Here's our summary of key events overnight that affect New Zealand, with news some investors are pinning a lot on post-G20 assumptions, others are far more sceptical.
All eyes are on markets to assess investor reactions to the G20 summit decisions between the US and China. Yesterday, Shanghai raced higher, up +2.6% narrowing their 2018 loss to -20.7%. Today, Wall Street's S&P500 index is up in midday trade, showing a daily gain of +1% and that means its full 2018 gain is just +3.2%.
Equity markets may have given a thumbs up, but bond markets are far more sceptical. In fact the UST 2-10 curve is now under +17 bps and at that is its lowest level since June 2007. This is a sharp reduction from yesterday's +20 bps and last week's +23 bps. But at least its not negative yet. In four of the past four instances when this differential turns negative, the US falls into a recession lasting at least six months.
Meanwhile in the engine room of the real American economy, construction spending fell for a third straight month, while private-sector figures showed an uptick in manufacturing order growth but offered a mixed view on overall factory activity.
In Mexico their factory sector slipped into a contraction, while Canada achieved a small gain in an already healthy expansion.
China's factories have stopped expanding, but they aren't yet contracting either. Clearly Shanghai investors think that is about to change for the better.
In Europe, the ECB is to adjust the capital shares of its member national central banks, a step that will have implications for its bond-buying program and the amount of stimulus reaching the euro area’s weakest members.
In Australia, CoreLogic reports that since peaking in July last year, Sydney’s housing market is down -9.5% which is on track to eclipse the previous record peak-to-trough decline set during the last recession when values fell -9.6% between 1989 and 1991. Melbourne dwelling values peaked four months later than Sydney, in November 2017, and have since fallen by -5.8% through to the end of November 2018.
Although their core housing markets might be weak, their equity markets caught the US-China truce bug, rising +1.8% yesterday. Those investors are betting that China is the winner here and they will need more of what Australia sells them. The only problem is that they are not looking at the iron ore price; it fell -10% over the past few days.
Tomorrow we get data on Australia's Q3 GDP growth. It is expected to come in at +3.3% pa, just marginally lower than the +3.4% result for the June quarter. This result will have an outsized influence on the NZD if it surprises.
The UST 10yr yield is unchanged at 2.99%. More importantly however, their 2-10 curve has slipped another -3 bps to now be under +17 bps and its lowest since June 2007. The Aussie Govt 10yr is at 2.60% (up +1 bp), the China Govt 10yr is at 3.40% and up +2 bps, while the NZ Govt 10 yr is at 2.61% and also up +2 bps.
Gold is up +US$11 to US$1,233/oz.
US oil prices are higher today having gained about +US$1 US$52.50/bbl. The Brent benchmark is now just on US$61/bbl. Russia and Saudi Arabia have agreed to extend their production cuts.
The Kiwi dollar is starting today firmer again at 69.3 USc, which is a ½c gain overnight and its highest since mid June. On the cross rates we are unchanged at 94.2 AUc, and up at 61.1 euro cents. That puts the TWI-5 at up to 73.8 and its highest since April.
Bitcoin is sharply lower, now at US$3,812 which is a -6.8% loss overnight. This rate is charted in the exchange rate set below.
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61 Comments
"The cycle merely repeats where China now joins the rest of the world under a confoundingly low growth ceiling. Nowhere is this more evident than in that country’s industrial base, which despite so much targeted rhetoric remains the economy’s central axis.
Chinese industry never recovered from 2014-16, that last burst of “rising dollar” eurodollar disruption that closed off any chance for global recovery. Even during the “best” parts in early 2017, it was never all that good especially for private industry.
This more than anything explains the Chinese predicament. The economy was walloped by an enormous deflationary wave and was never able to regain its footing. Not for lack of trying, of course, as authorities threw everything they could at the problem. Immense fiscal “stimulus” in 2016 was aided by more creative monetary measures (Hong Kong) attempting to both stabilize China money internal as well as external (CNY)."
Nothing worked because globally synchronized growth was itself nothing more than a fairy tale, a companion narrative to rebalancing.
https://www.alhambrapartners.com/2018/12/03/chinas-global-slump-draws-c…
Interesting comparison:
https://www.unz.com/freed/comparing-china-and-america/
Fred Reed should move there.
https://www.radionz.co.nz/national/programmes/voices/audio/2018673567/c…
If you're on the average wage in Sydney, and own a house worth the average value, the decline in average property value in the last 12 months nearly matches your pre-tax income for the last 12 months.
What on earth is going through your head as you trudge off to work?
" I wonder why Wayne Bennet really went to the Rabbitohs?"
Because had that same buyer given any thought to the maths and probability of a correction taking place in the Sydney property marketplace, (it was all over the news, just as it is here, one way or another) they probably wouldn't have bought that average house in the first place.
You don't even worry about it Masher. I bought a house in the early 2000's and the GFC came and went and I didn't even notice it. Home ownership is a long term game and the house price will double by the time you finish paying the mortgage and the fact is you need somewhere to live and renting sucks.
And could you afford to buy that very same house today, at the price you'd expect to sell it for?
That's the problem. Many people couldn't even afford to buy the home they live in today at today's prices. There's a clue there.
Arguably, the early 2000's were the last time house were affordable on a maths basis. ie: if you bought and rented it out then, you covered all costs and maybe had something left over as investment profit - no NG needed! That doesn't apply today by a wide margin.
So what happens now? Do we keep 'doubling' and have 90% of today's young excluded from the ownership market and have to rent all their lives? ( there is a problem for society now, and in 30 years time!) Or does the market give them a go and get back to a level that you had in the early 2000s and let them affordably buy?
My hope is ...the latter.
I had a look at an interesting theory that when corporate tax take drops then a recession happens in the US. With a stronger correlation since 2000. Corporate tax take is definitely down this year in the US. Of course you can't really see if there is a recession or not until you're already in it.
Interesting article.
Why are our politicians turning a bling eye????? or are they....
https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12…
The report said New Zealand's Chinese diaspora - now 200,000 strong - had maintained neutrality and independence during the Cold War, but in recent times local NGOs and Chinese-language newspapers had been drawn into China's orbit.
Putting aside the fact that the author doesn't seem to be able to distinguish between Chinese people from civilised places like Hong Kong and Singapore, from Mainland Chinese people more subject to CCP coercion, there does seem to be a change in the propaganda effort by both sides. Xingmo's bias used to be well hidden, now it is not. "Dancing with the Dragon" was considered a good thing here until recently. I guess the CCP militarising the reefs and atolls of the South China Sea has exposed their naked imperial ambition. Deng Xiaoping did warn them not to be too bloody obvious about it.
Some years ago while studying, and having just read Jung Cheng's book Mao, the untold story, I was discussing China and the excesses of Mao and their impacts. In the group was a Chinese student and she made it clear that I, (and the implication was clearly 'we') did not understand China and it's history. This student revered Mao, and while not denying his excesses, essentially said they were not relevant. While China today has moved on somewhat from Mao, from a western democratic perspective there remains some clear legacy issues, not the least is the One Party State issue and how China treats its political opposition internally.
To me the Chinese seem to present two faces. On the one hand they are endeavouring to understand the world. Many seem to be quite learned, worldwise and open to or 'western' way of life. On the other they are very loyal to China, and remarkable accepting, and defensive of the lack of political freedom and it's consequences.
I wonder if it is a pschological thing, dissatisfied at home and looking for something better, but the cultural shift is just too great to be easily made. I think some will fall into this, but i am also sceptical that it may be an invasion by stealth, part of a bigger plan by China.
Was that off my recommendation? It is a damn interesting read eh. We don't understand. Lol. A bit like saying exponential growth doesn't apply to China, they are different. What is perhaps the most significant part of the comment by that Chinese student is the arrogance to dismiss a well researched and referenced piece of work.
I've read Wild Swans and a couple of others around the time, including one (I think it was) by a relative of Zhou Enlai.
I worry sometimes that the default "you don't understand China" becomes too much a default go-to whenever anyone points out a failing or makes a criticism, as if anything and everything should be accepted as good or right or best.
Agreed. One thing about human politics is that no matter where you come from, what your culture or colour of you skin, the politics do not change. People seek to preserve their power and privilege, and control those they percieve to be 'inferior'. The US clearly demonstrates the truth of the adage - "the only thing necessary for evil to prevail, good men must do nothing".
60% of Fortune 1000 companies will be out of business in just next 10 years
http://worldoutofwhack.com/2018/12/02/60-of-fortune-1000-companies-will…
That has some corroboration with this. https://www.ted.com/talks/geoffrey_west_the_surprising_math_of_cities_a…
Sigmoid Curve = Seneca Curve
Note what he says about the pace of change though, to keep up growth via new innovation you have to innovate exponentially. Not only do you make the treadmill faster, you have to keep adding treadmills.
But I love how prescient the last graph is. 23,000 companies across the US slowly dying, and that talk was done in 2011. He could have predicted GM's woes. I find that few people have the capacity to understand a rate of change.
Everyone is looking for growth, but growth is slowing. But it is frog in the pot of boiling water scenario, it is happening slowly so people don't realise it is happening. They won't jump out of the pot in time. Everyone keeps looking to accumulate just a bit more in the hope that they will be okay, but failing to realise their behaviour is part of the problem. This is well represented here by property investors, just one more rental and they will be immune, haha good luck with that.
That comment about looking for growth perhaps under pins most if not all our problems. first we live in a finite system, and the impacts of perpetual growth are becoming evermore evident. Perhaps business's need to change from growth to 'change'. Understand that they operate in a finite system, but that there is a perpetual cycle of change, and if you can adapt to change, earlier is better, then your future may well be more secure.
Examples may well be fuel companies exploring alternate energy sources, including batteries and working to make them affordable and useable. God knows they made enough profit over the years to be able to lead this research. Vehicle manufacturers producing alternate fueled vehicle (already happening, but frustratingly late, glacially slow, and expensive!).
House builders and home technology companies, and even municipal authorites only support ecologically sound building technologies. E.t.c!
Think about it like this…
Let’s say, for example, that you’re a “normal” guy or gal or Bruce or Sheila. After graduating uni or doing some form of tertiary education so you can pretend you’re not really a kid anymore, you’re probably mid-20’s. Throw a year or two in there to go see the world, drink far too much, and try not to get any STDs while simultaneously spending as much time horizontal as possible, you settle down and buy your first house.
You’d be late 20’s, early 30’s. Well, any Ozzies from the main centres such as Melbourne, Brisbane, and Sydney that have done that and who are not over the age of 60-ish have NEVER experienced a recession. And they’ve NEVER experienced falling house prices.
That’s really quite something, wouldn’t you say?
https://capitalistexploits.at/2018/12/juncker-speaks/#comments
Meet the Australian Property Investors of the year 2012
For fans of 60 minutes and all things Channel 9:
Bricks and slaughter: Part one - Exposing Australia's housing crisis | 60 Minutes Australia
https://www.youtube.com/watch?v=smPR0s2W-Ck
Bricks and slaughter: Part two - Exposing Australia's housing crisis | 60 Minutes Australia
https://www.youtube.com/watch?v=BbFvwYVfwq0
It’s no secret that Australia is experiencing a downturn in the property market. But for Aussies who own their own home or have a mortgage, there’s worse news. Many believe calling it a downturn is foolishly optimistic – the slump we are in is more like falling off a cliff. On 60 MINUTES, Tom Steinfort speaks with real estate and finance experts who predict property prices could slide by as much as 40 per cent in the next year. And if they’re right and numbers like that eventuate, there’s only one certainty: our entire economy faces catastrophe.
Reporter: Tom Steinfort
Producers: Gareth Harvey, Joel Tozer
all on the back of lower bank lending standards, the road to riches, owning other peoples houses.
https://www.thincats.com.au/blog/banks-just-want-houses/
I see our govt is borrowing 800 mill a month, perhaps they are getting in on the game too.
One in three mortgage holders are "potentially" over exposed. This means they are in trouble if they lose their jobs or encounter some other misfortune. However this is only going to happen to a small fraction of them. Increasing wages and high employment levels means that the majority will only need to do some belt tightening if the bank demands principal repayments.
The great majority of interest only mortgage holders are likely to have a large amount of equity in their own homes and have invested in a rental property. They are probably two income households. They may need to limit their overseas holidays or that next new car purchase if they are asked to repay capital but they will get through it.
They probably need a bit of a challenge in their lives to to be honest.
It's tolerable stress in most cases though. Two good incomes, high equity in the family home. The media have only highlighted a couple of extreme examples, people who got greedy and didn't think ahead, which get trotted out again and again. Yeah they're paying out more than what's coming in but still considerably less "stressful" than an average income earner paying rent each week.
I seriously doubt, willing to put money on this, that one third of mortgage holders are paying out more each week on essentials than they are earning in wages and other income streams.
While there’s no firm criteria for defining mortgage stress, a common industry benchmark is to consider any household where over 30% of the household’s post-tax income goes to servicing a mortgage as being in mortgage stress.
I technically ran at over 50% 40% for many years and still had holidays and wanted for nothing. A lot of renters are running at 40%+.
People can live very frugally if they have the will. No holidays, a second job, work overtime. Turn off the heaters. grow vegetables and buy in bulk. No new clothes. Make do with what you have. it's kind of fun.
But no, what do I see, shopping malls packed, can't find a park. everyone driving a better car than I do. Buying coffee, restaurants full. Holidaying on the Gold Coast and going to Dreamworld.
People can live very frugally if they have the will. No holidays, a second job, work overtime. Turn off the heaters. grow vegetables and buy in bulk. No new clothes. Make do with what you have. it's kind of fun.
Not good when the consumer economy drives 60%+ of GDP and drives employment / income growth. Be careful what you wish fo.
Zac,
nothing to do with your 30%, 40%.
its the DFA numbers
its people paying out more money then they are getting in,
Zac Zac
this is for you
https://www.youtube.com/watch?v=9RlVihZCU8g
it will help you when you think about Australian market, Australian Borrowers and Australian Banks.
I was in Aussie very recently up the coral coast. I hit the shops a few times, and a market. I was struck by the lack of business in the shops. They were empty. The sales assistants were bored. I didnt see anyone making sales. The market was a washout. The vendors seemed down and desperate. Plenty of people wandering around, the only thing selling. Coffees. It could have just been a slow november. Its not their busy time up there.
Andrewj your above feed touches just briefly on the real culprits.The RBA and the RBNZ. By accepting the Basel rules on capital required they are encouraging the trading banks to lend almost exclusively on residential to the cost of business farming and industry. The banks are commercial businesses, it is obvious they will pursue the best returns for their money. I have recent personal experience of the impact of my bank maximizing their return using the current risk assessment guidelines of the RBNZ.
it was only in the 70's we were all so poor, then the financial markets got going and we all became rich. some just more than others. Lets crash this party and buy assets at cents on the dollar, with money created out of thin air.
We really were so much poorer.
https://www.youtube.com/watch?v=pFafPqsW3Cg
agreed, the bankers BIS cap ratio make them thinking lending to small business a poor choice.
takes more reserves etc.
so that access to money and low interest rates are presented when everything is tied to the property.
its a crowding out factor.
The banks in Australia have risk models that revalue house values on a daily basis.
- check out the Jonathon Tepper on the jolly swagman pod cast.
https://www.youtube.com/watch?v=9RlVihZCU8g
I compare our current main bank - they put zero value on plant, machinery and vehicles for security. It takes too much effort to assess market value and their loan to value ratio doesn't make it worth the work and hassle. Compare that to many years ago UDC funded a business of ours solely using plant and machinery as security. We were able to update our gear, become more efficient and expand our business. Go figure.
Also in the G20 afterglow is this rather baldly stated ambition - 'from Shanghai to Lisbon', from the Great Dictator hisself - Vlad Putin:
...the eastward swing is long overdue. Only as part of a Russian-Chinese "Great Asia" from Shanghai to Lisbon could Russia find its way back to itself, after centuries of being set back as the European periphery.
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