US house sales slip; US factories expanding, but service sector slowing; EU strengthens; US talks down the greenback; Sydney train strike; UST 10yr 2.65%; oil and gold up; NZ$1 = 74.1 USc; TWI-5 = 74.8

US house sales slip; US factories expanding, but service sector slowing; EU strengthens; US talks down the greenback; Sydney train strike; UST 10yr 2.65%; oil and gold up; NZ$1 = 74.1 USc; TWI-5 = 74.8

Here's our summary of key events overnight that affect New Zealand, with news the Americans are manipulating their currency to gain a trade advantage.

First however, American home resales fell and more than expected in December as the supply of houses on the market dropped to a record low, pushing up prices. Volumes were down -3.6% compared with the same month a year ago, but prices were up +5.8%. However the whole calendar 2017 was not so tame; volumes rose to an 11 year high. And at the end of the year the number of houses available for sale was -10% lower, and at the current sales pace, unsold inventory is its lowest since these records began in 1999.

And US manufacturers are reporting a strong start to 2018 with the PMI up to a 34 month high. Their service sector isn't going the same way however. It recorded a slip in expansion to a 9 month low and an expansion below that for factories.

In Europe, the same survey shows a much faster expansion is underway. Their manufacturing index is holding at a much higher level than for the US, and their services sector is even more positive and at a ten year high.

In Japan, their manufacturing survey shows good expansion as well.

US officials may have opened a second front in the trade war they are starting. Yesterday it was punitive tariffs on some imports, today it is an effort to drive down their currency. They are taking their 'America First' message to Davos, the center of globalisation. It probably won't work out well. Already Germany, India and China have pushed back, and the Americans risk uniting everyone against them. The strategy has all the look of bluster that is not well thought through.

And China is using its special authoritarian powers to muzzle its media over reporting corporate debt excesses. It doesn't like talk about HNA's debt stress, for example.

In Sydney, their public commuter train system is to be hit with a strike. Travel in the city will become chaotic.

The UST 10yr yield is unchanged at 2.65%. The equivalent 10yr China sovereign bond is down -1 bp as well to 3.96%. The equivalent NZ 10yr sovereign bond is down -5 bps to 2.95%.

Oil prices are up further to be just over US$65 a barrel, while the Brent benchmark is now over US$70.

Gold is up strongly by +US$19 to US$1,357/oz.

The US currency is noticeably weaker today and the Kiwi dollar is now up to 74.1 USc and back to levels we last saw in early August. The greenback's weakness may now be official US policy. On the cross rates there is little change. We are at 91.9 AUc, and against the euro at 59.8 euro cents. That puts the TWI-5 at 74.8.

Bitcoin is now at US$10,932, down -2.9% in the past 24 hours. And you can now combine your gambling risks; EPL club Arsenal is being sponsored by CashBet, who are promoting the ICO to the club's fans.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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Who is it going to hurt?

Forget the trade consequences - the US exports+imports only amounts to 12.5% of their GDP. The boost they will get from more exports (airplanes, military equipment) will be wiped out from what they pay for imports (consumer goods).

But It is now so much cheaper for Chinese companies (for example) to buy up US real estate and businesses (not to mention farmland). This is where the main consequence will be.

As for the rest of the world, they (and we) are finding ways to avoid policy mistakes in the US - and in many cases avoid the US altogether. CPTPP, for example. This will just accelerate if the own goals keep coming from Washington.

The USA put a bit of break on Chinese investors when they made them identify the source of their funds and so has the Chinese government. We will be having an interesting time competing against the USA in some of our markets, as our costs don't go down when our dollar goes up.

First however, American home resales fell and more than expected in December as the supply of houses on the market dropped to a record low, pushing up prices. Volumes were down -3.6% compared with the same month a year ago, but prices were up +5.8%.

Hmmmm....

It’s what’s going on underneath the headline that really matters (as always). The reluctance of Americans to sell their houses has become such a contradiction to the attempt to paint the housing market, and therefore the overall economic condition, as healthy, even robust. Prices are rising, in some places quickly. Yet, inventory of available-for-sale homes continues to decline, sharply once again in December.

It’s a glaring dichotomy that ever the NAR’s Chief Economist, Larry Yun, has been forced to grudgingly address.

"Existing sales concluded the year on a softer note, but they were guided higher these last 12 months by a multi-year streak of exceptional job growth, which ignited buyer demand. At the same time, market conditions were far from perfect. New listings struggled to keep up with what was sold very quickly, and buying became less affordable in a large swath of the country. These two factors ultimately muted what should have been a stronger sales pace."

It’s the “exceptional job growth” premise that leads toward only confusion. It’s one of those terms, like “globally synchronized growth” or “economic boom”, that refers quite differently to only the mainstream depiction of the economy, the one that has been consistently overoptimistic about things for a decade. The actual data suggests an entirely separate set of circumstances, which is where all this misunderstanding comes in.

In truth, falling inventory is quite easily explained, and in a way that is perfectly consistent with labor market and national (labor) income statistics as they are. The BLS outside of the unemployment rate, which, for the nth time doesn’t include Americans who would work if there was work, actually has been describing a consistently and persistently slowing labor market. The timing of where that started matches with where resale inventory began to contract. Read more

As a complete dunce in matters financial my observation may mean little. However, I do find the resurgence in gold price as being ominous.

Today's rise is almost solely related to the decline in the US dollar. It only went up in US Dollars. In NZ dollars gold is still at its August 2017 level.

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http://aftinet.org.au/cms/node/1529