Key US factory survey stumbles; EU inflation dips; Canada house sales fall; G20 growth stable; China turns away from trade talks; UST 10yr at 3.00%; oil down and gold up; NZ$1 = 65.8 USc; TWI-5 = 69.5

Here's our summary of key events overnight that affect New Zealand, with news it may be dawning on some US policy makers that China may come out on top in the trade war and they have chosen the wrong strategy to address the imbalances.

But first, the NY Fed's survey of factory business conditions, a key one among the regional Fed surveys, has come in surprisingly flat. Analysts were expecting a minor indication of softness but have been delivered something more concerning. It is true that the overall levels are still relatively high, but most of their key sub-indicators fell and some quite sharply. And some of the rises - like for inventories and input prices - aren't positive either. The only positive bit is that the employment indicators held steady, neither rising or falling.

EU inflation dipped in July, slipping -0.1% to +2.1%. For the euro area, it was down to +2.0%.

In Canada, their existing house sales fell -3.8% in volume in August compared with the same month in 2017. There are two important reasons - major volume drops in British Columbia housing, and stricter national mortgage regulations are starting to bite. The data from Vancouver is eye-catching, down -37% year-over-year in volume terms. Nationally, the average price was up +1.0% to C$475,500 (NZ$554,700) - and in Vancouver the average price was up +4.1%.

Meanwhile, the OECD updated its June quarter G20 growth stats, showing this key group grew at +3.9% pa. That is unchanged from Q1-2018, but is bolstered by improvements from India, China, Indonesia and a small set of others, and restrained by the US, the EU, Japan and Australia among many others. India's +8.0% was the highest, South Africa's +0.5% the lowest.

On the trade war front, the Chinese don't seem eager to engage. The US is almost pleading for new talks, but China is looking away. In fact, there are reports that China might cut key exports to the US. That would be a whole new front in the battle. Certainly, it is driving China to insulate itself from US tariff pressure. The overall cost to China? - perhaps as many as 700,000 jobs. But that represents less than 0.1% of their employed workforce and may not even be noticed in their labour market statistics. The net result is that China may become more competitive, not less, through all this.

Markets are getting increasingly skittish over all this chest-beating. Today Wall Street is down -0.7% and yesterday Shanghai was down -1.1% and Hong Kong even more. But how much of that relates to recent storm damage consequences is a bit up in the air at present, although probably not much.

The UST 10yr is unchanged today at just on 3.00%. Their 2-10 curve is at +21 bps. The Aussie Govt 10yr is at 2.63% (up +3 bps), the China Govt 10yr is at 3.66% and down -2 bps, while the NZ Govt 10 yr is at 2.61%, up +3 bps.

Gold is up +US$8 today at US$1,201/oz in New York.

US oil prices are lower today and under US$69/bbl. The Brent benchmark is now under US$78/bbl.

The Kiwi dollar is starting today firmer at 65.8 USc. On the cross rates we are marginally firmer too at 91.6 AUc, and unchanged at 56.3 euro cents. That puts the TWI-5 at 69.5.

Bitcoin is now at US$6,304 and -2.8% lower than this time yesterday.

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45 Comments

China is therefore caught between two huge unknowns. What does the economy look like without government support? In addition to the sudden withdrawal of “stimulus”, how can it fare absent globally synchronized growth that even the IMF states is no longer synchronized?
http://www.alhambrapartners.com/2018/09/14/rebalancing-chinas-rebalancing/

There is a lot of propaganda being released from China about the tariffs on China. As always: don't believe everything you read!

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19

Running a big current account surplus is as dangerous as running a big current account deficit. It is ok for a while, but the problems get bigger with time.

Eventually, as with Germany and Greece, the money leant as customer finance to your clients becomes unrepayable and one or both of you must take a big loss. Because Germany is in charge of the euro they bankrupted Greece and printed the lost money via the smoke and mirrors of the ECB to hide their stupidity from the gullible German people, who trust their leaders.

Alternatively, as with China and the US in 2008, you wake up one morning to find your customer has stopped buying your stuff and you need to lay off a lot of people. The people laid off are not happy and have a deep distrust of their leaders based on the black years of the Great Leap Forward. Xi knows this and his consolidation of power has been largely about reforming the Chinese business model to address this vulnerability. It is a big job.

Here in little old New Zealand we run with the Greece/Turkey/Ireland current account deficit model on a she'll be right basis. She will be right until a critical point is reached, as it was in the late eighties. We seem intent to deny this. Instead we party on while the music is playing and the beer/wine/whisky is flowing, telling each other how clever we are and aren't we doing well. Meanwhile, those not invited to the house party get angry and plan their revenge.

Curiously, I keep finding the Americans quoting Yeats:

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.

The poem was written in 1919 in the aftermath of the First World War and the beginning of the Irish War of Independence that followed the Easter Rising, at a time before the British Government decided to send in the Black and Tans to Ireland. The 1916 Easter Rising was a bit of stunningly clever German intelligence skulduggery (much copied by the CIA) whereby they armed a bunch of angry young men in order to foment a revolution. In Russia the trick worked immediately, in Ireland it took longer. The silly Brits took the bait and overreacted by shelling Dublin. This was so shocking that it revived deep cultural memories of various acts of genocide and oppression over the previous centuries (Cromwell slaughtering a third of the population of Ireland, for instance). There followed 60 years of desolate times in Ireland and Dublin fell from being the second city of Empire to being nowhere town. It is now a German colony.

Well said RW. The last two line of that poem are interesting.....

Yes...well said Roger.
What u say about Current accts. is a realistic context and contrast to Jacindas' speech about ....'to build a more modern and fairer New Zealand'.
Good luck to her... I do embrace Labours actually trying something, BUT... modernness/ fairness does not make a cake bigger, nor make one work harder and be creative, nor pay down debt.....etc

Our Current Account deficit around $2,0 billion is not excessive.

This year's addition to the pile looks inoffensive, but it adds to a growing pile, the Net International Investment Deficit. To put it in English, NZ Inc posted a loss of $2.0 billion this year. Cumulative Losses to date are $156 billion. It peaked at $168 billion in 2016.

Those pennies add up to real money.

NZ dollar slipped below 50p last night for the first time since the Brexit vote in 2016.

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14

Ha, its down, down, down for goblin town (Orcland) you think? No one notices the NZD going down, it is a stealth house price crash following a stealth invasion (of people and capital) and the illusion of prosperity based on borrowing newly minted money and spending it on buying houses off each other. It's the Kiwi way.

Roger, please correct me if I'm wrong but have you ever seen the exchange rates feature on the mainstream evening news? In most countries you visit, it forms part of a small section of the business news where prices of gold, silver and a few currency cross rates pop up to keep people aware.... In New Zealand however all you get is a story about a blind cat that got stuck in a tree and needed all of the emergency services to get it down safely. Or have I got it wrong?

It's been a while since I tuned into fta tv, but yes, they certainly used to cover exchange rates, at least AUD and USD, with occasional mentions or the Euro and pound.

A blind cat stuck in a tree. That's actually meant to be an allegory of our situation in NZ.

LOL A blind cat stuck in a tree ............. yip sounds about right to describe our situation

Do you know if they got the blind cat down.

They cut the tree down.

The Ugly Truth about our household debt.

https://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&obj...

Spain, Greece and Italy all have lower household debt than NZ, if it were Switzerland and Germany we were being compared to then I would consider it less of an issue.

Household debt and house valuations compared

https://twitter.com/business/status/1041084669872271361

Are we doubling down on exactly the same mistakes that caused the financial crisis ten years ago?

https://www.telegraph.co.uk/business/2018/09/17/doubling-exactly-mistake...

Jaguar turns back the clock to the 1970's with a move to the 3-day working week.

https://www.telegraph.co.uk/business/2018/09/17/jaguar-workers-put-three...

Yer gotta larf. Seventies redux is one of my themes. Our current government is like a rerun of the Alf Garnett era. Why, why, why, would you set out to do that you ask?

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12

Who really wants to trade with China, what do they actually provide? The US is capable of making everything it needs within it's own borders, as it has before, and the only reason they have gone away from that is increased margin to the corporates. China, came in with no internal market as their population was derelict, of course they wanted to tap into the biggest consumer economy there was to extract what they could. With a captive workforce and authoritarianism they could leech away as long as the greedy would let them. So much of the "trade" between US and china is raw material to be manufactured and returned, how is that efficient? The answer is that it is not, but it is profitable, until it is not because the middle class goes broke. It appears to me that Trump wants to reduce this "trade" and restart manufacture locally, I can't fault the logic. To me it seems less a war and more weeding out the infiltrators.

NZ is viewing China differently. The difference is we get things from China which would be inefficient to make here so we have more actual trade as an exchange of goods. The risk though is we get cut off one day if they get cranky when we tell them what assh***s they are.

The concept of a stealth invasion is alarmist, but that is what China has done in the South China Sea. Russia's stealth invasion of Crimea was also very successful. They play a long game so it is certainly a vulnerability.

By stealth - do you mean buy up all the apartments in Auckland, Christchurch, Tauranga and Wellington. Then at an unsuspecting time of the year and over a period of weeks you ship over a few hundred thousand 'tourists' to occupy them.... Then the cruise ships simultaneously arrive in the harbours, except they are cruise ships loaded with men carrying semi-automatic weapons and RV's and there also happens to be an aircraft carrier 200 miles off the coast.

That's how I'd do it if I was one to plan such an event.

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11

No, that's outdated. A lot of wasted effort. A clever empire colonises through banking. You lend the country your money (not theirs, that is crucial). You can either lend it to their government to waste on trying to get re-elected, or better still, you lend it to the people to buy houses off each other. That is how I would colonise New Zealand. You allow the people to largely organise their own domestic and trade affairs. This also allows you to easily distract them and get them to fight amongst themselves a bit, so as not to notice the yoke or the master who they serve.

Hong Kong is the model to follow, limited autonomy as long as you don't rock the boat. The illusion of freedom. China is well on the way to colonising Africa by stealth.

I am somewhat suspicious of our low long term government bond rates, I don't think I've seen them lower than the US before, here or in Aussie. Who exactly is buying them? Does it matter? Are we being played? Remember, for China to run a current account surplus of +x it must export capital of -x. Likewise, to balance our current account deficit of -y we must import capital of +y.

The danger is we become a debt serf colony. We are already a sort of debt serf corporate subsidiary of Aussie in some ways.

Thinking about that does anyone know what proportion of overall NZ dollar currency trading is carried out by the Chinese?

My comments aren't about trying to stir up an anti China conspiracy theory. It is a useful example of the dangers of running a significant current account deficit for a long time. You will become a colony of somebody, or a failed state, or both. We still have choices. We are a sort of reasonably independent colony of the US and Australia, but there would be less freedom and no turning back with China.

Whenever I talk about the current account deficit, I get shunned. So I'm looking for a new angle that people can grasp without having to understand the simple but elusive mathematics of it. Not many people understand double entry bookeeping. It is the essential mathematics of finance, business and accounting. At school and university I was never taught it or heard it mentioned. There is a sort of medieval snobbery about money and the higher mathematics of money.

Totally agree and to the same extent much of Europe is beholden to Germany, its loans (via ECB) servicing consumption in all the nations that run a current account deficit whilst the debt fuels its own production surplus. In the long term it creates too many distortions and the debt levels within the Eurozone will ultimately fail, probably after the next crisis and I can't see the Euro having anywhere near it's current membership when it does. If you look at Italy, it is only the ECB that is buying their government debt, my question about currency purchases is merely highlighting the question of who would have a reason to purchase ours (it's not about the paltry returns) there is a bigger game being played.

Exactly. I'm sort of thinking out loud in these posts. I'm a businessman trying to understand how things work, mainly for my own personal benefit, but it is annoying when this is at odds with what is best for the country. The classic way to do well in Britain or New Zealand or Australia, the US or Canada, is to shun manufacturing and borrow to invest in rentals in the big city in the years following one of the regular busts. Which seems perverse.

Roger, Your comment re manufacturing struck me, as i have often wonder this. To me it looks like if you are making something, a widget, initially it is expensive, and most manufacturing firms need to be able to sell it at a price that at least covers their costs. An almost impossible target. The alternative is to sell at a loss until demand ramps up to overcome the development and manufacturing costs. this i think, is a little like Apple who did this initially with it's IPads and smart phones, essentially creating a market from nothing. A part of the problem I see is that every little supplier tries to exact their piece of the pie before it is cooked, and in NZ transportation costs can be a killer (have you seen what shipping companies charge lately?)

Finding a manufacturer to build a new idea can be equally fraught. the young lady and her family who invented the wood splitting tool, trying to find someone in NZ to make it was a good example. No one would come to the party at a reasonable cost, making the invention stillborn before it got into manufacture in NZ. I seem to remember they are getting it made overseas.

to create the fundamental shift you are talking about will need investors who are not only prepared to accept risk, but also wait for the return.

Sadly the memory of '87 has become indelible in the minds of both those that it effected and also their offspring and until something similar happens with the housing market, which it very well could because of the over-concentration of debt, then businesses will continue to struggle to raise enough capital (equity rather than debt) to be able to grow big enough to compete internationally. Someone will no doubt spout out about The Xero's of the economy, but they are exceptions rather than the rule and they're still not yet returning cash to shareholders.

Some good posts to read today, I've enjoyed this.

Roger, rest assured that I really appreciate the sort of 'thinking out loud' that you do. Showing yer Workings, as we were all urged to do in a well-bygone style of edumication, is important because it assists others to break through the blinders imposed by the varieties of magical thinking, group-think and other infestations all too apparent in common taters outpourings, on these August Threads.

Keep it up.

Ditto. Thanks for sharing your thoughts Roger.

This is a good comment stream. Ones like this that provoke thought have become too rare. Here is the way I see it. It is a credit based system, even surplus countries rely on expanding credit to keep production going. But those needing credit for production are selling it, not buying it. I think look a bit deeper to answer your very good question, who needs to buy debt? My thought is that investment funds dwarf any single governments annual surplus. That is claims of ordinary people on the future, and the demand is insatiable. It is the past 50 years surpluses in aggregate all looking for a return in a world where opportunities for returns are shrinking.

"Who really wants to trade with China, what do they actually provide?"

Are you serious???

If you remove everything made in China from your life:
- you won't be able to post here because you won't be able to use a computer
- no cellphone
- your car won't work
- your house will be empty
- you won't be able to watch TV
- etc

Some of these things are currently made or assembled in China. However, they weren't always and a lot of manufacturing is already moving away from China. No country, not China not the US and certainly not NZ, is indispensable.

PM's comments surrounding upcoming GDP figures giving NZD an early morning boost.

A demographic disaster awaits that no government seems to be talking about.
By 2030, 375 million (14% of the global workforce) will have "to move out of current occupational category to go find work".
At a time when the world is wholly fixated on attempting to solve chronic problems with short-term stimulus, I doubt we will ever be prepared to stay ahead of the AI curve.

https://www.mckinsey.com/featured-insights/future-of-organizations-and-w...

I wouldn't put much stock in the Global Times for accurate commentary - it is after all the Communist's mouthpiece. However, I think what is more likely the situation in China is that they don't know what to do yet. The factions are divided and many are angry at Xi for his actions. Once a consensus is reached then they will act - who knows what that will be though.

Lumbers is still getting hammered
https://finviz.com/futures_charts.ashx?p=d1&t=LB

Potentially that is a big deal. US Lumber prices tend to lead US construction by a few months....

Lets face it China was never going to stop its illegal and unfair trade practices by negotiation or for any from of altruism.

This Trade war was going to happen sooner or later

Charles is now the third I have read to pin his hat on the wheels falling off next year. He is less precise than the other two, who picked June.

https://www.oftwominds.com/blogsept18/next-crisis9-18.html

Winning? All talks about the trade war are now being censored on social media. Jack Ma suddenly "retiring" while Jing Dong's boss, along with many others, are being arrested for one reason or another as big companies are now being nationalised. Small businesses such as myself are about to be taxed to high heavens - does this sound like winning? China may win the long game simply because they do not have to worry about public opinion like Trump. China will do anything not to lose face to the USA, even if it means starving the population, and that is the most important thing to remember.

Good to have info from the coal face, while you still can.