90 seconds at 9 am: China cash stress

US housing volumes down, prices up; US default risk rises on debt limit shambles; China cash stress; Jackson Hole starts; HNA scrutiny deepens; AU realtors suffer; UST 10yr yield at 2.20%; oil and gold down; NZ$1 = 72.2 US¢, TWI-5 = 74.6

25th Aug 17, 7:39am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news all eyes are now on the weekend Jackson Hole meetings.

Firstly in the US, and on the heals of yesterday's data showing new home sales falling while prices rose, today brought data showing the same for existing home sales. Lower volumes sold also brought a rise in prices to a median of US$258,200 (NZ$358,000), which is up +6.2% from the same month a year ago. Despite the volume slip, supply is tight, especially in the South and the West, and sales contracts are completing within 30 days, and unusually short time. There is pent-up demand here, pressured because new home supply isn't coming on strong enough.

In American financial markets, they are taking the risk of a US default seriously. Investor anxiety is beginning to manifest in shorter Treasury tenors. The spread between one- and three-month bills has collapsed to about 1.6 bps, the flattest since February, as investors start demanding higher rates on one-month paper relative to three-month securities in order to compensate for default risk. The political talk is getting even more toxic as the President flings wild accusations.

In China, lenders paid the highest interest rate in more than two years to borrow short-term government funds, adding to recent signs of a mismatch between the demand and supply of cash.

But markets are also interested in the Jackson Hole speeches this weekend over what to do to wind back the US$14 tln in QE holdings, and on which another eye-watering US$400 tln in worldwide assets depend - and then there is the matter of whether Janet Yellen wants to stay on at the Fed for a second term.

And staying in the US, new research on HNA shows that the company probably violated Chinese securities laws in the way the former SOE became the private holding of a tight-knit family group.

In Australia, their real estate industry is battling low listing volumes as the market slows quickly. For example it has taken a real toll on listed real estate agency McGrath, whose full-year net profit dropped -42% to under AU$5 mln.

In New York, the UST 10yr yield is up today, now at 2.20% and recovering.

The price of oil is down by about -US$1 today and now just under US$47.50 a barrel, while the Brent benchmark is at US$52.

The price of gold is also slightly lower, down -US$3 to US$1,286/oz.

But the Kiwi dollar is basically unchanged today at 72.2 US. On the cross rates we are also stable at 91.3 AU¢, and at 61.1 euro cents. As a result the TWI-5 index stays at 74.6 and that is holding its lowest level in four months.

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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38 Comments

by bw | 25th Aug 17, 7:59am 1503604796

McGrath Real Estate floated about 2 years ago at A$2.10 and even with institutional 'support', it headed to 50 odd cents. At 73 cents now and a re-evaluation of the RE market, it's probably worth as much as SurfStitch.....(ie: 24/8/17 - "SurfStitch in total wipeout, collapses into voluntary administration")

by Chairman Moa | 25th Aug 17, 1:25pm 1503624356

McGrath is doing some shares buy back.. so might be OK (temporarily)

by MikeM | 25th Aug 17, 8:10am 1503605403

The only subject under debate at Jackson Hole will be the degree of insanity of the President of the Southern States of America.

by dictator | 25th Aug 17, 8:48am 1503607725

CNBC coverage of Jackson Hole is claiming the Philips Curve is dead. Reference to an NZ economist in the article.
https://www.cnbc.com/2017/08/24/at-jackson-hole-the-death-of-this-major…

by Roelof | 25th Aug 17, 9:10am 1503609041

Maybe the philips curve is dead because it measured inflation using the CPI...??
Maybe if monetary inflation ( including interest rates ) was used instead, they might see a more enduring relationship between unemployment and money supply growth...

Credit growth = more spending = more employment.
Contraction in credit = less spending = less employment.

Of course... credit growth , unless borrowed for real productive investment, becomes a "stimulant drug" that needs incresingly larger doses to get the same umph.. ie.. there is an endgame to this "model" of growth.

by Stephen Hulme | 25th Aug 17, 9:18am 1503609529

Who will return my lost compound interest arrears dating back to 2008?

by Zombie ponzi | 25th Aug 17, 9:22am 1503609746

You were meant to speculate on asset values over the intervening period.

by murray86 | 25th Aug 17, 9:29am 1503610196

If I am to understand the article correctly, the Phillips Curve identified an observed relationship between inflation and unemployment under specific economic conditions. The GFC saw the introduction of artificial tools being used in an effort to provide stimulus. So the "specific economic conditions" have now changed and they are surprised that the relationship has changed???! which rock did these guys crawl from under?

by nymad | 25th Aug 17, 9:42am 1503610953

Originally, yes.
And it's original observational relationship still works in, dependent on factor selection - observed time frame, etc.

Unfortunately for the author, the original or expectations augmented Phillips Curves haven't been used by the majority of monetarists for quite some time. Most New Keynesian DSGE stuff (simple terms) defines the Phillips Curve as current inflation being a function of output and expected inflation in t+1.

by Roelof | 25th Aug 17, 10:31am 1503613900

I think the philips curve is Irrelevant in todays world.

I prefer Ray Dalios Transaction approach. ( He foresaw the GFC using this simple model as an underlying first principle. )

Money + credit = spending which influences the total quantity of "goods" supplied.

The most easily identified and most easily influenced component of this simple model, is "Credit".

One does not need to be an economist to see how changes in the above simple model might influence levels of employment/unemployment.
dalios simple model does not require constant "tweaking".

What comes first in todays economy... output or Spending..??

by nymad | 25th Aug 17, 10:42am 1503614549

The modern Phillips Curve is still relevant. I'd say that pretty much all DSGE models use it. So, economists think it's important.

This is the problem - you are advocating a partial equilibrium model over a general equilibrium model.

Sure, the predictions may have been loosely correct in some cases.
But, our economy isn't adequately represented by a partial equilibrium.

I guess the real issue is the fact that the original article is talking about a Phillips Curve relationship that hasn't been used for a long time. This is what has set you off on the wrong course.

by Roelof | 25th Aug 17, 10:56am 1503615393

Thats why Dalios' approach is so brilliant.
An economy is far to complex to have much faith in complex equilibrium models..

As an investor , and as a simpleton, I've taken on the approach of much smarter guys.
They all seem to simplify their understandings down to first principles, and then build simple models/ maps based on that.

Dalios "Map" may be simple,. BUT the Data he gathers to monitor things is much more complex and deep..

Dalio has concluded that in our modern version of a Monetary system, Credit is the most important factor to measure, monitor and watch..
Levels of debt burden are far more of a precursor to future unemployment than is Out put or CPI inflation.
This is Ray Dalios' view and mine also.

I'm not an economist but I've had a lifetime interest in economics, particularly from the perspective of Monetary systems, philosophy, history and psychology.

by nymad | 25th Aug 17, 11:11am 1503616308

Fair enough.
I'm not saying you are wrong.
And for you, the 'Phillips Curve' relationship is quite an abstract one.

However, it isn't for economists.
Also for economists, simple models do not explain an adequate amount of economic factors.

It's like saying that we just model the level of harmful emissions from a vehicle based of the stoichiometric inputs of fuel. Sure, it might correlate to the end goal. But doesn't tell us what elements of the engine are producing the specific pollutants, nor does it tell us what elements of the input are more or less defining of the output.

by Anarkist | 25th Aug 17, 4:27pm 1503635271

My observation is that the economic models that economists choose to adopt is influenced just as much by politics as it is by the merit of the model itself or how closely the model conforms to reality.

by nymad | 25th Aug 17, 9:32am 1503610350

"Maybe the philips curve is dead because it measured inflation using the CPI...??
Maybe if monetary inflation ( including interest rates ) was used instead, they might see a more enduring relationship between unemployment and money supply growth..."

Sigh.
Let's only comment on things we understand.

It's not even apparent if the author of the linked article understood what the modern Phillips curve incarnations represent.

by Stephen Hulme | 25th Aug 17, 10:08am 1503612482

Let's only comment on things we understand.

Central banker talk and consequential actions are not found on such lofty sentiment.

Kansas City Fed President Esther George, who has been more forceful than many of her colleagues in recent years about the need to raise rates, lent support to that view on the sidelines of this week’s annual gathering of central bankers from around the world in Jackson Hole, Wyoming.

“There may in fact be something wrong with the models, I don’t know, I think that continues to be a question that many economists are asking,” George said during a TV interview with Bloomberg’s Michael McKee that aired Thursday. Even so, she favors another rate increase this year. Read more

by Roelof | 25th Aug 17, 10:13am 1503612810

Nymad.. this is what I understood.
https://en.wikipedia.org/wiki/Phillips_curve
http://www.econlib.org/library/Enc/PhillipsCurve.html

Its underlying premise does not seem complicated..??

Please give me a simple explanation ... Tell me what I'm missing..?

thks

by Stephen Hulme | 25th Aug 17, 10:34am 1503614043

I can tell you what the Fed misses regularly.

The Fed’s statistical models were apparently unable to forecast Verizon’s and Sprint’s entries into the unlimited data war – just as they were caught unaware of the looming oil price crash in 2014. For ferbus and the rest of the DSGE’s, consumers are always predicted to respond very favorably to whatever their handlers describe as “stimulus.”

The scale of these effects is not small. According to the BLS, the aggregate pricing of telephone services is weighted at just 2.465% of the CPI-U; wireless telephone services, its now majority subset, only 1.738% of the CPI-U. And yet, in the latest monthly CPI report, the wireless wars accounted for subtracting 0.2% off the year-over-year growth rate in core inflation. Read more

by Anarkist | 25th Aug 17, 4:43pm 1503636182

The neoclassic microeconomic models even fail to get the basic right. They aren't even able to account for why the market in concert tickets fails to clear.

"As an example most of us can relate to, look at tickets for very popular musicians. Such tickets are often notoriously hard to come by, especially for mega-acts like Beyoncé, with the demand far outstripping the supply. According to neo-classical economic theory, this should not occur — after all, if the supply is too low, then the suppliers can simply raise the price until the number of people who can afford tickets is equal to the number of tickets available, or they can increase the supply (by, say, adding more shows to a band’s national tour)."
https://medium.com/@Thucydiplease/economics-is-the-worst-social-science…

by nymad | 25th Aug 17, 10:37am 1503614235

Monetarists don't use the original or Augmented Phillips Curve anymore.
They haven't for a long time.

The current version used is based on output.
Output is a function of credit growth.
Sorry, I shouldn't have been so rude. But, essentially, what you propose is what is accounted for already.

by Roelof | 25th Aug 17, 10:59am 1503615581

yes... output is a function of credit growth.. SO... why not focus on credit growth..??

SO..Why is the Philips curve still relevant..??

by nymad | 25th Aug 17, 11:04am 1503615894

Sigh.

I now return to my original comment.

by Roelof | 25th Aug 17, 11:13am 1503616399

so do I... if output is a function of credit growth, then which is more relevant for determining/anticipating future levels of unemployment..??
You are implying that the Philips curve is more relevant..
I'm agreeing with Dalio , that credit and levels of debt are FAR more meaningful in anticipating not just levels of employment, but also future economic performannce.

Curious to know how you use the Philips cuve..?? How does it help u in "reading the tea leaves"..?

In the world of economics it would be unusual if we agreed.!

by nymad | 25th Aug 17, 11:16am 1503616592

"You are implying that the Philips curve is more relevant.."
This is the problem, you are thinking of the Phillips Curve as it's first incarnation.

As I said, the article does the masses a disservice by implying that monetarists still believe unemployment and inflation in levels to be highly correlated.

"I'm agreeing with Dalio , that credit and levels of debt are FAR more meaningful in anticipating not just levels of employment, but also future economic performannce."
Dalio agrees with NK monetarists then, because they believe that too. Hence why I said, the modern PC is focussed on current levels of output, which is a function of credit growth.

by Roelof | 25th Aug 17, 12:15pm 1503620132

dalio originated his simple model in the early 1970s'.. it is still the same now... unchanged...still completely relevent..

For the Philips model , to still be somehow relevant , it has had to be "adjusted" ..and now includes output.

including output is .... a very long way away from the idea that there is an inverse relationship between the level unemployment and inflation..

just my view..

by nymad | 25th Aug 17, 12:39pm 1503621549

"For the Philips model , to still be somehow relevant , it has had to be "adjusted" ..and now includes output."

Again, I go back to an original comment.
Please just read about the model. It will become evident what it was, what it went to, and what it is now.

"including output is .... a very long way away from the idea that there is an inverse relationship between the level unemployment and inflation.."
Not at all.
We know output (very simply) is a function of labour and capital.

by MikeM | 26th Aug 17, 7:49am 1503690568

Well the Dalio idea hasn't been bullet proof either. Unemployment has lowered significantly in the US but credit growth over the same period has been relatively subdued. Capex has been fairly average over the same period which would point to a preference by firms for labour over capital. That scenario could account for lower unemployment but subdued activity in other variables.

by Zombie ponzi | 25th Aug 17, 9:04am 1503608682

How does a property gross yield of 1% sound? (Probably not too bad for an Auckland investor).

If you thought Auckland was bubbly, some cities in China have gone full retard:
https://www.macrobusiness.com.au/2017/08/100-year-wait-turn-profit-chin…

Sorry to say but Chinese capital seems to understand speculation and shortcuts only. One can only imagine how messy the unwind will be if the stock market mania of 2015 is anything to go by.

In the meantime, it's one foot on the accelerator (housing), one foot on the brake (interest rates).

by Roelof | 25th Aug 17, 9:23am 1503609829

Sounds better than a -ve return.
to keep it in perspective, .. remember that over $10 trillion was invested in Govt bonds ( mostly in Europe and Japan) at -ve yields.. ( I still don't understand why..?? )

https://www.ft.com/content/669f5c8c-6130-3704-a463-08b1216af269

In these , very un-normal times, lows yields might not , in itself, mean there is a bubble...???
We live in a very contrived Central Bank manipulated world.

I'm guessing some "entities" have access to very cheap money..??

by Zombie ponzi | 25th Aug 17, 9:41am 1503610872

Agree Roelof, but the real return was still positive in Japan for example as they were experiencing deflation. China has positive interest rates and inflation.

Also agree yields are not necessarily proof of a bubble, but how's this for mania?
https://www.youtube.com/watch?v=3CPCtlxOgUY

by David George | 25th Aug 17, 10:02am 1503612142

Certainly some strange goings on with China.
The One Belt One Road initiative has been promoted by Professor(?) Siah Hwee Ang on this site. Seems there are some very serious concerns about the whole thing - not least the problem of dealing with the highly unstable Islamic States:
..... the [Chinese] state remains burdened with issues of overcapacity and myriad "zombie firms," especially within the metals and construction and materials sectors. Xu said that has partially been the motivation for the "Belt and Road" initiative: "Instead of solving the overcapacity problems, they are expanding the problem to projects overseas."
"They (China) are proposing lending money to foreign governments, who will then use the Chinese funds to pay the Chinese companies," he explained.
China's debt to gross domestic product (GDP) ratio surpassed 300 percent in June, according to the Institute for International Finance. And that's before the extension of further loans.

"Expansion of these soft budget constraints at such an unprecedented rate and in such a large scale is going to generate unprecedented consequences," Xu noted.

Crucially, the countries tied to the "Belt and Road" initiative are some of the riskiest developing countries in the world. A number of research bodies are now risk assessing the political, economic and business landscapes of the involved nations..................
"There are considerable risks of nonperforming credit in many of these projects and high risks of default."
"A risk to China's banking system is, by default, a risk to the global banking system,"
https://www.cnbc.com/2017/08/24/chinas-belt-and-road-initiative-could-b…

by Roelof | 25th Aug 17, 10:05am 1503612333

I've often scratched my head at Cinas' debt levels and its ,almost monopoly money like, growth in Money supply .
the only conclusion I've come to is that it is sanctioned... ie. The central dictatorship that runs China are conscious of what they are doing and are also ready to impose ANY kind of control or restriction in dealing with the unintended consequences of the rampant money supply growth.

How this unfolds is completely unknowable.... They are NOT a debtor nation. https://en.wikipedia.org/wiki/List_of_creditor_nations_by_net_internati…

not hard to see why Chinese individuals might like to have some of their wealth overseas in safe places.

by Stephen Hulme | 25th Aug 17, 9:34am 1503610496

The spread between one- and three-month bills has collapsed to about 1.6 bps, the flattest since February, as investors start demanding higher rates on one-month paper relative to three-month securities in order to compensate for default risk.

And yet the one month Treasury Bill yield fails to surpass the Fed's RRP Fed Funds corridor floor. Investors may have other matters pressing on their minds ahead of liquidating government securities.

by Roelof | 25th Aug 17, 9:48am 1503611332

Interest paid on excess reserves is now 1.25 % ....
I'm thinking this is the FEDs' preferred way to restrain credit growth while banks hold massive excess reserves..(A massive gift to Banks..as a reward for being mischievous and naughty, in the not to distant past )

We live in a fucked up world.... Are the Treasury Bill yields reflective of investors views..??
( I think price has lost isome of its ability to transmit meaningful information... to a certain extent.. ie.. we have to be very careful in the conclusions we draw..??) ... ( not that I know very much )

https://fred.stlouisfed.org/series/IOER

by MikeM | 26th Aug 17, 8:00am 1503691215

Yes I noticed for the first time in a long time US2T has been bid up over the coupon rate. And Fed Funds is languishing below target.

by Boatman | 25th Aug 17, 9:51am 1503611483

China also had a form of QE which led to a a whole host of consequences , some good and some not so good , but it did include a ramping in consumer spending , increased property speculation, funds flowing offshore and increased debt by local authorities .

This whole thing is now coming home to roost as it tries to unwind this .

Just wait until the FED starts unwinding its QE , then we will see sparks flying

by Alex Tarrant | 25th Aug 17, 10:06am 1503612387

Here we go:

Hon Mark Mitchell

Minister of Defence

25 August 2017

Media Statement

NZDF contribution in Afghanistan increased

The New Zealand Defence Force’s 10-person contribution to the North Atlantic Treaty Organisation Resolute Support Mission in Afghanistan is to be increased by three personnel.

“New Zealand has been contributing to Afghanistan’s stability since 2001, and we remain committed to the international community’s objectives there,” says Defence Minister Mark Mitchell.

“A deteriorating security situation has prompted the international community to refocus its efforts. Countries around the globe are making decisions to increase contributions to prevent Afghanistan from becoming a safe haven for terrorist organisations.

“New Zealand will continue to stand alongside our partners in supporting stability in Afghanistan and countering the threat of international terrorism,” Mr Mitchell says.

The 10 Defence Force personnel currently in Afghanistan are working as mentors and support personnel at the Afghan National Army Officer Academy in Kabul.

Two of the extra personnel will deploy to positions within Mission Headquarters in Kabul, and one will deploy to the Academy as a physical training instructor.

Resolute Support is a non-combat mission. New Zealand’s contribution is mandated until 30 June 2018.

by murray86 | 25th Aug 17, 10:41am 1503614490

Is this a concern? A 30% increase and only three people. Hardly going to complicate our role there.

Hamid Kharzai's comments on Stuff's The Valley series are interesting.