90 seconds at 9 am: PBoC struggles with its role

Markets rebound; factory data positive; Auckland 5th worst; China limits city growth, struggles with liquidity and currency; UST 10yr 2.06%; gold up; NZ$1 = 64.9 US¢, TWI-5 = 70.6

25th Jan 16, 7:36am by David Chaston

Here's my summary of the key events over the weekend that affect New Zealand, with news most equity markets made a recovery at the end of trading last week.

Wall Street ended higher, up +2% and that capped rises of similar levels in most other markets. The Nikkei was up almost +6%, although both in Shanghai and Australia a more modest +1% rise was booked.

Part of the more upbeat tone is the continuing 'good data' sets being released. They were there during the recent bout of anxiety, but they seem to still keep coming. Over the weekend, it was reported that sales of houses in the US surged back in December.

And both the latest US and Europe factory PMI reports out over the weekend are in solid positive territory. Even the report for Japan was positive.

But the consequences of the severe weather in the US north-east may echo in future reports.

Over the weekend, the latest edition of the Demographia affordability survey was out, featuring Auckland as the world's fifth most unaffordable city after Hong Kong, Sydney, Vancouver, and San Jose, CA. For Auckland, that is quite a leap from the previous year where it was 14th. Looking at the detail however, this survey has median household incomes at $77,500, up +3.2% in a year and up +9.8% in two years - and all three data items seem dubious. They also have median Auckland house prices up +22% in the year from 2014 to 2015 to $748,700. REINZ only reported a maximum +15% growth in any month last year. Despite these factual flaws, the survey is useful in shining a light on the unaffordability issue.

In another demographic note, both Beijing and Shanghai have launched targets to keep their populations below 23 and 25 million respectively. Chinese population control policies are shifting from 'family' to 'city'.

Another tough balancing act is playing out in their central bank. A leaked memo from the PBoC shows serious regulatory tension over how to keep up liquidity, especially heading into the Chinese New Year holiday week, while preventing the Yuan from depreciating fast. The perils of a centrally controlled economy.

Back in New York, the benchmark UST 10yr yield has bounced back somewhat and is now at 2.06% - that is up +7 bps and the biggest single-day rise since the last Fed meeting when rates were raised. Locally, swap rates rose but more modestly, although since Thursday the cumulative gain is pronounced.

The oil price has also had a good short-term gain and is now up to US$32/barrel on both benchmarks. Iran's re-entry into a post-sanction world has brought a 114-airplane order with Airbus, and the country's authorities are reportedly also negotiating a large order with Boeing.

The gold price is holding at US$1,100/oz.

The Kiwi dollar ended last week slightly softer but up from Thursday's lows at 64.9 US¢, at 92.6 AU¢, and at 60 euro cents. The TWI-5 will start this week at 70.6.

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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18 Comments

by Henry_Tull | 25th Jan 16, 8:29am 1453663773

The perils of a centrally controlled economy
And policy, based on a set of institutional/bureaucratic assumptions/wishes, driven structures are shown for what they are.

"GDT is just a sales channel," he said. "Rather than amending that forecast, we'd better take actions as management, as we're paid to do, to shift volumes to another channel and create supply-demand tension in GDT."
http://m.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11579…

Now most of the implants (terrace and otherwise) have been moved on we can be frank (in an OMG/FMG) price sort of way.

About time.

by childofthesun | 25th Jan 16, 9:53am 1453668825

About time indeed. Wonder what else they get paid to do other than taking action two years after their market intelligence told them where the market was heading. Seriously complacent organisation with a volume focussed approach. Spierings is capable but too many on his executive team lacking. As for the Board, less said the better other than that the suppliers are simply poorly represented.

by Penguin | 25th Jan 16, 9:14am 1453666446

My favourite economist John Mauldin reporting the clampdown on capital transfers out of China getting even tougher. Also underlying data on Chinese service sector worsening so imo caution prevails.
The big worry is if the Chinese investors have to start liquidating their overseas assets.

by dtcarter | 25th Jan 16, 9:27am 1453667230

Re demographia, why do people take an anti-urbanist so seriously? Should you really trust a two man think tank that ranks cities as tourist destinations by your ability to navigate them by rental car? http://www.rentalcartours.net/

by workingman | 25th Jan 16, 9:36am 1453667799

Auckland 5th worst? You're looking at it totally the wrong way. Auckland is doing 5th best in getting rich. 5th best in the world for heaven's sake!

Your mistake is thinking about the future - affordability for anyone coming. We're not interested in who might be coming. We're watching our own assets take off. It's the way we live here, patting our own pockets day by day.

The fact is, our government and its active beneficiaries have no interest in the future. What matters is getting whatever you can get - now, in the present - from any asset available to you. With regard to house prices, Key has previously stated that 700,000 home-owning Aucklanders are better off. Enjoy it. Live it up! Will our children and grandchildren will be able to enjoy the same independence and security of home-ownership? They can shift for themselves. Or, even better, they'll be a lifetime of fodder for the banks to feed on.

But thriving societies have an ecology – a balance – as much as the physical environment does. And if young professionals, let alone those on New Zealand’s perennially low wages, can no longer buy in Auckland, society breaks down. Do we care? Not us.

Exactly the same attitude shows in the trashing of our rural environment. The next agricultural and horticultural generation, with genuine 21st century concerns for value, ecology and sustainability, will inherit decades – literally decades - of degraded freshwater and poisoned soils. But, hey, what’s that to us?

So, wake up! 5th best! Open a bottle. Go out and buy something.

by childofthesun | 25th Jan 16, 10:00am 1453669204

Excellent workingman. For a forex dealer, next week is the long term. Let's worry about the next few seconds/minutes. Looking a generation ahead, forget it. Let the next guy worry about that.

by rastus1 | 25th Jan 16, 10:02am 1453669323

..nicely put as always.

Seems a greater and greater cross section of NZ are getting fed up with JK. Whether it's TPPA, house prices, wrecking of environment, immigration, flags etc etc. Perhaps the TPPA will trigger a wave of more active discontent, but maybe he is also doing a Muldoon as in Sprinbok tour division?

by steven | 25th Jan 16, 10:57am 1453672647

The problem is and I suspect it quite strongly is the left are too left and ppl shun them, hence the re-rise of NZF and the stagnation of the greens.

by Joe Public | 25th Jan 16, 10:31am 1453671106

"and all three data items seem dubious. They also have median Auckland house prices up +22% in the year from 2014 to 2015 to $748,700. REINZ only reported a maximum +15% growth in any month last year. Despite these factual flaws, the survey is useful in shining a light on the unaffordability issue."

Not sure why you are concerned about the movements. Surely the focus should be on the Median household income and median household house price. Thats the formula right. One divided by the other ? The median household price seems correct (perhaps slightly too low) especially considering REINZ just reported a median price in Auckland of 770k.

Is the median house price figure of 748k dubious David? is the median household income of 77k dubious ?

I am interested to understand which of these two figures was dubious??

by steven | 25th Jan 16, 10:54am 1453672471

I think they survey tends to take worst cases and may use overly simplistic math. Hence in absolute terms / answers its questionable (let alone its political commentary / stance which tends to marginal libertarian) . On top of that its light on detailed references, however if they use the same methodology every year (and I am not sure on that either as we cannot see it?) then you can use it for trend.

by dtcarter | 26th Jan 16, 11:56am 1453762612

They are not libertarian, they do not want to free up government regulation, they are pro-government regulation where by it forces auto-based suburban sprawl. They are pro-government regulation when it stops intensification of city centres. They are pro-government when it comes to building vast highway networks at public cost. They are only anti-government when government wants to restrict infrastructure development at the city fringes and/or provide public transport.

by kiwimm | 25th Jan 16, 12:58pm 1453679894

Even if their figures are wrong then the actual value might only be, say, 9.2 instead of 9.7 - the point is this is a long way from 3.0 (or 5.0 Auckland Council are targeting for 2030)

by Joe Public | 25th Jan 16, 10:36am 1453671380

David I have a good link you could use to check if the Median price of 748k is dubious http://www.interest.co.nz/charts/real-estate/median-price-reinz

Just select Auckland on the graph.

by David Chaston | 25th Jan 16, 12:21pm 1453677671

My scepticism over Demographia's data is technical, and almost all to do with 'incomes' and not 'house prices'. But I accept they are reporting a real problem.

We calculate this multiple properly, here. (Note it essentially shows the same problem.)

The technical problems with 'incomes' just allow critics some room to dismiss the results, which is unfortunate.

Demographia use a very general 'incomes' series out of the last Census. It is a meaningless mix of all sorts of income streams - apparently a 'median' household has self-employed income, + dividend income, + interest income, plus unemployment and other social benefits, + wages, salaries, etc. etc. And these incomes are for all age-groups 15 years and older. No-one has an income like that. Then they escalate this number for the years since, probably using a national QES number. They end up with an average-of-an-average that increasingly diverges from the Census base. When the next Census comes around, they ignore any discrepancies, which last time were huge.

And, these income levels are 'before taxes'. But I think the only incomes that should be in this are take-home-pays.

And, I think these types of measures should focus only on the first-home buyer issue. Personally, I don't care whether someone in Remuera can or cannot afford to buy a house there.

To my mind, the right way to focus on affodability is to look at a first home buyer's abolity to purchase a first quartile house. That is what needs to be affordable (and isn't now). Mashing up generalised medians over all age groups does not help us focus on the problem that needs to be solved.

But then, I am being technical. Demographia's survey matches others' pointing out there is a big problem in this space. And getting worse. So good on them for that.

by kiwimm | 25th Jan 16, 1:03pm 1453680212

As long as the comparison can hold across markets and time, it is useful to point out the differences. Also, your calculation of 8.9 versus their 9.7 makes little difference when the house prices are over 300% above similar cities elsewhere.

by steven | 25th Jan 16, 10:42am 1453671728

Interesting talk on oil prices,

http://money.cnn.com/video/news/economy/2016/01/22/davos-oil-panel-john…

by Joe Public | 25th Jan 16, 10:58am 1453672685

Its simplicity makes it powerful I believe especially when comparing cities against cities all over the globe. Median House price over Median household income and then ranked against other cities.

by Joe Public | 25th Jan 16, 12:44pm 1453679076

Thanks for clarifying David. I guess it is always going to be hard comparing even with after tax pay as different countries have different mortgage interest rates etc

Like you said it is a big problem and they are highlighting that which is a good thing.