US incomes rise, prices up less; US housing markets weak; China private sector in retreat; EU growth slows; NZ #2 in prosperity; UST 10yr at 3.04%; oil firms, gold up; NZ$1 = 68.5 USc; TWI-5 = 73

US incomes rise, prices up less; US housing markets weak; China private sector in retreat; EU growth slows; NZ #2 in prosperity; UST 10yr at 3.04%; oil firms, gold up; NZ$1 = 68.5 USc; TWI-5 = 73

Here's our summary of key events overnight that affect New Zealand, with news the world is awash in weakening economic data, reminding us how fortunate we are in New Zealand.

Update: Firstly, the latest US Fed minutes indicate they are on track to raise rates at their December meeting. But the number of rate hikes in 2019 is now less certain.

American consumer spending increased by the most in seven months in October, but underlying price pressures slowed, with the US inflation measure preferred by the Federal Reserve posting its smallest annual increase since February.

Meanwhile, their housing market trends took another dive lower. Pending home sales fell -2.6% in October from the prior month and far below the +0.5% gain expected. That makes this the tenth straight month this measure has declined on an annual basis meaning the October 2018 level was down -6.7% year-on-year and taking them to a four-year low.

And unemployment claims in the US are starting to worry some economists. Initial claims rose by +10,000 last week to 234,000, the third straight gain and the highest level since May. Markets were expecting a decrease to 220,000.

In China, a major trend is developing as private business concerns struggle in an increasing uncertain economic environment. The private sector there accounts for half of the country’s tax revenue, 60% of GDP and 80% of urban employment. But it is shrinking as state-owned enterprises have begun absorbing many of these companies as they suffer severe difficulties. The Chinese private sector is shrinking, and surprisingly quickly.

China's African Swine Fever outbreak is spreading and has never been in control. Now neighbouring countries are worried they will be a victim. This is an issue that could turn meat markets upside down.

In the EU there has been a bit of an unexpected turn, business sentiment stopped falling in November in the EU, picking up when the trend has been down.

That comes after Q3 data for GDP was soft in a number of countries including Sweden, Switzerland, and Germany. (and also in Japan).

In Germany, Deutsche Banks troubles with the Panama Papers keeps rolling on. Their head office and other locations in Frankfurt were raided by police and tax investigators overnight as part of a money laundering probe. Prosecutors said the raids targeted two Deutsche Bank employees, and others who have not yet been identified. This is the bank Donald Trump turned to after he stiffed New York banks in his business dealings, who then shunned him.

Further, German company Bayer is cutting 12,000 jobs in a major world wide restructure that will see it exit its animal health business.

NZ ranked #2 in world for prosperity. We were let down by education, health, and personal safety, but gained very high scores for economics, governance, personal freedom, natural environment and social capital. However, we slipped from #1 in 2017, 2016, 2015 and 2014, this time pipped by Norway. Canada is #8, Australia is #13, and USA #17.

In international trade transactions, businesses are rejecting the Chinese Yuan, according to the latest data from Swift. The CNY now only commands 1.01% of all trades, down from 1.21% last year. In fact, the AUD is more popular and trusted at 1.41%. China's goal of making their currency a core component in world trade is failing. The US dollar is still dominant, but it is the euro that is making the biggest gains.

All eyes now turn to the G20 meeting in Argentina over the weekend, and especially on the China:US trade talks - even if there are any.

The UST 10yr yield is lower at 3.04% (At one point earlier it dipped briefly below 3%.). Their 2-10 curve has fallen sharply too to now just on +22 bps. The Aussie Govt 10yr is at 2.60% (down -2 bps), the China Govt 10yr is at 3.40% and down -1 bp overnight, while the NZ Govt 10 yr is at 2.61% and down -4 bps.

Gold has risen for a second day, this time by +US$6 to now be at US$1,226/oz.

US oil prices are a little higher today at just under US$52/bbl. The Brent benchmark is now just under US$60/bbl.

The Kiwi dollar is a little lower to be now at 68.5 USc. On the cross rates we are also marginally softer at 93.8 AUc, and up at 60.2 euro cents. That sets the TWI-5 back at 73.

Bitcoin has moved up again and is now at US$4,323 which is a +2.6% rise from this time yesterday. 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 ».

Daily exchange rates

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End of day UTC
Source: CoinDesk

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To those who argued the UK were in a stronger position than the EU over Brexit.

Kind of reminds me of the "Millennium Bug", the 1st January 2000 came and went and nothing changed. Britain needs to pull the pin and get out of the EU before a number of countries over there drag it into a very big hole. They never took on the EURO because they are not that stupid, looks easy to me to just stick your fingers up at Brussels.

Without ongoing access and an ongoing relationship with Europe Britain is stuffed. Good luck on an island when you've given the up yours to all those surrounding you.

The Millenium Bug didn't have any significant effects because of the huge awareness and work done to prevent problems. It's a great example of identifying a problem, solving it through putting in huge resources, and then being somehow blamed when nothing goes wrong.

Ironically. The young would benefit greatly if those prices did indeed crash. Yet it is also the young,apparently , who mostly voted to remain and are angry about leaving.

I read a thread a while back where some young people said they were going to vote remain, but changed to leave when they heard leaving was likely to drop house prices.

Project fear is alive and well. The way the remoaners have conducted themselves has been shocking.

Bubbles and Hot Potatoes
"Quantitative easing wasn’t about creating more “liquidity,” or encouraging more bank loans, or any of the other excuses tossed around for it. What quantitative easing really did was to replace interest-bearing Treasury bonds held by the public with a mountain of zero-interest money that was so uncomfortable to hold that it drove investors absolutely crazy.

But they couldn’t get out of it, in aggregate. Whoever held it could only toss the hot potato to someone else by trading it for some other security, regardless of the price.

Paying interest on reserves was no small change. By paying interest on excess reserves, the Federal Reserve effectively converted those reserves to interest-bearing securities, and reduced the extent to which they behave as “hot potatoes.” In fact, at the current Treasury bill yield of about 2.3%, the economy doesn’t behave like the Fed is holding a $3.5 trillion balance sheet. It actually behaves as if the Fed has already cut its balance sheet to $2 trillion."

Got a question Andrew - the article makes multiple references to the hot potato of zero interest money and the problem it caused for people as they sought out some form of return. The problem I have is that in getting it down to ordinary people, it was fed into property via mortgages, just having them pay interest, but this didn't really create any real demand growth. Why wasn't it fed out in some other way to enable wage growth, leading to an increase of consumer consumption, and increasing demand? This would have provided the desired effects, and possibly created a situation where the excess could then be quietly removed gradually as the cycle became self sustaining?

It sort of looks like that the wrong people controlled it, used it to primarily look after themselves and their mates first without any real understanding of the consequences.

Nice question Murray. I think the answer is the system works rather differently to how we think it does. We think that savers lend money to banks who lend it to businesses who do useful things with it. This does happen to some extent, it is necessary to make the real process look legitimate, but the idea is based on how a gold and silver based system worked in the past.

It seems that money is now mainly created from the I.O.U that is signed by the house buyer. The bank then treats that I.O.U as a "promissory note" (which is the same thing dressed up in posh words), and lends the money to buy the house. The money then flows through the bank system as the house is paid for, but the purchase price is more than the bank loan that is paid off, in effect this is new money created. So bank mortgage lending has become the driver of the world economy.

The system works as long as house prices go up, it is self reinforcing, a runaway feedback process that feeds upon itself until something changes. That something is usually interest rate rises causing house prices to start going down in a self reinforcing downward process. Hence the booms and busts, normal times and chaotic times.

Much angst is expressed about the chaos caused and those in charge say "no one saw it coming", meaning no one they knew saw it coming. The welfare state has evolved as a mechanism to help society cope with the chaos.

This is too narrow Roger. "So bank mortgage lending has become the driver of the world economy" The excess money just gets put out into new mortgages, again not really developing any new, real growth in demand across all sectors. it may in property, as you say, for a short time. Let's ignore bank excesses, where they squander their and our money wastefully. This is too easy, and the mortgage has it all wrapped up that if it goes south, the bank ends up owning the property and the buyer is the one who loses. This is at least theoretically is a motivation to get their lending practices correct as the GFC "sub-prime" crisis demonstrated. What need to happen is that banks get that money into areas that leads to a growth in wages, and therefore consumption and so on.

A problem with this is of course is that banks see this area as high risk and business loans start at above 10%, even when the cost of the money is at or near 0%. thus they have kicked the legs out from under the effectiveness of any policy that that growth may be the policy target. In effect the banks are treating the money as their own. Another indicator of the failure of regulation.

I'm not convinced it is a failure of regulation. I seemed to work through blaming the banks, then blaming the regulators, but it is how the system works. It is not mean reverting but bangs from one extreme to the other exactly like an on/off thermostat. There have always been booms and busts throughout history, whatever the monetary system. Whilst the regulations can always be improved and the excesses curbed more effectively, I'm not sure that the system as a whole can be redesigned without taking a massive step backwards. That is what the USSR set out to do, and you end up with a miserable existence. The booms always seem to enable the blossoming of new technologies, and the busts do seem to be ameliorated by having a welfare system.

There is a deeper aspect to the booms and busts, they show us our individual weaknesses. Perhaps that is why they seem to be embedded in human society and also why they seem to stir us up so much.

Why not simply put a qualifying criteria on that zero interest money? Make sure it gets the desired results, and stops the greedy railroading it off the tracks. Say it cannot be lent out on a mortgage over property, set a maximum interest rate, ensure the end user has a robust business plan the defines how it is used, and provide a monitoring framework? We are sort of doing something like that now around ethical investing.

Even if you have planners of exceptional wisdom and foresight, what about the wacky ideas by underqualified people that get excluded? One in a thousand will lead to something new. Progress is largely experimental, theory follows. You don't need atomic theory until a Rutherford discovers the atom, which jolly well ought not to exist at all. You don't need a globe if you think the earth is flat. Evolution is chaotic and wasteful, but it works.

The problem with ethical investment is that often extreme competition, in sports, business and warfare, is needed to move things forward. There is a theory that the industrial world was the result of 500 years of warfare between Britain and France.

I largely agree Roger, but even if a business experiment fails, it still provides learning and gets money into circulation, which would be more productive thatn putting it into property (mostly). without experimentation we go nowhere. Playing safe we go nowhere.

Has there ever been a banking regulation that specifies a ratio of business vs mortgage/asset vs personal lending anywhere in the world at any time? I have often wondered if something like this might help soften the boom/bust cycles. I.E. regulations would insist that only a certain percentage of bank lending could be to assets/property in proportion to business and infrastructure lending

Following yesterday's annual update to the TWI weightings we are now the little 'yuan '.

Well done NZ for scoring so high in the Legatum Prosperity Index. Is it because of Labour that we are now #2 instead of #1?

I wonder if to have such a high level of 'Personal Freedom' we need a lower score in 'Safety and Security'?
The 2nd, 3rd and 4th safest and secure places are Japan, Singapore and Hong Kong. Yet they have fairly dismal personal freedom scores. Singapore especially.

May be it is not possible to have high freedom and high safety? Something to think about.

I am feeling way more prosperous since National got booted out, as for safety neither up or down. Down here in Wellywood keeping off Courtney after midnight helps..all that alcohol (drug of choice for Kiwis).

Zach, Freedom and responsibility go hand in hand, right-leaning governments generally have the attitude of look after yourself (= more freedom & more responsibility for individuals) and left-leaning governments generally have the attitude of we will take care of everyone (= less freedom and less responsibility for individuals)

Assuming that's the case at all, makes you wonder when the last time NZ had a right-leaning government was.

Recall Judith Collins in the last one deciding people should be in bed by 3am.

Reading/watching the talking heads they seem to wobble on an hourly if not daily basis between "oh my god we are losing shed loads" to "the market has stabilised/bottomed? its time to dive in? make a lot of money."

Seems potty to me.

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