US Fed confirms more rate rises; US building permits soft, hiring strong; competitiveness rankings; key derivatives dispute; China new loan growth weak; UST 10yr at 3.17%; oil dives, gold soft; NZ$1 = 65.7 USc; TWI-5 = 69.8

Here's our summary of key events over night that affect New Zealand, with news jurisdictional arguments are building up everywhere when 'compromise' is now a dirty word in public policy, in a winner-takes-all world.

The release of their September minutes shows the US Federal Reserve signaling they see a strong economy justifying continued interest-rate increases. That will put them in the cross-hairs of the US President.

American data for housing starts, building permits, and housing completion for September all came in lower than the month before. Building permit levels actually came in lower than the same month in 2017.

And new data shows end of year holiday hiring of more than 700,000 workers by American retailers will be the largest since 2014.

The American economy sits top of the World Economic Forum's annual global competitiveness survey for the first time since the GFC. Last year it ranked second behind Singapore, but these two switched this year. The US benefited from a revised ranking methodology this year. New Zealand ranks 18th (down from 13th last year). While we score at the top on the sub-category of 'Institutions', with the world's best "enabling environment', we are hindered by lower rankings in 'human capital', 'innovation', and 'financial markets'. Ovbiously we rank low in overall market size. Australia ranks 14th this year, and up from 21st last year. Last year, the NZ Government heralded the result with a gushy press release. This year, nothing.

An nasty but important tiff is developing as a consequence of Brexit. The EU is 'defending' itself from the position of London as a financial center by changing the rules for derivatives trading to ensure after Brexit that their regulations will apply for all traders of euro derivatives. But that catches the US trading firms too, and the American CFTC has threatened to withdraw US banks from the system it they become subject to EU regulations. Because the US institutions provide the bulk of the liquidity to the London systems, the impact will be enormous. It's just a threat at this stage, aimed at not having US banks subject to EU regulation on derivatives (as happens now), but the implications are serious.

Meanwhile on Brexit, there are indications that the EU is prepared to offer the UK another full year to achieve a negotiated resolution.

China is slowly selling its holdings of US Treasuries as it tries to restrain the fall of its currency. The value of the yuan is falling at a modest pace but is still under 7 to the US dollar. Selling US Treasuries helps keep that change from undermining market confidence. The volumes involved are still large enough to be one factor in the rising UST interest rates. The Chinese have reduced their holding by -US$37 bln in a year as Federal US public debt has risen by almost US$1.1 tln. But many analysts think a more rapid depreciation of the yuan is not far away and Beijing won't be able to prevent it.

Growth in China’s net new yuan loans in September slowed sharply despite government calls for expanding financial support for businesses, adding to evidence that the world’s second-largest economy is facing growing downside risks. Major SOE banks may not be enthusiastic members of the 'home team' after all.

The UST 10yr yield is up slightly to 3.17%. Their 2-10 curve has held at +29 bps. The Aussie Govt 10yr is at 2.71% (down -1 bp from this time yesterday), the China Govt 10yr is at 3.60% and also down -1 bp, while the NZ Govt 10 yr is at 2.71% which is down -1 bp as well.

Gold is down -US$2/oz and now at US$1,225/oz.

US oil prices are down sharply today on swelling US crude inventories and have fallen more than -US$2/bbl to just over US$69.50/bbl. The Brent benchmark is now just under US$80/bbl.

The Kiwi dollar is little changed today at 65.7 USc. On the cross rates we are at 92.2 AUc, and at 57 euro cents. That puts the TWI-5 at 69.8.

Bitcoin is also little changed at US$6.517. This rate is charted in the exchange rate set below.

This chart is animated here.

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

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41 Comments

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11

I had an interesting chat with a neighbour last night, who is working for a client that has a Chinese wife. I know of whom he talks to as they are customers of mine also thanks to the referral of my neighbour.

The wife is actively listening to Chinese talkback and has said there are real problems with China right now. The government are calling for expats to return, or more importantly to return their money back to the country. The offer out is even amnesty for those who were corrupt, or took out dishonest money from China. Sounds like they are desperate.

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24

....I know of a $100k they could have back. Would be in small parcels though, but apparently that ain't a problem.

Comment of the day please.

Word on the street is that rich Chinese do not trust President Xi to keeps his hands off their wealth. Getting in before the FBB could be lucrative for sellers.

The call for expats to return to China reminds me of the time they invited workers to come forward and criticize the party (hundred flowers campaign). Those that did were sent off to the work camps. Or the time the North Koreans invited all Koreans to return. Xi is viewed as becoming more like Mao and the rich will be seeking to offshore their wealth and their families if they can.

I doubt it if we would see it in property in NZ. A lot has changed..these transactions are highly visible and documented. Such is the relationship between NZ and China we would give them all the help they need to recover (a hold up on the wharf a simple reminder to us).

Surely it would be safer to drop your cash somewhere less likely to comply...the US for example?

A house in my street sold for quite a high price the other day. I'll see if I can find out who bought it.

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16

"By the time you can smell the tiger, it's too late..."

Somehow, the scale of May 29 keeps getting bigger. I should clarify, meaning that the very few data series that can pick up on what happened that day have had trouble picking up on exactly what happened that day. It was, to put it simply, a global collateral call of some undetermined magnitude. We know it was substantial by the earthquake across markets in the real world.
https://www.alhambrapartners.com/2018/10/17/the-very-very-very-big-things/

Scarfie... China is NOT the miracle some think it is..... just like Japan was not.
Check out this money supply chart... https://fred.stlouisfed.org/series/MYAGM2CNM189N

If that was the chart of a Brazil, or argentina.... I'd say that the value of their currency vs $US is under extreme downside pressure.. .... and maybe collapse once Capital flows outwards.... (leaves the Country. )

Can you gets ours? NZ

AJ.. u might be interested in this chart..
For me... it shows the relationship to money supply growth and property prices ( land values )
Its worth studying...
https://fred.stlouisfed.org/series/MABMM301NZM189S#0

https://fred.stlouisfed.org/graph/fredgraph.pdf?hires=1&type=application...

that chart looks the same as the top one?

It's almost like increasing money supply has an impact on asset prices? Bit of an epiphany here.

Really?
What way is causality flowing from that?

Money supply leading house price growth only appears after the structural break in 2010.
I can do a quick test for cointegration, if you like but by the looks of it I don't think those two share such a relationship. Perhaps prior to 2006, but I'm dubious abourt after that.

Roelof - what time series work have you done with this data?
Surely you've done all the Grainger tests?

Nymad... I'm not a bean counter..!! My interest in economics is in regards to trying to understand the underlying principles and the interconnectedness of things..etc
For me, Its not so much about causality, but about relationships and underlying principles... ( Once Money supply growth enters the economy, it can flow and manifest in different ways.... .... In NZ we have a love affair with Real Estate. )

I have not done any time series work with this... i dont even know what a Grainger test is....But ... I do trade my knowledge, and feel reasonably ok , within a context of uncertainty.... ( famous last words !! )
My view is that statistical correlation needs to go hand in hand with underlying principles.

If you want to know some of the context of the principles I kinda accept about the relationship of Money Supply growth to Real estate price growth ( land price component , mainly )... check out this link .
https://www.interest.co.nz/opinion/64724/lowell-manning-says-problem-hou...

Fair enough.
But relationships and underlying principles in economics are pretty much all about causality, not correlation.
Hence why I ask.
It's very dangerous confusing the two, but often done by many - Rodney Dickens is a perfect example.

I'm not doubting that Money supply and asset growth are related. I'm just saying from my (stats/econometrics) background that that data isn't as cut and dry as you assume.

Good point. An increase in money supply means nothing if borrowers in general cannot afford to service 'x' amount more debt to push up house prices by 'x' amount.

AJ... check the 2nd link

At least China directed investment towards industry, nearly everything we buy is made in China, all we did was speculate on unproductive assets.
https://www.youtube.com/watch?time_continue=1317&v=8FT-zyTX2nE

Growth in M3 from $158 billion to nearly $300 billion in 10 years. Did someone forget to add breaks to the train?

Thanks again gents. For everyone else, that's not sustainable here's Ireland's M3, you'll see a similar doubling of money supply between 2004 and 2007. Yes it was a quicker rise, look what happened afterwards (press max tab)

https://tradingeconomics.com/ireland/money-supply-m3

Here's what's happened - for the banks to keep lending (maintain business and profits) they have been increasing the supply of loans to compete with off-shore cash and debt that was being imported by foreign buyers. They are now going to be in a bit of a pickle because the assets are all valued on artificial (marginal) prices. Hence the loan rates are dropping (margins tightening) to attract more borrowers to prop up the prices on which their loans have been made.

How many Chinese people in Auckland?
In 2013, almost 1 in 4 people (23.1 percent or 307,233 people) living in the Auckland region identified with one or more Asian ethnic groups, compared with 1 in 5 people (18.9 percent) in 2006.Apr 15, 2014

And Japan - look at 1998 - 2010.

https://fred.stlouisfed.org/series/MYAGM3JPM189N

Scary as. Presumably disappearances and the odd execution style "robbery" are to be expected. Doubtless the media will spin these as criminal gang related, whether they are or not. An authoritarian state sees its citizens as property and has no qualms about getting people to do as they are told. So to frighten a community you just hire hitmen to slaughter a few prominent people.

Wonderful. Free speech and democracy not dead yet, even in America.

Love the satire....

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12

Er, this is New Zealand isn't it? What's with this "end of year holiday" nonsense? It's called Christmas. Yes, I know the socialist/atheists in the US want to make their belief into the religion of the Brave New World they want to create, but do we really need to go along with their thought control methodology?

Don't forget multiculturalists in that bunch. NZ's historical Christmas holiday may not be able to stay that if it offends people who prefer other religions.

It's the unspoken "Conform or else" that is a worry.

They'd have to change the word 'holiday' too, after all it derives from 'Holy Day' a day to go to church and no work.

Well, calling it the northern hemisphere winter solstice vacation period is a bit of a mouthful...

For anyone who doesn't want Christmas Holidays, it wont offend me one bit if you choose to ignore them and continue going to work.

Personally would prefer this option, and take the extra days off at non-peak times of the year, but stupid laws mean employer must pay day in lieu etc. for public holidays So he's not keen on that option.

Well it's Thursday 18th of October, 5 days until the end of the 'One purchased house, one guaranteed vote for National policy' comes to and end. I think I'll entertain myself with a bit of sport at the Auctions today, just to see how the market's feeling.

Okay, well I have had one thing confirmed today and that is that there are a lot of really stupid people out there. Why would you bid yourself up in an empty room, where you are the only buyer bidding and all you're up against is the Auctioneer bidding on the vendors behalf? , over 280K in increases from one idiot against 7 vendor bids, I'm not kidding I wanted to piss myself.

There were several instances today (approx. half the auctions) where buyers were bidding themselves up with no competition to hand. I think I'd best stay away from the auction rooms, all I wanted to do was shout 'WHAT'S WRONG WITH YOU, ARE YOU BLOODY STUPID?'

Sales rate was just over 50%. One Chinese buyer. That's all from me, I fear that stupidity has buggered New Zealand like it has done Australia. I'm off to set up a distressed debt fund... I'll be buying at 20cents to the dollar..

.... sure it wasn't Simon trying to get rid of some more cash before the audit gets underway?

Haven't heard a damn thing about Kiwibuild for a while, and the ballots for the Papakura homes should be sorted by now.. anybody got any info?

I see the kiwibuild page with the stats hasn't been updated since the 9th. (https://www.hud.govt.nz/residential-housing/housing-affordability/kiwibu...)