US service sector expansion slows; credit tightens; Vancouver housing cools sharply; Apple pays taxes secretly; investors love Hayne outcome; Aussie retail growth stalls; UST 10yr 2.70%; oil slips, gold stable; NZ$1 = 69 USc; TWI-5 = 73.1

Here's our summary of key events overnight that affect New Zealand, with news of some somewhat surprising fallout in Australia over the Hayne Report.

But first in the US, a sharp drop in new orders has weighed heavily on their service sector expansion. The ISM said its non-manufacturing activity index dropped -1.3 points to a reading of 56.7 in January. That was the lowest reading since July last year and marked two straight monthly declines. The Federal Government shutdown was blamed, but the surveyers are eyeing a broader mood change as well. The Markit equivalent recorded a very similar decline. Still, both surveys are showing healthy expansions, just at a lesser level.

And a growing number of banks (but still a minority) reported tightening their standards for loans in the fourth quarter and said they expected loan demand and performance to weaken.

In Vancouver, their once red-hot housing market continued to cool as the number of home sales fell to the lowest level seen in a January in 10 years. Only 1,103 homes were sold, down almost -40% from the same month a year earlier. The situation in Toronto is much lower as well.

In Europe, it is being reported that tech giant Apple reached a secret deal with French authorities to pay back taxes late last year, forking over about €500 mln in the confidential settlement. Apple has confirmed there was a deal, but not the amount it paid.

In Australia, the equity markets have decided that the Hayne Report was a clear win for the banks. In fact, they rushed to buy, adding more than NZ$20 bln to the value of the market in a single day.

Both S&P and Fitch have said the Hayne Report is credit positive overall for Australian banks, despite some near-term challenges.

The RBA interest rate review left official settings unchanged last night. It was a sanguine review, with the observations that "The main domestic uncertainty remains around the outlook for household spending and the effect of falling housing prices in some cities. The housing markets in Sydney and Melbourne are going through a period of adjustment, after an earlier large run-up in prices." Although tighter credit conditions were mentioned, the central bank seemed unconcerned. The adjustment is just one they know they need. And with the Hayne Report behind them and not as scary as anticipated, the risks of tighter credit conditions seem less enhanced. Still, they did trim their near-term growth forecast.

Australian retail sales fell -0.4% during December as online sale events in November reduced consumer spending in the weeks before Christmas. Markets were expecting a low result, but not a negative one.

But Australia has recorded another monster trade surplus in December to round out a surprisingly strong year, thanks to a large fall in the value of imports. Their trade surplus swelled to almost +AU$3.7 bln in the month and miles ahead of the +AU$2.2 bln surplus expected. In all of 2018, they recorded a surplus of both goods and services of +AU$22.2 bln, substantially higher than the +AU$9.9 bln in 2017.

The UST 10yr yield is lower today at 2.70% and falling -3 bps from this time yesterday. Their 2-10 curve is now just on +18 bps. The Australian Govt. 10yr yield is at 2.24% and a +1 bp rise overnight. The China Govt. 10yr yield is unchanged at 3.15% because markets there are closed of course, while the New Zealand Govt. 10yr yield is at 2.24% and a +2 bps gain.

Gold is not moving anywhere today and is still at US$1,314/oz.

US oil prices have moved lower today are now just under US$54/bbl while the Brent benchmark is little-changed at just over US$62/bbl.

The Kiwi dollar will open today in offshore markets at 69 USc, representing a slight firming overnight. On the cross rates we are at 95.3 AUc, and at 60.5 euro cents. That puts the TWI-5 up to 73.1.

Bitcoin has changed very little overnight, firming marginally to US$3,421. 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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13 Comments

Says it all Andrew the problem is the political cost of changing the path we are now on is too high only a major financial crisis will present the opportunity for a proper remedy.

Oh dear, the Aussies are beating us hands down:
Australia has recorded another monster trade surplus in December to round out a surprisingly strong year, thanks to a large fall in the value of imports.

So, their productive economy is doing very well and their speculative economy is deflating, it seems. How sensible.

The comparison with ourselves looks like a 100 to 0 win for the Aussies. Or perhaps AU$ 22.2 bln to -NZ$ 10.5 bln is even worse than that. Well done Australia.

I haven’t looked into it at all but do you know if there’s a reduction in consumption (brought about by the banks issues) in au that is helping push it towards a trade surplus rather than a deficit?

Not really. I know headline writrers focused on the drop in imports for the month of December. But for all of 2018, merchandise trade exports were up about +10% and service exports were up about the same. Imports rose on that basis too, but by less, about +8%. That was how they got to an annual AU$22 bln surplus (goods and services), comapred with less thah +AU$10 bln the prior year. That December shift you mention is trivial in the over scheme of things. And December exports were really strong.

Thanks David. Appreciate the in depth response.

What would those figures look like if the banks were NZ not aussie?

So we had a decade of government by property investors (3.4 properties per MP) and now what we have to show for it is a productive economy falling ever further behind our neighbour, higher housing prices than ever, and myriad barriers to increasing housing supply.

Well done New Zealand. Me included.

Lower Sydney house prices now incentivising buyers to upsize.
https://www.oneroof.co.nz/news/35926?ref=nzhhome

Sure, Must be an opportunity to grind sellers lower, but you also need to be prepared for it to happen to you.

Perhaps an advantage trading up in a downturn.
E.g. you sell your 500k house for $450k due to 10% downturn, but you buy a Million dollar house for 900k or lower due to downturn. And the higher price bracket houses get hit harder so maybe more than 10%.

Right, but your example doesn't show any opportunity, It's all relative. However, higher priced homes may be more susceptible to greater discounting during property corrections or busts.

Trump is trumping again in the State of the Union address.