Equities up; Fed resets normalisation;US sentiment drops; Vancouver housing taxes cause outrage; Hong Kong house prices fall; TPP wants to expand; UST 10yr at 2.79%; oil up, gold down; NZ$1 = 67.3 USc; TWI-5 = 71.7

Here's our summary of key events over the weekend that affect New Zealand, with news it's back-to-work with things looking a little brighter.

In equity and financial markets risk sentiment has improved on the basis that the US and China are now expected by traders to patch things up soon. The S&P500 was up a strong +1.3% on Friday and that followed European indexes that were up more, almost +2%. In turn Tokyo, Hong Kong and Shanghai all gained more than +1.2%.

Helping somewhat were remarks by the head of the New York Fed who said now is the time for policymakers to show "prudence, patience, and good judgment" - interpreted to mean fewer rate hikes in 2019. But there is no progress on resolving the shutdown with another Fed governor saying it is starting to hurt growth.

And perhaps supporting that restrained view is that American consumer sentiment tumbled in early January to its lowest level in more than two years ago amid fears that the shutdown and financial market volatility will slow the US economy.

In December American factory production rose amid broad-based gains in output. Industrial production was up an overall +4.0% year-on-year - but most of the gains were in 'mining' (+13.4% = oil and coal) and 'materials' (+6.1%).

Canada's inflation rate rose to 2.0% in December, higher than expectations of +1.7%.

In Vancouver, there is a new campaign underway to scrap its 'speculation and vacancy tax', one that now requires declarations from 1.6 mln homeowners and take about 30 mins to complete. A government coalition party, the Green Party is pushing to get rid the 'stupid tax'.

In Hong Kong, house prices are falling.

And later today, China is expected to report its Q4-2018 GDP growth rate, a level that is expected to undershoot at +6.4%. At that level it will be their slowest growth in 28 years.

In Japan there is a ministerial meeting of the eleven TPP members. And they have decided to open the Treaty up to new members. They are essentially trying to entice the US back in, but other may join first.

Analysts at Fitch Ratings say a series of recent weak data releases have dented their 2019 world trade growth forecasts, but not significantly. They are still forecasting that 2019 growth will be above trend with the US and China doing ok although Europe will be weak.

In Australia, the delayed payment operator Afterpay, which doesn't charge interest (and tis therefore not subject to regulation) but derives its income from fees when customers face credit stress, is expanding aggressively in the US. It is also reporting record results. Regulators are worried.

And staying in Australia, they have long allowed "self-managed superannuation" which has turned into a vehicle to put your retirement funds into residential investment property. The regulator (The ATO) is now worried about the effect of this because most of this is a leveraged investment - and the underlying security is declining in value. That risks the base retirement savings, especially if lenders find a loan breach and call in the loan via a mortgagee sale. The ATO says almost 6% of Aussie Super in SMSF structures is at risk, some compounded by the fact they involve personal guarantees. We are talking about more than $42 bln exposed of the AU$755 bln in SMSF plans (which more than a quarter of the AU$2.8 tln in Australian super schemes), and the ATO says this is now a systemic risk. Westpac is the most exposed.

Wholesale interest rates rose at the end of last week following four days of declines into record-low territory and the rises took rates back to where they were at the start of the week. The UST 10yr yield also rose on Friday at just on 2.79% and a +10 bps gain for the week, most of it on Friday. Their 2-10 curve is settled at +17 bps.

Gold is down -US$10 to US$1,282/oz.

US oil prices moved strongly higher are now just under US$54/bbl while the Brent benchmark is just under US$63/bbl. Both are gains of more than +US$1/bbl.

The Kiwi dollar starts today just a little softer from where we left it on Friday at 67.3 USc but which is almost a -1c loss from this time last week. On the cross rates we are softer too, down to 94.1 AUc, but little-changed at 59.3 euro cents. That pulls the TWI-5 down to 71.7.

Bitcoin is also softer at US$3,525, down -2.2% over the weekend. 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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17 Comments

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=121...
This superannuation comment was in the Herald yesterday. Its proposing higher kiwisaver contributions and at the end the kicker is compulsion and higher balances.... ".....as larger KiwiSaver balances might allow it to slowly introduce means testing to the universal superannuation scheme".
Essentially it is a Brian Gaynor advertisement for the funds industry. Hoping that a future govt will bring in means testing which would definitely give the funds industry a big boost. But thankfully no party has got any support for the means testing of NZ super. Rich people of course can do what they want with their NZ super eg donate money to charities and I'm sure a lot do so. Or at the very least to spend it and put it back into circulation. Which would stop if means testing was to take place.

Well, 3% vs 10-17% (& that’s on top of your gross not deducted from net).

While the article says that Australians are getting ahead of the retirement race, lets not forget it's not all about Kiwisaver, what about all the people in New Zealand who have invested in property.

I believe a degree of means-testing is inevitable and perhaps Brian is "kite-flying" to see if a political party will run with it. I am in the age group that grew up believing that NZ Super is a birth-right. It came as a shock to find that regulations over-turning that birth-right have been in force for many years!
It would be political suicide right now to bring in such changes but that is mostly because our age group are the most active voter group. That will change as disadvantaged 40 something voters realize their chances of replicating the retirement lifestyle of their parents are minimal to non-existent. That change may happen quite quickly which has implications for those contemplating retirement. The devil will be in the detail. For instance, will they have a top limit of the value of the house you own or the shares / bonds you own? For my own view I believe it will be bought into effect in gradual steps so as those that will miss out through means testing will have had several years of tax advantage to compensate.

Disadvantaged 40 yr olds would like the idea of universal super very much! Especially once they inherit and become advantaged!

A birth right.....please.....

Bottom Suddenly Falls Out of Demand in China in Many Sectors
“What we witnessed in November and December was just extraordinary.”
“I’ve been a manager for almost half a century, but this is the first time I’ve seen such a large single-month drop in orders for us,” said Nidec CEO Shigenobu Nagamori. “What we witnessed in November and December was just extraordinary.

https://wolfstreet.com/2019/01/19/bottom-falls-out-of-demand-in-china-in...

Michael Pettis points out that China's GDP is a much misunderstood statistic. It is more of a system input than an output, so it's meaning is quite different from its meaning in the West, where it is more of a rough measure of output:
The Chinese economy is not growing at 6.5 percent. It is probably growing by less than half of that. Not everyone agrees that the rate is that low, of course, but there is nonetheless a running debate about what is really happening in the Chinese economy and whether or not the country’s reported GDP growth is accurate.

https://carnegieendowment.org/chinafinancialmarkets/78138?utm_source=rss...

There are Lies, Damned Lies, and Chinese GDP figures. I really hope this squeeze puts an end to the Party's push towards totalitarian despotism and their desire to be the next big evil empire on planet Earth, but I am not optimistic.

Most western countries would be estatic to have growth half of 6.5%.
It is quite possible that China is about to experience a drastic financial collapse. However what matters is long term trends so compare with USA and NZ with long recession from 1873 onwards. However both countries were economic pace-setters if you compare 1850 to 1900.
NZ and USA could change leadership in response to recession but China cannot so totalitarian despotism & evil empire seems to be their one available path. NZ kowtowing to China is a bad policy that we will regret.

It is an odd thing really. In our society our leaders normally step aside without undue personal consequence. For a totalitarian regime that is very hard to do. All decisions end up as personal life or death ones. Usually yours and your extended family's life, and someone else and their extended family's death..

After organ harvesting of course.

To be fair to China they are more likely to send you to work with the peasants than execute you if you have had a powerful position. Excutions are reserved for the lower classes - like America. The main difference between China and NZ is that in NZ when Jacinda loses power she will retire from Parliament, wait a couple of months and then accept a few directorships with companies and nothing will happen to her partner and child. If we were China then Jacinda would be sorting wool with a shearing team in a cold remote valley and her partner would be prevented from fishing and the baby would be expelled from its posh pre-schoool.

The Global Economy Is Set to Find Out What Comes After Sadness

https://www.realclearmarkets.com/articles/2019/01/18/the_global_economy_...

Catch 22 all over again.

"We need dealers to be dealers, but they’ve been burned so many times they put no real stake in being a dealer. Why would they? ... we’re stuck with banks cutting back on (trading) because they lose money...by betting on a recovery that can’t happen until they stop cutting back."

Makes you wonder if there is a Stupidity Cycle.

One think I have noticed, is that when it is economic party time we compares themselves with those who appear to be doing so much better than we are; when times are hard, we look in shock at those who are doing worse and count our blessings.

Re - Vancouver, typical green nutters/hypocrites