Here's my summary of the key events over night that affect New Zealand, with news the surprise Chinese devaluation is shaking up world markets.
But first, in the US productivity rose strongly in the second quarter, but not as strongly as was expected, and a weak underlying trend suggested inflation could pick up more quickly than economists have anticipated. Wholesale sales were flat in June and inventories remained high in other data released overnight.
And small business confidence bounced back strongly in July from a 15-month low as owners anticipated solid sales and inventory growth.
But it has been the surprise devaluation of the Chinese currency that has galvanised markets overnight. It has hit stocks and commodities and boosted government bonds prices, undermining yields. The 1.85% devaluation is the largest in its history and reflects a sudden shift in Beijing’s exchange-rate policy, changing their policy focus toward stabilising growth rather than staying on their reform program. It is noticeable that every journalist seems to want to get the term 'currency wars' into their coverage of this change.
There was also data out overnight that car sales in July in China came in -6.6% below the same month a year ago, and unsold stocks are rising.
In Europe, overly indebted Greece and its international creditors reached an €85 bln (NZ$140 bln) bailout agreement overnight after nailing down the terms of the deal-in-principle they reached a month ago - by taking on even more debt. This deal is supposed to save them from financial ruin and keep them in the eurozone.
And in Australia, business confidence has fell sharply after two months of positive sentiment, according to the latest monthly National Australia Bank survey. Concerns about China's slowdown are weighing on companies' outlook.
Similarly, Singapore reported growth of just +1.8% that was its weakest in three years, held back by those same China concerns.
In New York, the UST 10yr yield benchmark has reacted to the China devaluation consequences in trading today and is now down sharply to 2.13%.
The oil price has fallen as well and in the US, is now currently just on US$43/barrel, and Brent crude is now back under US$50/barrel.
And the gold price is higher however on all this uncertainty, but only marginally up at US$1,110/oz.
The New Zealand dollar starts today lower as 'collateral damage' from the China devaluation, now at 65.3 US¢, at 89.6 AU¢, and at 59.2 euro cents. The TWI-5 is now at 70.1.
If you want to catch up with all the local 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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20 Comments
How is Inflation healthy when the wages component of all our societies if failing to match price rises ( which is not really inflation, is it! ) We have more inflation than you can shake a stick at if money supply is the definition applied, and where has that gone? House and the stock/financial market! Do we want more of that - NB: It hasn't ,and wont' work when personal debt capacity is saturated!)).
But there is no 'real' wage inflation! Real wages across the globe are falling, and have been for decades. "But in nominal terms they are rising, and debts are nominal!" is the usual response. But as Real Wages fall, any nominal increase gets eaten up by living costs and debt servicing. All that's left to fill the gap is ....more debt! That, as we are about to find out, is a self defeating cycle in two ways (1) Higher unemployment and (2) lower asset prices - all of them - Bond prices especially ( bonds are likely to fall in price from here = higher interest rates)
Is inflation realistically still a concern to central banks anywhere?
Upward traction is decidedly absent - the hoped for turn of events is a fading memory. Graphic evidence
If it's not inflation it must be deflation. Thats bad news for those who will find themselves struggling with the real cost of their debt.
It's about not buying today what will be cheaper tomorrow. It's the consequence of borrowing from the future, which looks like it just arrived and wants it's money back.
AJ... do u remember the Stagflation of the 1970s'...?? they couldn't lower interest rates during a recession.. Not classic inflation and not deflation...
Well maybe we are in a "new " twilight zone now... Maybe A new label will be created.. " bulldeflation"...???
Thats the problem with labels.... they blind us to what is a fluid and dynamic world...
Maybe money will keep being pumped like water..... Maybe all around us asset prices will boom...commodities will be on a roller coaster.... non tradable prices will creep up BUT.. the CPI will be muted because wage rate growth is largely muted and with tradables...we just import more... People will be squeezed.
BUT... everyone cries out for more money printing...lower interest rates...... and then the next generation , without assets, finds itself in the trap of poverty...
Inflation/deflation are just labels that we are stuck in the past with ..... An economy is a dynamic , evolutionary thing...
Just like stagflation was a bad thing (Worse than inflation)..... maybe bull- deflation is a bad thing...(worse than deflation )
In fighting what we think is an economic evil, (deflation )...and wishing for inflation we have created a new demon.... "bulldeflation"...
I reckon Schumpter was right about creative destruction...
Maybe we should just let it all unravel and yet at the same time somehow support things at a daily life level..????
Just thinking on the fly.... don't have any kind of fixed view..
The way we are heading.... I think we are in the midst of the biggest asset boom ever.... along with the greatest volatility ever....AND... is is just not possible for it to end well..
Different pressures back then Roelof, coming off the gold standard was the start of a new money supply. Interest payments compound as a percentage of the money supply, so back then it was all new and interest rates were finding their natural top. Plus at that time the EROI on energy was better than now. The rate of population growth has also slowed considerably.
A dose of realism on the US economy:
http://www.cnbc.com/2015/08/11/this-is-more-damagingthan-the-great-rece…
'' Over the past year, productivity has increased just 0.3 percent and a mere 0.5 percent over the past five years, during which the economy has struggled to escape the clutches of the financial crisis and the recession that supposedly ended in mid-2009.
The result has been growth in job creation but little corresponding rise in wages and, subsequently, living standards. It's essentially been the economy's dirty little secret even as Wall Street forecasters continue to project breakout growth that never seems to come.
"This topic is still getting almost no attention—particularly among presidential candidates—but there is a case to be made that the stagnation in productivity has been more damaging to the real living standards of Americans than the Great Recession,"
"And the gold price is higher however on all this uncertainty, but only marginally up at US$1,110/oz."
Actually gold was up about $40/oz late yesterday in NZD's. And if you look at the graph in the link below, I wouldn't say gold is marginally up in USD's, I would say it has had a significant bounce: http://www.sharpspixley.com/live-prices/gold/
Perfect storm of opportunity
New Zealand obviously did not want to only rely on China, but was in an incredible position at the moment.
"The centre of the world’s economy is moving in our direction. The demand for our commodity goods is growing. Technology’s arrived – it’s actually bringing us closer to the rest of the world," Makhlouf said.
“If you actually look at it like that, there’s almost what I’d describe as a ‘perfect storm of opportunity’ for us, and the big challenge is how do we seize it, and the risk is that we fail to," he said.
Treasury was watching what was happening to inflation in China, as well as watching to what was happening to house prices. The issue worried Treasury.
"There’s a big issue in China whether actually the housing market’s completely unstable. Anything that’s potentially going to damage Chinese growth, as our second-biggest trading partner, could have a big impact on us," Makhlouf said.
"On the other hand, I’d just observe that in China, there’s not a lot of leverage [in the property market]. So it’s not the typical consumer debt-fuelled scenario that a lot of the Western world’s gone through, but we have to keep an eye on China,” he said.
"The long and short of it is we’ve got to keep an eye on China, and understand it, and understand the opportunity, but also understand the risks there so we can better manage them.”
Over to you, Gab, give us the plan for managing these risks now.
http://www.interest.co.nz/news/54094/makhlouf-says-21st-century-will-be…
Maklouf was deeply implicated in the disaster that was Gordon Brown's chancellorship of the UK's economy (he was his private secretary). He, along with his minions in the UK Treasury/HMRC were apparently oblivious to the UK's housing bubble and the development of their debt mountain, which eventually led to the run on banks such as Northern Rock, and which came close to destroying the UK's economy. And we import him down here and put him in a major position of responsibility and expect his ability to call our economy to be markedly different to the abilities he demonstrated in the UK?
Folk should also not forget that one of Maklouf's first public pronouncements was that Treasury should drop all screening of foreign investment in NZ (back in 2011):
http://www.nbr.co.nz/article/controversial-brit-takes-treasury-top-spot…
http://www.nbr.co.nz/article/treasury-drop-all-screening-foreign-invest…
Yep, your tax dollars (and rather a lot of them) are going to pay this sage for such profound advice....
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