US retail and factory data disappoints; markets eye December Fed hike; Vancouver tax rakes in heaps; ANZ caught in water riots; UST 10yr yield at 1.70%; oil unchanged, gold down; NZ$1 = 73.1 US¢, TWI-5 = 76.4

Here's my summary of the key events overnight that affect New Zealand, with news of signs of an unintended outcome in Vancouver.

But first, American retail sales came in lower than expected in August, according to the 'flash' retail sales data out today. They were up only +1.9% on the same month a year ago, mainly because petrol sales were down -10.6% and department store sales were down -4.5%. Car sales were up +3.3%, hardware sales were up +6.6% and internet retailing was up +11% compared with the same month a year ago. Still, this was not enough for Wall Street, who expected stronger gains. They concluded this ends the likelihood of a rate hike from the Fed next week.

Or maybe that view was more about the Fed own release of data on industrial production and capacity utilisation, also out today. That survey from all the Fed regions showed a -1.1% fall in production but a +0.4% rise in capacity utilisation.

Either way, there is a 'relief rally' going on on Wall Street with equities up more than +1%.

However, the chances the Fed will raise interest rates in December have shot up in the past month to about 70%, according to a Reuters poll that showed economists are more convinced a move is on its way despite what is seen as weak data..

In British Columbia, Canada, their state coffers are expected to be filled fast by new taxes on Vancouver real estate. The state government now expects a $2 bln surplus for the year thanks to their new property transfer tax and fast-rising income taxes. They are signaling that about a quarter of these gains are about to go back into "housing affordability" programs. No specific details yet. But is does suggest that their new transfer tax is not holding back speculators - who are paying the tax and it is being added to house prices. Unintended consequence?

In Australia, one of the risks of outsourcing is playing out for ANZ. The bank is having trouble actioning home loan approvals because its major Indian back-office processing center is caught up in civil unrest in Bangalore. The issues there are nothing to do with ANZ; they are over regional tensions concerning water allocation. Staff in the Indian city have been told to stay at home for their own safety. ANZ Australia is paying a market-share price for the problem.

In New York the UST 10yr yield is unchanged today at 1.70%. There is a noticeable steepening bias in wholesale money markets however.

The oil price is also little changed in today's trading, with the US benchmark price now just under US$44 a barrel, while the Brent benchmark just over US$46.50 a barrel.

The gold price is noticeably lower, now just under US$1,315/oz.

The New Zealand dollar opens a bit higher than this time yesterday, now at 73.1 US¢, and on the cross rates it is at 97.4 AU¢, and 65 euro cents. The TWI index is now at 76.4.

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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43 Comments

"...Fed regions showed a -1.1% fall in production but a +0.4% rise in capacity utilisation".
How can a country produce less by using more of it's reserved production facilities?
What exactly are they measuring?

"unintended consequences" or intended? Perhaps their government is, like ours, committed to "ensuring that home owners do not suffer capital losses" (ie house prices don't become affordable).

Perhaps if it is "dirty money" people are willing to pay more just to launder the money.

"Price no object" is the obvious characteristic of "dirty money"

Hey Labrat - How can putting pressure on JK's fabulously fictitious foreign 3% have unintended consequences.
Is there a small chance that there is more than 3%?

3.1% maybe?......... (if we include penniless students)

"How can a country produce less by using more of it's reserved production facilities?"

By closing down some production facilities.

the FED wont raise this year, they will drag there chains like last time miss the optimal month and do it two meetings later as they did for the last raise

I agree - to do so would create carnage. The financial trends of some of the big Oil Cos tell the story of the cul de sac we are in. They need higher Oil prices, the world needs even lower prices.
http://www.marketwatch.com/investing/stock/BP/financials
http://www.marketwatch.com/investing/stock/RDS.A/financials
http://www.marketwatch.com/investing/stock/ENI/financials

How and why would it (an interest rate increase) create "carnage" .....

Pretty simple - a stronger US$, a relative increase in US$ denominated debt and higher interest rates globally - not likely to go down well.

The current settings are not perceived as precursors of better times ahead

If you look at inflation breakevens or the 5-year/5-year forward rate that is exactly what you see in ratcheting behavior. Even when things go right (loosely speaking) they go wrong. The fundamental truth is that there is no escape so long as the “dollar” system remains in a critical state. Inflation trading seems to know it, or at least seriously consider it even when the mainstream is already counting the recovery (all over again). Read more

Basically, there is no money in monetary policy.

It is notable that yesterday's NZDMO tender of $150m 2.75% 2025s priced only 14.39 bps under interpolated IR swaps compared to the previous tender level of 26.89 bps. Why did the risk of government debt suddenly rise compared to that applicable to IR swap counterparties?

..... so , how is this the Fed's problem. Suck it up ladies......

"But is does suggest that their new transfer tax is not holding back speculators - who are paying the tax and it is being added to house prices."

Well no shit...costs are never just absorbed. Of course they are added to price. The same would happen here. The only thing is whether people are still prepared to pay it. A good little earner for Govt though.

which should be used to build housing for its citizens and the infrastructure needed

"should"

should because like all governments a portion will end up supporting pet projects

Probably too early to tell. The following sites show slightly different results re Vancouver housing.

http://vancouversun.com/business/real-estate/seattle-gaining-on-vancouve...
http://www.theglobeandmail.com/real-estate/house-price-data-centre-canad...

The first site however implies that Chinese buyers reacted to the tax by moving onto Seattle which would suggest that they could also be showing increased interest in AKL (if that was possible).

makes sense right...101 economics tells us that ...

per google:
"Substitute goods are two goods that could be used for the same purpose. If the price of one good increases, then demand for the substitute is likely to rise. Therefore, substitutes have a positive cross elasticity of demand."

so Vancouver is taxed so buy in places that don't tax ie AUCKLAND

Something I've been wondering, and haven't really seen addressed, is the awareness of the existence of bubbles and how they work for Joe Average and his mum, on the ground in China. In the West we've seen repetition after repetition of the bubble cycle, over centuries, in umpteen commodities and markets, and still struggle to grasp the concept. Whereas in China, it's only a few generations out of Feudalism, until 25 years ago most people were in the fields in Mao suits, the last few decades were spent under hard-line totalitarian communism, the media is subject to a lot of censorship, and the central government has driven plenty of malinvestment. What's the level of understanding for the average person throwing their money into this? Is it a race to take advantage, grab the profits and GTFO before it blows, or do the people getting caught up in this genuinely believe it's a magical one-way bet?

My impression, having just visited, is that they indeed think it's a magical one way bet. My host owned two apartments - one for himself and one that sits empty waiting for his young son to grow up. Clearly rational in a world where prices only increase. More than half the apartments along the river were empty yet building was continuing apace.

There's an article just out on Bloomberg on this very thing. Makes our insanity look almost normal - 30% average annual debt growth for four years now!
China's homeowners have come to see near double-digit real-estate returns as a birthright, a bet on par with death and taxes. According to one study, more than 70 percent of Chinese household wealth is in housing. Investors believe there's an implicit guarantee that the government won't let home prices drop, even as many buildings sit empty.

Meanwhile, banks have gone on a lending spree: Total outstanding mortgage loans rose more than 30 percent and new mortgage growth clocked in at 111 percent in the past year. Since June 2012, outstanding mortgage loans have grown at an annualized rate of 30 percent. Predictably, that’s pushed prices higher and higher.
https://www.bloomberg.com/view/articles/2016-09-15/china-s-housing-gets-...

You could almost replace New Zealand for China in the article - but that would be naive. In China the Communist Party has far more control than the current government. If John Key / National takes action and the market does correct - National will definitely not get re-elected, but if they only tinker around the edges National has a chance they will be re-elected - that is if something else - that the government doesn't control - doesn't crash the market between now and the next election. A week is a long time in politics , a year is eternity.

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12

Tell me what ANZ Australia are doing having their loan approvals and documentation done in India. Does the NZ outfit do the same? This is a large and very highly profitable local business quite prepared to stiff their own country and it's workers to save a few pennies, is it any wonder folk are starting to realize this globalisation business has gone too far already.
Another thing; wasn't our Dear Leader supposed to be bringing all this finance back office stuff out to NZ, what happened to that? Perhaps he just needs to get our pay down to Bangalore rates first or is it the plan to bring the their $2/hour workers here. Its a work in progress I guess - good things take time aye Johnny.

Your pennies are a bank's millions. Incidentally I believe ANZ pays quite reasonably in India. It is just that if your cleaners need to make $16/hr, your finance professionals won't work for the same here.
Abolishing the minimum wage would allow us to be the country people out source to instead of from.

The minimum wage is the single greatest incentive to outsource/automate that I know of.

Well your dream of a race to the bottom looks to becoming reality.
Good luck all.

Why are businesses so hell-bent on eliminating their own customers?

David what do you mean by unintended consequences ? the intention was for foreigners to pay it right ?

They are raising funds for affordable housing so that is brilliant. Can't see any downside really can you ?

Foreigners pay more... more tax is collected..... if teh stamp duty isnt high enough to put foreign buyers off then crank it up to 25%.

Win / Win scenario ...
worst case housing still goes up and tax revenue is collected to help fund affordable housing
best case house prices are controlled and come down and tax is collected.

... it's a Win / Win / Win scenario , if you take those taxes from the wealthy overseas investors/speculators , and collect it into a fund for all the currently unfunded projects which are needed to upgrade and extend Auckland's infrastructure ...

No need to pick the ratepayers' pockets , nor to go into debt with Infrastructure Bond issuances ...

.... will Goofy see the light , at the bottom of a rich Chinese citizens wallet ?

No. The original motivation was for the tax to deter frothy buying activity, suppressing 'excessive demand' so that prices didn't rise [so fast].

What may be happening (although it is still very early in the process) is that prices are rising faster with the tax. That was not the intended outcome. If this is in fact what is happening, 'locals' will be even less able to buy in that market (not intended), and the only local winner will be the Government tax take (not forseen). It also seems cynical that only 25% of the Government's gains will go back into 'housing affordability'; why not all of it, when the idea of the tax was to make Vancouver housing more affordable for locals?

I suspect the 'faster price rises' event is likely what is happening because that is what the BC Government is seeing in its data - which is why they made today's announcement.

Remember, this new 15% tax on foreigners started on August 2, 2016. So they have two weeks of experience to base today's announcement on.

Doesn't matter

Foreigner walks into a Vancouver Real Estate Agent, buys property, pays the 15% tax, calculates cost so far, adds a mark-up of say 10%, and puts it straight back on the market with the same realtor

That's at least a 20% bump in prices in coming months

Realtor rings his buddy contact at the local media outlet - says - guess what

two otherguys -----"Foreigner walks into...." Thought it was going to be the Friday Funny, but unfortunately a true, sad, sick joke. :-)

Sorry David, where exactly in the below paragraph that you wrote did you state that "PRICES are rising faster ?"

Also can you please post an article that states prices are rising faster with the tax than they would have been without the tax. That is illogical and defies common sense. What you are saying is that because the foreigners are paying 15% tax then house prices are increasing faster. Please explain that.

Which means this comment you made is also incorrect : "'locals' will be even less able to buy in that market (not intended)"

Per the article:

"In British Columbia, Canada, their state coffers are expected to be filled fast by new taxes on Vancouver real estate. The state government now expects a $2 bln surplus for the year thanks to their new property transfer tax and fast-rising income taxes. They are signaling that about a quarter of these gains are about to go back into "housing affordability" programs. No specific details yet. But is does suggest that their new transfer tax is not holding back speculators - who are paying the tax and it is being added to house prices. Unintended consequence?

http://www.theglobeandmail.com/real-estate/the-market/toronto-sees-spike...

"The Vancouver market appears to be finally going through sticker shock after a three-year rally. The average price of detached properties sold within Vancouver’s city limits fell to $2.6-million in August, down 11.6 per cent from July, while the average price within Toronto proper rose 0.3 per cent to $1.21-million, according to data from real estate boards."

http://www.bloomberg.com/news/articles/2016-09-14/luxury-home-sales-in-v...

http://www.bloomberg.com/news/articles/2016-09-15/canada-august-existing...

Average Vancouver home prices in Vancouver fell by 18.8 percent on the month, faster than the year-over-year decline of 7.5 percent. In dollar terms, the monthly drop to C$846,244 from C$1.04 million still leaves the city’s prices almost double the national average of C$473,105.
“We expect some of the extreme weakness in August to be reversed in the coming months as the shock of the new land transfer tax on foreign buyers dissipates,” Diana Petramala, an economist at Toronto-Dominion Bank, wrote in a research note. “Nonetheless, we expect the market to remain weak at least through early-2017.”

Not sure what your sources are however perhaps you should look at Bloomberg going forward

Sounds like they have achieved their "Original motivation"

http://www.bloomberg.com/news/articles/2016-09-15/canada-august-existing...

exactly still trying to work out what the Unintended Consequence was ?

1. Extra tax revenue ? can't be that as that was the intention
2. Foreign buyers (incld stud + temp) now need to pay the tax, therefore a higher price. Again this was the intention of the tax.

Can anyone work out what was the unintended consequence ? Love to know

Hilarious how you are trying to put a negative spin on the Vancouver tax... really you think prices are rising faster because of the tax than they would have otherwise.... seriously?

Vancouver "- new transfer tax is not holding back speculators - who are paying the tax and it is being added to house prices"
Doesn't make sense prices are falling in Vancouver so how can speculators be hiking prices?

quote
"The new transfer tax is not holding back speculators - who are paying the tax and it is being added to house prices"

decipher - decode
suggests the speculators are foreign (because they are paying the tax) and by adding the tax to the price they are immediately "flipping" the property straight on to other foreign buyers which is telling you there is an offshore (OTC over-the-counter) market being operated - mopping up "dirty money" - price no object - GTFO money

That quote is telling you the speculators are themselves foreign

Re Vancouver Tax .......We also need to act in our own interests, and Government is being downright irresponsible in not protecting our "own best interests " .

We know is that markets habitually react unpredictably as in Vancouver , and oddly , the market is usually right .

We also know that any new tax has never, and will never, reduce the price/ cost of anything , and its simply counter-intuitive to even think it ever will do so . But at least Government can make some money from this rort , which can go towards the costs of sorting Auckland' road network shambles

And what is now occurring in BC must have been a consideration by those who implemented the Tax . That they chose to either ignore the possible consequence , or were happy with that possible outcome , we will likely never know .

Its like the folk who think a Capital Gains Tax will somehow miraculously reduce Auckland's house prices .

It simply defies logic to suggest that a tax that can be avoided by NOT selling an investment will either generate a windfall for the Fiscus ( I cant find the Itallics ) or make it easier for Kiwi homebuyers to buy a home .

In any event , I am in favour of applying a levy to foreign buyers coming in here with funds borrowed offshore at anything from a little as 2% to close to zero interest rates , and outbidding us in our own backyard.

Its called a level playing field , and its the Kiwi way of playing fair .We need to protect our interests as any other self -respecting nation on earth .

This is our game and we should make the rules

"This is our game and we should make the rules"

Ideologically, this is counter globalisation and the free trade monster.

So really its a case of choosing (way back) the route a la Cuba (which would be more sustainable in terms of consumption, population and resource protection) OR full steam ahead in to flogging resources and global growth... till everyone and the planet is stuffed. We can't have our cake and eat it.

I agree with everything you said Boatman other than won't reduce price.

See below from.Blomberg as of yesterday :

Average Vancouver home prices in Vancouver fell by 18.8 percent on the month, faster than the year-over-year decline of 7.5 percent. In dollar terms, the monthly drop to C$846,244 from C$1.04 million still leaves the city’s prices almost double the national average of C$473,105.

Increase prices demand drops..... That's how it works....if only 25% goes to affordable housing and 75% to govt coffers that's still good right as it that 75% and the 25% is money the govt would not have otherwise and it is not coming from Canadian citizens so why would they be upset.

The best "justice" money can buy.

The US Department of Justice has proposed a $14 billion payment to settle potential civil claims involving residential mortgage-backed securities, Deutsche Bank said in a statement. Read more

What a disgrace. If only there was some political leadership.