ECB starts its unwinding; US pending home sales slow; Mexico's trade deficit rises; China sells Govt bonds successfully but major losses loom; Fonterra likes Australia; UST 10yr yield at 2.45%; oil and gold unchanged; NZ$1 = 68.5 US¢, TWI-5 = 71.6

Here’s my summary of the key events overnight that affect New Zealand with news the Chinese bond market is giving opposing signals.

But first in Frankfurt, the ECB has decided to reduce the pace of its new bond-buying from €60 bln per month to €30 bln per month, starting in January 2018. This start of the ECB unwinding comes more than four years after the US Fed started along the same path. The ECB move comes as it raises its forecast for growth in 2018 to +2.2% across the whole currency union. That would be the fastest rate in ten years. But it is still a long way from moving off its 0% policy rate and its -0.4% negative deposit rate.

In the US, pending home sales – deals done but not yet closed – are slipping. In fact, they are now at their lowest level since January 2015, -3.5% below a year ago, and have fallen on an annual basis in five of the past six months. The after effects of recent storms has affected the market, the lower end especially. High priced housing – over US$500,000 – is seeing strong growth and activity.

In Mexico, they posted a larger trade deficit in September that expected. Imports are growing faster than exports there. But it is their trade with the US that is behind the shift. Exports to the US grew just +1.1% while exports to the rest of the world grew by more than +15%.

China’s US$2 bln bond sale has been done and the yields achieved are just a little higher than for US Treasuries. These 5 years bonds were sold at a price to yield 2.196%, or just 0.15% over comparable US Treasuries. That is being touted by officials as a sign of investor confidence in the financial health of China’s economy. But confidence in their bond market may not last; Chinese Government bond futures slumped and yields surged on reports that financial regulators planned to impose stricter controls on borrowing by commercial banks in the interbank market, the main source of short-term funding for financial institutions and the biggest trading platform for bonds. Yields on their 10 year are now over 3.8% and markets expect them to be over 4% relatively soon. Holders are facing significant, quick price drops (that is, losses).

In Australia, Fonterra is now their largest dairy company. Rival Murray Goulburn is on the block and although Fonterra is a bidder, it will probably lose out to the Canadian company Saputo. But that expectation is spurring Fonterra on across the ditch with substantial new investment and hundreds more farmer suppliers. The prize is capacity to supply Asia, something that is not growing fast enough in New Zealand.

In New York, the UST 10yr yield is holding at 2.45%

The price of crude oil is marginally higher today and now just under US$52.50 / barrel, while the Brent benchmark is just under US$59.

The price of gold is unchanged at US$1,272 oz.

The Kiwi dollar has slipped slightly from this time yesterday, now at 68.5 US¢. And on the cross rates we unchanged against the Aussie to 89.2 AU¢, but we made a tiny gain against the euro to 58.5 euro cents. That puts the TWI-5 index virtually unchanged at 71.6.

If you want to catch up with all the changes yesterday we have an update here.

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

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