90 seconds at 9 am: Presumptions awry

US LMCI rises; negative rates drive saving; EBA wants to set 3% leverage minimum; AU's Chinese spying risk; CBA set to report AU$9.5 bln profit; UST 10yr yield at 1.58%; oil up, gold down; NZ$1 = 71.4 US¢, TWI-5 = 74.8

9th Aug 16, 7:38am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news some economic presumptions are being challenged today.

But first in the US, the closely watched Labor Market Conditions Index published by the Fed rose unexpectedly and much more strongly than expected in July, after falls in the previous six months.

In Europe, after some experience with negative interest rates, the conclusion is that the rationale for them is wrong. Low or negative rates don't encourage consumers to spend because they have more disposable income; quite the opposite. The signal to consumers is that their savings can't earn anything and from that they need to save more capital for retirement. Low or negative interest rates reduce consumption, increase savings - just the opposite of what policy makers want to achieve.

Staying in Europe, just how problematic bank capital has become there is highlighted in a European Banking Authority report recommending that banks their should have a minimum of 3% capital - that is a maximum leverage of an eye-watering 33 times. And don't forget they are saying they need to impose this standard as an improvement on what they have now! We may have problems in New Zealand with too much bank leverage, but they pale compared to the Europeans.

In Australia, concerns are surfacing about the link between big infrastructure sales and Chinese espionage. NSW's privatisation of their State Grid is likely to get vetoed because the Chinese buyer has been implicated in about 60 cyber attacks on Australian infrastructure networks in the past year.

And staying in Australia, their biggest bank, who is publicly claiming their margins are under pressure, is set to reveal a record profit of AU$9.5 bln for the year. Analysts say AU$10 bln is likely next year. "Future margin pressure" complaints are a perennial line banks push just before announcing their results - which are often at record levels - and this year is no different.

In New York, the UST 10yr yield is unchanged today at 1.58%.

The US benchmark oil price is up US$1.50 today, now over US$43/barrel and the Brent benchmark is over US$45/barrel. Low crude prices have brought a cut in petrol and diesel pump prices in China, the third this year.

The gold price is marginally lower at US$1,334/oz.

The NZ dollar is basically unchanged from this time yesterday at 71.4 US¢, at 93.3 AU¢, and at 64.5 euro cents. The TWI-5 index is at 74.8.

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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19 Comments

by Stephen Hulme | 9th Aug 16, 8:04am 1470686658

In Australia, concerns are surfacing about the link between big infrastructure sales and Chinese espionage. NSW's privatisation of their State Grid is likely to get vetoed because the Chinese buyer has been implicated in about 60 cyber attacks on Australian infrastructure networks in the past year.

And the Five Eyes alliance which includes ourselves and Australia is not spying on China? Yeah right!!!!

This has more to do with the US political pivot to Asia, which is not really in our trading interests or Australia's. Tough times ahead.

by murray86 | 9th Aug 16, 8:10am 1470687028

Did Winnie get an answer to how the Chinese knew about the steel industry request to MBIE to probe the price of Chinese steel being dumped into our market? Which Chinese company got the contract for IT infrastructure here? How do you think the found out about it, spies in MBIE? It is easier to tap into our IT infrastructure, and crack any encryption, if any, that is in place. Let's face it, they are not our friends, they are in it for the money and control. It is not personal, it is just business. Keep telling yourself that until you've lost it all to a foreign concern and are living on the street!

by Stephen Hulme | 9th Aug 16, 8:27am 1470688056

You will no doubt be pleased when the US instructs Key to impose trading sanctions against China just as it did to Europeans previously exporting goods to Russia.

by murray86 | 9th Aug 16, 8:31am 1470688267

Nope, I'll not be pleased when any country dictates policy to us. But I am concerned when we seem to have an open door policy to nations with a history of unscrupulous practices, that are not democracies, do not have a free press, and do not have a system of laws and Courts that at least makes some effort to be transparent and provide Justice for all. While the Yanks are not perfect, at least those ideals are the basis of their system!

by Stephen Hulme | 9th Aug 16, 8:49am 1470689362

We knew all that when we went all in with the trade deal and forecast a white gold rush, which never materilaised, other than the damn expensive, on many levels, dairy irrigation infrastructure.

by murray86 | 9th Aug 16, 9:13am 1470690786

Yup

by Henry_Tull | 9th Aug 16, 11:10am 1470697825

Hu's dinning on who.

http://www.stuff.co.nz/national/politics/9847806/Chinese-leader-to-visi…

The meeting also saw the formal approval of a new target to raise two-way trade between New Zealand and China to $30 billion by 2020, although the release announcing the target was accidentally distributed to the media almost an hour before the meeting took place.

"I think that's eminently achievable," Key said after the dinner.

"But as President Xi said when we were having the discussion, that just means China's got to drink a lot more milk, and they're up for that."

this has got Coen Brothers written all over it.
read the script "Bridge of Spies"
http://dreamworksawards.com/download/BOS_screenplay.pdf
https://www.youtube.com/watch?v=kQtN5g-6s6c

so none of them were lying.
one of them was lying (and the other didn't know) - in two possible combinations.
one of them was lying (and the other knew) - in two possible combinations.
both of them were lying (and the other didn't know) in two combinations.
both of them were lying (and the other knew) in two combinations.

Hu knew.
http://m.nzherald.co.nz/opinion/news/article.cfm?c_id=466&objectid=1122…
see the comments

by Henry_Tull | 9th Aug 16, 6:40pm 1470724835

Other places its all about power

China has said that its relations with the UK are at a “crucial historical juncture” amid doubts over the future of the controversial Hinkley Point C nuclear power station.

The intervention by the Chinese ambassador to the United Kingdom comes after the British government’s decision last month to delay final approval of the project, which is receiving major financial support from China.

“If Britain’s openness is a condition for bilateral co-operation, then mutual trust is the very foundation on which this is built,” Liu Xiaoming wrote in an article for the Financial Times, in which he placed the project at the centre of Britain’s evolving trade relationship with China.

https://www.theguardian.com/uk-news/2016/aug/08/china-warns-uk-relation…

Anyone up for a bit of pattern recognition.

by Henry_Tull | 10th Aug 16, 3:11pm 1470798713

Here is Rod thinking aloud, and what many are musing (China and trade with wise).

http://www.radionz.co.nz/audio/player?audio_id=201811417

9:56
and
11:40
especially (for students note the baseline is displayed in the second part on this occasion).

by Stephen Hulme | 9th Aug 16, 8:16am 1470687372

Under traditional “rules”, devaluing of a currency is supposed to bring about a measurable, even obvious increase in the export sector of the country undertaking the manipulation. The Japanese have been notorious for believing in the paradigm, and not just in the past four years under QQE and the whispers of it. Some people still believe that China is merely the latest to desperately employ the tactic.

A more than 6 percent slide in the yuan against the dollar over the past year appears to have done little to help China’s exporters in the face of stubbornly soft global demand and weak commodity prices. Read more

by murray86 | 9th Aug 16, 8:22am 1470687763

CBA to declare a A$9.5 Bln profit! How much of that came from NZ? And how long until our Government understands that we are being seriously fleeced by all banks.

A question that DC did not answer last week when a corresponder here posted a link to an article that described JP Morgan, Citibank, HSBC and National Providence own between them almost 50% of the four big banks, and did not differentiate between custodian and shareholder. My additional question is who owns the rest? Who controls the banks? They flex their muscles, crying hard done by when being asked to be fairer, but then declare humongous profits! Why won't Governments step up to regulate them?

by David Chaston | 9th Aug 16, 8:42am 1470688969

ASB's tax paid profit was just under NZ$900 mln. That represents only about 9% of the CBA AY$9.5 bln result. (But don't forget, you would also need to add in the Sovereign result. However, in terms of CBA's scale, it won't be large. Probably about NZ$100 mln. So together they may represent about 10% of the CBA result.)

by murray86 | 9th Aug 16, 9:17am 1470691057

That's about $200 for every man, woman and child. Not bad for a small country. What do the other three big banks take out? That flow of cash across the border has got to be a concern. Is it before or after tax? what tax rate do they pay? Will they be paying $280 mil + to the Government?

by mspace | 9th Aug 16, 10:25am 1470695103

The 30 June 2015 financial statements for ASB show an effective tax rate of 28%, with a tax charge of $333m on NPBT of $1.2b, so it's likely pretty similar this year. Actual cash tax payments were $335m

For comparison, Westpac's NZ operations (basically the same size as ASB) reported an effective tax rate of 27% ($375m tax expense on NPBT $1.4b, year ended September 2015) and actual cash tax payments of $369m.

Interestingly, ASB paid out $1.2b in dividends last year, whereas Westpac paid out very little ($160m).

I'll leave BNZ and ANZ as an exercise for the reader - all this is publicly available, though ASB's current year data will take a few more weeks to come out once they've dotted their is and crossed their ts.

by murray86 | 9th Aug 16, 12:19pm 1470701968

Ta, sort of makes it obvious why the Government won't put the brakes on them doesn't it? Too much easy money.

Four banks, near enough to $1 Bln tax revenue. No matter that it is money taken out of the economy that could earn a lot more taxes, this is just too easy.

by Tom Joad | 9th Aug 16, 8:30am 1470688234

In Europe, after some experience with negative interest rates, the conclusion is that the rationale for them is wrong.

The collective "wisdom" of Central Bankers has led the world to this impasse. Several observations:

(i) The "wealth effect" is dead. Rising asset prices around the world have not fuelled consumpton - they have benefitted a fraction of the population who are wealth hoarders rather than spenders.

(ii) Record low, and continually falling interest rates for over 8 years have re-inforced the belief that all is not well and so populations continue to save rather than spend.

(iii)Young people are saddled with the double-edged sword of student loans and inflated property prices. Hence have less disposable income and are saving more to buy a house.

(iv)Retirees are spending less as they have less income from their savings.

(v)Soaring property values make litte difference to owner occupiers as they still have to live somewhere - it's paper-wealth built on a sand-castle. However, mortgage holders have less disposable income as they channel more into their repayments.

I don't know how to fix this but am certain that keeping the ponzi afloat by ever lower interest rates is heading in the wrong direction.

by @tony | 9th Aug 16, 9:05am 1470690317

There are ways.
No one has the balls to do it [pollies are too short term focussed - it may hit the next poll!].
Limit mortgages to 3.5xmain salary and see what happens to house prices.
Also see what happens to our social fabric when half of the parenting unit stays home to bring up the kids.
Sadly; it won't happen... people are just too focused on their perceived "value" (so supporting the BANKS without realising the true cost to themselves and the country/world as a whole).

by Hevi Groswaite | 9th Aug 16, 9:39am 1470692367

Today corporate balance sheets rival many countries GDP. Banking holding companies are among the biggest corporate bodies. To assume papa government is unaware of the naughty children pillaging New Zealand is ludicrous, and they are certainly getting their pound of flesh in corporate taxes, and a few backhanders here and there! Expecting the government to voluntarily relinquish this income by reigning in their 'bankster' cronies to please a few concerned citizens, is a pipe dream. The odds of a bail out under the TBTF. banner are better.
And, the gall in claiming next years' woes as justification for this years profits, speaks volumes of deception, misdirection, and collusion. And then there is the good people of China sabotaging industry so they can buy on the cheap! What happen to that "Rainbow Warrior" spirit of yesteryear? Then, we brought the French government to bear, today we can't even boycott a thieving banking corporation, or boot booby-trapping chinese!

by Boatman | 9th Aug 16, 11:48am 1470700096

Dumb fools ..... what were they thinking?

Of course lower interest rates encourages thrift , even here in NZ , ask me , I used the post 2008 GFC crisis which led to the OCR at around 2,5% to pay off my mortgage and all other non- tax - deductable debts completely.

Now we have a surplus , and we are still not spending large , its going Govt Bonds , Bonus Bonds , the NZX and our Kiwisaver .

You see , we are due to reach retirement age in less than a decade, and we know we will need a large slug of money to live comfortably