Investors turning away from US Treasuries; China faces dollar debt crisis; Fed official turns dovish; Mexico & Indonesia raise rates; RBI to be muzzled; UST 10yr at 3.07%; oil flat and gold up; NZ$1 = 68.8 USc; TWI-5 = 73.1

Here's our summary of key events over the weekend that affect New Zealand, with news China may be heading for a dollar-debt crisis and just when investors are turning away from US Treasuries.

In the US, foreign investors, especially governments, are tiring of holding American Government debt. New official data shows a foreign investment outflow in September, essentially ending the long term inflow trend. China's holdings in Treasury securities fell by -US$13.7 bln in a month and -US$31 bln in a year. Japan's holdings in Treasuries fell by -US$2 bln since August and by -US$56 bln from Sept. 2017.

China holds about US$1+ tln of US Treasury securities and has about US$3 tln in foreign exchange reserves. All very impressive until you realise that it's private sector owes about US$3 tln in US dollar-denominated debt. A falling yuan exchange rate to the US dollar, or a rise in US benchmark interest rate, will hurt. Both at the same time would hurt even more. Analysts are now worrying about a dollar debt crisis in China.

In the US, household indebtedness rose again in the September quarter, and across almost all types of borrowing. That is now almost 5 years of continuous rises, following almost five years of straight reductions. But at US$13.5 tln, this is now only +6.5% higher than the last peak ten years ago. Interestingly, mortgage debt is still -4.3% lower than in 2008. However other types of personal debt have climbed to more than +45% above its 2008 level to just under US$4 tln. But of course their economy has grown substantially in the past ten years, so household debt as a percentage of GDP has actually shrunk from 87% then to 66% today. (Equivalent New Zealand household debt levels are 76% on the same basis in 2018.)

US industrial production growth stalled in October but the result is probably better than it first appears. Car production was lower, so that means there is strength in the rest of the American factory sector. And that comes as both Pacific and Atlantic ports report surging import volumes.

Canadian factory sales edged higher in data released over the weekend. And Ontario has decided to exempt new builds from its rent control regulations, in attempt to encourage investors to build more. The current law has seen a much lower volume of apartments being built.

Comments that were interpreted as dovish from the newly appointed vice-chairman of the US Fed saw the greenback fall and US benchmark interest rate yields fall. He said interest rates are at near 'neutral' levels which traders are interpreting as meaning the Fed may be near-done raising its policy rate. The next Fed review is on December 20, NZT.

Mexico however has moved again already. Over the weekend they raised their policy rate by +25 bps to 8.0%. They cited their new government's spending and stimulus programs that have driven down the value of the peso and raised the rate of inflation. Mexican inflation is now at +5% and the new fiscal policies are expected to push it a lot higher.

And Indonesia has also raised its policy rate in a surprise move, upping it to 6.0%.

In India, there is a breakdown in the relationship between their central bank and the Government with the Government insisting on easy money, less fight against inflation and protections for weak banks (some of which are its friends). Later today key decisions will be taken to impose more direct 'oversight' of central bank decision-making there.

The UST 10yr yield is starting the week at 3.07% after a net dip of -12 bps last week which puts it at a 2 month low. Their 2-10 curve is still at +26 bps however. The Aussie Govt 10yr is at 2.68%, the China Govt 10yr is at 3.37%, while the NZ Govt 10 yr is at 2.74%.

Gold will start at US$1,221/oz.

US oil prices are stable today at their new lower levels at just under US$56.50/bbl. The Brent benchmark is now over US$66.50/bbl. Oddly, the US rig count is still holding high this week despite these low prices.

The Kiwi dollar is starting the week at 68.8 USc which consolidates a +10% gain against the greenback in the past three weeks. On the cross rates we are also firmer at 93.8 AUc, and at 60.2 euro cents. That puts the TWI-5 at 73.1 and at its highest level since June.

Bitcoin is now at US$5,536 and unchanged from where we left it on Saturday. This rate is charted in the exchange rate set below.

This chart is animated here.

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37 Comments

Okay people, this week's sweepstakes. B&T have currently 41 auctions on the schedule for the 21st. If we leave out the single mortgage auction at 9am, that's a nice round 40. Predictions?

I'll go with 8 sold under the hammer, and 5 withdrawn. Half of the sales over RV. 18 failing to raise a bid.

I'll go with 14 sales under the hammer.

35% clearance rate? optimist :)

Just copied the list of properties to an excel spreadsheet, so its the 40 properties as on the website now, late additions will not be included.

I'll put the list up this afternoon once I tidy it up.

I think it will be staggering low.

A nicely timed article from Stuff on Friday afternoon had many people heading into the weekend reading that interest rate rises will occur, and property prices will fall over the next few years.

Its these very types of articles that have been the basis of FOMO in the past, and I see it doing exactly the same for FONGO, if it isn't already.

Numbers.. I need numbers. How low?
Nzdan has 5% (2 sold)
fibar has 10% ( 4 sold)
I have 20%.
Retired Poppy has 25% (10 sold)
and the optimists have 35% (14 sold.)

18%

17.5% (7 sales) it is.

I'll go with 10, a 25% clearance rate.

I'll go with 2 sold under the hammer.

Are you trying to give TakingThePiss a heart attack? :)

I'll go with a 10% clearance rate.

Ah, an optimist I see!

What have the attendances been like over the recent months compared to now?

I get the feeling a lot of real estate agents will be busy over the coming weeks. NZ main news websites have been flooded with articles recently (going both ways) about NZ property, but Im starting to sense an anxiety among the general public.

Theres going to be a lot of people disappointed to learn that their house is no longer worth 150% of RV, no matter what justification they try to provide. It was enough to justify the 2 Bali holidays, Louis Vuitton bag, Holden Maloo ute and 2 jetskis two years ago, but thats a completely separate conversation.

I was reading some fascinating articles last week about 5 Australian economists predicting what the Australian property market would do for the next 12 months. The article was from August 2017, with it very much being a favorable outlook. Any negative outlooks were held by a minority, if at all. The thing is, the downturn in Australian property prices started only 10 weeks after this article. If you compare the outlooks to the actual outcomes to gulf is staggering!

I don't see it being much different here. We will talk about what could happen, the impacts if it did happen, a counterargument that it won't happen, then the realisation that it is already happening.

Good post Masher.

Articles in question:

https://www.domain.com.au/news/melbourne-property-prices-will-they-conti...

https://www.domain.com.au/news/what-now-for-sydney-property-prices-five-...

So take the Sydney housing market for example - only one of the five economists predicted there would be a price drop, yet the price drop has been four times worse than that one persons worst case prediction.

Yep. Bank economists serving the 'creators of money' have had a tendency to be a little optimistic in Australia. Thank heaven we never had so much interest only debt, negative gearing and spruiking or we could suffer a similar fate. DFA are doing some really interesting stuff at the moment on NZ. Well worth a watch.

https://www.youtube.com/watch?v=ISvdDCctE64&t=14s

A very good watch indeed mate. Cheers!

41 auctions in 1day in a quiet market.... with clearance rates at a record low..

Running for the gates?

A bit of that, and a bit of the normal pre-xmas rush I think.

I'll go with 14 cleared

35% clearance rate

Okay, you and Zach both on 14 under the hammer.

Ok maybe a bit too optimistic, however it is supposed to be peak selling season and those that want to sell by xmas may reset their price expectations.

Maybe the USD as the worlds reserve currency is coming to a close?

Across the ditch, “The Reserve Bank of Australia has made a surprising admission that the crackdown on housing lending could crunch the economy, in what could be a hint that the bank will loosen up rules on investor lending.” - https://www.news.com.au/finance/economy/reserve-bank-finds-new-risk-in-h...

I think the RBA realised they’ve backed themselves into an impossible position to escape from without some pain. Interesting to see how they try to play it out.

Pain - self inflicted or enforced - nether seems palatable but it will be a question of wait and see....

"Aha! The problem is, you see, that Australia’s economy is so tied up in construction. It is not that the housing market needs more homes. It’s that our economy can’t afford to stop building them. Not all at once anyway."

Agreed. Taking a step back further, how did housing and accordingly construction become the linchpin? If it’s not due to natural demand, who or what has created the artificial need?

Many for sale signs going up in our neck of the woods - hb's havelock north - a sought-after leafy suburb.

up
10

Avocados were formerly the nefarious cause of the housing crisis. But the conspiracy goes deeper. It's those damn leaves causing the issue.

Dollar leaves, indeed.

Leila - 97 I see on realestate.co.nz. Looks like some seriously over leveraged people trying to keep up with the joneses driving there Remuera tractors . Another 450 sections coming on the market privately, and plenty of developers doing spec homes on carved off sloping sections miscalculating the true cost. Its going to be a blood bath soon.

Nic, I really think I have the upper hand now. I’m already planning on how I’m going to use that $10.

Hardly

At 14,341 today .... this will need to be a big week I think, but I have a feeling the lead up to the summer hols could be different this year. If you were a seller today, seeing a market about capitulate, would you list now and try and beat the post summer holiday rush? Or wait until after Christmas when there will inevitably be lots and lots of sellers to compete with? Interesting times!.

Are you confusing me with Hardly??

Just typing too quickly whilst thinking about all that money I'm going to make off this bet!

15k by the end of Nov or Dec?

December 24th I think.

I agree Nic if I was a seller I would have got out a month or two ago. It’s going to be very bad in March.

Ever notice how little movement is needed in the market to turn everything into a crisis? Volatility hasn't really returned, this is nothing compared to what used to happen. It would be wise to invest in brown pants for the next 2-3 years.