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US factories improve; China's steel industry recovers, with property; Norway targets executive pay; eyes on RBA; UST 10yr yield 1.84%; oil lower, gold higher; NZ$1 = 70.1 US¢, TWI-5 = 72.5

US factories improve; China's steel industry recovers, with property; Norway targets executive pay; eyes on RBA; UST 10yr yield 1.84%; oil lower, gold higher; NZ$1 = 70.1 US¢, TWI-5 = 72.5
3rd May 16, 7:25am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news the economic signals seem better out of China.

First in the US, manufacturing activity rose for a second straight month in April but at a slightly slower pace, as new orders and production fell. The American economy is on track to grow at a +1.8% annualised rate in the second quarter according to a regional Fed report. That is up from the +0.5% in the March quarter.

In China, there has been a swift positive turnaround in its steel industry with a key gauge showing a very positive outlook. That is the first time the industry has been in expansion mode in over two years.

And China’s property market was in a broad-based recovery last month, with more cities reporting growth in new home prices.

In Europe, Norway is taking a stand on excessive executive pay. This is news because tiny Norway (population 5.2 mln) has a huge, out-sized sovereign wealth fund based on its oil reserves. That fund is the world's largest at NZ$1.26 tln. It is invested in equities so it gives it a lot of clout in the annual meetings of firms it invests in. It is now leading shareholder revolts over management pay levels which it says "have been getting out of hand". And it has had some notable wins. It's a signal that these state-controlled funds are shifting to a more activist approach, pushing a social agenda as well as an investment one. That will be fine so long as you agree with their agendas. But most of the big sovereign wealth funds are not based in democratic countries and may not have socially progressive goals.

Later today, all eyes will be on the Reserve Bank of Australia's latest policy rate review. It's a line-ball ball; hold or cut.

In New York the benchmark UST 10yr yield is unchanged at 1.84%.

But the oil price is lower at just under US$45/barrel in the US, while Brent is now just under US$46/barrel.

The gold price is inching higher today, now at US$1,293/oz.

And finally today, the NZ dollar opens at 70.1 US¢, at 91.6 AU¢, and at 60.9 euro cents. The TWI-5 index is now at 72.5.

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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16 Comments

by  Zachary Smith  |  3rd May 16, 8:59am 1462222782

China’s property market was in a broad-based recovery
I wonder if restricting capital outflow would increase local prices?

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by  Andrewj  |  3rd May 16, 9:13am 1462223636

South Korea’s exports tumbled to $41 billion in April, marking the 16th consecutive month of declining foreign sales. Last month’s result represented a 11.2% decline from prior year, and an 18% drop from April 2014. Moreover, within that shrinking total, exports to China were down by 18.4% last month, following a 12.2% drop in March.
As can’t be emphasized enough, printing GDP by means of wanton credit expansion does not create wealth or growth; it just results in an eventual day of reckoning when the speculative excesses inherent in central bank money printing collapse in upon themselves.
Surely, China is close to that kind of implosion. During Q1 total credit, or what Beijing is please to call “social financing”, expanded at a $4 trillion annualized rate. This was up 57% over prior year and represented debt growth at a 38% of GDP annual rate.

Stated differently, during the first 90 days of 2016 China piled another $1 trillion of debt on its existing $30 trillion debt mountain, while its nominal GDP expanded by less than $175 billion.

http://davidstockmanscontracorner.com/its-not-random-the-global-economy…

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by  Stephen Hulme  |  3rd May 16, 9:56am 1462226176

A failure of monetarism.? Read more and more

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by  Roger Witherspoon  |  3rd May 16, 10:53am 1462229619

There was I thinking it was the fault of people like David Stockman. When the US reduce their deficits it causes world trade to shrink. Reduced trade deficit, current account deficit and budget deficit sound good but cause a shortage of USD in the rest of the world. Triffin's dilemma.

The big US companies are all multinationals so their income shrinks and eventually their share price collapses, as have all other commodities, you know, gold, copper, coal, iron ore, dairy, oil, to name a few.

I find Jeffrey Snider's work wonderful (bar the pedant in me when he says the Phillips Curve was invented by a Brit. AW Phillips was a kiwi.) However he does fall into the trap of whining and whingeing about how awful the Federal Reserve are. "Ain't it awful, the government should do something about it" is a totally whoosy refrain. The well meaning, responsible bods at the central banks just do what seems best to them in response to events as they unfold. They do not understand the forces at work and are deluded into thinking they can manage them better than the unruly populace at large. Gosplan reinvented.

I found a great paper by Claudio Borio at the BIS:
http://www.bis.org/publ/work395.pdf

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by  Stephen Hulme  |  3rd May 16, 11:45am 1462232726

Thank you Roger - In my case I believe he is preaching to the choir.

Nonetheless, without spending more time on the article, this comment is of interest:

In addition, there is growing evidence that the cross-border component of credit tends to outgrow the purely domestic one during financial booms, especially those that precede serious financial strains (Borio et al (2011), Avdjiev et al (2012)). This typically holds for the direct component – in the form of lending granted directly to non-financial borrowers by banks located abroad4 – and for the indirect one – resulting from domestic banks’ borrowing abroad and in turn on-lending to non-financial borrowers.5 The reasons for this regularity are not yet fully clear. One may simply be the natural tendency for wholesale funding to gain ground as credit booms, which is then reflected in rising loan-to-deposit ratios.6

Much has been said by rating agencies about the risks of NZ banks' reliance on foreign wholesale funding - an area deserving much more transparencyt than the RBNZ is willing to attend to.

Note the comment at the bottom of banks funding by sector table.

Figures exclude foreign currency funding, which accounts for approximately 21% of total registered bank funding as at December 2015. NZD funding costs also exclude the impact of hedging, for example interest rate swap costs incurred against fixed rate claims. View table

This opaque and inadequate admission hardly allows the bank deposit funding base to discern which banks are most dependent on this funding model and thus avoided.

In January Moody's highlighted that, at more than 140%, the New Zealand banking sector has the highest loan-to-deposit ratio out of 13 Asia-Pacific countries. Of the big four banks, S&P figures as of December 31, put ANZ's at 135.9%, ASB's at 136.6%, BNZ's at 162%, and Westpac's at 147.4%. Kiwibank's was 109.9% Read more

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by  Roger Witherspoon  |  3rd May 16, 11:19am 1462231148

It is certainly frustrating. Meaningless "facts" like The big four banks had an average tier one capital ratio of 11.6% at the end of 2012.

Tier one ratios mean the fictitious amount of capital that a bank might have.

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by  dictator  |  3rd May 16, 11:59am 1462233566

These loan to deposit ratios are great news, for those anticipating a future disaster. It makes me wonder how vulnerable our banks are to currency fluctuations and if they have diversified sufficiently.

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by  Stephen Hulme  |  3rd May 16, 12:45pm 1462236314

Currency volatility is not a big current risk. The foreign loans are hedged via cross currency basis swaps, but rollover rate and risk are certainly issues, as are higher basis quotes and counterparty failure.

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by  Stephen Hulme  |  3rd May 16, 9:17am 1462223822

Goldman Sachs Group Inc (GS.N), the banking gold standard for the world's elite, sees a future in less prosperous investors. Read more

Times must be tough in the wholesale space if recent quarterly losses demand sales people track down the mass mediocre targets to relieve them of wealth. A warning for the complacent.

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by  Roger Witherspoon  |  3rd May 16, 9:59am 1462226345

How the mighty have fallen, having to stoop to lending to the plebian masses in their search for fresh fish. Goldman Sachs becomes second hand car finance company.

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by  dictator  |  3rd May 16, 12:03pm 1462233804

Actually there was a report that showed there were more banking profits from both the rich and the poor. The middle class aren't really worth their time due to low or no profits.

Targeting the poorest for exploitation created the environment that led to the sub-prime collapse. In fact if you look at P2P lending there are a lot of people that would be happy just to get a loan, even if the interest is 39.99%. A bargain compared with payday loans.

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by  profile  |  3rd May 16, 12:00pm 1462233658

The Case of the Missing Baby. It's probably climate changes fault as well.
"If some of the international trends are hard to fathom, so is the strange uniformity within countries. Trude Lappegard, a Norwegian demographer, says that her country’s baby bust, which has been going on for six years, might be easy to explain if it had hit one group especially hard. Instead, women of all ages and all levels of education are having fewer children.

...Ann Berrington of Southampton University points to housing. Young and even not-so-young couples find it hard to buy property in England and Wales: 46% of 25- to 34-year-olds lived in private rented accommodation in 2014-15, up from 24% a decade earlier. Four in ten 24-year-olds still live with their parents. Home-ownership rates have fallen in America and Australia, too. The rate is rising in France, where fertility has held steady—though that might be thanks to strong pro-natalist policies.

You can have a baby in a rented flat, of course. But in a country like Britain, where earlier generations found it easy to buy homes, that seems to flout a psychological rule for some. In the 1960s Richard Easterlin, an American economist, suggested that people would avoid having children if they felt unable to bring them up in a style that at least matched the way they were raised. It might be time to dust off that idea."

http://www.economist.com/news/international/21697817-financial-crisis-h…

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by  @tony  |  3rd May 16, 3:10pm 1462245030

Obviously missing your climate change story for today:

http://www.msn.com/en-in/health/medical/climate-change-may-lead-to-oxyg…

It should come as no surprise that human activity is causing the world’s oceans to warm, rise and acidify. But an equally troubling impact of climate change is that it is beginning to rob the oceans of oxygen... Should notice this gem by 2030...

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by  @tony  |  3rd May 16, 3:20pm 1462245632

It's a classic way to mess up the debate; come up with someone (no comment) and get them to write a paper and get the press to promote it as "FACT"... (just like lead in petrol - which is a fantastic story of dogged persistence against the corporate beast; if you ever get chance to see the latest Cosmos series).

So...
This is a great initiative; peer review the people trying to FUD the Climate Change issues.
http://climatefeedback.org/

Good for them.

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by  Afewknowthetruth  |  3rd May 16, 3:28pm 1462246121

'women of all ages and all levels of education are having fewer children. ..Ann Berrington of Southampton University points to housing'

I was born in Southampton, grew up there, was very familiar with Southampton University and studied at another university not far from there.

'Baby bust' has got almost nothing to do with climate change and everything to do with overpopulation, loss of confidence in the future, mismanagement [by governments and councils] and general impoverishment of the masses.

On the other hand, the accelerating meltdown of the Arctic: 'Arctic Sea Ice is Falling off a Cliff and it May Not Survive The Summer':

https://robertscribbler.com/2016/05/02/arctic-sea-ice-is-falling-off-a-…

the collapse of the Great Barrier Reef

http://www.abc.net.au/news/2016-03-28/great-barrier-reef-coral-bleachin…

and record temperatures across the globe:

http://robinwestenra.blogspot.co.nz/2016/05/the-dying-earth-05012016.ht…

ARE being caused by CO2-induced 'climate change', which IS the fault of industrial humans and IS the fault of governments and corporations misleading the masses.

Once the global environmental collapse reaches a critical point (10 years from now? 5 years from now?3 years from now? ) human populations will begin to collapse in most locations. At the moment it is mostly people in Africa, the Middle East and Asia who are dying from climate change.....and their deaths 'don't count'.

From your linked article:

'America’s Census Bureau simply assumes that current fertility rates will persist. Since 2008 it has slashed its prediction for the country’s population in 2050 from 439m to 398m.'

With environmental collapse accelerating, America is unlikely to have a population of even 40 million in 2050, and more likely zero.

http://mead.uslakes.info/level.asp

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