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Fed minutes confirm selldown, reveals debate; airfreight markets leap higher; EU and Japan make huge trade deal; UK has insider trading epidemic; ATO hit again; UST 10yr yield at 2.33%; oil and gold lower; NZ$1 = 72.7 US¢, TWI-5 = 76.9

Fed minutes confirm selldown, reveals debate; airfreight markets leap higher; EU and Japan make huge trade deal; UK has insider trading epidemic; ATO hit again; UST 10yr yield at 2.33%; oil and gold lower; NZ$1 = 72.7 US¢, TWI-5 = 76.9

Here's my summary of the key events overnight that affect New Zealand, with news there may be signs both the EU and Japan are rethinking their dairy trade protectionism.

But first, in Washington the latest set of Federal Reserve minutes have been released and it is clear from them they have concrete plans to start shrinking the central bank’s large portfolio of bonds and other assets in the next few months. They may not be united on exactly when that will start however. Nor are they united on how to read the inflation signals. But the issues are timing, not direction.

Also released overnight were some very strong international trade data. Global air freight, measured in freight tonne kilometers (FTKs), grew +12.7% in May 2017 compared to the year-earlier period. This was up from the +8.7% annual growth recorded in April 2017 and is more than three times higher than the five year average growth rate of +3.8%. Freight capacity, measured in available freight tonne kilometers (AFTKs), grew by +5.2% year-on-year in May 2017. Airfreight prices may be coming under upward pressure as trade grows faster than capacity available.

In Brussels, where the Japanese prime minister is visiting, tweets from negotiators and a report from one news agency says there will be a major free trade deal between Japan and the EU. It is comprehensive and will include dairy products, a traditional sticking point for both. Japan's dairy industry is protected by 40% tariffs; the EU is famously sensitive about that sector. Breaking this barrier may portent wider access in other arrangements.

In Sweden, car maker Volvo announced all new models will have an electric motor from 2019. The Chinese-owned firm has become the first traditional car maker to signal the end of the internal combustion engine. It plans to launch five fully electric models between 2019 and 2021, plus a range of hybrid models.

A new report out overnight concludes insider trading in England is still a serious problem. Suspicious share trading preceded 19% of all UK takeover announcements in 2016. After a crackdown on insider trading about ten years ago there was a big drop in unusual market activity two days before takeover announcements, from around 30% to 15% between 2009 and 2014. But it crept up again last year.

In Australia, their Tax Office is being buffeted with reputation damage. Earlier it was the arrest of a very senior manager for covering up major tax fraud by his family. And yesterday, its computer systems went down - again. This time for five hours. They have a whole range of credibility issues.

Trading has resumed in New York today and the UST 10yr yield has slipped to 2.33% after the Fed minutes release.

The price of oil is lower by more than US$1.50 today to just under US$45.50 a barrel, while the Brent benchmark is now just over US$48.

And the price of gold is lower again, falling to just on US$1,220/oz.

The Kiwi dollar is slightly softer too at 72.7 USc. On the cross rates we are softish as well at 95.8 AU¢, and at 64.2 euro cents. The TWI-5 index is now at 76.9.

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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10 Comments

But first, in Washington the latest set of Federal Reserve minutes have been released and it is clear from them they have concrete plans to start shrinking the central bank’s large portfolio of bonds and other assets in the next few months.

Hmmmm....

Federal Reserve policymakers were increasingly split on the outlook for inflation and how it might affect the future pace of interest rate rises, according to the minutes of the Fed's last policy meeting on June 13-14 released on Wednesday.

The details of the meeting, at which the U.S. central bank voted to raise interest rates, also showed that several officials wanted to announce a start to the process of reducing the Fed's large portfolio of Treasury bonds and mortgage-backed securities by the end of August but others wanted to wait until later in the year.

"Most participants viewed the recent softness in these price data as largely reflecting idiosyncratic factors...however, several participants expressed concern that progress...might have slowed and that the recent softness in inflation might persist," the Fed said in the minutes. Read more

Raising the Fed Funds rate to ~3.00% will more than likely involve committing more securties to RRP draining operations to enforce the rate corridor floor. Currently this activity absorbs ~$500 billion. Some claim this could rise toward $1.5 trillion if the desired level of consumer inflation never materialises, but rates have to be normalised. Add this to the asset offset to circulating currency liabilities and at least ~$3 trillion of liquid secutities will have to retained on the Fed's balance sheet.

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Vovlo announcement is pure marketing nonsense. Hybrids are primarily driven by internal combustion engines. The electrive drive is just a small energy recover system.

"This announcement means that we will no longer manufacture cars driven by internal combustion engines," says Håkan Samuelsson. "

"Volvo Cars will launch five cleaned electric cars between 2019 and 2021, three of which will be Volvo models and two electrified performance cars from Polestar, the Volvo Cars performance brand. Full details of these models will be announced at a later date.

These five cars will be complemented by a number of gasoline and diesel-based plug-in hybrids and 48-volt mild hybrids,"

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When an electric vehicle which can tow a 2-tonne caravan over the Takaka Hill and back, total range around the 500Km mark, and be 4WD to get to those West Coast beaches, comes onto the market, I'll start to get Interested. Until then, the SUV run on truck-stop diesel will just haveta carry on.

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Range, ok.

Re towing, electric motors are capable of providing far more torque than even diesel engines, which is what's critical for towing. They would actually be much better for towing the boat, and with individual motors for each wheel you would actually be able to achieve a much better 4WD result too.

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Yes, of course they do in terms of torque. That's what's in electric or diesel-electric locomotives, after all. Plus no gearbox needed...

The issue with EM in vehicles is simple: the happy sweet spot of battery technology, cost, range and weight is still far distant for most of us. 'Affordability', a.k.a the Real World, strikes yet again.

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Well most of us don't need a car to do 500ks, nor tow a 2 tonne caravan. However, with Apple spending 12 billion a year on R&D, a big chunck no doubt on electric vehicles, add in google, tesla and all major motor companies, I suspect you might get your wish sooner than you expect.

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The only true increase in aggregate corporate cash flows over the last ten years was when businesses in the US were starting in November 2008 (when systemic liquidity was at its worst) for six months cutting an average of 700k jobs each and every month. It has been a lesson that stayed learned largely because monetary policy has done nothing to alleviate liquidity pressures (proven by more than just 2011), preferring instead the attempted manipulation of sentiment.

Spare cash is, from the view inside of boardrooms, better either hoarded or “invested” in share repurchases. Committing to expansion is under these circumstances (liquidity preferences) the highest risk scenario, meaning high risk and little expected return. Thus, the world remains stuck in liquidity preferences no matter what – at least until someone actually and directly addresses the real monetary problem. Read more

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US creating a source of greater fools?

Two major changes in the mortgage market go into effect this month, and both could help millions more borrowers qualify for a home loan. The changes will also add more risk to the mortgage market.

First, the nation's three major credit rating agencies, Equifax, TransUnion and Experian, will drop tax liens and civil judgments from some consumers' profiles if the information isn't complete. Specifically, the data must include the person's name, address, and either date of birth or Social Security number. A sizeable number of liens and judgments do not include this information and have subsequently caused some misrepresentations and mistakes.

Of about 220 million Americans with a credit profile, approximately 7 percent have liens or civil judgments against them. With these hits to their credit removed, their scores could go up by as much as 20 points, according to a study by credit rating firm Fair Isaac Corp. (FICO). Read more

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Every single car I have owned has an electric motor, usually just to run the windscreen wipers.

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Mine have all had an electric motor to start the petrol motor.

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