US factory activity surges; global factories healthy; Wall Street hits new records, again; EU jobless falls; another EU airline collapse; Sydney house prices slip; UST 10yr yield at 2.33%; oil and gold drop; NZ$1 = 72 US¢, TWI-5 = 74.8

Here's my summary of the key events overnight that affect New Zealand.

Although there are other big events in the news today - another mass shooting in the US, an independence vote in Catalonia - the global economy grows on regardless.

A closely watched report shows American factory activity surged to a more than 13-year high in September amid strong gains in new orders and raw material prices. A separate report painted a more modest picture, but it did show strong hiring gains in their factory sector.

A related global survey of manufacturing showed conditions holding at a 75 month high. China's factories are part of the improvements.

And on Wall Street, equity indexes surged to all-time highs earlier today, a strong start to the fourth quarter.

In China, there is an ironic item of news. The city there regarded as their "coal capital", Taiyuan, has just banned sales, transport and use of coal in a move to tackle their chronic air pollution issues.

The EU jobless rate is down to 7.6% in August, a strong improvement from 8.5% a year ago, and the lowest rate since November 2008. Seven of the 28 member countries have an unemployment rate below 5%.

And staying in Europe, yet another airline has collapsed, affecting 100,000s of passengers. Britain's Monarch Airlines has followed Air Berlin, Alitalia, as others like Ryan Air struggle to keep planes in the air. It seems to be a uniquely European crisis.

In Australia, the rate of expansion in their manufacturing sector has picked up slightly from what are actually quite healthy levels. However, they are a long way behind the New Zealand equivalent which is high by world standards.

Sydney house values actually fell in September as capital gain growth continues to lose steam across the ditch. That fall was the first month-on-month for this benchmark city, surprisingly pulled lower not by apartments but by detached single-family homes. But median housing values remain 29% higher in Sydney than for Melbourne, according to the latest CoreLogic report.

In New York, the UST 10yr yield is holding at 2.33%.

The price of crude oil is down by more than -US$1 at US$50.50 a barrel, while the Brent benchmark is just under US$56. As a rise in US drilling and higher OPEC output, especially from Iraq, have put the brakes on the recent rally.

The price of gold is lower yet again, down sharply by -US$10 to US$1,273/oz. These falls are now accumulating; remember the gold price rose to US$1,346 on September 8, so the decline since then has been -US$73/oz or -5.4%. Rising supply might be an issue holding the price back.

And the Kiwi dollar is also again softer and will start today at 72 US¢. On the cross rates we are now under 92 AU¢, and 61.3 euro cents which is being moved a bit by the uncertainty surrounding the independence vote in Catalonia. Our TWI-5 index is now at 74.8.

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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End of day NY time
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4 Comments

"the rate of expansion in the manufacturing sector has picked up slightly from what are actually quite healthy levels. However, they are a long way behind the New Zealand equivalent which is high by world standards." does not square with "dramatic new rate offer of 3.87% by HSBC for an 18 month fixed home loan term, ASB has announced a new carded 'special' rate of 4.39% for 12 months fixed in what is becoming a very competitive mortgage market."

We may think we have rewritten the rules, but I doubt we have. One of those two indicators of the economy is wrong. Whichever one it ends up being....will be bad.

And on Wall Street, equity indexes surged to all-time highs earlier today, a strong start to the fourth quarter.
Hmmmmmm...

There, is however, a big but: "EPS levels are merely back to where they stood in November 2014, when MSCI was 15% lower, and overall profits have yet to exceed 2008 levels when the index was a third lower." Which, as the strategist explains, means that essentially "QE sustained equities levels in anticipation of a profit recovery, but rather than de-rating as those earnings came through, markets are simply being propelled to ever higher levels." And while stocks are in a bubble, it was "created during the 2011-15 era when global profits went nowhere, yet equities rose 30%", something Goldman Sachs pointed out over a year ago. Read more

Stocks are historically expensive because they trade on still the QE3 assumption. Part of the rationalization for it is simple disbelief; it is hard and even impossible for some to imagine how the US and global economy might just stop growing and stay that way. If you think such a state an assault on logic and sense, then you might trade as if one lost decade is the absolute limit of stagnation and malaise. True growth must be just around the corner, so why wait?

An objective view of monetary conditions, however, easily disabuses such a notion. Not only can one lost decade become two, it is from the monetary realm that such possibilities become reality.

All the ingredients for a stock bubble are present. It’s not really a monetary bubble so much as an expectations bubble. Rationalizations about money have had the effect since 2012 of hardening the wrong ideas.

Everyone always wants to know when confronted by this data exactly when people will wake up from the hazy doses of self-deluded reality they have become emotionally attached to. There is no answer to that question as we can’t know when, nor exactly what it might be that draws open the curtains of disappointment (to put in mildly). All we can do is honestly analyze money, economy, and valuations and see them for the (heavy) risks that they represent. Read more

Expectations ......

Dow Jones Index is back above 22500, powering to another record high, NY has happily forgotten the drive up was due to the expected Trumpian Corporate Tax Cuts to 15%. That's not going to happen. Who cares, even if the tax cuts never get off the ground NY is never giving that rise back.

For the repo market and collateral flow, it would seem September wasn’t very kind nor near enough of “reflation” enthusiasm. That condition appears to be continuing, too. Though the fails data is a week now two behind, there is every reason to suspect last week wasn’t much better and this week at the very least starts the same way. The equivalent yield for the 4-week bill remained below the RRP floor all five days, signaling a significant premium for pristine collateral is still being paid. At just 95 bps today, the yield was the lowest since late August.