US debt issuance leaps; Canada new jobs grow; Shanghai markets tumble; Japan has trade surplus; China tax growth stalls; Aussie inflation looms, house prices to sink; UST 10yr at 3.17%; oil drops, gold holds; NZ$1 = 65.4 USc; TWI-5 = 69.7

US debt issuance leaps; Canada new jobs grow; Shanghai markets tumble; Japan has trade surplus; China tax growth stalls; Aussie inflation looms, house prices to sink; UST 10yr at 3.17%; oil drops, gold holds; NZ$1 = 65.4 USc; TWI-5 = 69.7

Here's our summary of key events over night that affect New Zealand, with news the world's biggest economies are facing enormous challenges.

First in the US, the size and implications of their fast-growing debt problem is revealed in today's Treasury announcement that they will auction US$211 bln in securities next week alone, comprising US$127 bln in new debt and US$84 bln in rollover debt. Yes, that's right one fifth of a trillion in one week.

Across the border, Canada added +28,800 new jobs in September, double the gains reported for August. But almost all were in trucking and delivery jobs, as well as education and healthcare. Factory jobs decreased, a sharp reversal from August.

The Shanghai equity markets were down -3% yesterday in a sharp contrast to most other markets. Shanghai is now down -12% since the beginning of October, down -23% since late May, and down a massive -43% since the start of the year which was its recent high. By any definition this is a full bear market in China and dangerous territory for them. Margin calls and writedowns will be causing real issues, unreported because of their censorship. Clearly the 'home team' has proven useless to stem the red ink.

This drop has unnerved Wall Street, which is also sharply down today, down almost -1.5% in mid afternoon trading.

Japan's trade balance has bounced back to a surplus for the first time in 3 months of about US$1.2 bln in September. Exports were down -1.2% from a year earlier, the first contraction in 22 months. Demand for cars and mobile phone parts was sluggish and restrained by typhoons and earthquakes. Imports were up +7% due to higher crude oil prices.

Back in China, their central and local government fiscal revenues (taxes) grew just +2% year-on-year in September. This drop in the growth of tax collections is a surprising result and may reflect a sharp slowing in commercial activity in the country.

In Australia, consumers are facing higher prices for staples such as bread, chicken and cheese as drought-driven crop shortages, rising fuel prices and the weaker Aussie dollar pushes up production costs.

And economists at AMP Capital have raised their estimate for the housing market peak-to-trough decline to be -20% in Sydney and Melbourne over the next two years. Low auction clearance rates, tighter credit availability, and changed policy around negative gearing from a win by the Labor Party in the next election has seen this decline deepened from their previous estimate of a -15% drop. If they are right, all the gains in the past three years will be erased.

The UST 10yr yield is still at 3.17%. Their 2-10 curve has held at +29 bps. The Aussie Govt 10yr is at 2.72% (up +1 bp from this time yesterday), the China Govt 10yr is at 3.58% and down -2 bps, while the NZ Govt 10 yr is at 2.72% which is up +1 bp.

Gold is little changed at US$1,226/oz.

US oil prices are down again today by another -US$1/bbl to just over US$68.50/bbl as the full implications of the building US crude stocks sinks in. The Brent benchmark is now just under US$79.50/bbl.

The Kiwi dollar has slipped today and now at 65.4 USc. On the cross rates we are at 92.1 AUc, and at 57.1 euro cents. That puts the TWI-5 at 69.7. The Chinese yuan is also approaching 7 to the US dollar, almost matching its lowest since early 2017, and getting nearer its rate in 2008.

Bitcoin is lower at US$6,467. This rate is charted in the exchange rate set below.

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40 Comments

11
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Central bankers have failed miserably.. now with rising prices how are they going to muddle their way through.... won't be surprised to see a few resign as they won't want to be involved in this very complicated scenario

Money for nothin' and chicks for free…
My best guess is their muddling will repeat the cycle of debt boom and bust. It’s the result of people believing you can create money from nothing without the seemingly obvious negative consequences.

Actually, I disagree. Central bankers, including the RBNZ, have been remarkably successful in keeping things on an even keel - even if they did have to use excessive QE. We have prosperity with low inflation and have had that for an unusually long period. Real wages have been rising. Of course things haven't been even for everyone, but they never are. By any standard, central bankers have done a very good job. You can't conclude the same for the fiscal authorities in many countries (although you can include NZ in that small group).

Is the end coming for the current long run of prosperity? Of course it is, we just don't know when. Will it be the mother of all depressions? Highly unlikely. More likely just another recession to clean out the recent excesses. Do monetary and fiscal authorities have sufficient firepower to deal with it? Probably, but it might be tighter than it needs to be because of some fiscal irresponsibility in some large economies. Could NZ weather the shocks? Almost certainly.

16
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Hi David, I can definately understand your conclusion when looked at through the prevailing economic thought. I would contest however that our growth, through credit creation/money printing has detached from what should be the underlying driver which is productivity.
As with all credit it’s great for the short term but it’s not a long term solution especially the way we are using it.
The following is a very crude analogy but I feel as if our current economic system is like a dealer and a junkie. The dealer gives the junkie just enough to “keep things on an even keel,” make the junkie feel good or “prosperous” all while his life is slowly being eaten away (inflation and reduced productivity). The junkies outcomes are now more dependant on what the dealer gives them as opposed to what they produce. This will continue on in cycles with the dealer manipulating the junkie until they can continue no more. When that is, I don’t know? While credit isn’t heroin, it sure is addictive and while central banks aren’t dealers they sure behave like it.

12
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Doesn't it end with the junkie either dying in an alley, or getting caught stealing and thrown in jail? Meanwhile the dealer moves on to new victims, always in danger of arrest, or slaughter by rivals.

To give another perspective..
The railroads of USA , back in the 18th and 19th century.. was all built on massive debt and corrupt business.
When it all collapsed and people lost their shirts.... the railroads were still there... they had been built.
The railroads played a BIG part in Americas economic development.

The Capital formation could never have happened without the debt, the credit growth, and the over-exuberance of the mkts..

When the smoke cleared.... the game changed and life went on...

Credit/debt Capitalism is pretty bad.... but not all bad..
My biggest problem with it is that debt/credit growth ( in the form of money ) , results in a growing wealth inequality.. .. in wealth transfer

I agree Roelof, difference being when the smoke clears what will we be left with? We haven’t been using our credit/debt for productive ventures, mostly speculation sadly enough.

There is a line of analysis that suggests the severity of the last crisis was caused by Paulson, Geithner and Bernanke making a terrible mistake in shutting down Lehman Brothers. It was only when they realised this that they started to do the right things. The principle action was getting Congress to suspend mark to market accounting, as it only works when times are good, in a crisis it causes the sort of collapse the Federal Reserve was established to prevent.

Central banks are made of people and sometimes they make mistakes. Hopefully they learn from them.

10
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So rewarding the people who caused the GFC was a good thing...?

I would have preferred them to have let the other banks fail too. Take away all the power the banks have amassed, and return them to a more manageable size.

Agreed, the actions taken have just continued the issue in the hopes that that can gently manage debt down (which they can’t). It sucks but we’re backed into a corner that no amount of economic manipulation can get us out of without some sort of damaging deleveraging event.

The trouble with central bankers and indeed a lot of economists generally is that they look at debt as something to service rather than pay back, particularly when considering their economic growth models. GDP that is debt fuelled, as it has been in the US (government) UK (government) Australia (Household) New Zealand (Household) is still debt rather than productive growth. It works okay for a time, but when it comes to pumping up a housing market or national debt However most people don't want to be servicing a debt when they hit their 60's and 70's, (repayment rather than servicing is the preference) but a government can palm the debt off on the unborn and therein lies the problem (servicing rather than repayment is their preference - the ultimate can kicking) So with all debt, how long can you keep expanding a balance sheet to support jobs and spending (either govt - creating jobs, or household - making people feel artificially richer) if the economy cannot kick start the 'real productive growth.' that is necessary.

Interest rates could still go lower in NZ and we could pump the credit system again.. But when it comes to the point of negative interest rates and still needing to pump the system, what you end up with is Japan. China's long term future could be a continuing success story, however it could also become the next Japan and lose a couple of decades. What impact will that have on the nations that rely on them? What pressures will it create in their society? How long will the 'home team' hide the reality from their people, Closed door politics (one party rule) is going to get very hard to manage in the digital age and don't forget that in the last crisis in 2008/09.. I-phones and smart phones were in their infancy, yes a few people had them but most of those phones didn't have a camera as well as all the mod cons they do now. 10 years on and information and access can spread like wildfire, even in China. I think Central banks may have a really tough job on their hand because last time around it was a global crisis, this time around we have the added concern of more nationalistic politics taking hold around the globe (apart from in New Zealand) because we're diffrunt? Or are we to seeing a shift towards a more nationalistic sentiment?

Nic, I think the banks have changed their position from repayment of loans to servicing them. At the turn of the century (2000, I ain't that old) I was acquiring a few rental properties. When i sold them I was able to payback the mortgages without excessive break fees. today I understand that where a person wants to pay back a mortgage before it's term it up, i.e. early, the banks now charge them for the lost interest payments. This is a significant shift that is about keeping debtor entrapped in debt, rather than helping clients get ahead?

Similar in the UK. Generally people fix mortgage for 2 -5 years, but there are redemption penalties usually around 3% of the loan balance if paid off in full during the first year of the term, 2% in the second and 1% in the third. This reduces the movement of borrowers when good rates come up elsewhere and also means that if an investor fails to sell at the end of the fixed term then the penal rates of floating mortgages (usually a couple of percentage points higher) mean that they quickly re-fix to a lower rate rather than bear the costs of too long off the fixed rates. Similar thing is happening here now.

Appreciate your response..

My worry is the future, ie, now with Prices rising (all good for RBNZ to say, its mainly due to Oil), but its still stinging people, and masssive amounts of debt out there, how are they going to balance the possibility of retaining low inflation and reining in debt

Central Bankers can't fix the problem, David. Lomborg was just plain wrong (purposely, is my assumption) and Julian Simon took it to extremes suggesting that copper was in our heads. But their problem is all the same one - attempting exponential growth on a finite planet.

If you want to do that growing virtually, I have no problem. But when you want to buy physical stuff - which is the end spend for most folk - you are chewing into the planet. The end-game comes rapidly, the mid-game heralds the last possible 'doubling'.

Central Banks can't create physical stuff - they can only print numbers. Those numbers represent the expectation that the future will supply physical things. More physical things. QE was a bet without underwrite - meaning the numbers have to be reduced in buying-power. Whether that happens gradually or collapsingly is the only question in town.

There is no fiscal/monetary firepower capable of 'dealing' with' ultimate scarcity. Lorax 101. Have a nice day.

Would be interesting to see the appetite for $211b in securities, especially in the short term offerings with the volatility in the market.

Also, when the Canada and Japan mentions above are the only good news on 90s at 9am it doesn't really help to perk up the Friday morning.

"File it under “what were they thinking?” In March 2015, confronted by a severe external monetary squeeze, the PBOC made a truly radical choice. Maybe it was that for a few months anyway things looked a little better. The eurodollar system had practically melted down globally first on October 15, 2014 (collateral) and then in December 2014 and January 2015 culminating with the breaking of the Swiss National Bank. February and March 2015 were so much better by comparison."
https://www.alhambrapartners.com/2018/10/17/not-a-good-start-for-chinas-...

An indication of Chinese concerns. Pledged shares http://data.eastmoney.com/notices/detail/600490/AN201810161214503790,JUU...

Thankfully the Japanese only really speculated in their own property market in the late 80's and 90's. China, well that's a slightly different story because they've managed to speculate (with pledged loans and cheap credit) pretty much everywhere. How will it impact the smaller cities where the concentration of speculation has been at its greatest?

18
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David, I keep thinking this and it’s time to write it down. As an ex-financial markets guy, with a small personal portfolio to manage, I find your morning summary to be far and away the best, pithy but meaningful write-up available anywhere in the market. And I’ve read a lot of them - Reuters, Bloomberg, NZ brokers, NZ newspaper websites, WSJ, Marketwatch, IG and similar brokers.. I appreciate the local content / relevance particularly, but even aside from that, it beats anything else globally. Congrats!

Thank you.

It is well deserved praise David. The coverage each morning is exceptional and helps to encourage some very good discussions which just don't happen on any other news site I've come across.

Sure, opinions will always differ on subjects, but what's important is that the debate takes place.

Absolutely David, from someone who's been here since you had hair.

To jump on the bandwagon as well, thanks! Interest.co.nz is what news should be, relevant and without the fluff or agenda of others. Plus I do enjoy a dabble in the comment section every now and then.

The race to the bottom continues in spite of all the machinations of the central banks.The only solutions the RBNZ has is cheaper debt(OCR) and then the bail in of depositors with the OBR.

Given that Australia is now looking at a 20% drop in house prices, if NZ was to suffer a similar fate would the banks here go bust with only a 15% ish capital ratio
https://bankdashboard.rbnz.govt.nz/capital-adequacy
ANZ, BNZ, Westpac and ASB look the most over exposed
https://bankdashboard.rbnz.govt.nz/asset-quality

It's very interesting to look at and when you factor in that 1/3 of those business loans are to the construction sector it just shows how dangerous the exposure to housing is..
Westpac are still my short bet for the first bail-in. When their CEO came clean in Australia about 50% of the loan book being interest only (October 2017) that was the warning signal.
There are more construction cranes on the East Coast of Australia than there are in the US at present. What happens when those houses come on stream and there is no Chinese cash to prop up the prices?

https://www.youtube.com/watch?v=EG3fou1E6os

Anyone noticed that nowhere on the international financial news is anyone using the " R " word ?.......... Recession

Its like we are standing on a railway line staring at a train in the form of a Global Recession coming towards us, and no one has any idea what to do next

Boatman,
It does seem that a few words are missing from the vocabulary, although the 'R' word officially only applies when referencing 2 quarters of negative GDP. For now the US are avoiding that by adding $7 of debt for every $4 of 'GDP growth' Is it real growth?

economic decline · downturn · depression · slump · slowdown · trough ·

credit crunch · credit squeeze · stagnation · stagflation · hard times · bust - itsy bitsy gully..

Not seeing many of these being used either, Porquoi? Because 99% of the populous only nourish their brains with what the MSM feed them and the MSM are under the control of the money - it's the same in NZ

It makes more sense when you believe that it's not the US$ that is the worlds reserve currency but the Euro $.
Thats why China is struggling, it has to replace unavailable Euro$'s with US$ and it's just not that easy. Yes it's deflationary.

The central banks have been very successful in creating enormous bubbles everywhere.as well as fuelling a continued debt mountain which has reached around $275 trillion.
Whats their next trick money directly in the people bank accounts and
Yellen says Fed purchases of stocks, corporate bonds could help in a downturn
www.reuters.com/article/us-usa-fed-yellen-purchases-idUSKCN11Z2WI
Central Banks Could End Up Owning Every Asset In a Country
www.bloomberg.com/news/articles/2018-04-03/the-tokyo-whale-steps-up-with...

but Euro $'are outside banking regulations, how big a problem is anyones guess but looking at whats going on in China and EM's I'd go with a very big deal.

It would be more cart before horse, ie the central banks react to the "free market" melt downs, so its more the ambulance at the bottom of the cliff to catch the mess and creation.

" It used to be that if the US sneezed, the whole world would catch cold. Placed in terms of how the global economy worked, the point was easily made that US demand pretty much directed how it would fare for everyone else. Without US economic growth, the world would surely stumble as it had throughout modern history.

Apparently, this is no more if US central bankers are to be believed. The minutes to the September FOMC meeting were released yesterday and contained within the ball of contradictions was this gem:"

This cannot be good

https://www.cnbc.com/2018/10/18/china-stocks-plunge-amidheavy-selling-in...

Pledging shares for loans, in a stock market that has plunged over 20% this year, is there a point where there is not enough shares to cover the loan???

20%? Shangjai composite index down 30.15% since Jan 24. This is well beyond correction and into crash territory.

Since China’s reopening, it’s been a huge mess and not just in that place. Shares have just about crashed, the Shanghai stock index (SSE) is down almost 12% just in the nine sessions since traders came back from the weeklong National Day Golden Week holiday. That’s a liquidation, not at all surprising given the signals for more monetary tightness projected by authorities in the coming weeks and months.
https://www.alhambrapartners.com/2018/10/18/running-holidays/

by Stephen Hulme | Thu, 01/06/2017 - 16:13
up7
Special Report: 'Ghost collateral' haunts loans across China's banking system

In some cases, collateral that has been pledged simply doesn't exist. In others, it disappears as borrowers in financial distress sell the assets. There are also instances in which the same collateral has been pledged to multiple lenders. One lawyer said he discovered that the same pile of steel was used to secure loans from 10 different lenders. Read more and more

https://am.jpmorgan.com/blob-gim/1383258499796/83456/WP-GL-China-repo-ma...

https://www.reuters.com/article/us-china-collateral-fake-specialreport-i...

the same collateral pledged to buy houses in AKL?