90 seconds at 9 am: Separate policy paths

US and ECB go separate ways; BofJ drives rates below zero; France fails EU standard; end of the iron age; oil and gold prices fall; NZ$1 = US$0.824, TWI = 78.9

11th Sep 14, 7:15am by David Chaston

Here's my summary of the key news overnight in 90 seconds at 9 am, including central banks choosing quite different paths.

Policy divergences between the major economic powers is growing, and we may be seeing the start of a long term trend. The easiest case to see is between the US and EU, but Japan and China are also going separate ways.

The Bank of Japan drove a short-term interest rate below zero by buying 3 month bills for more than their redemption value. Essentially it is paying to lend money to the market. It is a dramatic step in its already unprecedented effort to stoke inflation and a likely sign it will continue its aggressive asset purchases.

France said overnight that the country will not hit a 3% EU budget deficit target until 2017. This is the beginning of a major push-back against EU austerity policies, and possibly the ECB's strategies.

The iron ore price has declined sooner than expected this year as supplies exceeded demand and prices are unlikely to recover according to Goldman Sachs. They say 2014 will mark the end of a so-called iron age. Adding to ore-price woes, it is now expected that scrap metal will satisfy a bigger portion of China's steel appetite.

And in what is being called "a surprise and a disappointing result" the latest Westpac MI survey of Australian consumer confidence dropped sharply yesterday.

The UST 10yr benchmark bond yield rose noticeably again today and is now at 2.53%. After yesterday's rises we saw New Zealand swap rates rise, and we are likely to see the same today, irrespective of what the RBNZ says at 9 am.

The price of oil and gold both fell overnight. The US oil price is now under US$92/barrel and the Brent benchmark is now under $98/barrel. The oil price has fallen a long way in a short time.

Gold also fell again, and is now at US$1,245/oz.

We start today with our currency slightly higher against the US dollar compared with this time yesterday. We are now just on 82.4 USc, but also up against the Aussie at just a tad below 90.0 AUc, and the TWI is at 78.9. However, we fell even further against the Chinese yuan - a big sharp move is building there.

If you want to catch up with all the changes yesterday 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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16 Comments

by MortgageBelt | 11th Sep 14, 8:07am 1410379639

Where is the NZ inflation?

The Chch rebuild was supposed to send inflation high.

In John Key phraseology - show us the inflation that the RBNZ is supposedly trying to suppress.

by Henry_Tull | 11th Sep 14, 8:50am 1410382210

Alibaba and the IPO

"The coolness to the IPO by Aussie funds might be simply due to wariness with Chinese governance models and the cautious approach Australian funds have to jumping into direct Chinese investments," said Alex Dunnin, a director at super research firm Rainmaker. "The cliche is that despite the China investment boom the people making the money from it are still overwhelmingly the Chinese and not the foreigners."

Risks outlined in Alibaba's prospectus include its partnership structure, which gives seats on the board to a self-selecting group of executives.

Alibaba, which is incorporated in tax haven the Cayman Islands, also does not own the operating companies inside China which run the business. These are controlled by Mr Ma and bound to the parent company by contracts in order to avoid Chinese rules prohibiting foreign control of internet businesses. [understood to include app/cloud developments]

Alibaba says these contracts "give us effective control over each of the variable interest entities and enable us to obtain substantially all of the economic benefits"

by steven | 11th Sep 14, 10:45am 1410389100

Iron age?

It is all good listening but,

6minutes in,

China is investing Billions to get the iron ore, I assume to give OZ mines some competition, maybe not a good share buy over in OZ.

http://www.youtube.com/watch?v=f4-hao1rG3U#t=395

regards

by waymad | 11th Sep 14, 11:44am 1410392654

Good Hartwich article re Germany and its prospects. In a word: Dubious.

The Der Speigel references to the 'crumbling republic' are Page 1 and Page 2

I do recall, from a coupla decades ago as an eager MBA student, listening to Philip Burdon warning that MMP (then a shiny new toy) was going to lead to a complete stasis in public matters. I thought then - nah, no worries. Common sense will prevail.

Bzzt. Wrong.....

by Brendon | 11th Sep 14, 11:53am 1410393189

Germany like many countries has strengths and weaknesses. The problem is the euro is a disaster. It has allowed Germany to exagerate its strength at the cost of other weaker countries.

by steven | 11th Sep 14, 2:26pm 1410402365

MMP, FPP etc or indeed any system makes no difference in the failure to address the root problem.

regards

by DFTBA | 11th Sep 14, 12:11pm 1410394265

Meh - the system is broken, we're going back to Victorian times unless we can find a new economic model.

by cowboy | 11th Sep 14, 1:30pm 1410399009

Victorian would be good compared to what looks like a more Plantagent style of corporate feudalism. Bring entirely new angle to "cradle to grave" service contracts.

I just wonder where the resources must come from, and what one must do to receive a decent share including into old age or infirmity

by steven | 11th Sep 14, 1:55pm 1410400543

"I just wonder where the resources must come from"

makes 2 of us (at least)

regards

by steven | 11th Sep 14, 2:05pm 1410401155

Just one fly in that. The victorian era effectively used up all the UK coal. So from the start of the Industrial revolution (1830 ish) to 1913 when coal output output peaked, was all of 80 years. 80 years later in effect there is no British coal left to mine. So going back to a system that was just as (if not more) rampantly exploitative model as what we have now isnt going to work either.

Oh and bear in mind the conditions many of the ppl lived under back then generated the likes of the Russian revolution.

oh boy.

So its going to be very interesting to find a "new model" that even works without fossil fuels let alone one that still gives many ppl the elusion they will be better off as time passes. Ergo the right's entire political and economic model is broken but the left's looks no better.

regards

by DFTBA | 11th Sep 14, 3:19pm 1410405565

Yes, maybe Victorian was too late as a comparison. Georgia, maybe? A time when the wealthy increased their wealth easily, just y holding on to land and collecting rent....while the poor (no middle class, then) survived on subsistence farming and cottage industries. Or joined the navy or some such....

With automation steaming ahead (excuse the pun), there seems to be less need for a labour force. So if people can't earn their keep with labour, how will the Great Unwashed survive?

Would you say that the world before fossil fuels did not have a 'economy'? Surely we can adept to using renewables...een in the short and medium term this could BE our economy.

by DFTBA | 11th Sep 14, 3:24pm 1410405857

sorry, that should read GeorgiaN

by cowboy | 11th Sep 14, 8:24pm 1410423846

renewables we'd be looking at the late parts of the Roman/Bryzantine era which is what much of our systems are based around...and then bloated with cheap high density fuel. Rome was logs and charcoal, That got you copper, brass, fired-clays, some irons. With coal you can make steels and steampower. Oil is even better. Electricity is nifty but converting it for storage is tricky.

Energywise you can bet that mroe push will be towards cheap atomics. renewables are still an option (wind, solar); hydro is only good in small doses otherwise we end up killing and buying too many rivers - but like geothermal some spots are that good it's worth doing. But the conversion there is to electricity, which then must be converted again for storage.

We should be seeing better technological efficiency. insulation, passive solar design, double glaze, solar H/W, heavy design thermal memory - the beauty with these things is that they can be a bother to capitalise and setup, but they are pure energy and cost savings in the future. We can build a yellowcake secure industry for handling uranium reactors for mega bucks, and a cost per charge...but it costs so little for the energy you don't use in ok insulation. The more that is paid, then the more the lower income earners suffer (1) for money to keep warm etc, and (2) because companies like to "value-add" to what they supply making low income earners targets for services they can't afford but have no choice but to pay for.

by Ergophobia | 11th Sep 14, 2:05pm 1410401152

cowboy and steven, From the world and the sun - they are very big ye will notice.

Ergophobia

by steven | 11th Sep 14, 2:23pm 1410402204

"world" well what can I say except you seem unable to grasp how small the world we live on is when there are 7billion of us all wanting to eat, drive etc.

The Sun doesnt give out much energy, or cheaply by the time it gets to us. It also sucks as a transport energy source.

This is nice and simple,

http://zebu.uoregon.edu/disted/ph162/l4.html

As an example,

"So over this 8 hour day one receives:

8 hours x 600 watts per sq. m = 4800 watt-hours per sq. m which equals 4.8 kilowatt hours per sq. m
This is equivalent to 0.13 gallons of gasoline
For 1000 square feet of horizontal area (typical roof area) this is equivalent to 12 gallons of gas or about 450 KWH

But to go from energy received to energy generated requires conversion of solar energy into other forms (heat, electricity) at some reduced level of efficiency. "

Oil in effect is the solar power collected over millions of years and concentrated and not 1 days' solar energy.

Ergo, ergophobia you do not grasp the scale of the problem or the work needed to even attempt to address it. It will need some hard work.

regards

by cowboy | 11th Sep 14, 3:21pm 1410405717

a handful of sunlight isn't going to get you anywhere.

raw materials need processing, creative work requires inputs, people require inputs, make you a deal next six months I'll give you sunlight, you give me your wages.... fair swap if your comment is true.