Here's our summary of key events overnight that affect New Zealand, with news there is a sudden fall-off in the growth of airfreight volumes.
But first, US pending home sales data for contracts to buy previously owned homes fell in July for the seventh straight month. A lack of supply in the market is the reason the industry is giving and the fall-off in volumes is particularly noticeable in the West. Separate data shows home prices rising at the rate of +6.3% pa in an affordability challenge that may be impacting sales volumes.
The second revision to the second quarter American GDP growth data has been released confirming it was the best growth since the third quarter of 2014 with the annual growth rate up marginally to +2.9% pa compared with the annual rate in Q2-17. (This is the consistent basis we use for all other countries and different to what the American publicise.)
The same data shows that US corporate profits rose +16.1% as a result of the large tax cuts and the expanding economy. (see page 16.) This data has pushed the S&P500 up by +0.5% today.
Canada has now joined the NAFTA negotiations and claims a deal can be achieved by the end of the week. They already have agreement on car manufacturing; dairy trade seems to be the current sticking point and the Canadians are expected to concede that one, a bargaining chip they have been holding back until this moment. And Canada has won a rollback on newsprint tariffs.
And staying in Canada, graphic new evidence that raising the tax rates at the top income bands actually reduces the tax-take collected. The Trudeau Government has a -C$4.6 bln shortfall from the effect. Of course, the American experience of cutting top-rate taxes doesn't generate rising tax collections either.
In emerging markets, pressures seem to have escalated in the past 24 hours. The Turkish currency is taking a new hit. And the Argentine bond risk premiums have suddenly blown out. Both stem from investors losing faith that the local governments can control the pressures facing them.
All these trade pressures are strangling the growth of international air freight. It was up only +1.9% in July, the slowest annual growth rate since May 2016. In the huge Asia/Pacific region, growth was only +0.5% pa as momentum leaks away fast. Further, the OECD is reporting a contraction in trade in the June quarter among the G20 nations.
In Australia, Westpac is coming under severe margin pressure which has forced it to raise mortgage rates suddenly. It is raising is variable rate by +14 bps to 5.38% and is the first of the big banks to do that, although most of the smaller ones have already moved higher following the same pressures. The increase applies to all its customers, new and existing. It's a rise that could add AU$300 mln to Westpac's bottom line. The pressure on Westpac is somewhat unusual but the other three big banks are expected to follow at some point. Westpac New Zealand doesn't seem to be suffering the same pressure, according to the RBNZ Dashboard data. (P3) Also, see this.
The UST 10yr is unchanged at 2.88% and the 2-10 curve is now at +20 bps. The Aussie Govt 10yr is at 2.55% (down -1 bp), the China Govt 10yr is at 3.63%, down -2 bps, while the NZ Govt 10 yr is at 2.64%, up +1 bp.
Gold is unchanged today at just on US$1,205/oz in New York.
US oil prices are much firmer today, now just over US$69.50/bbl. And the Brent benchmark is just under US$77.50/bbl.
The Kiwi dollar is softer at 67.1 USc. On the cross rates we are firmer at 91.9 AUc which is as high as it has been in a month, and at 57.3 euro cents. That leaves the TWI-5 at 70.7 and still at its average over the past month.
Bitcoin is at US$7,017 and virtually unchanged from than this time yesterday. This price is tracked in the exchange rate charge below.
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41 Comments
"Westpac is coming under severe margin pressure which has forced it to raise mortgage rates suddenly"
Sounds right. But let's remember that there are other reasons to raise the Variable rate, like (1) it will 'encourage' any borrower migrating from Interest-Only into Fixed Rate at the lower rates ( and try to avoid the debacle that will come with those Resets, regardless!) and (2) if the whole curve is going to fall further, getting borrowers to 'lock in' now at what will be higher Fixed Rates makes sense.
The Canadian experience re taxes - it is well known that there is a tipping point on personal tax rates where the cost of tax avoidance, or evasion, exceeds the benefits. Putting taxes up for the top brackets would simply have made those wealthy few spend more on their accountants to find ways to avoid tax. Apparently there is also a point where a tax cut can actually lead to an increase in the tax take. I believe it to be on the same principle.
Indeed. One of the reasons that a land value tax makes far more sense as a part of tax base - given the value of the land is driven by the communities and public works around it. It's a bit odd to keep on hammering those earning a living while leaving this completely off the table.
An increase in tax rates always increases interest in minimisation.
A personal anecdote; I've always been a 'everyone should pay their fair share of tax' kind of a guy and been pretty relaxed but after the last election when kiwi taxpayers were saddled with a higher personal tax regime, I was motivated to take a closer look at my arrangements. A chat with the accountant revealed that with some basic restructuring of my personal tax affairs I could legitimately reduce my liability to a modest extent. If I wished to be more creative yet still within the law, significant reductions were possible.
I went with option A but if not for the dismissing by the coalition of taxpayer grievances over the effective ratcheting up of tax rates due to fiscal drag, I'd have blithely cruised on as I was.
An increase in tax rates always increases interest in minimisation.
Exactly why a land value tax as a component is better (in addition to the value of the land being driven by the communities and public works around it). It's less vulnerable to minimisation.
It's also how land banking was originally addressed here (and in the UK, along with other measures) to increase average citizens's access to a small piece of land (thus capital).
It definitely has merit - along with dropping income taxes accordingly to achieve a mix of tax on land value income and employment-based income. Bringing down prices is not the only desirable element. It also cannot be avoided, as other taxes can (e.g. Warren Buffett noting he pays less tax than his secretary).
There's a reason that Milton Friedman - a man who really did not like taxes but saw them as a necessary evil - said (paraphrased) "All taxes are bad but land tax is the least bad".
In concept, I favour land tax as well - for its inherent wide catchment fairness. But a problem is that income taxes are not 'dropped accordingly'. Every government, the last and also this lot, cynically allows fiscal drag to erode any such temporary offset. Even our usually voluble PM is careful to confine herself to saying Cullen's tax grab committee recommendations 'could' be fiscally neutral. With Robertson staring at a looming fiscal hole there is zero chance of that.
"The yield curve isn’t really about looming recession, though admittedly that’s what sparking all the interest in it. The UST market alongside eurodollar futures (and interest rate swaps to a certain extent) are calling Powell’s inflation, “rate hike” bluff. It’s the highest stakes poker, a game at which the long end is undefeated.
Is this time different? We can start by asking any one of the BRIC’s how they feel about dollar-driven inflation versus deflation. Globally synchronized growth? It wasn’t much growth to begin with even in early 2017, now in 2018 more and more there isn’t much for synchronization, either. If anything is becoming more homogenized, it’s the indications for the global economy cooling perhaps rolling over. Maybe even a recession or two here and there.
Just the sort of stuff of flat curves.
Inflation hysteria has almost certainly been dead for a while. If the events earlier in the year didn’t outright trash it, May 29 sure did. Whatever still lingers of it in the occasional unkempt media (Bloomberg) space, the yield curve is busy cleaning up the small remnants of what’s left."
http://www.alhambrapartners.com/2018/08/29/whats-on-peoples-minds-not-i…
The writing is on the wall
China's Building-Boom Hits A Wall As Shadow-Banking System Collapses
https://www.zerohedge.com/news/2018-08-28/chinas-building-boom-hits-wal…
How the hell wants an IOU?
Lucky you. Bicycling is difficult in several parts of hilly-windy Wellington with narrow roads.
It is cheaper to fill up your car than use public transport. The cost of fuel will have to be over $4 a litre before the switch to train/bus would make economic sense to me.
or a nui electric scooter, would be intersted to see one around wellington to see how it goes up the hills
http://www.niuscooters.co.nz/
Looks like pimp John Chow is standing for Auckland mayor. Chow said it was this "unique mix of growing up as a Kiwi but holding onto my Asian roots" that would make him a good mayoral candidate in a city where a quarter of the population is Asian. The Chinese are going to show their power level as a voting bloc some day and this might be it. They probably make up about 12% of Auckland now.
We're heading into identity politics. There will not won't be room for sitting on the fence or voting on policy. It will be "if I don't vote for my group, then the other group will take everything". Diversity = division.
https://www.stuff.co.nz/auckland/106683871/john-chow-for-auckland-mayor…
I'm surprised small motorcycles are not more popular. A brand new Suzuki GSX150 can be bought for $2995 +ORC
https://www.suzuki.co.nz/Motorcycles/Model/gsx150/street
This is an amazing bargain. It's hard to see how it can be made so cheaply. Very good reviews. Has the power of an older 250cc.
A question. If the bank commentators and business leaders are all so depressed and this lack of confidence is going to have a real bearing on future economic activity why is the NZ 2-10 year spread still up around 90 points?
Surely if the future is so bad the spread should be a lot lower. Asking out of self interest as I keep wanting/waiting for longer (3-5 year) fixed rates to come down.
Below from Bloomberg a couple of days ago. Probably links in with poor air freight demand and most of this inventory will be junk value pretty quick.
Storm clouds are brewing over the global technology industry.
A host of hardware companies, including Apple Inc., Samsung Electronics Co., Foxconn Technology Group and Intel Corp., are sitting on inventory stockpiles not seen since the financial crisis a decade ago.
And it comes amid a possible U.S.-China trade war, likely monetary tightening by the Fed, more expensive growth in China’s consumer economy, and a long-standing sense that we’re in a tech bubble.
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