hike.

In New York, the UST 10yr yield benchmark is up today to 2.16%.

The US benchmark oil price is up slightly to US$46/barrel, while the Brent benchmark is at US$49/barrel.

The gold price has fallen back, after hiking earlier this week, to US$1,146/oz.

The New Zealand dollar has made major gains against the Australian, following the price of iron ore dropping below US$50 a tonne for the first time since July. The dollar's the strongest it's been in six months, at 94.5 AU¢. The New Zealand dollar's also strengthened to 66.9 US¢, following the announcement of weak GDP growth in the States. It's at 61.0 euro cents. The TWI is up to 72.2.

If you want to catch up with all the local changes yesterday, we have an update here.

The easiest place to stay up with event risk today is by following our Economic Calendar here »

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17 Comments

by MortgageBelt | 30th Oct 15, 8:24am 1446146689

When is NZ predicted to achieve the 2% inflation target?

Or would we prefer to keep encouraging deflation?

by David Chaston | 30th Oct 15, 8:51am 1446148309

We are there now. The average non-tradable inflation in the three quarters of 2015 is +2.0%, dropped by the one-off ACC reductions (essentially). The 2014 average was +2.7%.

It's just the tradables sector that is very low, and the main reason is the very low oil price (but not the only reason).

I find it hard to see any of this as a problem for people's spending power.

What is a problem is the too-low interest rate. It is causing a mispricing of risk, boosting asset values pointlessley, twisting economic decisions into otherwise unjustifiable choices, causing inequality. This is what needs to be fixed.

by Andrewj | 30th Oct 15, 9:24am 1446150250

David, have we not left it too late, the wheels are coming off, bubbles have reached peaks not seen before. Any correction now would be catastrophic for those with high debts.
http://www.trademe.co.nz/Browse/CategoryAttributeSearchResults.aspx?sea…

http://www.bloomberg.com/news/articles/2015-10-27/cummins-falls-after-t…

by steven | 30th Oct 15, 9:35am 1446150923

Thanks for the clear insight into your political bias, your best yet.

So the non-tradables who in effect have a monopoly power to rise prices are doing so. The tradeables do not have such leverage and therefore bear the brunt of the non-tradeables arm twisting.

It may ondeed be hard to determine why it is a problem, but it clearly is from the average CPI.

Interesting things happen when you forecast,

http://www.tradingeconomics.com/new-zealand/inflation-cpi/forecast

A bit dubious of course as things get "sticky" it seems.

Tradables,

"The tradable component decreased 1.2 percent in the year. Lower prices for petrol (down 6.8 percent), milk, cheese, and eggs (down 5.7 percent), and international air fares (down 6.5 percent) made the main downward contributions. The main upward contributions came from higher prices for fruit, package holidays, and furniture and furnishings."

http://www.tradingeconomics.com/new-zealand/inflation-cpi

So sure petrol dropped in price however imports rose to counter this which isnt un-expected due to the exchange rate giving a 20% ish move. What happens I wonder if we take out the exchange rate move?

ie we need to be comparing apples with apples.

In terms of a "too low interest rate", where there is no growth in goods due to lack of demand (and even excess capacity) then companies are simply not investing. Inequality isnt caused by a too low rate, greed and parasitic behaviour is the true cause. A low rate just makes it harder for the financial parasites to extract the % they feel they deserve un-observed.

by Andy Rodgers | 30th Oct 15, 9:39am 1446151175

"What is a problem is the too-low interest rate. It is causing a mispricing of risk, boosting asset values pointlessly, twisting economic decisions into otherwise unjustifiable choices, causing inequality. This is what needs to be fixed."

DC - I totally agree. Will we eventually go the way of Europe with Italian 2 year bonds at a negative 0.23% interest rate. Who in their right mind would buy these?
http://moneyweek.com/italian-two-year-yields-go-negative/
I

by @tony | 30th Oct 15, 10:11am 1446153068

Tax idle money (get it investing in new companies and R&D).
Limit remuneration (total package) to 300K in NZ. [have more people at the top - share the work - have a F^&ing life!]]
Limit mortgages to 3.5xhighest household wage (over next 10 years) - Allow 1 parent to stay at home to bring up nice kids - we are losing a generation!!!
Stop foreign buying of houses (or make strict restrictions)
Let the GOVT print money and build LOTS of renewables (jobs/environment and long term payoff).
Let the money flow....

Also pay the bottom staff more:
http://www.marketwatch.com/story/the-70000-minimum-wage-is-paying-off-f…

"Revenue is growing at twice the rate it was before Chief Executive Dan Price made his announcement this spring, according to a report on Inc.com. Profits have doubled. Customer retention is up, despite some who left because they disagreed with the decision or feared service would suffer. (Price said he’d make up the extra cost by cutting his own $1.1 million pay.)"

Stupidity: keeping doing the same thing and expecting different results

by Chris_J | 30th Oct 15, 1:36pm 1446165360

$300k max?? That's communism. Been done before if you hadn't noticed and that worked out well didn't it...

by Chris_J | 30th Oct 15, 1:31pm 1446165086

DC, the simple solution to low interest rates and soaring house prices (other than/or in addition to migration controls) is to reduce the term of loans in Auckland, thus increasing principal repayments and counteracting the impact of low mortgage rates.

Restricting the maximum term of loans to 20 years could be a start. That increases weekly payments by a quarter over a 30 year loan with 4.5% interest rates.

by steven | 30th Oct 15, 2:12pm 1446167554

"too low" Maybe try some economics,

http://www.frbsf.org/economic-research/files/wp2015-16.pdf

and comment,

http://krugman.blogs.nytimes.com/2015/10/28/check-out-our-low-low-natur…

"L-W attribute the decline in the natural rate largely to the slowing of potential output, which in turn reflects demography and what looks like a slowdown in technological progress. That’s more speculative. But the low natural rate is as solid a result as anything in real time can be.

This in turn tells you several things. It says that all the complaints that the Fed is artificially keeping rates low are nonsense; rates are low because that’s what the real economy wants, and the Fed’s only alternative would be to create a depression."

and,

http://equitablegrowth.org/department-of-huh-qe-has-retarded-business-i…

and,

"But let me say, as I have before, that this whole aversion to easy money, on grounds that keep shifting and don’t seem to have much to do with any coherent economic argument, evidently has deep roots in the conservative psyche — and it’s in the id, not the rational mind."

Lets see the economic argument David, because just like others in here before you they have been unable to answer my concern and very probable outcome or raising the OCR that of "only alternative would be to create a depression."

by muntijaqi | 30th Oct 15, 10:37am 1446154631

The reason why inflation is bad news is not because of increases in prices as such, but because of the damage inflation inflicts to the wealth-formation process. Here is why:

The chief role of money is the medium of exchange. Money enables us to exchange something we have for something we want.

Before an exchange can take place, an individual must have something useful that he can exchange for money. Once he secures the money, he can then exchange it for the good he wants.

But now consider a situation in which the money is created "out of thin air," increasing the money supply.

This new money is no different from counterfeit money. The counterfeiter exchanges the printed money for goods without producing anything useful.

He in fact exchanges nothing for something. He takes from the pool of real goods without making any contribution to the pool.

The economic effect of money that was created out of thin air is exactly the same as that of counterfeit money — it impoverishes wealth generators.

The money created out of thin air diverts real wealth toward the holders of new money. This weakens the wealth generators ability to generate wealth and this in turn leads to a weakening in economic growth.

Note that as a result of the increase in the money supply what we have here is more money per unit of goods, and thus, higher prices.

What matters however is not that price rises, but the increase in the money supply that sets in motion the exchange of nothing for something, or "the counterfeit effect."

The exchange of nothing for something, as we have seen, weakens the process of real wealth formation. Therefore, anything that promotes increases in the money supply can only make things much worse.

Want inflation? how about increasing the salaries? how about bursting assets bubble and redirecting capital to productive investment?

I am happy with deflation.

by Andrewj | 30th Oct 15, 8:47am 1446148032

–Australian Household Debt at 134% Of GDP Now Highest In DM World

http://davidstockmanscontracorner.com/update-on-the-housing-bubble-down…

by KH | 30th Oct 15, 10:05am 1446152747

China stops it's one child policy. Big Mistake. But it is allievated by a significant generational social change factor. Many chinese will continue with 'one child' by choice.

by @tony | 30th Oct 15, 11:29am 1446157767

At least the Chinese had the sense to realise the planet is overpopulated and do something about it.

The west would "greed" (growth) itself until the planet falls over had it not been for the idiotic practice of selling each other higher and higher priced houses until no one could afford to have kids. So Plan B import them from other countries so we can get them into massive debt to the banks too.

by Stephen Hulme | 30th Oct 15, 10:18am 1446153513

In light of Deutsche Bank's catastrophic demise might I suggest an historical review of global central bank failure to incorporate eurodollar credit creation within their systemic risk regulatory management regimes?

It has long been recognized that a shift of deposits from a domestic banking system to the corresponding Euromarket (say from the United States to the Euro-dollar market) usually results in a net increase in bank liabilities worldwide. This occurs because reserves held against domestic bank liabilities are not diminished by such a transaction, and there are no reserve requirements on Eurodeposits. Hence, existing reserves support the same amount of domestic liabilities as before the transaction. However, new Euromarket liabilities have been created, and world credit availability has been expanded.

The outstanding stock of banks’ foreign claims grew from $10 trillion at the beginning of 2000 to $34 trillion by end-2007, a significant expansion even when scaled by global economic activity (Figure 1, left panel). The year-on-year growth in foreign claims approached 30% by mid-2007, up from around 10% in 2001. This acceleration took place during a period of financial innovation, which included the emergence of structured finance, the spread of “universal banking”, which combines commercial and investment banking and proprietary trading activities, and significant growth in the hedge fund industry to which banks offer prime brokerage and other services. Read more

by Stephen Hulme | 31st Oct 15, 9:22am 1446236579

Part 2 for those with investment concerns beyond leveraged shelter and the coins in their pockets.

"From the Fed’s basic perspective, there are no bubbles in M2 because they have monetary causation reversed. For orthodox economics, under largely money multiplier-type assumptions, banks make deposits as they make loans therefore the two are tied together which is what allows the Fed its control mechanism even under the more dubious interest rate targeting scheme. In the wholesale system, however, assets get created as do liabilities that are often (mostly) nowhere near deposits. The use of a deposit account only shows up when those wholesale liabilities and assets are eventually aroused into traditional usage. Read more

by dtcarter | 30th Oct 15, 11:08am 1446156521

I can't believe that for so long you were exempted from the one-child policy if your first born was a girl. Was it not obvious that would lead to gender imbalance?

by Halfway To Paradise | 30th Oct 15, 1:26pm 1446164804

It stated on the TV news that Chinese in urban areas can now have 2 children. It sounds like this new policy is only going to effect the wealthy or at least better off.