US homes sales fall; CLO risks jump; Canada inflation falls; Chile raises rates; China growth slows; Italy contagion spreads; NZ wealth ranks high; UST 10yr 3.20%; oil and gold unchanged; NZ$1 = 65.9 USc; TWI-5 = 70

Here's our summary of key events overnight that affect New Zealand, with news of the fast rise of the CLO, a close cousin to the GFC's CDO

But first in the US, home sales volumes fell in September by -4.1% from the same month a year ago and the most in over two years as the housing market continued to struggle despite strength across the broader economy. First home buyers account for 32% of all sales, a proportion that has been rising for a year. The median existing-home price for all housing types in September was US$258,100 (NZ$391,600), up +4.2 percent from September 2017. September’s price increase marks the 79th straight month of year-over-year gains.

An overnight NY Times report is exposing financial market risks from CLOs, Collateralised Loan Obligations. These are just like the GFC's CDOs (collateralised debt obligations that had high risk mortgages backing them), but these new CLOs have high risk corporate loans underpinnimg them. The markets are growing very fast and now exceed US$600 bln. The explosion comes as the US Administration unwinds regulations on Wall Street allowing risky financial 'engineering' to resurface. But it's not the only type of debt growing fast. US student loans now exceed US$1.5 tln and with interest rates rising there, the pressure on these borrowers will magnify.

In Canada, they had a surprise fall in their rate of inflation. It came in at +2.2% in September, down sharply from +2.8% in August. Easing petrol costs were behind the reduction. A surprise fall in the level of retail sales in August was also reported, a surprise because a rise was expected.

Chile's central bank has raised its policy rate by +25 bps to 2.75% and that is despite inflation easing there. A strong labour market and rising growth were behind the decision to tap the brakes a little at this stage.

China’s economy grew at a slower-than-expected +6.5% in the third quarter, the weakest since the global financial crisis. Retail sales however rose faster than expected, up +9.2%.

Yesterday in Shanghai, stocks meandered unchanged in the morning session, but suddenly sprang to life in the afternoon session, jumping an impressive +2.6% on the day, all happening in the one hour to 2:15pm their time. It has all the hallmarks of a stage-managed pump by the 'home team'. Today, Wall Street is ending the week with an unchanged day, which will make it an unchanged week.

Concerns over Italy’s finances spread to other European bond markets this week, in a worrying sign for investors who until recently hoped that market jitters would be contained. The gap in yield between 10-year Spanish bonds and haven German debt hit its widest level since April 2017 during Friday’s session before narrowing later in the day, In the US, benchmark yields rose as investors increasingly accept that the Fed will keep raising rates over the next year.

You might find this item a little hard to believe, but according to the Credit Suisse Global Wealth report, New Zealand has the sixth highest average wealth-per-adult in the world. That is a drop from fourth place last year. Further, they project that in five years we will hold our place in these rankings with a gain on average of +4.8% per year. Only Canada is expected to do better among OECD countries. Australia is ranked second in this survey behind Switzerland, followed by the US, Norway and Belgium, and then New Zealand.

The UST 10yr yield is ending the week higher at 3.20%. Their 2-10 curve has dipped however to +29 bps. The Aussie Govt 10yr is at 2.70% (up +1 bp overnight), the China Govt 10yr is at 3.58% and down -1 bp, while the NZ Govt 10 yr is at 2.69% and up +1 bp. New Zealand swap rates are unchanged this week for durations out to three years, but have slipped and flattened for longer durations.

The VIX has eased off a little this week and is now at 20, down from 26 last week. It is still above its average over the past year of 12 and showing that volatility has returned to the markets. And the Fear & Greed index has moved further to the extreme end of the 'fear' side.

Gold is unchanged overnight at US$1,226/oz and that puts it up +US$8 for the week.

US oil prices are little changed today at just under US$69/bbl. The Brent benchmark is now just under US$79.50/bbl. But both are pullbacks from this time last week. OPEC is suggesting that prices could fall from here. The US rig count had a small rise this week on top of last week's jump.

The Kiwi dollar is ending the week noticeably firmer at 65.9 USc, and up almost +1c in the past seven days. On the cross rates we are also higher at 92.5 AUc and that's its highest in 16 weeks, and at 57.2 euro cents which is its highest in seven weeks. That puts the TWI-5 at back over 70 and a good weekly gain of +100 bps.

Bitcoin is now at US$6,432, little-changed from yesterday but a net gain of +3.2% over the past week. This rate is charted in the exchange rate set below.

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

Daily exchange rates

Select chart tabs »
The 'US$' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'AU$' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'TWI' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '¥en' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '¥uan' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '€uro' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'GBP' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'Bitcoin' chart will be drawn here.
Loading...
USD 
NZD
End of day UTC
Source: CoinDesk

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

43 Comments

China’s Economy Is Not Crashing, It’s Worse Than That

https://www.alhambrapartners.com/2018/10/19/chinas-economy-is-not-crashi...

I recall George Friedman saying ten years ago that CCP needs 8% growth to maintain power. I wonder if US policy is based around this, they just need a good supply of popcorn.

China as our second largest trading partner is an issue. Australia as our largest trading partner could be a bigger issue with a negative savings rate and a crashing real estate market. This is an interesting watch (not all of it is correct) but it is a easy watch for those that want a straight forward overview of 'ponzi' mortgage financing and asset bubbles and the risks that are ahead.

https://www.youtube.com/watch?v=QIELN8C-7bQ

On the downside, wealth per adult dropped by more than USD 10,000 in Israel, New Zealand and Sweden

http://publications.credit-suisse.com/tasks/render/file/index.cfm?fileid... page 6

Denial Phase.
Played golf yesterday and the gentleman I played with has been trying to sell his house for the last 6 months. I asked him how it was going. 'A bit quiet', was the response, just one viewing in the last 3 months..
He said he'd had three agents round to see him and went with the highest valuation. 'What was the difference' I asked him? 'Well there were two agents who said around $900,000 and the other said $1.2 million.'

I asked whether he'd given any thought to the possibility that the other agents may have been right? 'No chance, $1.15 million is the lowest he'd go.' - I just smiled and said 'I'm sure it would be alright now that summer is here.' One things for certain though, his new build will be finished by the end of next month and then he'll have a full mortgage to cover with no job to pay for it.

Old real estate guy I worked with years ago said there was only ever one reason why something wasn't selling and everything has a price

Obviously we will rank very very high with such over inflated assets, without looking at other measures such as debt...

Actually, their definition of 'wealth' is assets less debt.

I tend to take the view that debt represents not so much the ability to pay, but the amount of wealth available to be extracted.

And I note it's an average - perhaps reflecting the degree of inequality of wealth (i.e., growing concentration with a smaller and smaller elite class?) in our society?

Based on whose valuations of what, David?

'Valuers' valuing housing via what next-door sold for, when next door was valued at...by....

Where's the base-line?

Australia's Property Market Black Hole - They won't be at number 2 in the Wealth list by this time next year. Wealth? Or a credit bubble? Good luck trying to mark to market house prices when nothing is selling. Sound familiar (NZ has over 35,000 properties for sale and at current sales rates there is already stock in the market for the next six months. Housing shortage? or Credit shortage?

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

There are a lot of sold signs around my place.
You know, we can categorically state the "nothing selling" statement is false. 5506 properties sold throughout NZ last month.

What about the 30,000 that didn't sell last month who are now facing even more competition from the rising level of stock that was added during September?

In my hood, Kohimarama, the lowest number of open listings on Trademe was 17, it went to a high of 24 and has just dropped to 21 with the sale of 37 Southern Cross Road, on Friday. Three new listings were made in the last week, 8 listings are more than one month old. Sounds like a normal market to me. With some 2,900 dwellings in the suburb and Core Logic estimating my homes value at 99.1% of CV I’m struggling to see why you are obsessed with housing as there is no overhang and properties are moving.

Still taking comfort from looking at the Core Logic data for your house every other day? Obsession?

It’s on my banking app and free. I treat it as a data point that is regularly updated, consistently observable and if it’s good enough for my bank to use as a portfolio security valuation input I figure it has some rigour to it. If/when your much prophesied market collapse happens I’ll still be quoting it. In the meantime it appears that people are getting on with their lives and buying/selling in a normal market, at least in my corner of the World.

Yep and ... next door was hydraulicked up by money out of a washing machine

That’s interesting. Is it the best measure as debt pushes asset prices up in most cases? Debt to gdp would surely still be a better measure of wealth?

https://www.youtube.com/watch?v=vCqEQ-7Fyc8

No chance that the Australian's will be number 2 in the wealth index by this time next year.... That index may have just been a list of which markets have the most over-valued housing markets (largest household credit bubbles)

With the absence of overseas based marginal gamblers, Auckland crème de la crème now largly selling below 2017 CV; https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=121...

When adjusting for inflation, this is a pretty poor showing and for those with their eyes open, won't present a surprise. The fact that in the absence of a global shock, this poor performance could easily last at least a decade, won't deter spruikers continually arguing their unbanked double digit gains up till 2016! Gaining equity has just become a monumental headache for the unprepared.

Hahaha.....

If people only...........

Hahaha.. sorry I can't stop laughing just thinking of some folk on this site

So much for the resilience of the leafy suburbs.

There's theory and then there is reality ...

Hmmm, that article mentions a property at 1 Orakau Ave selling for 1050k. That is a good buy price for this property. According to the ZS system it should have fetched closer to 1200k going by its sales history.

https://www.barfoot.co.nz/764174

Confirming that the property behind it sold for 1160k in August 2017 and it is smaller with only a single garage although very similar. It has an RV of 1380k compared to the one above which is 1425k

https://www.barfoot.co.nz/601244

The owners of 1B will be very upset about this I imagine.

Number 1 is actually a two bedroom (as is #1B) although the lounge has been partitioned to make a third bedroom. This should have enabled it to fetch more.

At this stage we only have the Herald's report on the sale price. It would be good to confirm this price from B&T. If it did go for 1050k it is a genuine low price for a "leafy suburb" home.

I'm inclined to think the Herald has misreported this. No doubt it will turn up in the auction results pages soon. The other properties mentioned seemed to follow the rule. The CV is not as important as the sales history in determining what price it should have got.

I have heard on the grapevine that bridging finance is starting to get a lot harder to access.

Quite sobering reading on the Christchurch oversupply.

Keeping it low key though – don’t want to spoil "someone’s" long weekend.

https://www.stuff.co.nz/business/property/107971093/is-christchurch-the-...

It’s not oversupply, it’s just right. Affordable housing. If you are starting a business consider Christchurch. Low house prices = lower cost of labour.

Well put. Plot prices start with a 1, house plus plot in the high 3's to mid 4's. Awklanders - please compare, and do try not to get those tears in yer keyboards...

The Credit Suisse report also says NZ has 155,000 "millionaires", where a millionaire is defined as anyone with a net worth of more than US $1 million, or roughly NZ $1.5 million.

Most 2-adult-person households will not have "millionaire" status, as that means a household with NZ $3 million net worth. Even if we pretend that Auckland house values are as high as their prices, there can't many households with NZ $3 million of net worth.

What about 1-adult-person households? Perhaps elderly widows or widowers, who own their NZ $1 million house individually plus NZ $500,000 in other assets.

Hard to imagine there can be as many as 155,000 individuals in NZ with net worth of NZ $1.5M +.

That's 3% of the population, I think your imagination is too limited

.

.

When those billionaire brothers rode into New Zealand loaded with cash , built up over years of hammering nails and a little help from the Chinese state , the OIO and John Key backed their overpriced bid for the Crafar farms because of their undoubted business acumen and their absolute lack of farming skills. Frustrated by the failed Lochinver station bid and a few following state threats, ( whats new) , they traveled across the ditch and attempted to purchase the Kidman farms , this time blocked by wily Morrison. So they took their bags of cash to Brazil, soybean heaven taking a US 286m stake in Fiagril , followed by a 253m stake in Belagricola. Unfortunately the wheels are coming off quickly for Hunan Dakang.
1/ A reminder http://www.sharechat.co.nz/article/e734a83e/milk-nz-holding-surprised-by...
2 Things could be better /http://www.midianews.com.br/agronegocios/grupo-chines-poe-a-venda-negoci...
3/ A lot of pain, hows the local currency https://www.yicaiglobal.com/news/international-food-drop-its-hot-potato-....
4/ Its share price .https://www.bloomberg.com/quote/002505:CH.
Will their New Zealand assets be put on the chopping block soon , given that its controlling unit has already pledged all of its shares and its copper . A little more uncertainty on the stock market should see margin calls.

Canada legalised Cannabis, New Zealand gave a free pass for Cocaine...........A bit RICH.......but true.

Seems very, very, very good reason to get on that RICH LIST.......ASAP.........EH...Kiwis.

Free property ladder, free pass for this n that.....life's all good.....snort.

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=121...

My mate Kevin in California bought into the Canadian Pot business with his 401K. I talked to him yesterday to see how he was getting on, he got in at .14c and got some out when it hit $8 the rest he sold at $7, he made 2.1 million dollars in just over 3 months, as long as it stays in his 401k it's tax free. Not bad for an ex DEA agent.
I see Peter Thiel was also big in the Canadian pot business.
https://www.bloomberg.com/news/articles/2018-09-19/thiel-backed-fund-hit...

"New Zealand gave a free pass for Cocaine"

How?

Nz rich lister discharged without conviction for importing Cocaine and something else (Methamphetamine?). Not a huge quantity (13grams) , and supposedly for self-medication.

A rich prick getting off scott free for something that would most likely get most people a holiday in the iron bar hotel.

'Since reopening from its Golden Week National Holiday, Chinese markets have plunged. The benchmark Shanghai SSE stock index is down nearly 12% (through yesterday) in just nine trading sessions. It is an obvious liquidation event. The loser in the trade war?

That’s not really the game, however. The real one that is being played in the dark is one at which no one will win. There can’t be a winner. The end result, as we’ve seen time and again, is only variability amongst all the losers. It’s not at all the same to declare we might’ve lost the least, as will be the temptation here, certainly not after these last eleven years."
https://www.realclearmarkets.com/articles/2018/10/19/central_bankers_can...

"It Will Not End Well" - How Gibson's Paradox Has Been Buried

https://www.zerohedge.com/news/2018-10-20/it-will-not-end-well-how-gibso...

"The Chinese Bubble is again at the precipice. The last comparable episode, back in late-2015/early-2016, unfolded in a different global backdrop. China implemented additional stimulus measures, while the ECB and BOJ boosted QE and the Fed postponed "normalization". For the most part, rates were near zero globally and bond yields were declining. Pricing pressures were still leaning disinflationary. Global risk markets were neither as inflated nor as fragile as now.

That crisis episode saw the PBOC employ $100s of billions of reserves to stabilize the Chinese currency, in a global backdrop approaching $2.0 TN of annualized central bank liquidity injections. Back then, China was facing a relatively stronger economy and a booming apartment Bubble inclined for "Terminal Phase" excess.

The Chinese have considerably less flexibility today. The burst EM Bubble poses major financial and economic risks for a much more fragile Chinese system. At about $3.0 TN, China's international reserves are down a (mere) trillion from 2014 highs. And pushing more Credit, investment and speculation into Chinese housing at this "Terminal Phase" is a perilous proposition.

For too long China needed to rein in Credit growth. They made an attempt. Not surprisingly, the results have been unsatisfying. The risk of Bubble implosion has now incited yet another round of stimulus measures. But Bubble risk is indomitable, risk that expands parabolically during the "Terminal Phase." I believe there are a number of important factors - domestic and international, economic and financial - working against Beijing's current stabilization efforts. Chinese officials might be at the cusp of finally losing control. The Trump administration provides a most convenient scapegoat. "
https://creditbubblebulletin.blogspot.com/