90 seconds at 9 am: Risks mount in the US, China, UK

China on the move; equities lower; US tax cut didn't motivate companies to invest; Malaysia and EU fight over palm oil; Brexit options narrow; UST 10yr 2.73%; oil jumps and gold up; NZ$1 = 68.3 USc; TWI-5 = 72.4

29th Jan 19, 7:51am by David Chaston

Here's our summary of key events overnight that affect New Zealand, with news that markets have moved into a risk-off mode today.

But first, the Chinese have approved credit rater S&P to issue ratings for Chinese companies. Large American credit card companies are also trying to get access approvals.

And Chinese New Year is upon us again, starting a huge family-reunion migration that will involve more than 400 mln rail trips alone, expected to be +8.3% higher than the records smashed just one year ago.

Overnight, European equity markets were lower across the board, and by almost -1%. That follows Japan (-0.6%), Hong Kong (+0.0%) and Shanghai (-0.2%). Australia was closed yesterday of course, and the NZX traded very thinly (+0.0%). Today, the S&P500 is down -1.2% in mid-day trade. Bellwether stock Caterpillar reported sharply lower profits that surprised analysts because that is a sharp reversal from prior 2018 quarters. They have been hurt by soft demand in China plus higher US manufacturing and freight costs. That sent their shares tumbling more than -8%.

A respected quarterly survey of business investment in the US has reported that 84% of businesses didn't change their businesses’ capital investment or hiring plans following the US$1.5 tln business tax cut (from 35% to 21%) that came into effect on January 1, 2018. That proportion was actually higher than in 2017 (81%). Those corporate tax cuts were designed to spur business spending and job growth. That hasn't happened.

In the US, the Trump Administration has lifted sanctions on a key oligarch and ally of Vladimir Putin. It's a move not all lawmakers in the US approve of.

A new trade dispute is brewing between Malaysia and the EU over the EU's campaign against palm oil. Singapore-based conglomerate Wilmar has a choke-hold on South East Asian production of palm oil (and the region's politicians).

The biggest trade dispute at present is the looming Brexit deadline. Ireland is saying it would not accept any changes to an agreement aimed at preventing a hard border on the island of Ireland. London is boxed in and under pressure, more so as supermarket chains now say they can't be sure they can maintain food supplies in a hard Brexit situation. That may occur in just 60 days. A plan is on the table in the London parliament to extend the UK membership of the EU if a hard Brexit is the only option.

In Germany, they have committed to ending coal mining and using coal as a source of their electricity production, by 2038, giving them 20 years to wean themselves off this fossil fuel. They are already in a program to eliminate nuclear power.

The UST 10yr yield is -3 bps lower today to be just on 2.73% and building on last week's small fall. Their 2-10 curve is now under +15 bps. The Australian Govt. 10yr yield is at 2.22%, holding after last week's big fall. The China Govt. 10yr yield is unchanged at 3.16%, and the New Zealand Govt. 10yr yield is at 2.35% and up +1 bp.

Gold is holding at its new higher level of US$1,302.

US oil prices have fallen very sharply today, down almost -US$2/bbl to just on US$51.50/bbl while the Brent benchmark is just on US$59.50/bbl. Markets are past the turmoil in Venezuela and now concentrating on the lower market demand conditions.

The Kiwi dollar starts today holding up at 68.3 USc. On the cross rates we are little changed at 95.4 AUc, and at 59.8 euro cents. And has the TWI-5 up to 72.4.

Bitcoin is -3.8% lower today at US$3,411. This rate is charted in the exchange rate set below.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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48 Comments

by Nic Johnson | 29th Jan 19, 8:42am 1548704528

A bit more on the slowdown in China since Q4 2018. Interesting read and an an extra to compliment the Caterpillar results David mentions above.

https://wolfstreet.com/2019/01/28/the-chilling-thing-nvidia-just-said-a…

by RickStrauss | 29th Jan 19, 9:21am 1548706875

Wow, that's quite a few different sectors warning of declines in their own business due to a slowdown in China.

by Andrewj | 29th Jan 19, 9:58am 1548709135

Werner
Systemic crises happen when bank credit creation for non-GDP (i.e. asset purchase) transactions expands for several years significantly above growth rate of the long run ability to service bank debt, aka national income or GDP. Quantity Theory of Credit
https://eprints.soton.ac.uk/36569/

by Nic Johnson | 29th Jan 19, 10:36am 1548711365

China, and as consequence the rest of us may be heading towards our 'Minsky' moment.

https://seekingalpha.com/article/4236041-heading-another-minsky-moment

by Withay | 29th Jan 19, 9:00am 1548705639

“In Germany, they have committed to ending coal mining and using coal as a source of their electricity production, by 2038, giving them 20 years to wean themselves off this fossil fuel. They are already in a program to eliminate nuclear power.”

I’ll be curious to see what they intend to replace coal and nuclear with. Their solar and wind transition has been a disaster so far.

by nymad | 29th Jan 19, 9:13am 1548706389

Surely Gas.
They may also reduce their net exports.
Coal and Nuke are only like 30% of their generation capacity.

by RickStrauss | 29th Jan 19, 9:15am 1548706506

Putin's gas?

That seems risky.

by nymad | 29th Jan 19, 9:19am 1548706792

It does sound like a very risky thing to be committing to.

by Roger Witherspoon | 29th Jan 19, 9:33am 1548707604

The AfD will do even better as a result. The German intellectual elite seem not to have noticed the Gilets Jaune movement. If you piss on people long enough there is a backlash. Soaring electricity prices hit the less well off hardest. Stupidity rules, it seems. Don't get me wrong, I agree with the direction of travel, just the mismanagement of the transition process.

The Poles will be even more upset.

by Gold Kiwi | 29th Jan 19, 1:05pm 1548720351

Why? Russia has been supplying Germany with gas since 1973 and imports rose steadily in the decades that followed, undisturbed by the cold war.

by Lapun | 29th Jan 19, 9:24am 1548707090

Import electricity from Russia (gas) and France (nuclear) but feel very virtuous. Boast about their green credentials. Reminds me that slavery was illegal in England but the English put sugar in their tea and wore cotton clothes when both sugar and cotton were synonymous with slavery.

by Roger Witherspoon | 29th Jan 19, 9:30am 1548707441

Not to mention our cultural idea of retiring to a nice house in the country. There is something of a cargo cult in our worship of houses. Is it partly a misconception? Surely, these days the nice house is a result of wealth, not its cause, isn't it?

by keenaucklandobserver | 29th Jan 19, 9:31am 1548707498

Probably the display of wealth - just like cars etc. The question is whether such display of wealth is increasingly vulgar I suppose

by Roger Witherspoon | 29th Jan 19, 9:42am 1548708154

I think the arrogant display of wealth is very damaging. It gives the impression that wealthy people are all arrogant and wasteful. In reality, most are relatively frugal and hard working and like their privacy.

I struggled with this as a teenager, my father was equally happy chatting to miners in his local as he was with people who were quite well off. The trouble was, my young lefty views were in conflict with my experience that the most decent people seemed to be scattered across all layers of society.

by iconoclast | 29th Jan 19, 9:39am 1548707994

Disagree with you on "cause"

While the government decrees that there will be 2%-3% forever, at 2½ mandated inflation, house prices will double in 40 years. Add in some immigration and the 40 years becomes 20 years. Why wouldn't you invest in housing. Just because you bought an expensive house doesn't mean you had the wealth to buy it. You might have dived in the deep-end and mortgaged your life to the hilt

by Roger Witherspoon | 29th Jan 19, 9:46am 1548708381

I don't disagree. I was talking about the emotional tendency to confuse the display of wealth with the source of wealth. You are talking about rational action in a biassed system. I guess I think about income streams more than valuations.

by murray86 | 29th Jan 19, 9:55am 1548708921

It is a genetic trait for survival in the modern world. shelter is a fundamental need for survival and in this age that means a house. If you don't own that house then you are vulnerable to the whims of another. Others use houses as a source of power over others.

The topic is big but since Rogernomics adopted the Freemarket principles, successive Governments have gone away from the recognition of shelter being a fundamental right essentially based on survival. Some superficial lip service is still given but it is so shallow as to be non-existent. Even Twyford's comment on the news on the weekend that the Government feels that rent controls are bad policy shows that this Government has still not grasped that fundamental principle to the point where they will act to protect the most needy. in other words they would rather subsidise the wealthy than protect the rest. Money still out weighs need.

by Carlos67 | 29th Jan 19, 10:23am 1548710594

You cannot have rent control on a house that the government doesn't own. Everything is a loop anyway, if you limited rents then landlords would just eventually pull out of the market and there would be no rentals available. Of course the government could then try and buy the houses in a market they just stuffed up but they suddenly wouldn't have the money and so it goes round and round. Even the bunch of amateurs in the Labour government can see that.

by Pragmatist | 29th Jan 19, 10:38am 1548711485

"You cannot have rent control on a house that the government doesn't own."

Somebody forgot to tell america that..

"if you limited rents then landlords would just eventually pull out of the market and there would be no rentals available."

Bloody disappearing houses again?

"Of course the government could then try and buy the houses in a market they just stuffed up but they suddenly wouldn't have the money"

Remind me who owns the printing presses again?

by bw | 29th Jan 19, 10:41am 1548711715

The Government ( which of course is 'us', in theory!) can control rent, (eg: "Rent control in New York is a means of limiting the amount of rent charged on dwellings") but it doesn't have to. It can control the price and availability of money (credit), but even more, it can control the taxation of any and everything it chooses to at any given time.
Private landlords will always be about - they always have and always will be. The only factor that discourages them staying/more arriving is the purchase price of the accommodation to be rented. Other factors come into that calculation, but as you suggest, if rent-control came in, that effects the price one would pay to enter/remain in the market. At some stage, even with any changes, those calculations make sense, and the market demand for private rentals is satisfied.

by theglc | 29th Jan 19, 10:59am 1548712781

The problem with allowing the housing bubble to continue as long as it has is that yields have been often been below costs based on the ever increasing capital gain providing the return.

Now that Capital gains have stopped or are going backwards (in Akld) where do Landlords get their gains?, from rent increases of course. And because the housing is at such an unaffordable level against wages the rents become unaffordable.

We actually need a housing crash to get things back into kilter with wages

by Carlos67 | 29th Jan 19, 1:27pm 1548721658

Rents have a long way to go before they are unaffordable. Your rent is going to be top of the priority list, then your bills like power and water and transport to work. After that its all discretionary spending so when rents increase it cuts into this. Your basically riding a bicycle and living on baked beans before the rent is truly "unaffordable" .

I agree that rents are going to increase, but when I said this I got flamed. Probably because the majority of people on this site are renters.

by Pragmatist | 29th Jan 19, 2:06pm 1548723973

If rents are so affordable why are we paying accommodation supplements?

by nymad | 29th Jan 19, 2:40pm 1548726038

Mother of god.
Don't you ever suggest removing the landlord welfare system!
We are a civilised people here, Pragmatist.

by Kate | 29th Jan 19, 2:15pm 1548724506

No, Carlos, many/most renters are living on $1 bread loaves, tinned 'sugar' beans and $5 pizzas already (hence the obesity epidemic). What you do after that is over-crowd - and from what I've read, in many low income areas, we're already there too.

Rents are already extremely unaffordable based on our average wage - hence the continued growth in the Accommodation Supplement.

by PocketAces | 30th Jan 19, 8:00am 1548788401

You looking forward to the time when the pitchforks come out against the rentier class?

by murray86 | 29th Jan 19, 11:31am 1548714679

The entire point of Government is to regulate private behaviour for the greater good of society. On this basis, not only can Government set controls of rents, it has a obligation to do so. The problem is the "freemarket" economic principles that have essentially driven the bus off the cliff to the benefit of the wealthy and privileged.

I have stated this before, as the problem has got worse, the solutions to fix it have become much harder and more complex. Rent controls on their own would likely create as many problems as there are today, so other regulation must be in place as well - to regulate landlord behaviour, set the minimum standard and so on. A good analogy is motor vehicles. There is not one law to govern them, but a multitude. Imagine traffic without laws to Govern them? That is essentially the rental market.

As to landlords leaving? Some possibly many would, but they should be made to sell their properties and not be able to land bank them. And as the re-set beds in, landlords would again be making good returns, but based primarily on rental returns, having purchased the property at a sane price instead of the current situation. Exorbitant returns and extortionate rents (more than what a tenant can afford without subsidy) are both immoral and unethical and those who expect them are nothing more than parasites.

by Withay | 29th Jan 19, 4:18pm 1548731888

“The entire point of Government is to regulate private behaviour for the greater good of society. On this basis, not only can Government set controls of rents, it has a obligation to do so.” - With that thought process one could argue the government has an obligation to usher in utopia and has unlimited power to do so?

by murray86 | 29th Jan 19, 6:28pm 1548739683

That comment is a form of extremism. You suggest that because I have said they should regulate something that i mean all things should be regulated. You couldn't be more wrong. Besides if Governments tried to create a Utopia, and a few have tried, people would spend all their time trying to rort the system. Thus the game is never over.

Take it back to basics. What do you think the purpose of a Government is, and keep asking why, and you will get close to my comment? The real question is how to regulate to enable the best of the human kaleidoscope to flourish, while minimising or preventing the opportunity for harm to others?

by Withay | 29th Jan 19, 7:56pm 1548744977

The governments function is protection of its citizens life and liberty. My comment was not as extreme as yours is subjective - “the government is obliged to regulate behaviour for the greater good.” Who gets to determine that? It sounds like something out of a dystopian movie (Equilibrium perhaps?).

by murray86 | 30th Jan 19, 7:55am 1548788155

Life and liberty are another way of saying the greater good Withay. What is life and liberty when you cannot afford a roof over your head because the market has been manipulated and distored by unregulated parasites? What is life and liberty when jobs become closer to slavery than being able to fund a decent standard of living?

Who decides? That is what democracy is about. the community chooses who represents them to regulate the country. the big problem here is the quality of the characters who put their hand up for the job, as history tells us they are just as corrupt as business's and others. We are guilty of putting the fix in the hen house. So Government needs to be regulated too.

by Withay | 30th Jan 19, 9:43am 1548794621

Murray, the difference is I will try to be specific about governments role (hence life and liberty) whereas the comment “for the greater good” is very non-specific and can be interpreted differently by everyone. As you correctly point out there is a problem with the quality of characters putting their hand up for the job and corruption. This is why it is so important to define exactly what their role is so they can’t overstep their bounds. If we operate from a principal of “acting in the greater good” without defining it then we open the door to more corruption and abuse of power. I don’t mean this as a straw man but look at Venezuela. Chavez was elected to act on their perceived “greater good” and that didn’t turn out so well for example.

Long story short, neither government or business should be too big as they both can be “unregulated parasites.” Democracy isn’t a panacea unfortunately. It needs limits like everything else.

I really want to see NZ do better too, I want people to be able to afford a roof over their heads etc. The way I see this being achieved is a change of our underlying money creation system not giving government a broader missive. That’s where I see our disagreement in its most simple form.

by murray86 | 30th Jan 19, 9:59am 1548795555

I agree with 99% Withay. But i feel it is the Government's role. but you are correct for most. i do not think the money creation system is the problem, it is a symptom, and one of the tings that need to fixed.

the question is how. Having a Government that is really willing to regulate itself with transparency and integrity, to a very high standard is the ideal here. But as you indicate what is the standard and how do we set it. A job for the academics maybe?

by Withay | 30th Jan 19, 11:13am 1548800039

Happy to have a majority agreement and a small reasoned disagreement :). To the point of government self regulation, I think all regulation should be external, public and private. This would mean either the voters acting as a regulator of sorts or my preference, simple, clearly defined objectives for gov to persue.

by PocketAces | 30th Jan 19, 8:01am 1548788507

Life and liberty for whom, those who have next to nothing after paying rent can hardly be called free

by Withay | 30th Jan 19, 9:54am 1548795268

Liberty is the ability to act free of compulsion so long as your actions don’t impinge on the liberty of others.
I think what your trying to get at is financial freedom instead?

by Kate | 29th Jan 19, 2:19pm 1548724766

Yes, I heard Twyford say that. Total twat.

Didn't they effectively just introduce a mild form of rental control wrt limiting rent reviews/increases to once yearly?

by Gareth Vaughan | 29th Jan 19, 11:37am 1548715041

And with the US tax cuts a flop, the deficit continues to grow - https://www.bloomberg.com/news/articles/2019-01-28/another-year-another-1-trillion-in-new-debt-for-u-s-to-raise

by Kate | 29th Jan 19, 2:22pm 1548724940

Another neoliberal/status quo "idea" that's been tried for decades and never worked. Same here when JK did his "tax switch" - nada difference to the economy, plenty of difference to the lower incomers.

by Withay | 29th Jan 19, 3:46pm 1548729996

I don’t think the idea itself was flawed, the system it is operating in is. We are currently incentivised towards non productive behaviour I.e. speculation, so any money in this system returned to tax payers by gov typically goes to further speculation and non productive ventures. Your thoughts?

by meh | 29th Jan 19, 10:19pm 1548753560

Where else can it go? What more should we produce when we already have everything we need? What area of life is left to monetise? The greed for more wealth overrides any social/humanitarian issues.

by Withay | 30th Jan 19, 7:43am 1548787413

I don’t blame you for jumping to conclusions about greed and monetisation as that is what our current system is encouraging more and more of. I would point out however that we used to have to produce things to get money, now we are rent seeking. That’s why I say we need a system change. If we get back to production that really helps social and humanitarian issues. Look at the reduction in poverty since the 80’s for example.
By having a system that encourages production/development instead of rent seeking we would naturally see better social and humanitarian outcomes. It’s win win.

by Roger Witherspoon | 29th Jan 19, 1:19pm 1548721195

Inflation is theft? Surely, not? A warning from history:
https://www.dlacalle.com/en/venezuela-a-case-of-socialist-organized-the…

by Andrewj | 29th Jan 19, 1:41pm 1548722470

I’m betting that if you go to Washington right now Jay Powell is muttering to himself something about a series of one-year forwards.

Central bankers still don’t understand bonds because they don’t do money. They remain devoted to their outdated textbook. Don’t take my word for it, trust the curves inverted or not.'
https://www.alhambrapartners.com/2019/01/28/eurodollar-university-the-e…

by Andrewj | 29th Jan 19, 1:49pm 1548722955

Japan Cuts View of Exports as U.S.-China Trade War Hurts Trade
https://money.usnews.com/investing/news/articles/2019-01-28/japan-cuts-…

by Andrewj | 29th Jan 19, 1:52pm 1548723126

A couple of new developments in China that are worth commenting on. First, what everyone is calling a stealth QE. It isn’t. The central bank bill swap program is instead designed for two purposes at once, neither of which will follow along like an LSAP. The intent in doing this specifically right now suggests something other than stimulus.

People are finally starting to ask the right questions about China, in particular exposures to the country’s faltering economy. This is, after all, the basis for the “rising dollar” going back to the end of 2013. The global economy was either supposed to come roaring back from 2008 or, if it didn’t, EM’s with China in the lead were expected to be insulated from the fallout.
https://www.alhambrapartners.com/2019/01/25/three-for-one-in-china-stil…

by theglc | 29th Jan 19, 3:36pm 1548729392

Even our friends at the Herald have posted this very honest piece that our spruikers will undoubtedly disagree with

https://www.nzherald.co.nz/property/news/article.cfm?c_id=8&objectid=12…

by Nzdan | 29th Jan 19, 4:52pm 1548733933

While Sweetman doesn't expect falls here to be as dramatic as that, she says: "it's very difficult to paint a positive picture of the housing market in 2019."

The next question is “how careful is she being with her words?”.