US sentiment drops on stagflation concerns; Canada inflation jumps, EU inflation up; US & China talk trade again; US claims NAFTA progress imminent; UST 10yr 2.87%; oil and gold up; NZ$1 = 66.3 USc; TWI-5 = 70.2

Here's our summary of key events overnight that affect New Zealand, with news of some developments on the various trade fronts.

But first, most equity markets are ending the week with small gains, all that is except Shanghai which is down another -1.3% today. That takes the Chinese weekly drop to a -4.2% evaporation.

In the US, the latest consumer sentiment index came in surprisingly lower and well below expectations. In fact it has slipped to its lowest level since last September, with the decline concentrated among households in the bottom third of the income distribution. The dominating weakness reflected much less favorable assessments of buying conditions, mainly due to less favorable perceptions of market prices. Buying conditions for large household durables sank to the lowest level in nearly four years. This is a practical indication of coming stagflation.

In Canada, their inflation rate came in at 3.0% in the year to July, and far above the expectation of an unchanged 2.5% rate.

Inflation data was also out in the EU and they reported a 2.1% rate in June, also a rise but one that was expected.

They also reported a goods trade surplus of +€22 bln in June, right at expectations.

On the trade war front, there are reports that the latest talks between the US and China are that negotiators are drawing up "a road map for talks" to end their trade dispute ahead of meetings between President Trump and Xi Jinping in November.

That trade stoush has made international bond investors wary of holding UST investments. The American Federal government has been issuing more debt, but it’s not getting more foreign buyers in the door. As a result, local investors have so far financed all of this year’s increase in the federal government’s borrowing. With huge new issuance locked in for the next few years and continuing and growing trade deficits, it is hard to see that continuing without sharp risies in yields. And it is equally hard to know how the US dollar holdings by foreigners will be parked or recycled.

And on another trade front, the Americans are claiming a 'breakthrough' is near on NAFTA, but the other two countries say that will only be possible if the Americans show new flexibility.

We should also note that Greece exits the last of its three bailouts on Tuesday and hopes to be able to borrow again in international markets after a nearly nine-year debt crisis that shrank the economy by a quarter and forced it to implement painful austerity measures. The country is certainly changed but it is hard to conclude that it has a brighter future now after all that pain.

Meanwhile, the UST 10yr is little changed at 2.87% and their 2-10 curve is still under +26 bps. The Aussie Govt 10yr is at 2.54% (down another -1 bp), the China Govt 10yr is at 3.66% and up +4 bps, while the NZ Govt 10 yr is at 2.60%, unchanged.

The VIX has slipped back to end the week at 12.6, and almost at the average index level over the past year of 12. The Fear & Greed index has is moved further back toward neutral.

Gold is up +US$3 from yesterday and now a just on US$1,183/oz in New York.

US oil prices are higher today from yesterday and now just under US$66/bbl. The Brent benchmark is now just under US$72/bbl. The US rig count is unchanged this week but still at its recent high.

The Kiwi dollar is ending the week very much week firmer at 66.3 USc on the developing risk-on market tone, and that is +0.8% gain for the week. On the cross rates we are now at 90.6 AUc, and at 57.9 euro cents. That puts the TWI-5 at 70.2 and comfortably above its recent three year lows.

Bitcoin is now at US$6.489 and +2.4% above where we left it yesterday.

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

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19 Comments

We were sold out by a government interested in filling the pockets of a select few

Land sales to foreign buyers boomed under the previous centre-right National government, with 465,863 hectares (1.16m acres) bought in 2016, an almost sixfold increase on the year before. That is the equivalent to 3.2% of farmland in a country of 4.7 million people.

Sort of fake news. Like a typical Aucklander is a 55 year old unemployed builder, single father, that has never owned a house.

This seemed right although I would stress that it really needs to be a couple as it always has:

“I think a 30-year-old will be able to buy a house in Auckland, but they have to compromise,” says Hazeledine. “More apartments, more small houses, more tiny houses and people willing to take something in a not very good location and spend their weekends doing it up.”

First quote from the link:
"At 55, Gem Pritchard has given up on the dream of ever buying a home for his family."
Perfect example why it is dangerous to wait to buy a house. Imagine if he bought when he was 30 -35, 20-25 year ago, he would have a house now, and he would be sooo much better off.

the reason we need wage increases is that housing is taking up a disproportionate percent of family earnings. Like it or not people are going to vote to pull this ponzi edifice down

Imagine if Gem took action in his 30's and bought a house then… He was probably listening to a few mates who told him: "wait, houses are way too expensive now, they are over $100 grand now that's crazy and unsustainable"

always room for another doubling

"You don’t stop the printing presses unless there is something majorly wrong. We have the benefit of knowing what that is: the original Chinese shortcut of using eurodollars as their monetary base. It gives us the added advantage of realizing that when big Chinese money problems arise we know right where they are coming from."
http://www.alhambrapartners.com/2018/08/17/when-central-banks-dont-print/

Its scary to hear from Adrian Orr that he will fire up the printing press in NZ if the economy goes down. We are already seeing a deflation of the NZD, we can only hope it doesn't go exponential in the coming years...

if Central Banks could fix the problem it would have happened along time ago.

If I follow this correctly he is talking about the demand side of something I have talked about on these pages. Money when created has to find a home, if there is too much money created then it goes into asset price inflation. But someone has to borrow it into circulation first. so they need an asset to borrow it against and the ability to pay (which could be the ability to get a return on that asset).

I have for some time now been saying that the only way forward is to keep printing money exponentially (along with lowering interest rates), or to default and collapse. The system doesn't go backwards.

It could be said, again if I am reading Snider correctly, that the FED, or whichever central bank you choose, are not tapering of their own volition, this is being forced on them. A catch 22 for those not taking on new debt, it is putting the cost of their existing debt up.

China can't expand because no one is buying, the money flows from merchandise are not there anymore to underpin this game. They could go to plan B like New Zealand and inflate their property market. Oh wait they already did that. Tricky to follow Snider, so correct me if you see i am wrong, but it is a useful article. I will look forward to more from Snider on the same topic.

Andy Xie says with so much money from both government and retail investors already sunk into a business that relies more on false hope than sound fundamentals, the pain of a crash will be severe. Can it be avoided?
https://www.scmp.com/comment/insight-opinion/hong-kong/article/2160018/h...

Its almost as if government intervention doesn't work, the harder they manage the economy the harder it fails.

https://www.greaterfool.ca/2018/08/16/the-wall-5/ New Zealand gets a mention. Interesting perspective.

Canada's inflation data was massive. Well meaning economists missed estimates by so much .The only surprise being the somewhat muted reaction of the loonie.

And in China yesterday , one of its three main rating agencies Dagong suspended for 'violations'

"Runaway mortgage finance Bubbles turn increasingly precarious. Late in the cycle, systemic risk grows exponentially. As we saw unfold during the U.S. mortgage finance Bubble, there is a ("Terminal Phase") rapid acceleration of loan growth of rapidly deteriorating Credit quality. The unparalleled Chinese real estate Bubble is backed by, too commonly, poorly constructed residential complexes. If the P2P lending Bubble collapse is causing public angst, just wait until apartment prices start sinking.

While Beijing has over the years made numerous attempts to tighten real estate lending, mortgage rates have remained significantly below the rate of apartment price inflation. I would argue that China's real estate Bubble is today acutely vulnerable to an unexpected jump in rates and/or tightening of lending conditions. "
https://creditbubblebulletin.blogspot.com/

"Time and again it is the global banks who take to retreat that trigger all these massive worldwide money problems.

It is credit-based system, after all, so the lack of participation by credit institutions in it even if intermittently isn’t ever going to lead anywhere good in either the short run or longer term.

Over on the “red” side, same thing. US banks are borrowing fewer “dollars” and dollar instruments from foreign bank counterparties"

http://www.alhambrapartners.com/2018/08/17/tic-in-june-2018-the-question...