Strong US job signals push up inflation expectations; Canada growth up; China expansion slows; Beijing readies new stimulus; RCEP progresses; UST 10yr at 3.15%; oil and gold dip; NZ$1 = 65.2 USc; TWI-5 = 70

Here's our summary of key events overnight that affect New Zealand, with news stresses are building (for different reasons) in two of the world's largest economies.

In the US this weekend we will get the October non-farm payrolls report. Analysts are expecting a gain of +193,000 as a bounce from the rather weak September result. Today the ADP employment report showed a healthy gain of +227,000, boosted by strong rises in hospitality. the health sector, and other office-type professional jobs.

And the American employment cost index was up +2.8% year-on-year in September, the same rise as for June. There may be wage-push inflation building now, a trend sure to be being watched by the Federal Reserve. Another interest rate hike is expected there before the end of the year.

Wall Street likes this data and is up 1.7% today, meaning it is even over the past week and risk is back 'on'. Benchmark interest rates are rising too. Swelling American deficits will also mean they will have to pay more for their public debt, rapidly increasing the share interest takes from taxes (and soon more than the US Defense budget).

In Canada, their August reading for economic growth saw it pushed up to +2.5% and better than was expected. That is their seventh consecutive month of growth. Another interest rate hike is expected there as well, also before the end of the year.

In China, their economic expansion continues to slow. Official data out shows factory expansion at a virtual standstill, while service industry expansion is cooling but is still at a healthy level. Both measures are expanding at their slowest rate in over a year.

Beijing is reacting. Further stimulus measures are on the way, as the current piecemeal approach isn’t being credited as working well enough. It appears that China's leaders have no intention of caving in to US trade pressure, so are hunkering down for a longish battle in the overall trade wars.

One element of that is playing out in New Zealand right now. Delegates involved in the final round of negotiations for the China-backed Regional Comprehensive Economic Partnership (RCEP) are here and have reportedly agreed on the dispute settlement chapter. With the TPP now ratified, multilateral trade deals elsewhere are getting renewed impetus.

In the EU, both their inflation and unemployment rates came in exactly as analysts were expecting. Inflation is at +2.2% in October (it was at +1.4% a year ago), while unemployment was at 8.1% in September (down from 8.9% a year ago).

In Germany however, retail sales have taken a bit of a dive and are actually down -2.6% year-on-year to September on an inflation-adjusted basis.

New Zealand has again topped the World Bank's list of the easiest place to do business. We don't score high in every sub-category, but we are the place where it is fastest to establish a new business, much to the delight of some fraudsters. We score 60th in 'trading across borders', and 45th in 'getting electricity'. For 'resolving insolvency' we are 31st.

The UST 10yr yield is +5 bps higher today at 3.15%. And their 2-10 curve is now at +27 bps. The Aussie Govt 10yr is at 2.63% (up +4 bps), the China Govt 10yr is at 3.53% and down -1 bp, and the NZ Govt 10 yr is up +2 bps at 2.57%.

Gold is at US$1,214/oz and a decline of -US$9/oz.

US oil prices are softer again today and now under US$66/bbl. The Brent benchmark prices are just over US$75.50/bbl. Rising supply and falling economic growth are factors pushing the price lower.

The Kiwi dollar is starting today a little softer at 65.2 USc. On the cross rates we are at 92.2 AUc, and at 57.7 euro cents. That puts the TWI-5 back to 70.

Bitcoin is a little higher today at US$6,323, a gain of about +½%. 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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USD 
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26 Comments

The Lessons for Western Democracies From the Stunning Victory of Brazil’s Jair Bolsonaro
https://theintercept.com/2018/10/29/the-lessons-for-western-democracies-...

Great link. He's got it right. 'Drain the Swamp' was to my mind the most successful message DT put out in his campaign. Imagine a US-Brazil bi-lateral trade pact that teamed up against China? Formidable.

And then we have Xi telling his troops to ready for conflict;

https://qz.com/1440601/chinese-military-command-monitoring-taiwan-south-...

And Putin's delivering direct warnings as well;

https://www.politico.com/story/2018/03/01/putin-russia-nuclear-weapons-4...

It's all looking very tenuous.

Borders are more likely to be crossed militarily when countries begin to quarrel over trade.

Which post WW2 border crossings provoked by trade disputes are you referring to ?

"The latest numbers – including the sharp deceleration in M0 Money Supply growth (↓ -110bps to 2.2% YoY in SEP; TRENDING lower) continue to suggest Beijing remains handcuffed by international monetary pressures from providing the degree of monetary stimulus it would need to comp cycle-peak comparative base effects over the next two quarters."

https://app.hedgeye.com/insights/71177-china-s-economy-is-slowing-keep-a...

"Overseas turmoil continues in October. The Chinese government released its Purchasing Managers Indices (PMI) for both manufacturing and services. Each one came in at a multi-month low. The National Bureau of Statistics calculated that the manufacturing version was just 50.2 this month, the lowest level since July 2016. The Non-manufacturing PMI fell sharply to 53.9 from 54.9 in September. October’s index was below 54 for the first time since July 2017.

The direction of China’s economy is no longer in doubt. These sentiment estimates, regardless of their proximity to the 50 line, are consistent with recent economic accounts showing a downturn already underway. Given yesterday’s GDP estimates for Europe, this isn’t an economic development exclusive to China."

https://www.alhambrapartners.com/2018/10/31/continuously-misidentifying-...

Bond Bull Bull

"On February 12, 1999, the Bank of Japan announced that it was going full zero. Japan’s central bank would from that day forward push the overnight uncollateralized lending (interbank) rate to the zero lower bound. Further, it pledged to keep it there until Japan’s economy recovered

Trade war stuff didn’t really hit the tape until several months into 2018. There were some noises about it back in January, but there was also a prominent liquidation in global markets in the same month. If the world’s economy hit a wall in that particular month, which is the more likely candidate for blame?"

https://www.alhambrapartners.com/2018/10/31/china-now-japan-china-and-ja...

New Zealand could be an excellent place to do business, but somehow we don't seem to want to. Is that NZD/USD chart hinting at something? Now what sort of business do we want to be good at? We need businesses that are a good fit to our situation and abilities and can build on those abilities to generate more income.

if it just wasn't so bloody expensive

Yes look what is happening to the currency!
The real currency.

4x4 utes.
Repo numbers are up,
Said repo units being shipped to Ozz, in order to keep the price up here and get leased again there!.

Andrewj. With the expensiveness significantly contributed to by the monopolistic power of dominant conglomerates and our weak competition laws that facilitate this.

Netherlands and Switzerland are placed 36th and 38th in the ranking, lower than Russia and Rwanda.
The tech startup hub of the world with the largest VC capital raised per annum as a % of GDP, Israel, is placed 49th on the list.

up
11

NZ placed below Democratic Republic of the Congo as a place to do business as far as mining executives are concerned. DRC being a really, really, dangerous place. We only like to listen to those who tell us what we want to hear.

The point being that we do need some way of generating decent jobs, and mining is something that historically helped to build the country. We either need to recognise and encourage it, or find something else to replace it. That was why Helen Clarke and John Key went for immigration and tourism, presumably. Result, high house prices, homelessness and a low wage economy.

But, but, we shurely lead the world in quantity of hospo outlets and quality of flat whites.....all a them Barista Degrees, purchased with either Student Debt or (from this year) Free Tertiary Ed from the ever-producing Magic Munny Tree, are certainly not going to waste.... until, and of course, the hospo outlet goes bust. Again.

Mmmmm - coffee. Time for the morning visit to the little Italian....gotta do My Bit...

Yes, funny thing is though, the coffee here is really good compared to, say Britain, where the general standard is pretty awful. Costa coffeee anyone? Ah, the horror, the horror.

And compared to the US as well. And therein lie what I see as the answer to the future - the money is in low-volume luxury goods for the elites, as opposed to high volume everyday goods for the masses.

Agriculture needs to team up with our design/creative community - these folks have the right idea;

It’s a funny old world isn’t it? Sometimes progress isn’t progress at all. Instead of making things better, it makes them an imitation of what they once were.
 At Lewis Road we’ve found some of our greatest innovations have been by going back, way back, to how things were done before compromise crept in.

We don’t ask how to make something cheaper, or how to produce as much of it as possible, we only ask ourselves this: How can we make it as it should be?

That one simple question is the driving force behind every single thing we do, from the people we hire to the packaging we use. Because real progress for us, is what it should be for everyone; making things better.

https://lewisroadcreamery.co.nz/the-lewis-road-story/our-story/

Apply that same premise to all our produce (wool, leather, exotic timber, etc.) and manufacture the finished goods locally.

You are right. Advanced countries should not be in the business of labor-intensive bulk manufacturing.

Our productivity, skill level, wages and living standards as a nation are all stuck in limbo because businesses here are fixated on lowering costs instead of making a strong case to charge premium prices.

https://www.statista.com/page/Made-In-Country-Index

I don't think the majority of NZers know what it takes to generate a well paid job. The research, development, mobilization of capital, of people and resources that's needed. It requires acumen and vision and purpose in what field you are in and a spirit of entrepreneurship. That's really going to eat into a lot of people's meth time.

“Double Whammy of Rising Rates for Us and Our Consumers”: AutoNation
by Wolf Richter
We knew “free money would inevitably end. Affordability would become an issue – particularly around new vehicles.”

https://wolfstreet.com/2018/10/31/autonation-hit-by-double-whammy-of-ris...

Seattle prices fall sharply. New York condo prices nearly flat for the year. First feeble declines in San Francisco, Dallas, Denver, etc. Something is afoot.

https://wolfstreet.com/2018/10/30/declines-in-the-most-splendid-house-pr...

"On Wednesday, the US Treasury Borrowing Advisory Committee unveiled that it will increase the amount of debt to be sold at the upcoming quarterly refunding auctions to $83 billion from $78 billion three months earlier. This will be the fourth straight quarter of increasing refunding auction sizes and is driven by the soaring US deficit shortfall, which in 2018 hit $779 billion the highest since 2012, as well as the Fed's ongoing balance sheet shrinkage."
https://www.zerohedge.com/news/2018-10-31/treasury-announces-record-debt...

"... doing away with the public-private partnerships, which have been heavily criticised for failing to deliver value for money..."
And which direction is New Zealand headed? Scrapping PPP doesn't appear to be it! (eg: the new stadium suggestion for Auckland)

PPP's are good for some things bad for others, if the item has a long life span ie a toll road build to last 100 years why not, if its a school building with a life span of 20 years not so
the item needs to be paid off over time and then handed back about 1/2 way through its useable life span so the state derives the benefit whilst being able to pay off over a longer time frame.
the trouble is ideology
labour what to fund upfront and own everything. so everything has to wait to be built
national don't want to own anything and believe deep down in user pays, so you get now but you pay and pay and pay and it ends up costing three times the value
somewhere in the middle is the best for both worlds for cashflow and owing the assets

If you look at the Z Energy results the fuel review looks like it is going to be a total waste of tax payers money.

I dont know about that! Z has always charged a premium and I think some people have been prepared to pay for that but with the spike in prices that behavior is changing.

Given that Oil Prices have dropped by $11+ per barrel (-13%) in the last month and that is still no being realised at the pump tells me that there really does need to be a closer look at margins and when they apply them.

Might just be my memory fooling me, but even thuogh the regular pump prices haven't dropped I've been getting a lot more emails for 10c/litre discount days, gull for a couple days last week, today is Mobil, and there was a Caltex one the other day too.

I wonder if the average price actually paid has dropped due to all the discounting, and they are just gouging those that do not have the ability to wait for the next discount day?

Penguin. It always was going to be a waste of money and time. It was never anything else than a political window dressing exercise, mostly in response to fuel tax triggered anger from the public.

If the review by hand picked Govt stooges agreed with Cindys profoundly insightful declaration that 'in her book petrol is absolutely just too expensive' - what then ? .... regulate the price by government decree maybe using the Chavez/Maduro playbook as a guide? set up a state fuel distribution system ? or perhaps they have a cunning destroy Taranaki MkII plan tucked away that really will show big oil who is boss.