US Fed recalibration reveals confusion; US budget deficits cause concern; US home sales flat, Canada inflation stays up; China investment pulls back, Aussie fears; UST 10yr yield at 1.58%; oil mixed and gold down; NZ$1 = 64.1 USc; TWI-5 = 69.4

US Fed recalibration reveals confusion; US budget deficits cause concern; US home sales flat, Canada inflation stays up; China investment pulls back, Aussie fears; UST 10yr yield at 1.58%; oil mixed and gold down; NZ$1 = 64.1 USc; TWI-5 = 69.4

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Here's our summary of key events overnight that affect New Zealand, with news a spotlight is being thrown on some very large risks and some very large unintended consequences.

But first, the latest minutes show the US Federal Reserve debated cutting interest rates more aggressively at its last meeting, although they were united in wanting to avoid the appearance of being on a path to more rate cuts. The debate caused a split over whether to cut rates and by how much. In the end the cut they agreed was seen as a mid-cycle adjustment, a “recalibration” rather than the start of a more aggressive easing cycle. They clearly are unsure how future moves will unfold.

There is much to worry about. The key issues will get debated, with international participants including our own Governor Orr, at the Jackson Hole meeting that starts today.

One of those worries is that US federal deficits are projected to swell more than expected over the next decade, according to the Congressional Budget Office. Yesterday, the US Administration said it was looking at cuts to their capital gains rates and their payroll tax rates. But today they ruled these out. The spectre of trillion dollar deficits from an Administration who claimed they would produce a surplus as a result of their previous tax cuts-for-the-wealthy, is too much even for them. That fantasy has been thoroughly debunked.

American existing home sales rose more than expected in July, boosted by lower mortgage rates and a strong labour market. But they are only up +0.6% above the level of July 2018, so it is a boost above expectations rather than any real growth. Including 'points', American mortgage rates are generally higher than those in New Zealand. Median prices dipped from June to US$280,800 (NZ$438,200) but are +4.3% higher than a year ago.

In Canada, their inflation rate stayed at 2.0% in July and that defied the expected decline. Rising food and durable goods prices kept their CPI rate up.

China is pulling back on outbound investment, with the value of deals dropping -18% in the first half of 2019, the sharpest fall in more than ten years.

And China's monetary authorities say they are mulling official interest rate cuts and easing of their reserve ratios as a way to stimulate their economy.

In Australia, a new report says their universities face a 'catastrophic' hit if China rolls out currency controls to defend itself in the trade wars. The loss of up to -AU$1 bln from Chinese students would hurt in fundamental ways, the report claims.

And from the file of unintended consequences, the Aussie tax office has ruled that those who receive compensation from banks as a result of the Hayne inquiry into financial services may be held to owe back taxes for those earlier periods, and will need to fix filing an 'incorrect' tax return. Tax on more than AU$6 bln is involved.

The UST 10yr yield is still at 1.58%, little-changed from this time yesterday. Their 2-10 curve is flatter however, now at just +1 bps and their negative 1-5 curve is wider at -30 bps. Their 3m-10yr curve is wider, out at a negative -48 bps. The Aussie Govt 10yr is unchanged at 0.93%. The China Govt 10yr is up +2 bps at 3.06%, while the NZ Govt 10 yr is unchanged at 1.09%.

Gold is also little-changed, down -US$2 and now at US$1,504/oz.

US oil prices are a little softer today at just on US$55.50/bbl. The Brent benchmark is unchanged US$60.

The Kiwi dollar is softer against the US dollar and now just below 64.1 USc. That is a -4.4% devaluation since the beginning of July. On the cross rates we are lower at 94.4 AUc. Against the euro we are unchanged at 57.8 euro cents. The TWI-5 has now drifted down to 69.4.

Bitcoin is now at US$10,090 and that is a -6.2% drop since this time yesterday. The bitcoin rate is charted in the exchange rate set below.

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

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38 Comments

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Now a 63 handle on the USD cross – importing inflation?

The RBNZ may get it’s wish – lucky them!

the irony is that once inflation hits target, the next story is that it has to stay up so it can be sustained

Be interesting to see Snider's analysis of the money flows there, could it still be tracked back to the eurodollar?

Have a look at this
http://www.hurriyetdailynews.com/turkish-treasury-borrows-830-5m-through...
What will happen when and if the Turkish economy collapses. Who will be stepping in to pick up the pieces. It is a strategically key country for a lot of conflicting international interests.

16
up

Once Turkey gets closer to total collapse under a mountain of debt they could then formally join the EU – at that point they should meet the general criteria required.

you mean, once Italy leaves!!!

I was wondering with the governments focus on higher density housing where the workshops will go. Workshops where future inventors learn their craft as children, their place to play so to speak. We used to have them. Centralisation of farms is likely causing the same problem in agriculture/horticulture, the small family owned lots being the place where these types start out when young. I see the same problem with solo mums when they set themselves up a home, the only thought to a working space is the kitchen (I am sure there are some good exceptions).

I was going to applaud your sarcasm, but perhaps bitter irony is a more apt description....

How about some more irony. Used to be a builder might show aptitude at an early age in one of these home workshops. Now they have to pay to do a course to learn the skills just so they can get an apprenticeship. When qualified they can then build these high density homes without workshops.

Good for us mature types who grew up maintaining bicycles motorbikes and cars in home garages and workshops with non-smartphone related hobbies that developed hands-on build/construction/repair skills - we are becoming more valuable in a world with mechanically clueless young adults. Those kids are going to be bled dry by blue collar workers in their future lives.

Indeed, seeing the way parents are misusing devices as an easy way of placating and occupying children...the kids never have a chance. Adversely affected from a young age (research is starting to suggest) as well as being the most advertised to generation in history. The kids are a product of the inputs they receive.

I was having a go at Nymad yesterday in his claim about infinite ability to innovate. My comment there was in regard to nutrition, the lack of which is causing a lowering of average height and IQ now. Lack of real world input caused by digital devices is an additional way of retarding intellect.

The average American on the street;

https://www.youtube.com/watch?v=_mWtWz_aGyk

Yep - The effects of Poor nutrition is massively underestimated in terms of healthy brain function. Many modern day illnesses can also be reversed with a healthy diet - unfortunately doctors don’t receive any nutrition training which many admit they should.

"developed hands-on build/construction/repair skills - we are becoming more valuable in a world with mechanically clueless young adults. Those kids are going to be bled dry .."

The problem being that economics /supply chains have encouraged use and throw away & obsolescence ... theres more GDP in it
Its now far cheaper to buy new than repair (across many product lines)
With this widespread valuable repair / maintenance skills have gone .... this is the bleeding dry bit

Case in point, our new role model ... sir John
https://imgur.com/r/newzealand/9M2KqSs

Received this last night from DFA
“All members of society will lose the freedom and autonomy that cash provides, be more exposed to cyber threats, and lose the ability to use cash as a back-up form of payment”. And “other activity in the shadow economy is unlikely to be affected by the disappearance of cash as people find other ways to circumvent the law”.
https://digitalfinanceanalytics.com/blog/rbnz-consults-on-cash-and-blows...

Yes, and it is on the RBNZ website including a feedback survey. Scary stuff.....although I don’t use cash that much I would be really concerned if it was not available for use. Imagine the social engineering that could come into play over time....

It already happens. Mastercard, Paypal Youtube etc. already punish people for wrongspeak.
"Apple has quietly introduced "trust scores" for people based on how they use their iPhones and other devices.
The tech giant, which last month became the first public company to be worth more than $1 trillion (£757bn), said in an update to its privacy policy that the scores would be determined by tracking the calls and emails made on Apple devices."
https://www.independent.co.uk/life-style/gadgets-and-tech/news/apple-tru...

....that debate is worth following. Going right under the radar here, but if they do it in AUS, sure as eggs we are next.

Indeed Rastas.... Scoma thought he'd be able to introduce the $10k cash ban too without anyone knowing. I've been following the opposition narrative in Aussie and this $10k cash ban is just the start. The actual amount of the cash ban is in the regulations part of the act which means that it can be amended without consultation at anytime. KPMG are talking about it being $2000 max. The narrative that people are not picking up on here and in Aussie because the press aren't talking about it - including interest - is that this is part of the IMF introduction of negative interest rates. If people transact outside of the banking system then negative are much less effect hence the cash ban. It has nothing to do with the tax office missing out on tax because of cash transactions. Targeting big corporates who avoid paying millions in tax would be a more effective method of tax collection than targeting average Jo. INTEREST.CO.NZ could you write about this bill or like the Aussies will the press only pick up on it once the date for submissions is closed?

Well my prediction since 2013 is that interest rates will keep lowering (along with dropping velocity and an excessively expanding money supply). What I have also predicted is an increasing battle for the increasingly scarce unearned income. The issue you raise can be considered a part of that battle, so important you are keeping us appraised. There are lots of periphery issues I can see.

Thankyou Scarfie..... it's a shame that we have to find out about such important information from an overseas news source. Can't help but think we are being kept in the dark. Yes I know it's on the RBNZ website but seriously who looks at that on a regular basis. They want feedback but don't let the masses know via mainstream media.

Thanks for this.
Did the survey and answered nearly all for keeping cash in the society. I've always been an employee and self employed but all involve electronic financial transactions but still do most day to day living expenses in cash. Old habits die hard

The report linked to about Aussie Universities reliance on international students pulls no punches: https://www.cis.org.au/app/uploads/2019/08/ap5.pdf?

Seems they are totally reliant on the income from Chinese students.

Perhaps they missed the "don't put all your eggs in one basket" memo?

The spectre of trillion dollar deficits from an Administration who claimed they would produce a surplus as a result of their previous tax cuts-for-the-wealthy, is too much even for them. That fantasy has been thoroughly debunked.

So, when do the economic textbooks get corrected?

Chuckle. Ah well, it was only a fairy-tale. Maybe they can sell the film-rights. It'll be a parallel plot to Jack and the Beanstalk - magic beans being offered in place of the family cow (privatising of publicly-owned assets) golden eggs being obtainable if only you can get there, and the hero running afoul of Planning Ordinances (chopping down trees over a Certain Height). Should be a box-office success.

It was never in any economics textbooks.

Of course it is, it's termed supply-side economics;

Supply-side economics holds that increased taxation steadily reduces economic activity within a nation and discourages investment. Taxes act as a type of trade barrier or tariff that causes economic participants to revert to less efficient means of satisfying their needs. As such, higher taxation leads to lower levels of specialization and lower economic efficiency.

Yeah, there is a difference between lower taxes > more efficiency and lower taxes > more tax revenue. The former is a complex and arguable point; the latter is basically dreaming. You can see economists' response to both questions here: http://www.igmchicago.org/surveys/laffer-curve

Not a single economist believed lowering taxes would actually increase tax revenue. Don't confuse right-wing talking points with actual economics academia.

Very interesting link. Why then retain the Laffer Curve / supply-side economic theory within the curriculum when over half of academia are uncertain and/or disagree with its basic premise (i.e., question A)? It is particularly disturbing when politicians then use it as legitimization for lower taxation - just as John Key did in his first term.

The national party claimed falsely there was a deficit in the labours budget...

What is true though is the incoming future national leader will be disastrous for the economy, as he has hit Air NZ with a 30% drop in profit..

If you can stand a little above the partisan level, they all have deficient 'budgets'.

They all bet on growth.

The Kate comment above should be a clear enough warning - growth is over, This was long foretold:
https://en.wikipedia.org/wiki/World3

"but, most importantly, the warnings from Malthus onward have finally had their effect as may be seen from the population-limiting policies followed by China and, more hesitantly, by India. Without such policies all other efforts would be in vain. However, the basic message of Limits to Growth, that exponential growth of our world civilization cannot continue very long and that a very careful management of the planet is needed, remain as valid as ever".

Can you get that back to your party of choice?

stop lamenting.. read my comment again

Why buy German 10-years at -60 bps? Well, core inflation in Germany typically falls 330 bps in a recession. The current core is 1.2%. So that means deflation lies ahead and as such generates a de facto expected “real” yield of +1.5%. That’s why. Link

Here is the link to the Future of Cash survey from the RBNZ. Responses close 31 August

https://www.rbnz.govt.nz/notes-and-coins/future-of-cash/issues-paper-the...

"And China's monetary authorities say they are mulling official interest rate cuts and easing of their reserve ratios as a way to stimulate their economy." Easing of reserve ratios in an economy over-flooded with debt. What could possibly go wrong?