90 seconds at 9 am: Ukraine pain

US orders and confidence are up but so are jobless claims; China leading indicators rise; Russia's credit rating cut; NZ$1 = US$0.857, TWI = 79.8

28th Apr 14, 7:18am by David Chaston

Here's my summary of the key news over the long weekend in 90 seconds at 9 am, including news the Ukraine tensions are not getting resolved.

But first from the US, there was mixed economic news. Durable goods orders and non-defense capital goods orders came in much better for March than markets were expecting. But the number of initial claims for unemployment last week turned negative.

A similar trend was revealed in the latest US services PMI.

Then the respected University of Michigan consumer sentiment survey for April surprised on the positive side. At the end of this coming week we will get the US non-farm payrolls report and it is also expected to show building jobs gains after a slow weather-related start to the American economy in the first quarter, which we will hear on Thursday.

Stocks closed lower at the end of last week. Benchmark UST 10 year bond yields also fell slightly ending at 2.67%.

The price of crude oil fell again, but gold climbed and settled above US$1,300/oz at the week's close.

A survey of leading indicators in China out late last week was positive again.

The continuing battle of nerves on Ukraine’s eastern border and the US Fed's next meeting are sure to set the tone this week.

Extended sanctions on Russia will test the nerves of the Europeans as some big British and German commercial interests will be in the sanctions firing line.

Russia has had its credit rating downgraded over the weekend, and border nations are rallying together to help Ukraine handle the Russian threat.

We start today with the NZ dollar marginally lower against the US dollar at just under 85.7 USc, but higher against the Aussie at 92.7 AUc and the TWI will open at 79.8.

If you want to catch up with all the changes at the end of last week, we have an update here.

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

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19 Comments

by Andrewj | 28th Apr 14, 9:20am 1398633625

Gas prices in California are as high as $4.50 a gallon for premium. Starting to hurt.

by David Chaston | 28th Apr 14, 9:32am 1398634328

Really? US$4.50/gal = NZ$1.385/litre

Given that unleaded 95 is NZ$2.17/litre today in New Zealand, seems actually very inexpensive to me.

Decreasing energy intensity worldwide means it is actually much easier to handle than decades ago. Californians may whine at US$4.50 - and why wouldn't they - but actually they will be as good learners as Kiwis on how to live with high gasoline prices.

by Andrewj | 28th Apr 14, 9:36am 1398634579

Borrowed a friends truck and it was doing 8.3 miles to the gallon. The distances here are much more than home, almost double average miles done per year compared to NZ.

I was more thinking of the effect on the economy.

by powerdownkiwi | 28th Apr 14, 9:41am 1398634884

"Decreasing energy intensity worldwide means it is actually much easier to handle than decades ago. Californians may whine at US$4.50 - and why wouldn't they - but actually they will be as good learners as Kiwis on how to live with high gasoline prices".

eh?

Just what are they doing, to generate the income, to 'pay' for these higher prices they have to 'live' with? This is the same question we have to ask - you, David, have to ask - about housing loans.

If the incomes aren't based on the energy/work/goods/sevices sequence, they're based on nothing (inflated 'valuation of an existing house is 'nothing'). Your only way out of that - without fifcal collapse - is rampant inflation.

But yes, fuel is far too cheap - the 'price' neither reflects it's finite nature nor it's need to be mitigated, post-burn.

by steven | 28th Apr 14, 9:47am 1398635258

Except we cant afford, (or our present econony) to pay more..

regards

by dtcarter | 28th Apr 14, 9:55am 1398635754

If we can't afford to pay more, how did we pay for petrol mid-last year when it was 2.27/litre?

by steven | 28th Apr 14, 10:27am 1398637620

Context, I dont tend to think individually, but national sized impacts.

So a small % increase? well sure I can but I use about 1 tank at $80 month and have a decent wage. What about ppl using 1 1/2 tanks per week? and maybe on the minimum wage? Add 10% to fossil fuel and that works through the economy into food etc.

The global economy can expand on oil priced at $50, maybe even $80, not at $100+ it seems, oh and $147USD triggers a woppa of a recession.

So how do you feel with paying $3? our exchange rate is exceptionally high, where does petrol go when we see a more reasonable 0.75 to the USD? maybe even 0.65?

How will taht impact ppl using 1 1/2tanks a week?

I know some self employed contractors, they fuel bills are painful, they cant always pass on those costs.

regards

by steven | 28th Apr 14, 9:46am 1398635160

Wrong paradygm though David.

a) US cars tend to be big engined and large and hence poor fuel consumption. So 1/2 what we get? So what they are really paying is more $2.70 a litre?

b) You have to drive and quite a bit to get anywhere, so they use more at "$2.70 a litre".

I dont agree on decreasing energy intensity. How are you measuring it?

Some qulaifiers,

a) Energy use consists of essential (inelastic) use (say commuting) and descretionary use (elastic) eg petrol for holidays/day trips. So if ppl use less descretionary petrol and you are measuring against GDP, well yes possibly. However that should also be qualified with what is going into GDP, ie making real goods or financial hokey pokey. Fantasy cost little in energy I'd suggest.

Oh and some forecasters thought oil could get to $300, even $500USD. I'd suggest that its been proven that our global economy cant handle oil above $120USD and will stagger along at $100. To grow it needs oil at $50USD, that era has gone. Because the oil companies cant see us paying above $150US they are canning oil field developement and exploration, that means a looming shortage.

So the Q is just how do we ration fuel? price? which is how we do it now. Problem then is what do you do with the ppl who cant afford the energy to do a job? Doesnt bode well for our economy IMHO.

regards

by King of the whiners | 28th Apr 14, 10:37am 1398638249

LOL. So as Mr Chaston's favorite meme that US shale fracking has somehow abolished peakoil and will cause a fall in US oil/petrol prices evaporates into thin air he has now switched to the ' it will be alright because they will just adapt to high prices' meme.

Been to the US much? Perhaps noted the way that ALL their infrastructure/urban/retail areas are organised and laid out on the basis of dirt cheap petrol?

by David Chaston | 28th Apr 14, 11:30am 1398641420

Steven:

On the energy intensity issue, I was refering to

a) New Zealand here (Fig A 4b), and

b) the US, here.

Yes, I saw your 'financial hokey pokey' comment with regards to 'GDP'. Agree there may be definitional issues, but disagree that just because of these the concept is 'fantasy'. I think we are a long way from 'staggering'. Transitions don't suit everyone. You will hear more from the losers than the winners.

But I plead guilty to not having skin in the game - doesn't affect me personally. I walk to work, bus most everywhere else including most business meetings. I'm probably not typical, but hopefully I can look at these issues without hip-pocket bias.

by steven | 28th Apr 14, 12:30pm 1398645002

My comment is aimed at the real energy used to make a good, V a service or financial instrument that realyy isnt tangible. So in the 1970s and after the first energy crisis some countires switched away from producing goods and into services and finanace, these used less energy to "make" gdp.

Oh and now we import goods all have an oil content if only for transportation, so that isnt oil consumed to make a good here, so I'd be surprised if its shown in the data.

So Im not sio sure we really are less intensive, but thats an interesting ppaper or two....should send me to sleep tonight, LOL, thanks.

Oh and I wasnt aiming at you at all.

Fantasy, well is that financial instrument underwritten by something real? ie energy? How many trillions of such financial "assets" have no real backing because the energy simply doesnt exist to cash them in? Shell borrowed money to pay a dividend didnt it? others are cashing / selling assets to pay dividends, how long til those companies are worthless?

regards

by Andrewj | 28th Apr 14, 9:22am 1398633747

http://www.prudentbear.com/2014/04/money-and-credit-and-current-backdro…

http://d21uq3hx4esec9.cloudfront.net/uploads/pdf/140426_TFTF2.pdf

by profile | 28th Apr 14, 12:40pm 1398645651

All those long trips and they are still more energy efficient than the rest of us.

Since 1949 the size of the US economy has grown by a factor of almost 8 times, from $2.0 trillion in real GDP to $15.75 trillion in 2013. But over that time period, the annual amount of energy consumed in the US has increased by a factor of only 3 times

US energy consumption per $ real GDP.

http://www.aei-ideas.org/wp-content/uploads/2014/04/gdp.jpg

by steven | 28th Apr 14, 12:51pm 1398646269

Well if you say "long trips" then that is probbaly more appropriate to work on per capita and not GDP.

When you do that the USA looks way worse,

http://www.med.govt.nz/sectors-industries/energy/energy-modelling/publi…

Fig A 4c, page 9

AGW emmissions twice as bad per capita as NZ,

fig A 5a, page 9

Transport emisions, the US also looks twice as bad as NZ,

fig A 5c page 10

In terms of GDP, the US GDP is also "boosted" by a rather large debt mountain that they are not paying back. So what happens to the US GDP when they do? quite a severe retarction in GDP seems probable.

regards

by profile | 28th Apr 14, 1:43pm 1398649434

Not paying it back? Have a read of AEP's article last week - everthing you love in it - growth, oil, innovation.

The "long trips" was more in reference to the Andrewj comment.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10783…

by steven | 28th Apr 14, 2:09pm 1398650978

Except AEP is clueless on peak energy, he's a financial bod praying nothing more.

regards

by profile | 28th Apr 14, 2:24pm 1398651888

Aside from the fact he is peak oil believer and has written many articles on such.

by iconoclast | 28th Apr 14, 12:51pm 1398646284

GDP as a measurement of economic activity was developed in the 1940's in the US. It is now accepted that it is misleading and inadequte. As from 1 April 2014 the US is moving to a new measure called Gross Output as being more accurate

by antonymouse | 28th Apr 14, 1:33pm 1398648780

"Russia has had its credit rating downgraded over the weekend, and border nations are rallying together to help Ukraine handle the Russian threat."

David, what Russian threat? It's the U.S. that's meddling in Ukraine's affairs. So far the U.S. has spend over US$10 billion in the last 10 years or so to overthrow the Ukraine government to get this country to join the EU and NATO.
(as spoken by Ms Nuland)

For anyone who has not seen/heard this YouTube clip, where you can hear Ms Victoria Nuland, the U.S. Assistant Secretary of State, talk to Geoffrey Pyatt, the US ambassador in the Ukraine, to "organize" the Ukraine's government, it's an eyeopener.
It's the video where she says "F..k the EU"

http://www.youtube.com/watch?v=mBAB_unT2kM

Also worth reading from a more level-headed person is this article by Neil Clark, headlined: "I'm confused, can anyone help me?"

http://www.neilclark66.blogspot.co.nz/2014/04/im-confused-can-anyone-he…