90 seconds at 9 am: Skinny CDS spreads

US housing starts jump; Wall Street at records; China buys dodgy ratings; India's GST reform going well; Aussie banks get tick; UST 10yr yield at 2.27%; oil up, gold unchanged; NZ$1 = 73.6 US¢, TWI-5 = 76.6

20th Jul 17, 7:46am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news credit spreads for local bank debt are now back to the levels before the GFC.

Firstly in the US, housing starts jumped higher in June, up +8.3% pa, with the growth in single-unit housing making an impressive comeback. But multi-unit housing is still in the doldrums.

And in New York, both the Dow and the S&P500 have both hit new all-time record highs. This rise is said to be driven by good earnings reports.

In China, it has been revealed who they don't like western credit rating agencies. More than 30% of their companies win a AAA credit rating from a local ratings agency, compared with about 2% of companies from the standard Western agencies. And there are plenty of cases where a Chinese company will get a junk rating from S&P or Moody's but an investment grade one from one of their local raters, it is not surprising they won't pay or even seek an international-standard credit rating.

In India, their new streamlined GST system is getting some early positive reviews that it is transforming commercial life in the way promised. It is a reform that will have a major impact on India.

In Australia, their publication of "unquestionably strong" bank capital standards has been a non-event, with most banks already qualifying.

And the Australian Productivity Commission has reviewed the consequences of growing world protectionism for Australia. They say Australia would be hurt badly in any trade war with massive job losses and fast declining GDP per capita. It is hard to see how it would be any different in New Zealand.

In New York, the UST 10yr yield unchanged today at 2.27%. However, CDS spreads for Australiasian bonds are now at their lowest level since November 2007. Banks are now paying their lowest risk premium for offshore wholesale borrowing since before the GFC.

The price of oil is up again today and is now at just over US$47 a barrel, while the Brent benchmark is now just under US$50.

The price of gold is unchanged however at US$1,240/oz.

And the Kiwi dollar is also essentially unchanged from this time yesterday at 73.6 USc. On the cross rates we are at 92.5 AU¢, and at 63.9 euro cents. As a result the TWI-5 index will start today at 76.6 again.

If you want to catch up with all the 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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12 Comments

by bw | 20th Jul 17, 8:09am 1500494976

Trade War? “We’re already in a trade war with China. The problem is we’ve not been fighting back.” – Peter Navarro

by David Chaston | 20th Jul 17, 8:55am 1500497710

The only problem with that Navarro comment is, it is basically not true for the US. He focuses on the 'goods' deficit, when in fact the US has a surplus on 'services' trade. So overall, the US trade-to-GDP relationship has been improving for the past ten years, and is a very sustainable -2% of GDP. It is especially sustainable when the greenback is the world's reserve currency.

Navarro just shows his poor understanding of the issue - or his simple politicisation of it.

He also misunderstands how US MNCs influence this 'deficit'. There may be a goods deficit but it is due to large US companies parking their $ offshore. Hardly a problem with trade, or even "China"; More an own-goal by lawmakers in Washington. (And one the new Administration is likely to make worse.)

Navarro may write and talk profically (often only in soundbites) but his academic work is poorly regarded. It won't stand scrutiny.

by blue meanie | 20th Jul 17, 9:36am 1500500197

This article might explain the sudden jump in US housing prices.http://www.cnbc.com/2017/07/18/foreigners-snap-up-record-number-of-us-h… Also it may be of some interest to some of the commentators as to who is buying the lion's share. Seems capital flight is still happening out of the PRC.
Have a great day

by Stephen Hulme | 20th Jul 17, 9:45am 1500500713

However, CDS spreads for Australiasian bonds are now at their lowest level since November 2007

I suspect this one way spread collapse reflects a lack of bank balance sheet commitment to arbitrage the situation to reflect reality. Moreover, I understand the CDS market is effectively moribund.

A similar situation has existed in the past with the impossibility of US IR swap spreads trading negative against longer tenor UST issues. The 30 year still does. View data here.

by dtcarter | 20th Jul 17, 10:13am 1500502418

We currently have declining per capita GDP. Hate to see how much poorer again our country will become if trade wars worsen the situation. Expect that requests we are seeing not to seek help at A&E unless its immediately life threatening will become the norm.

by David Chaston | 20th Jul 17, 11:26am 1500506792

That is not correct. It is not declining; that is a new myth. GDP per capita is growing. But you could claim we have a slowing in the growth of per capita GDP. (It is now growing at just under its long-run average, on a 'real' basis.)

by RickStrauss | 20th Jul 17, 11:42am 1500507747

Weren't there some articles on here a while back suggesting GDP per capita had declined over the last two quarters?

by David George | 20th Jul 17, 1:09pm 1500512943

I haven't seen any claim for an actual recent decline in GDP/capita but with population growth at over 2% it would have to be a very real risk. Looking forward, a halt (or large reduction) in the 28 Billion private credit growth rocket fuel would put us into recession with some serious consequences.
BTW a very interesting take from Michael Reddell on the decline in our high relative prosperity (2nd or 3rd in the world) to thirtieth with a particular emphasis on our so called economic powerhouse.

"It is close to a tragedy. A deeply misguided policy, however well-intentioned, has reduced what was once one of the richest cities in the world to a rather mediocre mess: with few industries successfully competing internationally (in a small country the only long-term basis for prosperity), economic activity doing well only when a lot has to be built to accommodate yet another huge surge of new people, and houses so expensive that ever-fewer of the inhabitants can afford to buy."
https://croakingcassandra.com/2017/07/20/ruminating-on-auckland/

by RickStrauss | 20th Jul 17, 1:20pm 1500513649

Thanks David, will give it a read!

Edit: just read it...really good read, and quite sad how seemingly lacking in vision our leaders have been in recent decades. Ideologically driven toward neoliberalism, sure...but on what else?

by bob atkinson | 20th Jul 17, 9:06pm 1500541567

David Chaston - thanks for the link. It recommends another interesting website: http://www.oecdbetterlifeindex.org/#/00000000050

David George & Rick - looking at the link in David Chaston post it would appear to be -ve in 2009 and 2011 and not particularly impressive since then - but it is +ve and getting a little wealthier is much better than the opposite, Certainly comparing to other countries nothing that supports the often made assertion that every immigrant is bringing money with them that is making us all much wealthier (still absorbing a lecture by Prof Paul Spoonley earlier this month).

by JetLiner | 20th Jul 17, 10:20am 1500502849

Talking of Chinese rating agencies and their relative lack of impartiality, here's an article from Christopher Balding from a couple of years ago which sets out the exact problem that's been revealed by Bloomberg (http://www.baldingsworld.com/2014/04/01/credit-ratings-in-china-and-the…):

I believe strongly in the need for additional credit ratings agencies. However, if Dagong wants it self to be taken seriously: stop sounding like the propaganda department in the Finance Ministry for Beijing, establish credibility with your ratings, take out the Marxism, and be willing to rate a Chinese firm as junk debt. Then, you will be taken seriously outside of China.

by Stephen Hulme | 20th Jul 17, 11:07am 1500505672

Is S&P Being Sued Because It Downgraded the U.S.?

Why is the Justice Department suing Standard & Poor's for mis-rating structured credit securities before the financial crisis, and not suing Moody's, which gave a lot of the same products the same ratings? Read more

I guess all credit ratings agencies are captured. It's very hard to know the degree in respect of each rated security.