90 seconds at 9 am: Hong Kong being absorbed

US growth stronger than first reported; rift between US and EU grows; China ODI collapses; Xi readies Hong Kong takeover; UST 10yr yield 2.25%; oil down, gold up; NZ$1 = 70.6 US¢, TWI-5 = 75.1

29th May 17, 7:22am by David Chaston

Here's my summary of the key events from over the weekend that affect New Zealand, with news Hong Kong's special status is fast coming to an end.

But first, it is Memorial Day in the US and Wall Street's opening won't now happen until early Wednesday morning New Zealand time. It also the start of their summer trading period.

The American economy slowed less than initially thought in the first quarter, rising at the rate of +2.1% pa, much higher than the first estimate of +0.7%. But softening business investment and moderate consumer spending are clouding expectations of a sharp acceleration in the second quarter.

The US President's trip to Europe may be an important event and lead to a quick loosening of the relationship between the two allies. There seems little doubt the American did not impress his hosts as a reliable or stable influence and this may have wide-ranging implications for policy direction in Europe. A quite-separate approach to regulatory priorities will make life very different for large international businesses on both sides of the Atlantic.

It is also a public holiday in China. However, official data out there showed, outbound direct investment has spectacularly tanked in the March quarter. It dropped -71% year-on-year to just over NZ$8 bln in April from NZ$28 bln in the same period a year ago. In the first four months of this year, the country's non-financial ODI declined more than -50%. The country has also gone back to effectively pegging the yuan to the US dollar.

In Hong Kong, the 'autonomous' status of the city is ending and it is about to become just another China city. President Xi will visit the city in a month and his officials are setting the stage for the end of its special status. That probably also means that reporting and media outlets based in Hong Kong will also need to transition to be "news workers for the Party".

In New York, the UST 10yr yield is still at 2.25%. The yield inversions in China have unwound and their curve is now flat.

The price of oil fell over the weekend. The US crude benchmark is now back under US$50 a barrel, while the Brent benchmark is just over US$52. The American summer driving season which is typically a time of higher petrol prices will be different this year. Petrol prices are lower than usual with cars much more fuel-efficient that in the past. Demand is rising normally, but supply is abundant.

Gold is up by US$11 to US$1,267/oz.

Meanwhile, the Kiwi dollar is been holding its own, supported by positive views of the NZ budget and fiscal situation and is now at 70.6 USc. On the cross rates the Kiwi is at 94.9 AU¢, and 63.2 euro cents. The TWI-5 index is now up to 75.1, a one month high.

And bitcoin is much lower today, and back to just under US$2,200, a drop of -12%.

If you want to catch up with all the 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 ».

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.

32 Comments

by dictator | 29th May 17, 8:23am 1496003028

The first New Year's Eve in Hong Kong where there was no celebration it became clear to me that things were slowly changing. That was a long time ago. More recently the HK dollar was worth less than the Yuan. Slow and steady change. I wonder how many people have relocated from Hong Kong?

by jfree | 29th May 17, 8:25am 1496003122

National flip flopping all over the place to justify more subsidies.

http://www.radionz.co.nz/news/political/331777/govt-pulled-u-turn-on-ac…

by Hardly | 29th May 17, 11:20am 1496013640

"If we pay greater Working for Families are the supermarkets going to put up the price of Weetbix? Well, they may or they may not. What we do know is that if we don't make these changes those families remain under pressure and there's no possibility [of relief]."

This is a ridiculous argument, so ridiculous I feel embarrassed wasting characters addressing it. There are no similarities between wheetbix and housing. Breakfast cereals is a highly competitive market where sanitarium has bugger all pricing power. Check the increase in wheetbix costs over five years, I bet you it's low. Whereas housing is highly uncompetitive with massive barriers to entry/exit.

But regardless as a short term measure I guess we have to raise the supplement. I just wish we'd taken action on the housing front nine years ago. We need a real plan - free up land, up the number of skilled trades people, push down material prices, get industrial level building going. This needs government leadership immediately. I don't care who the government is as long as they pull finger.

by Eco Bird | 29th May 17, 9:03am 1496005385

Re RNZ subject, Yes, what an eye catching title eh? ... everyone is digging deep for any possible holes in this budget ...I guess digging dirt is a fun game for some in an election year ! ... some of which like this particular subject of AS is getting beyond silliness ...
Some of us just cannot celebrate or stomach a good move so we criticize no matter if it was a good or bad move !!
I am sure we will see more ridiculous assumptions and appalling in the days ahead.

by bw | 29th May 17, 9:13am 1496006018

(Bill English from that piece) .. landlords were restrained by the market. They don't have the option of just banging up the rent to any number they can think of."
Hang on! I thought that if Negative Gearing was abolished or CGT was brought in landlord COULD bang up the price to any number they could think of! Does 'the market' only work when you say so, Bill ?

by Eco Bird | 29th May 17, 9:52am 1496008366

Well, let's try putting the tax up on plumbers to 50% and charge them an extra $1500 a year for their ticket (license) renewal ... what do you think they would charge an hour then?

by rastus1 | 29th May 17, 10:51am 1496011861

..well eco bird, repairs and maintenance can be included in WFF. So frett not, National have it covered.

by mfd | 29th May 17, 9:23am 1496006606

The other possibility is other people see things differently to you. Maybe the reason others aren't celebrating an increase in AS is that we think it's a bad idea that achieves nothing more than pumping more money into an already inflated asset class.

by Eco Bird | 29th May 17, 9:43am 1496007805

Sure, people are entitled to think what they wish based on what they know or expect! ... but every landlord knows that it is the market (demand) and the customer are the ones which actually dictate what rent levels would or not be charged in certain areas ... NOT what they have in their pockets .... otherwise they risk having empty properties ... Hence realistically that assumption is counter intuitive .... you are free to disagree though.
furthermore , chasing Landlords out of this business will only make things worse for renters - there is stock /price balance in every market ...look what happened to rents in CHCH lately

by mfd | 29th May 17, 9:51am 1496008301

I agree, the market decides what rent levels will be. If the government shoves more money into AS, it changes the market and acts to increase rents. Rising rents acts to increase house prices as the yield increases. I'd be quite happy to see fewer landlords in operation, a landlord selling up has no impact on housing supply and a re-balance away from renting and towards home ownership doesn't seem like a bad thing to me.

by Eco Bird | 29th May 17, 10:35am 1496010940

Indeed, it will be a very good thing, only if most of the tenants could afford buying the properties they currently rent ... yet again, we tend to forget that there is a lot more in expenses which tenants do not pay when renting a house vis a vis owning one ... and that gets right in the heart of affordability of ownership ... the list is quite long and adds up to a significant percentage of the mortgage payment. Actually , rental property prices need to drop about 50% for most willing tenants to be able to buy them..

Yields and rents lag behind house price increases - they don't cause home prices to rise, often the opposite is true, we have to differ on this one! .... the example which Mr. English gave about the price of wheet-bix is quite logical.

by gooki | 29th May 17, 12:45pm 1496018737

"the example which Mr. English gave about the price of wheet-bix is quite logical."

No it's not because I can simply choose to forgo weatbix, or even breakfast cereal altogether and eat any number of other things like toast, or fruit.

Shelter is considered a basic human right, if I am not in a position to buy a home, our society dictates I must rent.

by murray86 | 29th May 17, 12:29pm 1496017799

I am concerned with the use of the word 'market' when people are discussing rents. this word presumes equal power between the renter and the Landlord (LL), but the reality is quite different. It is true that the rents are demand driven, but this is because landlords put the rent up when they see a lot of people interested and wanting (needing) to rent their properties. From the renters perspective though they NEED a roof over their heads, and when looking at the rental market, competition from other people looking as well they are forced to accept what they are offered, rather than being able to negotiate a more affordable rent. Any LL who says that when a prospective tenant tells them his required rent is too high, and they want to negotiate, that he is happy to do this, will flat out be a liar, as he will simply be in the position of knowing someone will be desperate enough to pay what he demands. the alternative is the streets! So the market is effectively the LLs looking at what others are charging and doing the same - essentially putting a gun to the renters heads. It is not the "market" it is extortion!

If you do not agree with this description, please explain why someone getting $750 a week would agree to a $400 a week rental bill?

by gingerninja | 29th May 17, 10:41am 1496011294

Ecobird, saying "wanting to chase landlords out of this business" is completely distorting and twisting the narrative.
What people are saying is they want there to be LESS renters and more owner/occupiers. Sure, this might mean that there might be less landlords or that landlords have to accept less profit. If there are LESS RENTERS whether landlords are "chased out of the market" or not, it won't push rents up because more of those renters would become home owners.

People who are complaining about the budget seem to be making the following points;

The budget is not directly addressing the CAUSE of housing affordability, it is addressing the SYMPTOMS of housing affordability.
(Do you think addressing the symptoms and ignoring the causes is a good long term solution to any problem?)

And that the budget is potentially worsening housing affordability by subsidising higher housing costs (which potentially further inflates housing costs) rather than reducing housing costs, or increasing incomes, thereby increasing housing affordability.
(Do you think short term strategies that address symptoms of a problem but which potentially WORSEN the actual problem in the long term is ever a good strategy for any problem?)

by Eco Bird | 29th May 17, 2:55pm 1496026503

Thank you all for your valued opinion and input ... all my above comments are based on my personal experience and how I saw the rental market performing in the last 18 years...

I cannot find any excuse for LLs who increase rents by massive amounts outside reasonable cost increases. there would be LL's who exploit market high demand and rental shortages at certain times in certain areas, but to my knowledge that is not the norm - look in trademe renting adverts you often see almost same quality houses in the same area which have quite varied asking rent prices. I also know that any LL who pitches his property too high risks leaving it empty for longer and that painfully hits his bottom line. The weekly rent of a vacant property is paid by its LL.

BTW, I used to pay $420 pw rent for a 4 bdrm in auckland in 1996-1997 when the total household income did not exceed $800 per week and that was for a family of 6, ... at a time when a standard 3 bdrm house used to rent for $250-260 pw. there was sharp property / rentals price drop in 1998, I asked my LL to reduce the rent by $20pw and he did. the same property is now rented for $800pw ....

by two otherguys | 29th May 17, 9:29am 1496006983

... often considered the beginning of the end of the British Empire

The transfer of sovereignty over Hong Kong from the UK to the PRoC, referred to as "the Handover" internationally or "the Return" in China, took place on 1 July 1997. The landmark event marked the end of British rule in Hong Kong, and is often considered to mark the end of the British Empire. https://en.wikipedia.org/wiki/Transfer_of_sovereignty_over_Hong_Kong

Here in NZ there was a substantial upsurge in migration from Hong Kong into NZ beginning in 1995 as those who werent prepared to take a punt got out. The exodus continued for some years. Hong Konger's were turning up in Auckland with suitcases full of cash and offering cash deals for property (that comment is not anecdotal - it's first hand). Plus there was plenty of second hand comments (among friends and colleagues) that suddenly floated up out of the swamp. They were cold canvassing.

With China now reneging on the freedom deal one can only expect another exodus

by Stephen Hulme | 29th May 17, 9:38am 1496007513

Longer life spans and disappointing investment returns will help create a $400 trillion retirement-savings shortfall in about three decades, a figure more than five times the size of the global economy, according to a World Economic Forum report.

That includes a $224 trillion gap among six large pension-savings systems: the U.S., U.K., Japan, Netherlands, Canada and Australia, according to the report issued Friday. China and India account for the rest.

Employers have been shifting away from pensions and offering defined-contribution plans, a category that includes 401(k)s and individual retirement accounts and makes up more than 50 percent of global retirement assets. That heaps more risk onto the individuals, who often face a lack of access to the right options as well as the resources to understand them, according to the World Economic Forum report. Stock and bond returns that have trailed historic averages in the past decade have also contributed to the gap. Read more

How many life times are required to extinguish the debts accumulated in one?

The problem for the world in 2017 is not that Enron turned out to be a fraud, but that Enron turned out to be the leading edge. By that I don’t mean the wave of dot-coms that disappointed and flamed out. The future was the future, meaning money and math.

There is nothing wrong with trying to forecast the future, nor even in trying to figure out what the future may be worth today. But turning that intangible expectation into something valuable, on terms equivalent with money, is a leap too far. The costs are nearly ten years of global depression, an enormous sum already but with no end yet in sight. Read more

As those of you who follow the CalPERS soap opera may recall, California Governor Jerry Brown pushed for the giant pension fund CalPERS to lower its assumed investment return from 7.5% to 6.5%. Given that the world is headed towards deflation and that CalPERS earned only 2.4% for the fiscal year ended June 30, 2015, Brown’s request seemed entirely reasonable. Instead, the board approved a staff proposal to move to the 6.5% target over 10 years.

One of the things that is perverse about pension accounting is that the convention is that the liabilities, that is, what the pension fund expects to pay out over time, are discounted at the same rate as the assumed returns. However, for a government pension plan, where taxpayers are on the hook for any shortfalls, the risk of CalPERS beneficiaries getting their money is not the risk measured in terms of what CalPERS projects in terms of future employee contributions, expected returns, and expected payouts; it’s ultimately California state risk, which means the liabilities should be discounted at California’s long term borrowing rate. With California rated S&P AA3, Moody’s Aa-, and 20 year AA muni yields 2.75% and A at 3%, no matter how you look at it, the discount rate on the liability side is indefensibly high. Read more

Futhermore,

The Bankers Trust New York Corporation's announcement Wednesday that it had overstated its foreign exchange revenues for 1987's fourth quarter by $80 million resulted from its unusual style of trading and the size of its market positions, industry executives said yesterday. Read more and more

by bw | 29th May 17, 9:32am 1496007152

Ah, memories! (and terrifying ones at that. Initially, no one had any idea what was happening - it being the first time that strategy had been applied down here. A lot of traders never recovered from the experience; some from the likes of Citi and BA )
"In one incident last fall, Mr. Krieger apparently took such a large position in New Zealand dollars that the currency moved 5 percent in one day"

by Roelof | 29th May 17, 9:50am 1496008212

Oh yes.... Unfunded Liabilities are probably the biggest unintended consequence of Financial repression.. ie.. Central Banks ultra low interest rate policies..

A lack of proper deleveraging since the GFC + unfunded future liabilities = a Serious Big Headache problem , for which there is no ( traditional... kick the can ) solution

by Conrad | 29th May 17, 9:54am 1496008459

Debts that can't be paid won't be. Anyone planning on retiring on a defined benefit pension in the future is in for a rude shock down the line.

by Roelof | 29th May 17, 10:06am 1496009160

I'm guessing there will be troubled times..... Some very serious Social unrest..
( Working for the public Sector might become an unpopular thing..?? )

by RickStrauss | 29th May 17, 11:46am 1496015173

Not to worry, what's important is that Bill's generation will be okay. Cans have been kicked far enough down the road.

by Stephen Hulme | 29th May 17, 10:12am 1496009540

Exactly. I had my non-contributory employer pension payments transferred to my own plan which I proceeded to trade, with Gilts, into a larger sum than would have been paid out due to fees (slippage) and dubious valuation methods.

by ham n eggs | 29th May 17, 10:53am 1496011984

Anyone planning on retiring (fullstop) is in for a rude shock

by Boatman | 29th May 17, 9:28am 1496006932

So Donald Trump has been true to form ...... unpredictable.

He went over the the Middle East and encouraged a fight between Sunni ( Saudis) V Shia (Iran ) and then proceeded to arm one side and castigate the other. That could make things worse for the region

Then he told NATO some home truths

He then told the climate change lunatics where to get off , and he is right about Carbon Taxes being a scam

by Stephen Hulme | 29th May 17, 9:58am 1496008704

The Democrats are now hovering around 40 percent, just a hair over the Trump-tarnished Republicans, at 39 percent. Similar surveys have shown that despite the near daily barrage of news stories pegging the president as a bumbling incompetent in the employ of a hostile foreign power, Trump, incredibly, would still beat Hillary Clinton in a rematch today, and perhaps even by a larger margin than before. Read more

by SimonP | 29th May 17, 11:49am 1496015383

175 countries signed the Paris Agreement. That's a lot of unanimity for a bunch of lunatics.

by rastus1 | 29th May 17, 12:35pm 1496018116

There was only one lunatic there and we all know that is. Even China and India are on board. Irrational and erratic trump could well change his 'mind' . What a leader ....

by Uninformed Hillbilly | 29th May 17, 7:48pm 1496044137

Because they got a carve out

by Stephen Hulme | 29th May 17, 9:55am 1496008505

Talking about wrong, I have to put my hands up. I have been expecting US wage inflation to roar ahead over the past three months to well above 3%, yet every data release has surprised on the downside. Wage inflation, as measured by average hourly earnings, has actually levelled off at close to 2½% while wage inflation for ‘the workers’ is actually slowing (see chart below)! Strictly speaking, "the workers" are defined (by the BLS) as "those who are not primarily employed to direct, supervise, or plan the work of others. Hey, that's me! Read more

by dtcarter | 29th May 17, 11:25am 1496013904

ODI collapse. I didnt realise the Chinese had a cricket team.

by Gareth Vaughan | 29th May 17, 11:42am 1496014932

Must be the influence from Hong Kong...