US jobless claims drop; China growth on target; Hong Kong stocks tumble; Spain imposes grip on Catalonia; AU jobless rate falls unexpectedly; UST 10yr yield at 2.33%; oil and gold little changed; NZ$1 = 70.2 US¢, TWI-5 = 72.8

Here's my summary of the key events overnight that affect New Zealand with news of a sharply falling New Zealand dollar.

But first, the number of Americans filing for unemployment benefits dropped to its lowest level in more than 44 years last week, as their labour market shrugged off the hurricane disruptions.

China's economy grew +6.8% pa between July and September, slowing slightly from the previous quarter but as widely expected. This rate is above Beijing's annual growth target of 6.5% for 2017. Chinese retail sales grew at a +10.3% annual rate in September.

The Hong Kong stock market fell sharply yesterday, a correction coming after recording record gains. Concerns about how Beijing will regulate their markets are growing, as are worries that interest rates are on the rise there. Some of the biggest falls were for stocks on mainland Chinese companies. The head of the Chinese central bank warned overnight of a "Minsky moment" - that excessive optimism that could spur a sudden collapse in asset prices. He is signaling a tougher line on their finance sector.

And staying in China, there are claims that the Beijing government has "foiled a coup" - language like of a Pyongyang-style purge is underway. Also underway is the drive to install Party units within all foreign companies operating there to "help foreign companies understand China".

In Spain, the Madrid government is about to do its own purge and impose tighter control on Catalonia, plunging the country into uncharted waters as they try to quell the region’s bid for independence. None of this will help the euro. But Goldman Sachs indicated overnight that it will be de-camping from London and heading to Frankfurt in response to Brexit. It is just the latest in a series of such announcements; it seems the EU has a lot to gain out of Brexit.

In Australia, their job growth and unemployment rate has improved unexpectedly to 5.3%. Their participation rate is now 65.1%. (But both are still nowhere near the New Zealand rates of 4..8% and 70.0%)

In New York, the UST 10yr yield is now at 2.33%, pretty much unchanged.

The price of crude oil is marginally softer today and now just under US$51.50 / barrel, while the Brent benchmark is just under US$57.50.

The price of gold is marginally higher, up +US$3 and now at US$1,286 oz.

And the Kiwi dollar is down almost -1½¢ on the announcement of the makeup of our new government, at 70.2 US¢. On the cross rates we are down to 89.2 AU¢, and at 59.3 euro cents. Our TWI-5 index is now at 72.8 and that is the lowest it has been since June 2016 and a -2% drop on the day. If sustained, that means New Zealand incomes have fallen when benchmarked internationally, and tradable inflation will be rising. Interest rate hikes may come sooner than previously expected.

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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49 Comments

sure plenty of farmers were sad at the result but once they hear the dollar has finally dropped with be happier as returns rise

exactly - weaker dollar helps all our exporters and businesses - and a little inflation wont hurt too much - nor will an increase in all the cars, whiteware, electronics and fuel maybe stop some of the rampant consumerism of goods we dont need!

The drop won't last long. It's just the usual knee-jerk reaction. Once the new government is accepted the market will return to normal.

Boy, that is real throw-back thinking. At our previous exchange rates, exports have zoomed to record highs, and that includes rural exports. The only benefits of a low exchange rate is for unprocessed commodities, things we have moved away from decades ago.

We will only succeed if we make and export products and services people want to buy, not because what we make is cheap. Meeting buyers needs with distinctive offerings has little to do with the exchange rate. We no longer just sell sheep carcases to the UK, in case you hadn't noticed.

Just for the record, our 10 year average NZD:USD exchange rate is NZ$1 = US$0.745. Our 2017 average rate is NZ$1 = US$0.716.

clearly you havent been involved with an exporting business.
A drop in the dollar is always great news.

But I spent 7 years as the manager of a NZ exporting business (manufactured products). Yes, I loved a dollar drop, but I also knew it would be volatile and wouldn't last. It was the 'easy' way to make NZD profits without having to do anything innovative. However, I also knew that that was quicksand on which to build the business. We developed products that customers wanted no matter what the exchange rate was.

For companies that rely on a low exchange rate to prosper, that is like an addictive drug. And it also requires them to ignore that their workers will pay the price with a lower standard of living by international benchmarks.

If a low exchange rate is the sign of success - even the key ingredient for success - then Venuzuela is the poster child.

In other words the drop is good but it wont last.... no s&#T..... Youre exposing your Nat bias.
I have been exporting for over 20 years in all sorts of currencies so yes Im aware of what the dollar does and doesnt do for your long term prospects.
But i wouldnt say NZ has moved away from commodity products by a long stretch.

This is where the commodity exporters need to step and add some real value if they want to remain relevant in the future. Selling milk and butter hasn't cut it in the recent past and not likely to improve if we stick with the status quo.

easier said than done (on scale) as Fonterra are finding - customer affordability plays a big part. And economies to scale is sometimes a necessary evil for cash flow ... eg All the wine companies I have worked with sell bulk tanked wine along with bottled labeled product...

True, but we are making steps in the right direction:

http://www.radionz.co.nz/news/business/341841/nz-tech-sector-now-third-b...

Only when you don't have to import factors of production, as DC said.
i.e. you are exporting raw goods, produced fully within the country.

What raw goods (fully produced in NZ) does NZ export?

A drop in the dollar is only good short term for any finished goods producer.
And...the associated volatility and import costs are terrible for any medium to long term planning.

Yes - i can hear all the exporters screaming for a higher dollar (their customers love it).
Personally when the dollar strengthens, I run down and fill the car up with gas.

You are quite right.

People seem unable to grasp the fact that NZ doesn't actually produce anything the end consumer purchases.

Rather, we produce commodities that then get value added to overseas, and sold back to us (at a now inflated price).

Dairy remains New Zealand's largest export sector with $14.2 billion, followed by tourism at $11.8 billion, according to latest Statistics NZ figures. Technology is third with $6.5 billion - a number Shanahan said was continuing to rise.

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1153...

Michael Reddell wrote an interesting piece on technology exports yesterday:
https://croakingcassandra.com/2017/10/19/the-tech-sector-and-ongoing-eco...

Incidentally, he's certainly one economist who believes we would benefit from a lower exchange rate.

https://www.stuff.co.nz/business/industries/98075182/aucklands-not-new-zealands-most-booming-region-on-this-measure

Brought to you by the land of Milk Milk powder and Honey Oil. No value add to be seen here.

I'm not so sure there David. Surely a lower exchange rate in the current circumstances means a reduction in the cost of wages, salaries and premises for all exporters, whether of simple or complex goods or services. More profit means more money for expansion for the small and medium sized Kiwi Mittelstat. What's not to like?

A lower exchange rate also allows people to start or expand businesses that substitute for imports.

The current setup favours bureaucrats, builders, hairdressers, accountants, lawyers, bank executives and real estate salemen; all good useful people up to a point, but better to favour the independent exporter who brings money into the country through trade rather than flogging the country to the next set of immigrants fresh off the plane. New Zealand has been running a current account deficit in this way since 1973.

That's the exporter trickle-down theory. It's never made any country rich.

Try telling that to the Germans or Chinese. You have to be clever:
http://www.bis.org/publ/work424.pdf

Actually, I think the main area that needs developing is import substitution. Who needs cheap immigrant labour or cheap foreign goods when you can just buy robots. To me, New Zealand is already dangerously over-reliant on exports.

Interesting point. But China and Germany can both hold those positions because they are backed up by huge FX asset resources. New Zealand does not have that, in fact our FX defense resources are smaller than most major hedge funds. We have no show betting against the market to force an unnatural outcome, no matter how 'clever' we think we are.

Yes, local 3D printing has possibilities. 'Robots' that subsitute for labour also. But neither will be happening at scale during the next Parliamentary term, or even the one after that. And these solutions will bring substantial social issues that will need to be addressed. Of course, they may get imposed on us (if we aren't first mover, and we are unlikely to be), and then import substitution may not mean much for employment at all (and it may be the least of our concerns).

The genius of that BIS article I referenced above is it shows how China and Germany recycle their foreign earnings as fast as possible. In order to run a current account surplus you absolutely must run a capital account deficit. So getting foreign capital out is a first priority.

The Chinese government clip the ticket and issue local currency for all surplus foreign currency. They then immediately buy foreign assets with that foreign currency. The Germans channel their societies' surplus to their Mittelstat who lend any money they don't need to their bankers who buy foreign assets (such as Greek debt). Both systems focus on government policy about whose hands the social surplus accumulates in.

If you want savings you channel the surplus to those who will save and invest it well (ie resident entrepreneurs such as yourself); whereas we channel it to labour (in the broad sense, ie lawyers, accountants, real estate salesmen, politicians, bureaucrats and the like) and real estate speculators who pass it on to the Australian banking system via rentier payments for mortgage borrowing. Thus our societies' surplus is transferred into foreign hands. That is what a current account deficit means.

And yet US dollar funding is still hard to obtain, in no uncertain terms for Germany and Japan.

Signs of global dollar-funding pressures are bubbling up in currency derivatives, making it costlier for international investors to protect against swings in the greenback when they buy U.S. debt.

Cross-currency basis swaps, which money managers and corporate treasurers outside the U.S. can use to borrow in dollars, remain close to the widest levels since January even after quarter-end, when such financing strains typically dissipate. The market was a key indicator of stress during the financial crisis, and while it’s nowhere near the alarming levels of that era, it’s still garnering the attention of analysts. Read more

The genius of that BIS article I referenced above is it shows how China and Germany recycle their foreign earnings as fast as possible. In order to run a current account surplus you absolutely must run a capital account deficit. So getting foreign capital out is a first priority.

Off-balance derivative entries create havoc for those charged with the responsibility for bringing such an entity to account on behalf of the public.

....in a credit-based global currency regime there is simply no way to tell with any degree of accuracy what any country’s net position might be at any given moment. The whole idea of a “capital account” is anachronistic in a credit-based system. Read more

This small snippet is a good example what we’re in for over the next while. Somewhere who’s been there done that has just shot down a couple of keyboard warriors with his real life experience.

David's caution is fully warranted, but, like everything else, it depends how you do it.

If you nationalise industry, beef up worker's rights, encourage government spending, expand red tape and have high tax rates, then you destroy the productive base of the country, as Britain did in the period 1945 to 1980. (In the 1960s they were pulling up railway tracks, in Japan they were putting in high speed trains. Britain is planning to put in a short high speed train by 2026....)

If you are clever, everyone does well, as Japan, South Korea, Germany, Singapore, Taiwan, Hong Kong and latterly China show.

New Zealand is not a stupid country.

Economies with strong fundamentals do not need the crutch of a weak currency .Currency weakness may be a symptom of underlying issues than a cure all for policy mistakes and structural rigidities.

From the BIS article linked above:
We analyse global and euro area imbalances by focusing on China and Germany as large surplus and creditor countries. In the 2000s, domestic reforms in both countries expanded the effective labour force, restrained wages, shifted income towards profits and increased corporate saving. As a result, both economies’ current account surpluses widened

China and Germany run a massive surplus via a weak currency. Some foolish countries choose to run a current account deficit by selling their assets to overseas owners, or borrow via foreign owned banks, thus ensureing future rentier payments flow abroad.

Far better to channel society's surplus into the hands of entrepreneurial residents (such as David, I might add).

The thing is I dont think you realise how cheap chinese produce is. Examples abound but I buy stuff on aliexpress for significantly less than I do retail or even so called trade here in NZ. Example typically 100 SS wood screws here $40NZ, NZ trade $28NZ, aliexpress $12NZ.

Never mind that they probably rust away nearly as fast as a non-SS one... they are probably subsidised in many hidden ways, but yes, cheap and the exercise is repeatable for many other products. If China would deal with its industries and labour in the way a Germany does (environment just for starters), then you would not be buying your screws for that money.

The thing is,

a) just where are Bunnings/Mitre10/Placemakers/trade Ss screws made? oh well china.
b) I can only comment for 18months use so far but I cant determine any difference in performance of SS screws. (see PS however)

c) Yes the estimate is that the environmental damage China is doing to itself is in the order of 5% GDP, so when its gets 7% or 10% really its 2 or 5% not much better than a developed country.

However the thing is like I said in a) same screws? in which case the increased costs apply to both sources, the Q is will Mitre10/Bunnings simply try and pass those costs on? I'd assume they are already pricing them at a level they think the punter will pay, in which case no they cannot.

At that point we get down to making screws in small runs in using NZ labour v mass produced in china and shipped globally.

After that its a q of with materials priced much higher is the activity economically affordable let alone worthwhile? so DIY might well cease as a major "industry"

PS the economics are quite interesting. I have a set of chinese Linear LM6 bearings, they cost $2NZ each and I need 8, cost to my door $20NZ. I am currently on my second set and they seem to last 12~18months per set in my chinese 3d printer. NZ price? $25NZ each and I need 8 plus GST plus shipping from singapore. So 1/10th the cost, will the tier 1 bearings last 10 years plus? yes maybe, do I care? no. Chinese 3d printer $1200NZ after paying import duties and GST < half or even 1/3rd the cost of a "good" printer. I could afford the chinese printer, not the tier1 one. So economic activity / use happens whee it would not have happened otherwise. PS I buy my rolls of filament here in NZ so the NZ economy does benefit some.

Well, keep buying your cheap chinese goods then. Just be mindful that you are kidding your self that it is cheaper if you don't account for the regular time and labour it takes to fix things that break every so often :) A bit of a typical kiwi thing to do though it seems. Perhaps that is why our productivity lags behind Germany by so much, lol...

good luck finding anything but cheap chinese goods in the New Zealand market. It's a real headache finding quality hardware wholesalers and distributors. A lot of the SS fittings I've used recently the screws have started corroding and they weren't cheap knock off brands from Bunnings either. Tend to buy from marine engineers these days - thankfully I have a contact in the trade.

In a report on foreign-exchange policies released on Oct. 17, the U.S. Treasury kept Japan on its monitoring list due in part to its goods surplus with the U.S., which Treasury said was $69 billion over the four quarters through June. . Read more

I love Michael Hudson's analysis but strongly disagree with his conclusions. He is quite right to focus on rentier income, but quite wrong that it should be given to bureaucrats to waste on our behalf. He misunderstands the adaptive nature of human society and assumes there is only one way forward, when in fact there are many and varied ways forward. The genius of our society has been it's search for improvement in all areas, particularly via competition.

So Michael is quite right that income and profit are taxed too heavily; and that land and banking and profit shifting international companies and monopolies are taxed too lightly; but he is too pessimistic that these small problems cannot be solved in piecemeal fashion with a few simple adjustments and a bit of trial and error along the way.

Whatever the settings some special interests will suffer and some will do well, that is why democracy tends to reset the settings the other way around from time to time.

He makes the fundamental error all intellectuals make - that there are only the solutions he can think of. What about creativity, the solutions he hasn't thought of?

New Zealand property market is over !!! Toronto housing market has crashed with only a 15% foreign tax being implemented , imagine completely turning off the foreign buyers tap as they have here today !!

Exchange rates movement have little immediate impact on activity. Arguing that competitiveness , by way of a lower exchange rate ,never matters is foolish. However the view that competitiveness is all that matters seems to be taken very uncritically, whereas in fact, trade patterns respond with long and variable lags to currency moves, other factors matter, a lot more for a lot longer. Having a lower exchange rate does not bring happiness.

The initial reaction is that economists are cutting back NZ economic growth by 0.25pc for each of the next 3 years.

up
10

As NZ growth was previously fuelled by mass immigration instead of increased productivity, I think a reduction in 'growth' sounds good.

Yes it was false economic growth as shown by our decreasing productivity per person.

I just wonder how many smart folks shorted the NZD....

But shurely, DC, it's time to open a thread for Economic Predictions - I'll bring popcorn....

AUD/NZD was a simple trade ,open positions set either side , market was primed ,each outcome was set to provide assymetry irrespective of Winston. Did not need to be particularly smart.

The Russian president recalled that the proponents of globalization had repeatedly claimed that international economic ties would bring world players together, helping resolve the most burning political issues.

In reality politics is increasingly often interfering in economic affairs, with some actors openly promoting their commercial interests via political means, Putin said.

"Not so long ago it was said that it is impossible, counterproductive and should not be allowed. Now, those who said it are doing exactly that. Some are not even hiding that they are using political pretexts and reasons to promote their own, purely commercial, interests."

To illustrate his point Putin referred to the latest package of sanctions recently adopted by the US Congress and signed by US President Donald Trump into law, which are "obviously aiming to expel Russia from European energy markets." Read more

An industry that has few concerns about New Zealanders becoming a rentier class.
Olly Newland. "But he (is) not keen on foreigners being banned from buying New Zealand housing: "They can't take the houses with them, they don't take them anywhere," Newland said of absentee landlords. "I'm not against foreigner buyers."
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1193...

Many pre-eminent economists have researched the issue of strong v weak currencies , and the consensus now appears to be that countries with a strong currency are better off in the long run .

In The Book "Surviving the debt storm" authors Skene and Kidd put forward strong argument for a strong stable currency in preventing banking crises and mitigating the effects of cyclical downturns

Hysterical over reaction to a blip in the dollar and sharemarket. The movement is fairly miniscule when compared with the usual fluctuations.
Dollar and sharemarket were both lower than they are today 2 weeks ago!

Tom Joad, ( sic ) dollar lower 2 weeks ago. Are you reading different charts, or back to front ?

Apocalypse Now - missiles at 50 paces

NZHerald is at war with NZ first and Winston Peters and anyone associated with him

Mike Hosking is having a nervous breakdown

Hosking is a National party shill. His face looked like a smacked arse as soon as Winston announced he was going with Labour.