Australia mulls a 15% GST; RBA mulls a rate cut; China PMI's wobble; Fed tightens capital rules; US GDP soft; UST 10yr yield 2.15%; NZ$1 = 67.8 US¢, TWI-5 = 72.9

Australia mulls a 15% GST; RBA mulls a rate cut; China PMI's wobble; Fed tightens capital rules; US GDP soft; UST 10yr yield 2.15%; NZ$1 = 67.8 US¢, TWI-5 = 72.9

Here's my summary of the key events over the weekend that affect New Zealand, with news - while you were celebrating a great All Blacks win - the rest of the world was showing a few wobbles.

But first in Australia, their government looks like it is considering raising their GST from 10% to 15%, with parallel reductions in income tax rates. And New Zealand's track record on GST is being used to support the case.

Well before any of these decisions are taken, the RBA will be assessing its cash rate, tomorrow. Markets are unsure what will happen. But the odds reflected in their swaps market have quickly strengthened to a 44% chance of the cut, compared with 28% before last Wednesday's CPI data and Friday's PPI data. Still, that is not yet a 50/50 chance. Betting analogies are appropriate given it will be decided on Melbourne Cup day.

Activity in China's factory sector unexpectedly contracted in October for a third straight month, the official survey showed overnight. This is heightening concerns that the Chinese economy is still losing momentum despite a raft of stimulus measures. Adding to this worry, China's services sector, which has been a few bright spot, also cooled last month. It is expanding but now at its slowest pace in more than six years. The changes to both these indicators are not large; but it is the direction that is raising eyebrows.

In the US, six of their biggest banks will need to raise an additional US$120 billion, most likely in long-term debt, under a rule proposed by the Federal Reserve over the weekend. This is part of their plan to address 'too big to fail' issues. The banks will have three years to raise the extra capital, and even tighter rules will apply in a further three years.

Advance data out on Saturday showed that growth in the third quarter in the US was running at a modest +1.5% and far lower than the +3.9% in the second quarter. The slowdown was due in large part to companies running down stocks of goods in their warehouses. Analysts said this impact is likely to be temporary and the economy will get another burst as stocks are replenished. Consumer spending remained fairly strong in this result and that underpins the minimal market reaction to the low growth rate reported in Q3.

The more the Fed looks at its data, the more likely it will raise rates, it is being claimed.

In New York, the UST 10yr yield benchmark rose on Friday is now at 2.15%.

Also gaining was the US benchmark oil price which is now just under US$47/barrel, and the Brent benchmark is just under US$50/barrel.

The gold price fell however, this time by only a small amount, and closed out last week at US$1,142/oz.

The New Zealand dollar starts the week pretty much where it has been over the past three, at 67.8 US¢, but very much higher against the Aussie at 94.9 AU¢. We were last at this level in May when we were coming down off the flirt at parity. We are also at 61.6 euro cents. The TWI-5 is at 72.9 which is a 5 month high.

And finally, Standard & Poor's say that winning a rugby World Cup is worth a boost in stock values in the weeks after the win. No word, though, on what it does to house prices.

If you want to catch up with all the local changes on Friday, 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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There is that word 'unexpectedly' again. I expect the word unexpectedly will unexpectedly become more commonly used....

Assessing economic data against a poll of professional market economists (surveys done by Bloomberg and Reuters usually) has been common for decades. 'Expected' or 'unexpected' phrasing has been around for all of my lifetime; its not new.


I fail to see any reference to the 'newness' or otherwise of the word in my original post. I was merely opining that with your particular world view on everything from economics to climate change the word 'unexpectedly' is going to be one that you are likely to be more frequently uttering in the future.

The GFC was "un-expected" by most economists, in fact only a handful of economists predicted it. What happened from that experience? why we still listen to the bozos who didnt see the GFC coming and marginalise the likes of say Steve Keen who did.

In respect of the Fed's new bank capital demands to eliminate a reliance on tax payer bail ins, a potential difficulty in terms of shadow bank type credit creation capacity comes to pass.

To further facilitate an orderly resolution, the proposal also would require the parent holding company of a domestic GSIB to avoid entering into certain financial arrangements that would create obstacles to an orderly resolution. These "clean holding company" requirements would include bans on issuance of short-term debt to external investors and on entering into derivatives and certain other types of financial contracts with external counterparties. These requirements will reduce the risk of destabilizing funding runs at the holding company, reduce holding company complexity, and enhance the resiliency of operating subsidiaries during an orderly resolution. The proposal also includes regulatory capital deductions for Board-regulated banking firms that hold unsecured debt of the parent holding companies of domestic GSIBs.

Which identity gets the credit rating - the holding company or the sub? If it's the former are holding company credit guarantees extended to the latter?

Which raises the issue of the Fed's failure to account for current methods of debt creation beyond the capacity of the traditional fractional reserve model.

Our analytical framework to understand what modern banks do is muddled by trying to draw parallels with what traditional banks do. Traditional banks engage in credit intermediation by issuing loans and insured deposits, linking ultimate borrowers with ultimate savers.

Modern banks do something quite different. Modern banks are dealer banks (Mehrling et al. 2013 ) that finance bond portfolios with uninsured money market instruments, and rather than linking ultimate borrowers with ultimate savers, they link cash portfolio managers and risk portfolio managers who in turn manage ultimate savers’ savings.

Cash and risk portfolio managers are ‘natural’ complements to each other. Cash portfolio managers are cash rich but ‘safety poor’ since they are too large to be eligible for deposit insurance. This drives them toward insured deposit alternatives such as collateralised repurchase agreements (or repos; see for example Pozsar 2011 and 2012 and Pozsar and McCulley 2012).

In each and every one of these cases, risk portfolio managers repo securities out and cash in, and on the other side, cash portfolio managers repo securities in and cash out. Cash portfolio managers have their safety (thanks to the securities posted by risk portfolio managers as collateral) and risk portfolio managers have their enhanced return (thanks to the funding provided by cash portfolio managers in exchange for collateral).

Dealer banks are intermediaries between risk portfolio managers and cash portfolio managers. Risk portfolio managers interface with dealers on the asset side of dealers’ balance sheets and cash portfolio managers interface with dealers on the liability side of dealers’ balance sheets. In this process dealers intermediate risks (credit, duration, and liquidity risks) away from cash portfolio managers and toward risk portfolio managers using repos and derivatives. This is risk intermediation (see Figure 1, and Checki 2009, Pozsar and Singh 2012, and Claessens et al. 2012). Read more

The good news is the lack of reference to depositor funded bail ins. Unlike the neoliberal republic demands of the RBNZ, the Fed recognises the destabilising nature of calling upon retail depositors to monitor banks' risk taking endeavours and exact measures to counteract indiscretions.

I found David's link very interesting. It appears the Federal Reserve are well aware (or at the very least, partially aware) of the destabilising nature of modern wholesale banking. However, they have to move extremely slowly so as not to cause an implosion of the vast, unknown trillion dollar, wholesale credit bubble. This gives both the appearance of incompetence and the appearance that their monetary machinations are ineffectual.

I wonder if they have a timeline when they expect to have got wholesale banking back to a sensible size. I also wonder if it can be done without another credit implosion...

So GST is a regressive tax, thus hammering to ppl with less (or no) disposable income harder. Meanwhile the ppl with disposable income and the ones that dont need more $s in their pockets, will pay less. Yes that makes sense, the only real unexpected thing is that ppl still believe this neo-con pile of crap.

"Analysts said this impact is likely to be temporary" funny thing but I have small feet and what I am finding is now for years one now stocks small sizes due to the "low demand" On top of that shoe shops seem to only have 1 pair per size if you are lucky in common sizes, (1/2s often not). Bit ad hoc I know but this doesnt seem uncommon, ie stocks are being run down and I suspect much wont be replenished until the economy actually picks up. Thank god for Amazon is all I can say.

The number of pop-up stores in Wellington has definitely increased. Main chains liquidating their stock??

90 seconds you say?

A bonus issue today ...   ;)

And finally, Standard & Poor's say that winning a rugby World Cup is worth a boost in stock values in the weeks after the win. No word, though, on what it does to house prices.

The Dunedin ratepaying underwriters of the Forsyth Barr Stadium will no doubt be expecting some magical largesse to offset crippling rates bills.

Dunedin city councillors are preparing for a fresh war of words over Forsyth Barr Stadium, following confirmation it needs another $1.81million a year from ratepayers.

The extra costs, together with a nearly $1million budget hole to be plugged by mid-2015, would see nearly $20million in extra ratepayer funding pumped into the venue over the next decade. Read more

I seem to recall this issue was discussed at great length a few years back.

I believe it was called GFC1.

Loading up the unsuspecting ratepayers for a commercial gamble for a commercial gambol for a suitably named stadium, should have been doubly barred.

Playing around with other peoples money is not what the poor suckers expect, from the people sucking them dry and skimming a few bucks for themselves.

Household and Commercial Rates have gone through the roof, while the poor savers take a hit. Now it is the turn of the ratepayers, who are also savers to get a double whammy, yet again.

Doubling down on an investment is doubly irresponsible, by all accounts.

Especially on a falling market.

So please get yer hands out of the ratepayers and savers pockets you damn parasites, this is not what we bargained for when electing a bunch of idiots.

Nor should a "private' funded stadium, be named after a financial entity, expecting a kick-back.

Please note.

This is not the first time, you have been warned. Fiddling and paying around with taxpayers and ratepayers money is not funny.

Criminal proceedings should be mandated and back dated for this type of criminal intent.

When will we ever learn, GFC2 is coming the same as GFC1.

Blatantly obvious to expect much else.

The signs are writ large.

Dunedin Town 0 Muggin(g)s 1.8 Million and counting.