90 seconds at 9 am: EU banking jitters

US house sales up, service sector grows faster; Canada housing stumbles; air cargo growth slows; BofE worried about EU banking sector; UST 10yr yield at 1.79%; oil lower, gold unchanged; NZ$1 = 71.5 US¢, TWI-5 = 75.7

27th Oct 16, 7:26am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news of jitters in the European banking sector.

But first, in the US sales of single-family homes rose unexpectedly by more than +3% in September, pointing to sustained demand for housing. The American trade deficit narrowed sharply, while both wholesale and retail inventories rose in September, both surprising the market.

There was also a surprisingly strong improvement in their service sector. October data pointed to faster growth across the whole sector. Business activity and incoming new work both expanded at the fastest pace for 11 months. The latest survey also revealed an upturn in confidence towards the year-ahead business outlook, with service providers reporting their strongest optimism since August 2015.

Across the border, Canada's housing agency is warning on the state of the country’s real-estate markets as frothy conditions persist in some key cities. They expect their markets to slow sharply in 2017.

The World Economic Forum says that the gender gap is getting wider. But it rated New Zealand ninth in the world in terms of gender equity; that's up from tenth last year.

Airlines are expecting air cargo trade growth to slow in 2017. But this review shows just how fast airfreight is grabbing market share of the trade in goods worldwide. And that in turn involves a vast reduction in stocks companies need to hold.

In Australia, yesterday's surprise rise in their CPI probably lowered the chance of a rate cut next Tuesday.

In the UK, the Bank of England has asked large British lenders to detail their current exposure to Deutsche Bank and some of the biggest Italian banks, including Monte dei Paschi, amid mounting market jitters over the health of Europe’s financial sector. There are real concerns about this because as soon as banks stop trusting each other, problems mushroom fast.

In New York, the UST 10yr yield got up to 1.80% today which is its highest level in five months. It's one bp lower at present.

But the US benchmark oil price is -$1 lower today at just over US$49 a barrel, while the Brent benchmark is still just under US$50 a barrel

The gold price is unchanged at US$1,272/oz.

The New Zealand dollar is just a touch lower too, at 71.5 US¢, and on the cross rates it is 93.5 AU¢, and the euro to 65.6 euro cents. The NZ TWI-5 index is now at 75.7.

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 ».

Daily exchange rates

Select chart tabs

Source: RBNZ

Source: CoinDesk

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

17 Comments

by Stephen Hulme | 27th Oct 16, 9:15am 1477512910

China gobbling up Japanese government bonds

It bought close to a net 9 trillion yen ($86.6 billion) worth of JGBs in the January-August period, more than tripling the amount from the same period last year. Read more and more

by murray86 | 27th Oct 16, 9:43am 1477514631

Who in China is buying these Steven? This is clearly a strategic move, but does it make Japan vulnerable to the Chinese? Government bonds are generally regarded as the most secure, but with the vulnerability of world economies at the moment, how secure is that?

by Stephen Hulme | 27th Oct 16, 10:16am 1477516600

Who in China is buying these Steven?

The reputed owner and reported seller of US Treasury reserves - the PBOC, I guess. If you have have followed the links there is a description of a remarkable yield enhancement available to those engaging in this sovereign reserve swap trade.

by Boatman | 27th Oct 16, 11:21am 1477520464

@ murray86 , Its the Chinese Central Bank ( read Government ), they run a policy called Mercantalism

Basically the Chinese make stuff and sell it for US$ , and when the payment gets to China , the Chinese Govt sweeps up all the Foreign Currency from exports , and pays the exporter in Yuan ( they are not allowed to hold other currencies without sanction from the Govt.)

So the Chinese Govt gives its citizens monopoly money , and it gets all these US$ and Yen and dont know what to do with them ( altho they do buy inputs , raw materials and commodities with some of it )

Now they simply buy Interest bearing bonds ( Gilts ) with this money such as Japanese Bonds or Fed Bonds , Eurobonds , etc

by Stephen Hulme | 27th Oct 16, 11:57am 1477522620

Exactly. I posted a link yesterday stating as much.

The Chinese get not just “dollar” collateral which can be mobilized quite easily, they also reduce their own short “dollar” footprint by bringing in oil that they now don’t have to buy on global markets. They have, in fact, turned a virtual currency into a real commodity by pawning it off on those more desperate for it. In other words, they conjured “dollars” that they themselves don’t really have so that they could position trade factors financially in their favor. Under a gold standard, they would have lent Nigeria (or Angola) gold and been repaid in gold assuming that they had done it all; that is the difference, under a gold standard the Chinese could not so easily just summon “money” with which to lend Nigeria or Angola in the first place. From that perspective, the eurodollar is like a highly contagious virus with a long incubation period. Everybody just creates “dollar” IOU’s and spreads them everywhere, leaving behind the contamination of now being “short.”

Is this Bank of England description stating anything different?

Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

The reality of how money is created today differs from the description found in some economics textbooks:

Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. Read more

Do NZ banks get a lien on NZ property by fabricating credit for cashless buyers?

by Stephen Hulme | 27th Oct 16, 10:35am 1477517730

Upton Sinclair once observed, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” For Economics (capital “E”) and those who practice it, this is the literal truth; realizing that monetary policy is futile is to realize that central bankers and all the economists attached to them are just extraneous expenses. Read more

Mario Draghi is certainly a character unworthy of his salary.

Mario Draghi used his second appearance in Berlin in a month to drive home his message that a three-decade slide in long-term interest rates can only be properly arrested with the help of governments.

The “type of actions we need, if we want interest rates at higher levels, are those that can raise the natural rate,” the European Central Bank president said on Tuesday. "And this requires a focus on policies that can address the root causes of excess saving over investment -- in other words, fiscal and structural policies.”

Having been the focus of increasingly sharp criticism in the German media and from some political parties that accuse him of hurting savers through low-rate policies, the ECB president mounted a detailed defense of his monetary policy and pushed the blame for low returns firmly elsewhere. Draghi said slower productivity growth, aging societies and an excess of saving have all contributed to driving rates lower. Read more

For how much longer must citizens of the world endure this incoherent self-serving nonsense when it is clear to his central bank cohorts in other spheres that:

“In a barter economy, there can rarely be investment without prior saving. However, in a world where a private bank’s liabilities are widely accepted as a medium of exchange, banks can and do create both credit and money. They do this by making loans, or purchasing some other asset, and simply writing up both sides of their balance sheet.” Read more

by dictator | 27th Oct 16, 11:55am 1477522521

The double entry accounting system is the ninth wonder of the world, right after compound interest and Einsteins substantial investment losses after claiming it the eighth.

by murray86 | 27th Oct 16, 12:22pm 1477524170

Stephen thanks for your earlier reply I have another question. Mario Draghi states there is excessive saving over investment. Is this true that banks have too much depositors funds? On this site there is another article that suggests the banks are desperate for depositors funds, but interest rates for deposits are falling. If there is too much depositors funds, why aren't the banks investing them where they are needed?

by David George | 27th Oct 16, 1:16pm 1477527386

Considering our latest record trade deficit and forty year unbroken current account deficit there is no way we Kiwis can be accused of adding to the so called savings glut.

by dictator | 27th Oct 16, 1:25pm 1477527931

Bonus Bonds were created to encourage Kiwis to save. It's safe to say that didn't work. Consumer culture and marketing is the true Kiwi Dream.

by Joe Public | 27th Oct 16, 10:41am 1477518093

Canada market intended consequences!. Well done Canada

VANCOUVER (NEWS 1130) – The National Bank of Canada is predicting a major correction to Vancouver’s hyper-inflated housing prices over the next 12 months.

In a special report released Friday, the bank says the cost of a detached home will decline 20 per cent, with more modest nine per cent and five per cent price drops for attached homes and condos respectively.

by Boatman | 27th Oct 16, 11:24am 1477520683

Everyone is worried about the European Banking system .

Quite apart from what has been flagged , have they provided enough provisions for defaults by sovereign members ?

by Boatman | 27th Oct 16, 11:27am 1477520864

Lets be brutally frank here , if Deutsche Bank goes , we are all in trouble .

Lehman Bros would look like a kindergarten in comparison

by bigblue | 27th Oct 16, 11:44am 1477521889

Poor old BNZ only made $913,000,000 - guess they will have to put interest rates up!
http://m.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11736…

by Rumpole | 27th Oct 16, 12:19pm 1477523996

Well done David for mentioning a little Banking crisis in Europe, Congratulations Boatman for recognizing the potential for 3 suspended Italian Banks and the possibility of Deutsch Bank being in serious (terminal) trouble which their 3rd quarter results due tomorrow may provoke a market reaction of unprecedented proportions. Yesterday hedge funds were reportedly pushing 50,000 orders a second into the market using their high frequency trading Algorithms. If the odious trio Junker, Tusk & Shultz enforce a Banking bail in making depositors deemed investors with a loss of some/all of their capital the ramifications for the financial system and those responsible may be like the French revolution.

by Rumpole | 27th Oct 16, 12:21pm 1477524078

I forgot to mention that the NZ Media have not even whispered this - asleep on the job - and they wonder why the public are deserting their products.

by dictator | 27th Oct 16, 2:54pm 1477533251

I'll be matter of fact with respect to most journalism. They have been replaced with AI writers that then get edited and published. Not really journalism, no investigation or new thinking.