Here's my summary of the key news overnight to keep you up-to-date over these holidays.
The American trade deficit fell to an 11-month low in November as declining crude oil prices sharply reduced their import bill, prompting some economists to raise their growth estimates for fourth-quarter GDP.
And on Saturday we get the next reading of US unemployment with the release of the December non-farms payrolls report. Earlier today the precursor ADP Employment Report was released and that showed that private payrolls rose +241,000. That is in line with estimates for the non-farm payrolls report and would represent a strong finish to the quarter.
Across the Atlantic things are not so cheery. Inflation has turned negative; has turned to deflation with prices falling -0.2% on an annualised basis. Most of the fall can be attributed to the sharply lower cost of energy however. Excluding that, inflation was up +0.6%. I suspect we will be regularly talking about inflation excluding energy from now on.
American interest rates are likely to rise in 2015, while eurozone rates probably won't. How this can be sustained (and it probably can) is the subject of some debate. Paul Krugman has been looking at the issue, as have others.
Locally, December median rent levels show that a 3 bedroom house will cost $365/week, equal to its all-time high. In Christchurch that figure is unchanged in December at $450 per week, in Wellington it is $480 per week, while in Auckland the median is up to a record high $575 per week.
Low oil prices continued overnight with the he benchmark US price is now just on US$48/barrel and the Brent benchmark is just on US$50/barrel. In Australia, billions of dollars worth of projects face an uncertain future amid write-downs and job losses across their battered oil and gas sectors as the global oil crash deepens. In fact one analyst said giant Santos is 'worthless' at current prices and exchange rates.
This stunning oil price rout seems to be nothing more than economics 101 - in this case caused by markets clearing a huge increase in supply. Years of high prices pushed consumers to curtail their demand and seek alternatives and efficiency. Those same high prices encouraged suppliers to invest to more production, making many long-term bets. The resulting production increase has all come along at roughly the same time, and the markets are clearing the imbalance via the price.
Gold also lost some ground and is now at US$1,213/oz.
UST benchmark 10yr bond yields have stayed low overnight in trading on Wall Street and are currently at 1.98%, a fresh four year low. As we noted yesterday, New Zealand interest rate swaps saw more yield falls. Today the 1-5 curve is now just 19 bps and the 2-10 is just 16 bps, also fresh 5 year lows.
The NZ dollar has held yesterday's higher levels following the better dairy auction prices and is now at 77.6 USc, still rising against the Aussie and now at 96.4 AUc, and the TWI is now at 79.8.
The easiest place to stay up with event risk over the holiday period is by following our Economic Calendar here » Have a fun, safe New Year celebration.
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16 Comments
Chuckle - its a collapse in DEMAND which is driving the oil price falls. Just one example - Japanese oil demand has fallen significantly:
http://www.platts.com/latest-news/oil/tokyo/japan-july-september-oil-de…
http://www.sweetcrudereports.com/2014/10/22/japanese-oil-demand-falls/
Meanwhile the carnage in the US shale oil patch gathers momentum:
''American oil and gas companies have gone heavily into debt during the energy boom, increasing their borrowings by 55% since 2010, to almost $200 billion.Their need to service that debt helps explain why U.S. producers plan to continue pumping oil even as crude trades for less than $50 a barrel, down 55% since last June.
But signs of strain are building in the oil patch, where revenue growth hasn’t kept pace with borrowing. On Sunday, a private company that drills in Texas, WBH Energy LP, and its partners, filed for bankruptcy protection, saying a lender refused to advance more money and citing debt of between $10 million and $50 million. Neither the Austin-based company nor its lawyers responded to requests for comment.
Energy analysts warn defaults could be coming. “The group is not positioned for this downturn,” said Daniel Katzenberg, an analyst at Robert W. Baird & Co. “There are too many ugly balance sheets.”
http://www.wsj.com/articles/deep-debt-keeps-oil-firms-pumping-1420594436
Re Japan. Yes, efficiency, alternatives, milder weather, and the re-start of nuclear power are all having a combined effect there. Interestingly, all sustainable. I suspect many consuming countries are reaping similar benefits of alternative strategies to the unusual 'high prices' of oil in past years.
Certainly, New Zealand is seeing lower energy demand, and that is despite rising economic activity, currently at record levels.
Demand for energy is certainly not "collapsing" - but it is getting smarter. We are no longer at the mercy of the energy suppliers. A big (long-term?) win for adaption. People underestimate the ability of humans to adapt. Price signals are the most powerful driver; leaves regulation in the dust.
ah talking like a right wing free marketer, thanks for the clear insight into your thought process.
The problem with market signals is they take no account of time or more specifically time lag.
Robert Hirsch pointed out in 2005 that when peak oil occurs it would take 10 to 20 years to move away to something else. (conventional crude) Peak oil was/is 2006~201x) where is the price signal? it went to $148 in July 2008 then to $35 and now oh wait the price is collapsing again from a peak to a low so no panic we'll be fine.
Sorry but I am long over accepting that the market has any idea what so ever what is going on. I might well accept that regulation is flawed but that seems to be mostly down to us the voter's fault voting in who we have. That is our failure.
New Zealand's apparent lower energy demand 'despite rising economic activity' has everything to do with the relative change in sector contribution to economic growth. Thus NZ Stats (no less) has had this to say:
'A structural factor contributing to the reduction in energy intensity in New Zealand is the growth of service industries, which are less energy-intensive than industries such as manufacturing.'
The same process has been going on throughout the developed world (de-industrialisation), and of course is mirrored by the move of industrial production to China etc (with their concurrent ramp up in energy profligacy).
You will have do a little better than 'suspecting' things.
No longer at the mercy of the energy producers? Don't make me laugh.Once the present shake out in the oil markets is over (unless this really is the onset of perma-depression in which case all bets are off) and a swathe of necessary future project investments has been destroyed (along with the US shale oil industry in its current ponzi form), we will be once again exposed to those high oil prices you find so 'unusual'.
Question is, with the manufacturing sector cornered, will China continue their military aggression, or will the economic advantage prove tempting enough to continue to leverage their industrial monopoly. (and whether Party politics will cost them everything. again.)
Presumably Mr Wheeler is on holiday. It would seem certain that inflation will be lower than the RBNZ target band, and may even threaten deflation over the next six months to a year. Only rents and government services seem to be keeping elements of prices up. The exchange rate on a TWI basis is now again well above the level that Mr Wheeler last described as unjustifiably and unsustainably high. That height seems more sustainable than he thought, especially given he doesn't appear to be doing anything about it.
Resulting price signals are reinforcing that property is the best investment; and that jobs in finance and government- central or local- are the most rewarding. Are they the signals that we want to give?
As a minimum you would expect some statement explaining government and RBNZ non responses to near zero inflation. Will they conveniently start talking of inflation excluding energy, as David suggests? Will they decide that zero inflation is fine? Will they formally move the target?
Will they decide that zero inflation is fine?
A definition of genuine inflation is hard to locate behind the veil of officially instigated adjustments underlying NZ Stats version. But the annual rise in credit growth is an undoctored version that others can agree upon and currently registers north of 4% - hardly deflationary - view RBNZ statistics. The division of GDP growth currently favours capital rather than labour, thus the latter has not experienced an increase in purchasing power necessary to agitate historical inflationary impulses.
Thanks for the links. The particular measure the RBNZ are officially targetting is the All Goods CPI, which hit 1.0% in the most recent update. Treasury, from your link, were predicting March 15 CPI at 1.3%. Given oil and related price drops over the last six months, and the very high exchange rate, it would be surprising to see inflation not go below 1%, even with higher house rentals.
You raise a good point in relation to what is the best measure, and whether some inflation, or non inflation- is better or worse than others. Wages generally and government costs are sticky. It is easier to make someone redundant than lower their wages.
Some very modest inflation helps manage this transition from some industries to others as relative competitiveness and demand changes. A high exchange rate with nil inflation favours government employees and contractors. A low exchange rate and modest inflation favours trading industries. Low interest rates favour the indebted and so pump up asset prices, and reduce saving. The paper you linked to has the current account deficit growing to 6% of GDP, a rather disastrous level if true. You rightly contemplate whether high credit growth is ideal in this scenario- pumping up asset prices, and selling assets to pay for day to day wishes/needs.
For some of these reasons the one target, really one tool approach of the RBNZ, as mandated by the Nisister of Finance, seems well out of date. At a minimum the perceived relative positives and negatives of missing the target should be explained, if and when they do miss them again.
I'm betting the "Chch solution" will be used.
Run around talking to media, holding meetings, pointing fingers and setting up committees, and hoping the problem will solve itself in the meantime.
Apparently this is a very successful technique (provided your salaray is provided by tax or rate payers)
We are actually the Lucky Country . Things are either okay, good , improving or excellent on just about every measure .
Activity is at recrod levels and I suspect we are closer to full employment than we have ever been.
Its fair to say that things are going far too well for us right now , so we need to avoid complacency .
The strong currency appears to be the 'liquor in the punch' which is adding to everyone's exuberance at this party.
Enjoy it while it lasts , because at my age I have come to realise that when things go really well , it does not last forever .
The only constant is change , so while we need to take advantage of the "good times' we also should be aware that 2015 could bring some changes to the Global economy that may wash up here .
As a positive we are , luckily, a small open free market economy which is able to adjust quickly and rationally to whatever shocks we get coming our way
What about all the derivatives on hedged oil-prices due later this year sometime?
Max Keiser and Karl Denninger have a chat here:
http://www.realecontv.com/videos/debt/lower-oil-price-not-good.html
Are lower gas prices at the pump a bad thing? Of course not.
But here's what is bad: At least 20% of all high yield bonds (junk bonds) are invested in the oil fields and that paper is based on an assumption of oil at or well above $80 a barrel.
Remember pre-2008, how residential real estate was the engine driving the otherwise weak US economy? That according to the idiots at CNBC and other deep thinkers pre crash.
What has been keeping the US economy numbers up since then? Success in the oil patch of course, specifically the dubious miracle of fracking (which we reported a year ago was a financial disaster waiting to happen.)
Are we the only analysts to see the obvious connection between the role a goosed and fraudulent real estate market played in keeping the market up pre 2008 and a QE inflated bubble in the price of oil (and related industries)?
If oil doesn't get off the canvas and soon, a lot of "fracking bonds" are going to go the way of AAA sub-prime paper with similar results.
Worse really, because the financial system's underpinnings are even shakier now than they were in 2008.
- Ken McCarthy
More on the spreading bust in US oil junk bonds:
http://wolfstreet.com/2014/12/07/bloodbath-in-oil-patch-junk-bonds-leve…
''How bad is it? The number of leveraged loans in the oil and gas sector trading between 80 and 90 cents on the dollar (blue line in the chart below) has soared parabolically from 0% in September to 40% now. These loans are now between 10% and 20% in the hole! And some leveraged loans are now trading below 80 cents on the dollar (red line):''
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