Here's our summary of key events over the weekend that affect New Zealand, with news regional governments are starting to organise some push-back against China's Belt & Road initiative.
Firstly however, there is a range of data out in the US pointing to varying outcomes.
Housing starts dropped sharply in February and were -4% lower than the same month a year ago. That is a drop of -50,000 new houses worth some US$12.5 bln and not insignificant.
But overall industrial production was up +4.4% in February from a year ago, and well above analysts expectations of a 0.3% gain. That gain brought quite a strong rise in capacity utilisation and its highest since January 2015.
And consumer confidence is rising with one survey at its highest level since 2004 and a new record high. Driving this is the immediate expectation of conditions. But consumers are wary of longer-term consequences of current policies, with that part of the index dropping.
The latest data shows that China is slowly reducing its holdings of US Treasury debt. All up, foreigners hold US$6.3 tln of this debt or 30% of the total $20.9 tln but US$5.7 tln of that is intergovernmental holdings. So of the debt held by the public, this foreign holding is 41.3%, of which China holds 7.8% and Japan holds 7.0%, both levels too small to be a serious security threat to the Americans.
In China, a good proxy for real activity is their rail volume activity which increased +8.2% in February from the same month in 2017, although that was down from a +9.4% year-on-year increase in January.
More than 100 countries have agreed to try and get an international consensus on how to tax digital businesses across borders as part of the BEPS initiatives - all in the next two years. Trying is one thing, but getting agreement may be tough. However, the EU is proposing a 3% tax on their revenues and may do that on their own.
In Russia, their central bank is shoring up two financial institutions hit by international sanctions over Crimea violations. It will cost the Russians up to 3.8% of their GDP to protect these two banks. It comes at a tricky time for Russia who is facing new sanctions after their chemical attack in the UK.
In Australia, their Reserve Bank has warned investors that a shift higher in global interest rates could impact other asset classes as major governments shift from net buyers to net sellers of bonds.
And staying in Australia, They are joining with ASEAN to push-back against China's dominance of infrastructure funding and the influence across the region. The plan is to design new regional development projects free of China's influence and debt-traps, partly fund them with private sector and regional institutions like the Asian Development Bank, and keep them competitive with subsidies in national aid budgets. They are being helped by increasing wariness of the price China expects for its brand of largess.
In New York, the UST 10 yr yield will start the week a little higher at 2.85%. Interestingly, New Zealand is not seen as particularly vulnerable to rising interest rates, but among those that are is Australia. It is all to do with exposure to floating rates.
The gold price has slipped again, down -US$4 and now at US$1,314/oz.
Oil prices are up marginally today with the US benchmark just over US$62/bbl and the Brent benchmark now just over US$66/bbl.
The Kiwi dollar will start today ½c lower at 72.2 USc. On the cross rates we are unchanged at 93.6 AUc and 58.7 euro cents. That puts the TWI-5 at 73.4.
Bitcoin is now at US$7,460, down -8.7% from this time on Friday. It has been slipping steadily all weekend and is now at its lowest in more than six weeks.
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6 Comments
The global interest rate situation is all rather fascinating.
On the one hand you have China and Japan with trillions of US government bonds, the result of their excessive current account surpluses over the decades. Which was the result of their successful gaming of the international money system. For thirty years these US government bonds have been a good investment as steadily decreasing interest rates have inflated their value. All that has changed. They now own trillions of US government bonds that are steadily falling in value as US interest rates rise. What to do? If they sell them they will push up their own currencies (sell USD, buy CHY) and lower the value of their remaining holdings. Well and truly trapped.
As regards New Zealand, we are in an interesting position. Our low government debt and high housing debt means the RBNZ has us well and truly in their grip. If the RBNZ want to cool things down they have only to put up short term interest rates. They are free to do this as the effect on our government finances are manageable. Most countries are not so fortunate.
This is the most interesting graph to me at the moment, it shows 12 month Libor, which is a way of measuring the demand for wholesale bank finance (as in, where our Aussie banks go for offshore funds):
https://fred.stlouisfed.org/series/USD12MD156N
Obviously not so simple but there is a perception that a rise in interest rates will up the NZ$. Said NZ$ is liberally slated as being seriously over valued, but on the other hand, reducing interest rates has not had much impact on that. Seems to be NZ just goes where tides take it as and when the big global economies have their “moments.” What has worked for NZ so far, is that it middles out and has not had to experience either a too high or too low tide.
The U.S. Government debt passed the $21 trillion mark over the weekend. http://www.usdebtclock.org/
It will be interesting to see how long it takes the bond market to factor in this exponential increase in U.S. Gov't debt.
A little fact from Ireland,where only 3150 homes nationwide are available to rent.House building has collapsed ,in part due to high construction costs. Rents have surged,house prices have moderated,but sales have collapsed. Berkeleys,following on from Redrow last year ( large U.K. Based home builders) have stated that they cannot ramp up building to meet government targets,planning costs being a major issue. Does New Zealand have some special fairy dust, or should we go and purchase a rental property
Yes, you can argue that NZ (and Australia for that matter) does have special fairy dust. And we don't just have the dust, we can actually make it by the truckload. It's actually juicing our economy because what it does is make people feel elated about everything and they will spend more money, which is really the lifeblood of the nuts and bolts side of our economy. The problem with fairy dust is very little is known about the side effects and there doesn't seem to be any example of of it being used without some kind of massive upheaval at some time in the future.
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