90 seconds at 9 am: NZD falls -5% since election

Earnings drive Wall Street higher; PMIs up in US, EU and Japan; US mortgage market sags, R&D spending up; Xi the next Mao; AU calls for land tax; UST 10yr yield at 2.41%; oil up, gold down; NZ$1 = 68.9 US¢, TWI-5 = 71.8

25th Oct 17, 7:35am by David Chaston

Here's my summary of the key events overnight that affect New Zealand with news there are high-level calls for a land tax in Australia.

But first, Wall Street is higher today as earnings by major companies come in ahead of market expectations.

October data indicated an accelerated expansion of American private sector business activity. The upturn was supported by the fastest rise in manufacturing production for eight months, plus another strong increase in service sector output.

A similar upturn is being reported in the Eurozone, where they are also seeing jobs being added at the strongest pace in over ten years.

In the US, their mortgage market is forecast to shrink in 2018 on a sharp drop in refinancing demand, but loan originations will pick back up somewhat in 2019. Total mortgage originations are expected to decline to US$1.6 tln next year, lower than an expected almost US$1.7 tln this year. Loan volume is then expected to recover somewhat to US$1.64 tln in 2019.

A 1000 company sample of some of the world's largest shows their R&D spending rose by +3.2% in 2017, pushing it to an all-time high of US$702 bln. The figure marked a resumption of meaningful growth in such investment following flat results in 2016, and means the global private-sector spending is now 2.7 times as high as it was in 1999 - the first year of the survey.

Overnight, China’s Communist Party granted President Xi Jinping authority on a par with Chairman Mao, revising its constitution to include his "political theory", and pushing ahead with policies to make China a major world power.

China is set to extend the term of its leases on rural land by another 30 years. Leases serve as ownership for China's 590 mln people in the countryside. Current leases are due to expire in 2027; adding another 30 years gives rural farmers effective 'ownership' until 2057. These farmers can sell their lease rights so long as the land stays in rural use. China is keen for average holding sizes to expand to get better rural productivity.

Global wine production is set to drop more than -8% from 2016 which will make it the lowest level for almost 60 years. Harsh weather in Europe was to blame for the dip, but production in the Southern Hemisphere is up. New Zealand produces 1.2% of the world's wine. All this points to firming prices for our output as demand is rising.

In Australia, their Productivity Commission has called for their system of Stamp Duties on property transactions to be scrapped, and be replaced with a land tax. (page 20)

In New York, the UST 10yr yield is now at 2.41%, a six-month high.

The price of crude oil is marginally higher again today and now just under US$52.50 / barrel, while the Brent benchmark is just over US$58.

The price of gold is down -US$4 and now at US$1,274 oz.

The Kiwi dollar is down sharply again today reaching nineteen month lows this morning, at 68.9 US¢. And on the cross rates we are also down at 88.6 AU¢, and at 58.6 euro cents. Our TWI-5 index is now at 71.8. The NZ currency is falling out of favour with investors; the TWI is down -5% since the day before the election.

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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40 Comments

by Penguin | 25th Oct 17, 8:07am 1508872058

Currency falling as Economists are cutting the Economic growth rate. Will be interesting to see if increased cost of imports pushes inflation up.

by Stephen Hulme | 25th Oct 17, 8:56am 1508874988

Hmmmm...

For totalitarian states this is the standard order (and for a good deal too many “democracies”, too). A leader is always looking to tighten his grip on political power because despite the love affair for authoritarianism (especially in the form of technocracy) in the West that kind of system is uniquely fragile. Like an organized criminal operation, the real danger is most often from within the power base rather than from the people outside of it.

I can’t help but wonder, however, if what we are seeing here in the 19th Congress is designed instead for that latter case. China’s great challenge has been for the last quarter-century to modernize not just as a matter of economics but more so social progress; to take the peasants out of their subsistence lives and given them a shot at middle class progress and even luxury. Economically satisfied citizens are a far better long-term proposition than a politically unstable peasantry prone to fits of righteous anger.

In the West, “we” can’t make out the economic risks because the political class has forbidden it as a legitimate topic. And so in that respect the world over here is perhaps further along in the wrong direction politically than even China. To be clear, I’m not suggesting authoritarianism is the answer, only that the Chinese at the very least appear to be approaching the world as it is from a far less idealized, imaginary even, perspective.

Then again, that’s to be expected. The Communists in China know and have known more about the real dollar (credit-based reserve currencies, as Zhou Xiochian noted in March 2009) than any officials in America. The devastating technical incompetence displayed these last ten years really boil down to that one factor. I have to believe the Chinese truly, deeply regret, as many Americans and Europeans will in the coming years, ever believing so thoroughly in the Maestro. Read more

by Andrewj | 25th Oct 17, 9:02am 1508875373

one of the comments on that article

China’s Robot Revolution
By R. Colin Johnson
July 27, 2017
China is investing more than $3 billion a year in robots (chicken feed) to keep from losing its manufacturing base to lower-cost developing nations. Yet even in China, workers are being replaced by robots for their increased productivity, according to Investors Business Daily (Foxconn, which assembles the iPhone there, replaced 60,000 workers with robots at one facility last year, and aims to continue the trend in all its manufacturing sites).
According to Tobe, China is determined to produce 150,000 industrial robots by 2020, 260,000 by 2025, and 400,000 by 2030, generating $88 billion over the next decade. China’s “stated goal,” according to Tobe, is to overtake the U.S., Germany, and Japan in robotic manufacturing sophistication by 2049, the 100th anniversary of the Communist takeover there.
https://cacm.acm.org/news/219707-chinas-robot-revolution/fulltext
Also see related pension shortfalls: “Adding in China and India, which have the world’s largest populations, the combined savings gap for the eight countries reaches a total of $400 trillion by 2050, a sum five times the size of the current global economy.”

by bw | 25th Oct 17, 9:19am 1508876352

"We" only see, what we are told to see.....(An oldie, but a goodie!)

https://www.youtube.com/watch?v=IGQmdoK_ZfY

by Stephen Hulme | 25th Oct 17, 9:36am 1508877417

Another one, I came across in my university days trying to create mathematical models of human hearing.

by Boatman | 25th Oct 17, 9:16am 1508876194

Even if a weaker Kiwi$ leads to price increases it will likely not lead to a sustained uptick in inflation .

The inflation numbers need to be taken over a sustained period , not a one -off spike due to a weaker currency

by Stev-O | 25th Oct 17, 11:01am 1508882511

Combined with ~10% increases in minimum wage per annum which will also have an effect on all the higher earning sectors I think it's safe to say there will be higher-than-target inflation in the next 3 years. Winston knows this will put us into recession hence the change in the Reserve Bank Act.

by Boatman | 25th Oct 17, 11:47am 1508885247

While I am somewhat uncomfortable with the three-in-the-bed coalition , I dont share your pessimism about our future .

by dtcarter | 25th Oct 17, 3:02pm 1508896971

were you more comfortable with the 4-in-the-bed coalition we had for the last nine years?

by Stephen Hulme | 25th Oct 17, 9:46am 1508877980

Hero to zero?

Fletcher Building chairman Sir Ralph Norris said: "I want to offer my personal apology to our shareholders. Mistakes have been made and responsibility ultimately rests with the Board. As we stated at our full year results briefings, we fully accept this responsibility." Read more

by Cowpat | 25th Oct 17, 9:54am 1508878484

When truly unexpected events take place, the first reaction in currency trading is to close a losing position , then consider the new information. The election result although unexpected ,did not solve Europe's woes, nor the UK and London's impending separation. It did not solve Canada's and Australia's mounting economic challenges, nor the United States and current federal reserve settings, and the potential carnage in bond and stock markets. China may wave a magic wand again, it may not. There are a lot of similarities, globally between the elections of November 1999 and September 2017, regarding how the NZD may respond in coming months/years . I have called parity with the AUD on a number of occasions , perhaps 2018 is the year. Ex Expat mentioned the novelty Big Mac pricing , the NZD is currently about 25 percent undervalued against the USD, One thing for sure if your selling NZD your buying another. The question is whether the election truly changed the value of the NZD.

by flebus | 25th Oct 17, 11:32am 1508884336

Where does the 25% undervalued vs USD come from? That is opposite of anything I've read coming from the Reserve Bank, which last time I checked (granted, it might have been a year ago) put the 'correct' value as something like .64 USD.

by Cowpat | 25th Oct 17, 11:45am 1508885143

Flebus the valuation I gave comes from the July Economist Big Mac Index, which Ex Expat alluded to. . Adjusted in raw terms , NZD undervalued by 25 percent. I simply put it out there. I don't eat burgers, some do. Whether the NZ burger gets an extra dollop of mayo or has the lettuce removed over the coming months , or a bit of both, time will surely tell.

by flebus | 25th Oct 17, 11:55am 1508885701

Interesting, never seen that before. I'm curious that it shows the US average cost of a Big Mac as $5.30, because no.

by Yankiwi | 26th Oct 17, 3:03am 1508940207

Somebody is using inaccurate data IMO.

When I look at: https://www.fastfoodmenuprices.com/mcdonalds-prices/ I see that the average US Big Mac costs 4$ USD. This is a bit different than the $5.30 USD that is referenced in the Economist Big Mac Index (and also doesn't align with my memory).

by MikeM | 25th Oct 17, 9:58am 1508878710

Good opportunity to go long NZD.

by Penguin | 25th Oct 17, 11:31am 1508884317

I'm waiting a bit longer yet.....

by waymad | 25th Oct 17, 11:05am 1508882738

Well, Godzone is yet again the Social Lab-Rat:

Vastly increased minimum wage will test the wage costs/employment offerings/inflation balance
Extension of ETS in some form or another to agriculture will test the production quantity versus production mix equation
Industry-wide wage bargaining will test the definition of 'industry' and will provide a field day for re-describers of various stripes
SME's will boom but as sole traders/franchisees/mom-and-pop outfits, because the disincentives for employing staff are far too great - a good test of #1
Big increase in regional construction and fit-out as regionalisation takes off - but the real test will be of productivity (the local example is the Christchurch re-build, now petering out)
Minimum wage rises are a classic universal pricing signal for sectors highly exposed to labour costs, without attracting anti-trust/cartel accusations, so expect a raft of 'em
A billion tress sounds marvellous, but to get trees planted in deserving areas (e.g. north and west of Gisborne) means long days in hot sun, on 45 degree slopes, living in work camps and plonking in 100 trees/day. There would have to be 4550 such plonkers, working 220 days each year, to achieve the 100m trees per annum. Compulsory tree-plonking, attractive, much? Oh, and the cost? 4550*8*220*20 = $160m and change per annum...

Bring popcorn....

by RickStrauss | 25th Oct 17, 10:59am 1508882340

Let's not deceive ourselves that National is much less socialist than Labour, while we're here.

It's National who elected to instead of freeing up the housing market and encouraging productive investment, simply subsidise a low wage economy (increasing Working for Families, or "communism by stealth", as they described it), and subsidise the property market (increasing the Accommodation Supplement, benefits, and the First Home Buyers grant).

They were supposed to be something different, but they've moved so far left they're nigh on as socialist as Labour now.

by steven | 25th Oct 17, 11:30am 1508884230

1) Its hardly vastly increased wage especially when its spread over some years and somewhat negated by CPI which hits the lowest income the a hardest.

i) I assume then those on the minimum wage and having to claim support off the Govn? will then not claim so much.
ii) there is then more of a differential between WINZ payments and wages making it more attractive to get work.
iii) I've yet to see anything concrete that actually says increasing the minimum wage actually impacts the economy in a negative way overall
iv) Whatever happened the the right wing mantra "user pays"? seems it only applies to those able to take money, not those having to pay it for services they want.

7) Trees. got to wonder on that one. Actually I wonder what the carbon foot print is for putting trees in? I assume its NET good but I'd like to see that confirmed.

by nymad | 25th Oct 17, 11:34am 1508884497

Waymad is right to question the minimum wage.

The big question is where is the productivity growth to underpin the increases.

Raising it by ~25 % over the next 3-4 years without corresponding productivity growth is cause absolute chaos.

by meh | 25th Oct 17, 12:04pm 1508886293

Other than construction is it possible that we've achieved the theoretical supply/demand equilibrium and there is no more productivity growth available?

What radical technology innovation is going to boost productivity in the same way computers allowed us to get more done?

Enough studies suggest that after 6 hrs individual productivity decreases so instead of demanding more hours per worker maybe it should be more workers per hour? That would mess with "economics" though wouldn't it.

Is the size of the FIRE sector dragging down overall productivity measurements as we all know there is almost zero productivity here?

Why can't economists remove their blinkers and see that maybe productivity isn't the issue, that maybe the stick isn't going to get more out of the slaves, that fiat currency is practically worthless, that asset bubbles and debt are the noose and the "economic growth" model and false concept of "wealth" are the inherent flaws.

by tgcam4 | 25th Oct 17, 2:32pm 1508895128

"What radical technology innovation is going to boost productivity in the same way computers allowed us to get more done?"
To name a few: AI, Blockchain, Autonomous Vehicles, increased automation and self service machinery.

by ham n eggs | 25th Oct 17, 2:40pm 1508895647

AV's??

http://www.dailyimpact.net/2017/08/03/the-self-driving-car-is-only-an-o…

These "tech breakthroughs" just reduce demand

by tgcam4 | 26th Oct 17, 10:52am 1508968342

I was thinking in terms of productivity per worker. If truck drivers are replaced by av's, a transport company produces more per person. Your article says nothing about productivity, just says they are a long way off.

by ham n eggs | 25th Oct 17, 2:36pm 1508895419

Productivity has flatlined due to the rising (energy) cost of energy. Energy is the base input for all goods and services. So regardless of what financial trickery is employed, we see ZILCH general inflation.... Any inflation is quickly offset by lower demand (affordability). There is just isnt the surplus in the system for wage growth. The rising underlying costs of the essentials is putting pressure on all disposable spend.
Yet the economists wait for the hyperinflation to kick in... surely those printed dollars will show up somewhere....!!! Alas. no.

by notaneconomist | 25th Oct 17, 4:13pm 1508901218

It has nothing to do with energy but everything to do with government spending.
Productivity has flat-lined due to the rising costs of the public services.......

by ham n eggs | 25th Oct 17, 4:54pm 1508903653

Nothing to do with energy? Then i can only assume your pantry & your log burner is full of dollar bills. Or you're an economist.

by Didge | 26th Oct 17, 10:52am 1508968355

What happens if a human worker requires less electrical energy than a robot?

by flebus | 26th Oct 17, 10:57am 1508968633

Have you seen The Matrix?

by Didge | 26th Oct 17, 11:12am 1508969557

Giggle!

by waymad | 25th Oct 17, 12:53pm 1508889201

Some pithy 'splainin' from Eric Crampton on the min wage hike here: https://offsettingbehaviour.blogspot.com/2017/10/the-big-minimum-wage-h…

Bears out my #4, above, mainly.

by MikeM | 25th Oct 17, 1:30pm 1508891440

I imagine there will be a few SME failures if wages go to $20.

Might be a way to clean out inefficiencies though.

by tgcam4 | 25th Oct 17, 2:34pm 1508895277

agreed. Might be cheaper to buy automated systems rather than hire low skilled people too.

by delboy | 25th Oct 17, 2:50pm 1508896216

Indeed, businesses will simply pass the increased wage cost to the consumer or increase investment in automation to reduce headcount.

Potentially an opportunity for landlords providing housing for those on minimum wage or benefit to increase rent and finally get a decent rental yield.

So there's certainly some upside and opportunities.

by bigblue | 25th Oct 17, 1:22pm 1508890929

Mike Hosking must have popped a happy pill http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11936459

by dtcarter | 25th Oct 17, 3:06pm 1508897184

yeah, the guy is deranged. A couple of days ago it was all doom and gloom "Already a mess - we are all in trouble". What's changed since then?

by MikeM | 25th Oct 17, 5:20pm 1508905237

Maybe he was told to by his chiefs.

by zorba - old | 25th Oct 17, 10:32pm 1508923930

Exactly - told to tone it down. I noticed it also the night the Government was announced. He was apoplectic until near the end when his demeanor changed completely - a whisper in his earpiece me thinks!

by dtcarter | 25th Oct 17, 3:04pm 1508897088

Best to avoid double negatives? Global wine production dropping -8%, is another way of saying it rose +8%.

I think you meant to say it dropped 8%