Weekend briefing: Yellen and Draghi drafted to fixed entrenched political problems

US consumer sentiment slips, but economists upbeat; India's factories busier; Draghi now running Italy; UK GDP sinks; NSW incentivises building for renters; UST 10yr at 1.20%; oil up and gold down; NZ$1 = 72.3 USc; TWI-5 = 73.6

13th Feb 21, 8:37am by David Chaston

The kayak stage of the 2021 Coast to Coast race today

Here's our summary of key economic events overnight that affect New Zealand, with news the British have set a 300 year record for their worst economic performance in a year.

But first, in the US, the latest UofM consumer sentiment survey edged downward to a six month low in early February, with the entire loss concentrated in the Expectation Index and among households with incomes below US$75,000. Households with incomes in the bottom third reported significant setbacks in their current finances, with fewer of these households mentioning recent income gains than anytime since 2014.

But a new survey of economists expects US 2021 growth to show its strongest gains in 25 years. And in fact, the Atlanta Fed's GDPNow forecast suggests Q1-2021 might be off to a sharp +4.5% pa rise. Most senior professionals however think it is likely to be more like a +2% growth rate.

In the US State of Maryland (basically Baltimore), they have enacted a tax on Big Tech revenues along the lines the EU has proposed and Australia is contemplating. It too will face fierce opposition from the industry.

In Washington, ex-Fed boss and now Treasury Secretary Janet Yellen is to create a new senior position that will drive their regulators to do more to strengthen their financial system’s resilience to climate risks.

In Canada, their Senior Loan Officer survey has turned very negative again.

In India, industrial production rose in December, surprising analysts who had expected another decline.

In Italy, the former head of the ECB, Mario Draghi, has formed a new national unity government in an attempt to get Italy out of its economic funk and break the entrenched partisanship in their politics.

In the UK, they released their Q4-2020 GDP data overnight. It rose by +1.0% from the prior quarter which was a surprise, but the level of economic activity there is now -7.8% below its year-ago level. That is its worst annual result since 1709! Even so, this grisly decline is marginally better than forecasted.

In Australia, property developers building housing for NSW renters will be eligible for tax discounts and planning exemptions.

Victoria will enter a “short, sharp circuit-breaker” lockdown for five days amid fears the highly infectious UK strain of coronavirus has spread in the community there.

On Wall Street the S&P500 is little changed in early afternoon trade, up just +0.1% as this market continues to meander near its all-time top for a fifth straight day. It is heading for a weekly rise of +0.8% and all of that came in Monday trade. Overnight European markets were up about +0.7% although Frankfurt was flat. Yesterday Shanghai was closed and will be until Thursday next week for its New Year holiday, Hong Kong was closed too. The Tokyo market was down -0.1% yesterday for a weekly rise of +2.6%. The ASX200 fell -0.6% on the day for a weekly fall of -0.5%, while the NZX50 Capital Index fell -1.3% in its Friday session capping a weekly drop of -3.6%.

The latest global compilation of COVID-19 data is here. The global tally is still rising, now at 107,970,000 and up +488,000 in one day. The pandemic seems to be easing in some places now but not on an overall global scale. Global deaths reported now exceed 2,374,000 and +16,000 since yesterday.

More countries (88) have started their vaccination programs. About 160.7 mln doses have been given so far (+9.0 mln more overnight), and there is clear evidence the vaccines are working to reduce or even eliminate deaths for those who have taken it.

The largest number of reported cases globally are still in the US, which rose +117,000 overnight for their tally to reach 28,024,000. The US remains the global epicentre of the virus although there is some easing. The number of active cases fell sharply overnight and is now just on 9,601,000 and +8,000 more in one day, so more new infections again than recoveries. Their death total is up sharply too at 488,000 (+5000) with the Superbowl party surge showing up now. The US now has a COVID death rate of 1468/mln, and that compares to the disastrous UK level (1707) where deaths are also still rising (116,000, +1000 overnight).

In Australia, their community control is impressive but Victoria is in a snap 5-day lockdown again as the UK strain may be in the community there from a border breach. Their all-time cases reported is now 28,890 and only +11 more cases overnight, in both the community and new arrivals and all in managed isolation. 55 of these cases are 'active' (+6). Reported deaths are unchanged at 909.

The UST 10yr yield is up +4 bps from yesterday at just on 1.20%. That is its highest in almost one year. Their 2-10 rate curve is steeper at 109 bps, their 1-5 curve is steeper too at +42 bps, while their 3m-10 year curve is also steeper at +117 bps. The Australian Govt 10 year yield is up +6 bps at 1.26%. The China Govt 10 year yield is unchanged at 3.26%, while the New Zealand Govt 10 year yield is also unchanged at 1.31%.

The price of gold will start today down -US$8 from yesterday at US$1820/oz. But it is still up +US$17 in a week.

Oil prices are almost +US$2 higher today at just under US$60/bbl in the US, while the international price is just over US$62/bbl.

And the Kiwi dollar opens today unchanged at 72.3 USc but firmer in a week. Against the Australian dollar we are softer at 93.1 AUc and almost -¾c lower for the week. Against the euro we are down slightly to at 59.6 euro cents. That means our TWI-5 is a little softer from yesterday at 73.6 and largely unchanged in a week.

The bitcoin price is little changed overnight from this time yesterday and is now at US$47,814. But it has been volatile in between. At one point it hit a new all-time high of US$48,926. Volatility has been high at +/- 2.9% in the past 24 hours. 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 ».

Daily exchange rates

Select chart tabs

Source: RBNZ

Source: CoinDesk

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

12 Comments

by PonziKiwi | 13th Feb 21, 8:49am 1613159378

Draghi ex goldman sachs head of europe and Yellen former fed chair..

Yellen said in 2016 that direct funding from fed to govt will probably be needed. When are people going to realise central banks are going to offer bank accounts to the public. The regulator offering a product that the banks offer can only end one way. No more banks and no more cash....

by keithwoodford | 13th Feb 21, 2:43pm 1613180583

The offering of Central Bank accounts to the public will not happen. Much easier to leave the operational issues of dealing with the public to the commercial banks, with the Central Banks pulling the strings through OCR and various forms of QE, and the commercial banks clipping the ticket rather nicely (for themselves) while making it all happen
KeithW

by bw | 13th Feb 21, 4:34pm 1613187272

Most of the us already have an account with the "New Zealand Central Bank', we even have an account number, except it goes by another name; the Inland Revenue Department. We pay into it on a weekly or other regular basis as a mechanism to settle our annual tax bill (that's what a fiat currency is; a call on taxation of the citizens of a country). That seems to work ok - we don't need a commercial bank to hold those funds on our behalf until tax payment time.
So why the problem with having a Call Account with the RBNZ? All the other messy commercial stuff can still be done by the retail banks - loans, cards, term deposits, forex etc. but I see no reason why the RBNZ should not offer a simple call account to any tax paying citizen that might want one. For those who worry that, "The banks are going down and will take my deposits with them!" it's as gooder alternative as any.

by nigelh | 14th Feb 21, 9:06am 1613246792

I'd suggest retail accounts, mortgage accounts, term deposits etc too much in the messy basket for a central bank. More regulation of the banks needed to avoid an OBR event. Would prefer more regulation on capital requirements to a $50k deposit insurance type scheme or upping the deposit to at least $250k. I think Oz is at this figure but in AUD.

by Foxglove. | 13th Feb 21, 9:04am 1613160292

extraordinary that the pandemic has resulted in a record annual financial dud performance by the UK since Walpole’s prime ministership.Ok something of a generalisation but that means the pandemic is a greater destroyer than, for example the 20th century, two world wars and the great depression sandwiched in between. What this shows terrifyingly, is just what destruction power pre loaded virus terrorists could achieve, working their way through targeted cities for example. Best not to think about it.

by frazz | 13th Feb 21, 9:12am 1613160760

Its it all just Covid though? Brexit seems more of the decline me thinks.

by False economies | 13th Feb 21, 9:13am 1613160797

I'm no conspiracy theorist, but you can bet your bottom dollar that some countries will have been thinking about this. If they could find a virus that targeted certain demographics that would be a powerful weapon. As resources become more scarce...

by Squishy | 13th Feb 21, 9:29am 1613161750

The UK introduced a simple 3 tier Covid strategy in late November.
By mid-December it had a 4 tier strategy.
By late December it moved to a nationwide lockdown where it has remained since and the Government have indicated it is likely to remain until April.

Their financial performance mirrors their Governments complete failure to control the Coronavirus pandemic in that quarter. Now they have to dig their way out with the vaccine.

by Rosenstein | 13th Feb 21, 9:32am 1613161942

The central banks will destroy us all.

by Audaxes | 13th Feb 21, 11:07am 1613167650

In Washington, ex-Fed boss and now Treasury Secretary Janet Yellen is to create a new senior position that will drive their regulators to do more to strengthen their financial system’s resilience to climate risks.

She might wish to prioritise the risks attached to every day bank payment and clearing systems.
There's Much More Going On Than You've Been Led to Believe

by nigelh | 14th Feb 21, 11:57am 1613257065

Thanks. Good link. Reminded me of the hassles I had with a forex transfer and had to dig a bit into the SWIFT messaging system to eventual show the financial institution I was dealing with that they were wrong in using the incorrect intermediary bank for the transfer. I suspect they had a cosy relationship with the particular bank on the fee side. Once the FI used the correct intermediary bank everything went fine but it took at least a week to resolve.

by Audaxes | 13th Feb 21, 11:46am 1613169976

The UST 10yr yield is up +4 bps from yesterday at just on 1.20%.
Oil prices are almost +US$2 higher today at just under US$60/bbl in the US, while the international price is just over US$62/bbl.
Hmmmmm...
Five year real interest rates just spiked down to -1.93%.

While inflation expectations are a necessary condition, they are, by themselves, nowhere close to sufficient. To start with, TIPS pays investors based on the CPI and the CPI over the last decade has been moved around by WTI alone rather than WTI plus anything else. If there was an inflationary recovery on the horizon, and investors believed it was a realistic possibility, then inflation expectations would imagine TIPS holders getting paid by more than supply factors in Cushing, OK.

Bouncing up and down by oil prices only proves the economic deficit; that there isn’t anything other than crude to provide that government-funded benefit. An inflationary period is one where real economy opportunities are widespread, never concentrated so narrowly. Sure, TIPS benefit from oil but the CPI would be accelerating for these many other factors.

What that would mean is rising nominal yields, too. Given where the yield curve is now, steepening right from the start.
And while the curve has become somewhat steeper, it’s only because of how things are going at the short end. The 2s10s part of the curve, for example, has decompressed to 82 bps at the start of 2021 – the steepest since October 2017.

Over the past two months, however, that steepening has been a product of the rate on the 2-year Treasury falling while that for the 10s has barely budged. Despite vaccine-aphoria being introduced into crude in a small way, therefore TIPS, the rest hasn’t gone along.

The TIPS rate along with a minimally higher 10-year is declared proof positive the Fed has been successful at its inflation engineering when there’s everything here (including oil, too) to contradict that assessment.

To begin with, the other part of TIPS no one ever talks about. Real yields. Because nominal Treasury rates haven’t moved all that much, the rise in oil prices, particularly the post-vaccine move, has had to come at the expense of so-called real rates. This changes the interpretation entirely.

Both the 5-year and 10-year real rates have fallen dramatically, staying down despite all these recent “positive” developments which are said to be economic game-changers. In fact, the real 10s yield is equal today to its lowest on record while the 5s are mere bps from their own.

What does that mean? No recovery, no inflation. Rather, TIPS are being moved higher by expectations for the CPI to be better, on average, because of higher oil prices alone. The economy itself, which is what would produce actual inflation – sustained, broad-based increases in all consumer prices not just one or a few commodities – is being priced simultaneously as if prospects for the intermediate and longer terms have changed very little.

In other words, a woeful economic situation which would be made worse (more miserable) by rising crude. Link