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US data tame as Q3 GDP awaited; ECB stays with unwinding despite weakening; equities up; China SOE risk revealed; Aussie budget improves; UST 10yr at 3.14%; oil and gold little changed NZ$1 = 65.2 USc; TWI-5 = 69.7

US data tame as Q3 GDP awaited; ECB stays with unwinding despite weakening; equities up; China SOE risk revealed; Aussie budget improves; UST 10yr at 3.14%; oil and gold little changed NZ$1 = 65.2 USc; TWI-5 = 69.7

Here's our summary of key events overnight that affect New Zealand, with news of the size of the risk to global financial stability from the Chinese SOE system.

But first, American business spending on equipment appeared to have remained slow in September. Military spending held up the data. And the goods trade deficit widened further as rising imports outpaced a exports. US economic growth has clearly moderated in the third quarter. In fact, tomorrow morning we get the first official reading of Q3 US GDP and the consensus is a "+3.3%" annual rate in their terms. Year-on-year growth (the usual international measure and how New Zealand reports its growth) is expected to come it at just under +3% pa.

Pending home sales were also weak, with this September measure down -1.0% from the same month a year ago. Only in the South is this metric higher than a year ago. A lack of inventory of moderately priced homes and rising interest rates affecting affordability are the factors restraining the US housing market.

Across the Atlantic, in holding its official settings unchanged, the ECB acknowledged that the eurozone’s economic growth momentum has weakened, but confirmed it would press ahead with plans to phase out its QE policies this year. This will be particularly hard for Italy which has been counting on monetary stimulus after it has been blocked from fiscal stimulus. After outpacing the American economy over the past two years, the eurozone economy has lost traction in recent months. A closely watched survey of business managers suggested growth is at its weakest level in about two years.

Despite all this tame economic news, Wall Street is higher today, recovering all of yesterday's losses although no more than that. Shanghai finished yesterday unchanged, a rare day of no losses.

In China, their government has for the first time tallied its total financial assets across its sprawling network of thousands of state-owned companies, warning in a report of poor management, bad planning and the urgent need for a system to provide legal accountability and supervision. The scale of these assets is impressive - they are worth about US$35 tln, or about equivalent to half the world's annual GDP. There is huge global systemic risk in such a pooly managed system.

In Australia, insurer QBE who has a big business with lenders mortgage insurance (LMI) sees continuing falls in house prices in NSW, Victoria and Queesland until at least 2021. But the scale of these declines are not large, according to their analysis.

And surging corporate and personal tax collections have lifted the Australian federal budget into balance for the first time in a decade, as their coffers are boosted by both healthy global and domestic economies.Data released yesterday showed the budget is AU$9 bln better off in the first three months of this financial year, compared to the May budget forecasts. Credit ratings agency Fitch Ratings has confirmed Australia's AAA sovereign rating.

The UST 10yr yield will start today at 3.14% and marginally firmer from this time yesterday, with their 2-10 curve still under +27 bps. The other yields we follow include the Aussie Govt 10yr which is at 2.63% and down -3 bps, the China Govt 10yr is at 3.57% and unchanged, while the NZ Govt 10 yr is at 2.59% and down -7 bps. Swap rates moved lower yesterday too, and flattened. In fact our 2-10 swap curve is at its flattest since November 2016.

Gold is at US$1,229/oz and up +US$2 from this time yesterday.

Oil prices have stayed down again today and holding at a six week low. US oil prices are just under US$67.50/bbl. The Brent benchmark is just over US$76.50/bbl.

The Kiwi dollar will start today unchanged at 65.2 USc. On the cross rates we are at 92.1 AUc, and at 57.3 euro cents. That leaves the TWI-5 at 69.7.

Bitcoin is now at US$6,437, again little-changed yet again. 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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34 Comments

are we in recession? it's starting to feel like it.

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not yet, which is surprising as most of our last growth was built off importing people and house price inflation allowing people to borrow and spend.

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So not much different to a pyramid scheme or ponzi?

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I know - despite the fact that house prices have barely come down a few pp's in Auckland but still rising everywhere else and migration growth at the current 'lower' levels is still contributing 1.5% to NZ's population each year.
As I said in an earlier post, our productivity and per capita economic growth is down in the dumps despite rapid population growth and low interest rates. How deep in recession would we be if and when interest rates and net migration return to long-term average levels?

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100%. Its amazing how many late 20s/early 30s professionals who have returned from their OE are starting to head back overseas again.

I got made redundant 10 months ago and have been self employed since then. Happy to take my time for the right role to come about. Its pretty clear however that NZ businesses are not creating new roles, and people aren't resigning from their current roles. At times it has been weeks between calls regarding a role I applied for.

Two weeks ago I decided to start looking in Aussie. Since then I've had phones calls every day, four interviews and two second interviews and another next week......all without leaving home! Converting back to NZD my take home salary if I acquire one of these roles will be 65% higher than what I'd get in NZ. Its a no brainer what I do.

Yes, the Aussie economy may not be too crash hot but with five times the population of NZ there is literally fives times the opportunities.

Don't be surprised if those Kiwis with a lack of obligations start heading for the door, quickly.

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Is it a year ending with 8? If yes, then yes

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We are doing great and life is wonderful!

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You have been on interest.co.nz for more than eight years now saying a major recession is imminent, pointing to doomster references. I am sure you will be right one day, but it will have been a very long wait. After all, eight years is actually longer than the traditional business cycle ...

:)

You may have to wait even longer. I got a press release from Winston Peters today proclaiming that "one year on, and New Zealand has a brighter future". What if WP's is right for a change? You will have to wait even longer for your recession.

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There's a couple of participants on this site who have been claiming that PropertyPrices are going 2Crash for the past 8 years. Here's to another 8 years!

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Just my opinion David, if you don't like it have others. I never thought Central Banks would take such extreme action and let asset bubbles flourish all over the place. In my business I watched as newcomers loaded with debt push valuations to extremes. At the same time costs were rising way beyond official inflation figures.
Interest rates at 5000 year lows have left us with the highest asset values to earnings in history, dangerously exposed to market shocks.
Im still on the sidelines.

After every boom I've witnessed in my life there has been a correction perhaps this time is different, I think the 144,000 people sleeping in tents tonight in California tell another story.

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AJ...In support
History suggests (all the way back to the Tulips) that every 70-80 years or so (pretty sure David won't remember the last one) what looked like a recession turns into a depression.... We've merely extended the timeline on this one.... For those that want a look, go back to the1930's, (Great depression) 1850's (started with British Bank failures) , 1770's (End of East India bubble, Bengal bubble) , 1720's (south sea bubble), 1640's (End of Tulip mania).... these tend to end with a war.. Printing presses merely pushed back the inevitable depression and spared war...for a while....20 years perhaps? Was the GFC really that big? Not really, most businesses sailed through and have continued to be crap ever since... earnings isn't there and growth only comes from adding more people to transact.... I have a feeling that we may not have seen the true effects yet but they are slowly building.... At some point those that are working 12-14 hour days to earn our worthless paper (Western printing) will have had enough of exchanging labour and sweat for used 'shit roll'.... Until then, let's all enjoy it and carry on oblivious..

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AndrewJ and Nic, at some point you are going to have to face up to your obsessional madness. I suggest seeking professional help soon.

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I don't comment on house prices as a rule. Im more interested in the nuts and bolts of how things work.
High house prices are what happens if you let banks create loans in non productive assets and create asset price increases that feed of each other. I own a house and a small cottage, I don't own any investment properties although I have in the past.
The reason for my recession question is because in the last week, three friends have commented that their businesses are very slow at present. My friends in real estate are still foot to the floor, but are they linked the real economy.
Im a fan of Orwell, this world is changing and Im not sure it's for the better.

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ZS - when you say seek professional help, do you mean a visit to the nearet real estate agent for some therapy?

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Hi David

Sat up all night waiting for the press to publish Winston's press release that 'one year on, and New Zealand has a brighter future," and do you know what, none of the press have released it...

Big opportunity to get the scoop on the MSM first thing Saturday morning.

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Shunning the naysayers, yesterday ,I went long shares,doubled down on AMP,slapped down a deposit on another Auckland shelter,and brought more breeding stock for the ostrich farm. Financial genius,almost an expert,I must be close to being called an economist.Morning trip to pharmacy to pick up yesterday's prescribed meds.

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Cowpat - I am not a financial advisor - I work for my pittance - but there is a gaping hole in your investment strategy - no Fonterra. But I do have a cheap dairy farm you may be interested in ...

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As long as you have residency or else belong to the Nat party

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Nah...I am still Asian, have not bought my National Party Hat...as it won't wear to well with my forebears..I am just here for the ride and the State Pension, once I become a resident. I did contribute to the National Party, last year, as I had faith in the then Leader, but he let me down, none too gently, when he ducked and dived off somewhere else. It was an expensive mistake I shall not make again..Cost me millions..now billions.. for no reward at all. Oh ! and that fellow Bridges, I overheard he was not fussy about who bought into his little scheme, so he will not get my vote, when able. OOPS...wrong ID.......must swap hats......this Fake news is getting to my brain...cannot remember who I voted for and when.....XI...Leader CCP.

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Sorry - I only take Financial advice from my dearly departed Nigerian uncle. He has millions in the bank.

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I can help you move those millions around, the World,just send me your email address and bank account number and I will put it in my Cayman Islands swap shop account for all my Brethren and Relatives..

You can come and stay with me...when sorted...We have influence. Noncents...we do not mind. Prefer US dollars.

Luv and Best Wishes,

Uncle Sam and your dear Uncle Donald.

(Might as well get a chip off the old Block, no names, no pack drill..it is Friday...after all )

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A cheap dairy farm? Meh - that's small beer. I have an Awkland Tram which needs - oh - quadrillions. Go long or go home....

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"Their Luck Is Running Out": Why Albert Edwards Expects A Chinese Hard-Landing
https://www.zerohedge.com/news/2018-10-25/their-luck-running-out-why-al…

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If you simplify it, its hardly surprising, they developed quickly, which is fine, but they went into serious overshoot with a falling population, and they will have to deal with that because even canceling the one child policy will have little effect, their people are sophisticated and educated, they will have few children, same as in the west and Japan. They need to turn it into t a positive but I fear they are going to try use the rest of the world to keep it going, that belt and road initiative the big driver there. Japan used the rest of the world as well, to keep themselves going, but they did it a bit more wisely, with quiet investment in growth in other countries.

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Brilliant article. Thanks Andrew. Fiscal recklessness looks good but eventually the credit card gets declined. 11% of GDP. Who knew?

Chinese money has been flowing here because there is nowhere good in China for it to flow to.

https://www.zerohedge.com/sites/default/files/inline-images/China%20soc…

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The challenges, and the reason for the fund's shuttering are the same as those faced by so many other value investors: "Today, we are finding it exceedingly difficult to deploy capital with an acceptable margin of safety," wrote Eli Weinberg, SPO co-managing partner, in a letter to investors seen by Bloomberg.

"Businesses we admire, in well-positioned sectors with attractive growth prospects, are priced to perfection",

and in some cases, thanks to central banks, well beyond.
https://www.zerohedge.com/news/2018-10-25/5-billion-hedge-fund-spo-shut…

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"Today, we are finding it exceedingly difficult to deploy capital with an acceptable margin of safety," reminds me of the situation we had with finance companies a decade or so back, awash with money with no decent investments to make, so they lent to boy racers so they could lower their cars, install big bore exhausts and thumping bass speakers in the back of their rice rockets. That didn't end very well, either

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"I looked at the Bank of England data, and it was 3.5% of business lending went to manufacturing, a century or so ago that number would have been more like 80% and that’s a trend that has been going on for a long time. And you compare this 3.5% going to manufacturing with 75% going to either finance or real estate and you can see that something’s wrong, finance has become...disconnected from the real economy.”
(Comment from Australia)

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$35 trillion in fantasy assets in China? "Poorly managed" is presumably code for loss making. Assets that lose money are of questionable value. The CCP needs employment or they lose their mandate. So they create the money to keep these businesses going. Eventually reality must bite. Presumably that means the Yuan goes down 20% to 50%. The Chinese model is the same as the Japanese model, but in a more authoritarian way.

Never bet against America.

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The US needs to deal with a “huge deterioration” in the standards of corporate lending instead of focusing on deregulation, Janet Yellen has warned.

https://www.ft.com/content/04352e76-d792-11e8-a854-33d6f82e62f8?segment…

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Talk about brass neck. Sloppy corporate borrowing practices caused by low interest rates? Surely not?

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One thing about corporate borrowing that really bothers me is the amount of loans for the purpose of share buybacks in the US. I'm sure a lot of the debt is in 1 year bonds and with interest rates increasing in the US there are going to be a lot of corporate financial problems when they roll over the debt.

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Ooops, dp.

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Thud! Sept New Home Sales Plunge 5.5% from Dramatically Revised Lower August
https://moneymaven.io/mishtalk/economics/thud-sept-new-home-sales-plung…

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