90 seconds at 9 am: US prices rise

US core CPI rising; Yellen eyes rate rise; Greeks say they are insolvent; UK prepares to leave the EU; China wage rises drive productivity; huge Australian subsidies; NZ$1 = 73 US¢, TWI-5 = 77

25th May 15, 7:32am by David Chaston

Here's my summary of the key issues from over the weekend that affect New Zealand, with news of rising prices in the US.

Rising housing and medical care costs boosted underlying American inflation in April, a supporting sign for the Federal Reserve as it contemplates raising interest rates this year. Energy prices kept the American CPI negative, but without them they prices rose almost 2% in the year to April. The official CPI "less food and energy" was up +1.8%, but the food component was up +2% on its own.

In Athens a senior government minister has publicly admitted Greece will have to default if it cannot convince its partners to forgive its debts. He said they don't have the funds to make the June repayments to the IMF.

In Britain, they are preparing to leave the EU. The British have a referendum coming up on the issue. No date has been set for it yet however.

China is undergoing a period of rising wages. The standard idea is that this will reduce their competitiveness. But it may not turn out that way. It is proving to be a catalyst for productivity improvement says one prominent analyst. Robots are coming to China fast.

In Australia, the stunningly high levels of subsidies their governments have paid to get solar PV capacity installed on household rooftops was revealed over the weekend. They have spent AU$18.7 bln to avoid costs of AU$9.4 bln. And yet the study's authors suggest the arrival of affordable batteries might change that unfavourable balance.

Back in New York, the UST 10yr benchmark yield finished last week virtually unchanged at 2.21%.

Rising bond yields are a threat to the value of global bond portfolios. Three years ago this market was valued at US$100 tln and it is likely to be much larger now. Forty percent of that is in the US. Bond markets are worth at least treble the market cap of global equity markets. Bond prices mean much more to financial stability than stock prices.

The US oil price fell again in trading on Friday and is now under US$60/barrel again, while Brent crude is at US$65/barrel. Suppliers keep talking about raising output. In fact, crude output is rising even in China.

The gold price is marginally higher however at US$1,206/oz.

The New Zealand dollar starts today slightly lower at 73 US¢, at 92.1 AU¢, and at 66.3 euro cents. The TWI-5 is at 77.

And although we will get the usual end-of-month data releases this week, the big one to watch out for will be Fonterra's announcement giving its early indication of their 2015-16 payout levels.

If you want to catch up with all the local changes on Friday, we have an update here.

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

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39 Comments

by GeordieWilsonFX | 25th May 15, 9:25am 1432502703

One way to make sure we are awake on a Monday - knock 1.1c off the AUD!

by King of the whiners | 25th May 15, 9:59am 1432504762

Reality finally sinking in:

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=114…

''In the US cheap oil hasn't provided the economic stimulus that it was widely expected to.
More than six months into the great oil price crash, US growth remains sluggish.
GDP growth in the first quarter of this year was almost nonexistent at just 0.2 per cent.
That has US commentators concluding that the negative impact of the US energy sector contraction has weighed more heavily on the economy than expected.
The US energy sector built on shale oil and fracking has grown and grown in the past decade to produce all this surplus oil. Now it is so big that its contraction is hitting the US data harder than anticipated.''

And here is something else that will be 'unexpected'

http://www.bloomberg.com/news/articles/2015-05-21/oil-s-whodunit-moment…

''Millions of barrels of untapped oil that U.S. shale drillers discovered during the boom years are about to disappear from their inventories.
Six years ago, the industry pushed the Securities and Exchange Commission to make it easier for companies to claim proved reserves for wells that wouldn’t be drilled for years. Some prospects considered sure-things when crude was $95 a barrel are money losers at today’s $60. When crude crashed in 2008, 44 U.S. companies wiped 630 million barrels from their books.

Now the stakes are higher. Of all the proved reserves of oil and natural gas liquids found by the 44 companies since 2008, more than half -- 5.4 billion barrels out of the 9.7 billion -- is attributed to wells that don’t exist yet, according to data compiled by Bloomberg.

“We’re going to see a lot of proved undeveloped reserves get vaporized,” said Ed Hirs, a managing director at Houston-based Hillhouse Resources LLC, an independent energy company, who also teaches energy economics at the University of Houston. “It could easily be 10 or 20 years before some of these wells get drilled if prices stay at these levels.”

And when the shale oil companies are forced to de-list all that 'inventory' from their books do you think it is going to be a) easier or b) more difficult for them to keep raising the cash they desperately need to keep the shale oil Ponzi going? No wonder none of the executives at the companies concerned wanted to talk about it....

by Gummy Bear Hero | 25th May 15, 10:25am 1432506345

... only a matter of time before some government somewhere in the world sets up a royal commission on how to cope with too much & too cheap oil ....

Swear to God , some people are never happy ... the odds are even steven's , I'd reckon , that they'll conclude we need to burn it ....

by steven | 25th May 15, 11:04am 1432508674

We consume more than we can find, ergo the reserves will get used. Of course a) many reserves are at a price to bring to the consumer that the consumer cannot afford and b) will ensure severe climate change impacts if we do.

So a) what has "too much" bought us in time? maybe 2~5 years. In the mean time the musical chairs game the financial parasites play continues on.....

by Gummy Bear Hero | 25th May 15, 11:11am 1432509080

.. if I consume more Gummy Bears than they can extract from the Gummibar Mines , the price goes up ....

Why is oil different ?

... we aren't consuming enough oil are we ... huh ! ... I'm right aren't I .... yupppppppp ......

by OnwardsUpwards | 25th May 15, 11:30am 1432510250

Yup, there's more oil than we know what to do with. It's no wonder that all these 'peak oil' clowns have moved onto the next big 'sky is falling' doom fest - Bonds 'bubble'

by meh | 25th May 15, 12:43pm 1432514599

Peak Economics. Peak Economists. Peak Money. Peak Debt.

by PeakEverything | 25th May 15, 1:48pm 1432518530

Peak everything

by muntijaqi | 25th May 15, 4:25pm 1432527959

Peak oil is a fact.

Oil prices go down not because there is no peak oil but because there was a massive over-investment a decade ago (the oil sector is showing now the consequences) as they all were expecting demand to grow at a pace that is not happening.

by steven | 25th May 15, 11:10am 1432509050

It has not been "un-discovered" though, the oil is still there just un-affordable. This I think has not at yet really dawned on ppl. What is going to be interesting is we are at the half way mark with the cheap stuff gone. So for the half left how much of that is actually affordable? 50%? in which case the effects of a post peak-oil world could well be even more severe than thought. ie instead of a 4% decline rate initially it may actually be way way bigger say around 2035.

by Andrewj | 25th May 15, 10:18am 1432505931

Lawrence Lindsey: “We’re delaying a normalization of rates way, way beyond what is prudent. We have a monetary policy that’s now in place that was adopted for the crisis conditions of 2008 and 2009. This summer we’re going to be getting the seventh year of this recovery. It’s been a lousy recovery, but it’s still the seventh year of a recovery. That is totally inappropriate. The unemployment rate is essentially at what economists call “NAIRU” [Non-Accelerating Inflation Rate of Unemployment]… When I went to school, you’d be laughed out of the classroom if you said the right interest rate when unemployment rate was five four [5.4%] was zero - it was just the most preposterous thing you could imagine. Or that the Fed should have quintupled its balance sheet in five years. We’re at the point of absurdity. Maybe it made sense when you had a crisis. It does not make sense now. At some point what is going to happen - and this gets to my eight or nine cataclysmic number [on a scale of 1 to 10] - is that we’re going to get a series of bad numbers - a little higher inflation, higher average hourly earnings or whatever - and the market is suddenly going to say, “Oh my God, they are so far behind the curve that they will never catch up.” And the market is going to force an adjustment on the Fed that will be wrenching. That’s the cataclysmic outcome. If the Fed were to get a little bit ahead of the curve - or even maybe move a little bit closer to the curve - that’s the best we can hope for - we would mitigate that. We would phase into it gradually. And that’s why so much is at stake in the monetary policy that we adopt now…

Lindsey: “It always ends this way. If you go back and you look at Rome. You look at the Ming Dynasty or you look at Zimbabwe - it always, always, always ends this way. And the question is how can you delay it… The end game we’re all talking about here is a very unpleasant one. It means that the financial arrangement that the state has created is no longer sustainable by society. And that’s how overly indebted societies end and they move on to a new type of arrangement. So it isn’t going to be a pretty change - if we get there. And that’s why it is so urgent that we act now. It is not just a matter of numbers. It’s a matter really of political liberty. Because the government will not voluntarily let itself go out of business. It will use all of its powers - I’m not talking about just our government but any government - will use all of its powers in order to fund itself… It isn’t hard to get the math to work for America to save itself - and that’s why I’m optimistic like my colleagues here that we could do it. But we’ve got to get on the wagon and get doing it soon because time is running out.”

My thoughts: The abhorrent dilemma facing our nation is becoming increasingly difficult to evade. As such, leading policy figures are becoming more outspoken – in some cases stunningly candid. And future readers of history will be left bewildered and appalled that key issues were in fact recognized yet policymakers lacked the fortitude to confront them.

http://creditbubblebulletin.blogspot.com/2015/05/my-weekly-commentary-p…

by steven | 25th May 15, 11:06am 1432508786

He needs to go back to school then.

by Roelof | 25th May 15, 7:34pm 1432539273

Why does he need to go back to school steven...???
I agree with him....

by steven | 25th May 15, 7:58pm 1432540713

"When I went to school, you’d be laughed out of the classroom if you said the right interest rate when unemployment rate was five four [5.4%] was zero "

If that his his justification for where the interest rate is, well, mind you the salt water and austrian schools, well yes....been proven well wrong.

What he is doing is cherry picking one statistic to his advantage and ignoring all others and also not the true un-employed one...which is far higher. On top of that the "OCR" is based on inflation expectations and not so much employment.

by cowboy | 25th May 15, 7:54pm 1432540463

yes the classic thinking is unemployment and interest rates are proportional.

The lower the interest rate then the lower the unemployment rate.
Unemployment too high? drop interest rates so businesses spend and hire, and people borrow.

Economic growth (as shown by inflation) too high then lift interest rates to slow it down and it will make more people unemployed.

complete failure of an idea but it fitted the patterns until the time. ignores problems to do with skill specialisation and training times. ignores future cost to economy of loss to interest.

Actually pretty much is the blueprint for todays' triangle crush of problems.

by steven | 25th May 15, 8:17pm 1432541847

The "hawks" or maybe is that the hamfisted have been wanting higher interest rates for a while. No matter what the Q or problem is answer its "raise rates". Yet from Sweden to the UK we can see the effect of doing that, but they still want it.

What isnt clear to me is why. Is it a hope that the economy will implode and Obama gets the blame? They are positioning themselves short? in order to make huge profits? they really think that raising will cure this? dunno, I am mystified.

by Roelof | 25th May 15, 8:52pm 1432543973

No.... he is not cherry picking. Read what he says...and keep it in context.
I am investing based on the senario he describes.
Ie. A series of bad numbers + a little inflation = the fed unable to respond because they have not normalized interest rates.
Nothing to do with austrian economics...
It is simply how central banks manage (try to) the business cycle

by steven | 26th May 15, 7:16am 1432581385

Yes he is, he is taking one data point and then using it to commit a logical fallacy. I have read it and lots like it, its rinse and repeat, ie whatever the problem the answer is, raise interest rates.

eg http://davidstockmanscontracorner.com/

Now I like their data and information gathering, their conclusions and opinions are well partisan and nutty, but I take the valuable parts and leave the rhetoric.

bad numbers + inflation is frankly (past the stats on the day) an oxymoron. Bad numbers herald problems and that indicates in turn deflation not inflation. What is little btw? 1%? 2%? 4%? so again we have moved from "here comes significant inflation we have to raise rates now!!" of the last few years to "lookout here comes a "little inflation we have to raise rates now!!"

When in a zero bound trap raising rates begats dis-inflation and if allowed to continue deflation.

Austrian, well the very position you hold is very Austrian, certianly anti-Keynesian.

I am curious, investing in what? (way generally?) There is also asymetrical risk and impact, a little inflation can be cured fairly easily by raising rates. If you RB is a bit late the raising cycle is going to be higher than ideal. However once in deflation the impacts are far bigger and very hard to fight.

In terms of un-able to respond, yes indeed the Fed cannot go lower with rates once in the zero bound trap, that leaves Govn spending or printing to avoid deflation. The former at least gives something positive if its spent wisely, the latter, well no traction.

by cowboy | 26th May 15, 8:07am 1432584435

What you identify as the real actual action is why I started calling foul on many of the government and experts.

One day economy is bad so we have to raise interest rates to incentivise people to invest.
oops inflation has lifted we need to raise interest rates.
Oops inflation is crashing we need to lift interest rates to keep banks safe.
Oh gosh farmers had a good year better raise the interest rates in case the economy grows.

Kind of spotted a pattern... yet interest rates have fallen...because the patient is _dying_ from the mismanagement.

by MortgageBelt | 26th May 15, 8:25am 1432585500

It seems the methodology of repeated cycles of raising then lowering interest rates is now being acknowledged as largely ineffective. Life support all the way is now the new order it seems. An overheated and inflationary economy might be very difficult to produce under global conditions even if it was desired.

by steven | 26th May 15, 10:04am 1432591452

It is now, yes.

by steven | 26th May 15, 10:03am 1432591402

Pr 2004 and stable and low oil prices targeting inflation this way made sense as it worked. Post peak oil with the inherent volitile and extreme prices, where high oil prices due to demand which act as a brake by itself, no.

"mis-management" well if you are politically blinkered and refuse to recognise exponential growth is finished with then yes it is gross mis-management. Then what political party even admits this, let alone has a solution? none. Any party that tells the pleb voters "we are screwed, get ready for 3~4 decades of shrinking back to a pre-fossil fuel economy" is un-electable. No one wants to listen.

by DFTBA | 25th May 15, 11:59am 1432511979

Interesting, thanks for that.

by sharetrader | 25th May 15, 11:37am 1432510621

i think the FED has missed the boat, they should have raised once a while back to put minor shock back into the system, it wouldnt have made things crash but would have allowed the world to start to adjust asset prices back down. they way they are going they are allowing the ballon to go up and up and are trying to talk it down, sound very much like our reserve bank wait way too long to react and the situation gets out of control.
in my mind the FED have almonst lost control and if they dont get it back they will have to get the printing presses up and running again

by iconoclast | 25th May 15, 12:43pm 1432514614

Humbug

The usual think-tank nonsense and mis-information and mis-direction

In Australia, the stunningly high levels of subsidies their governments have paid to get solar PV capacity installed on household rooftops was revealed over the weekend. They have spent AU$18.7 bln to avoid costs of AU$9.4 bln

There are 2 million residential houses with an average Federal Government subsidy of $3,000 per installation amounting to $6 billion incurred over 6 years of the program

Then they include the cost of the paltry Feed-in-Tariffs which are "administered" by State Governments but are recovered from grid-users as an add-on to power charges and are not a govt subsidy. The total cost of the Feed-in-Tarrifs over the life of the scheme do not come anywhere near the initial capital cost subsidies

At best the total value of Government subsidies + FIT can be no more than $7-9 billion over 6 years

What they never mention or do studies on are

(a) annual subsidies to the big miners and polluters of $10 billion pa
(b) tax concessions on negative gearing $5 billion pa
(c) annual tax concessions on compulsory super contribututions by the young now exceed pensions to the old

by Andrewj | 25th May 15, 1:18pm 1432516709

HSBC fears world recession with no lifeboats left
The world authorities have run out of ammunition as rates remain stuck at zero. They have no margin for error as economy falters

http://www.telegraph.co.uk/finance/economics/11625098/HSBC-fears-world-…

by sharetrader | 25th May 15, 1:31pm 1432517461

a lot of countries that have high interst rates are now cutting pakistan, russia brazil, the ones that printed and have no interest rates have nothing to cut so will have to print. the whole system is screwed up. what seemed a good idea to cut the edges of a depression looks like coming to bite us on the A--se.

by Andrewj | 25th May 15, 1:39pm 1432517984

http://www.global-rates.com/interest-rates/central-banks/central-banks…

by steven | 25th May 15, 1:40pm 1432518025

So the Q is will the final outcome "today" be worse than if in 2008/9 the Fed had not "invented" QE? Lets recap,

The global financial system would have collapsed in 2008/9, today? well dead is dead.

What we have seen is many of the 'rich" have gambled big time in assets that dont give a realistic return ie the P/E sucks on the primis of selling to a bigger fool. So whose going to lose the most?
For many, will debt be jubilee'd? aka Steve Keen?

Got to wonder about the large quantities of money that has been hiding in Govn bonds for years, was / is the eventual collapse expected? I wonder...

by notaneconomist | 25th May 15, 2:30pm 1432521009

AJ if it all falters it could well be a good thing.....no one is willing to prune the dead wood out.....and believe me it has to come out. As far as I can see the breaking point to the downside will be when business can no longer sustain the costs of the bureaucracies and public services......

They're trying to inflate away from the debts but I'm not so sure business has enough petrol left in the tank!

by steven | 25th May 15, 3:35pm 1432524904

"all falters" Given the plunge of 1929 into the greatest depression in the 20th Century and our debt and state is currently worse I'd suggest falter is an understatement. Now we have micro trading etc...suggesting a way faster event and indeed a financial system freeze. How will ppl eat with no banks do you think?

"petrol left in the tank" yep there is not. So no growth and in fact shrinkage as the petrol runs out, that's peak oil for you.

So who's trying to inflate? more like not to deflate.

by Kate | 25th May 15, 2:50pm 1432522224

Interesting summary/article, Andrew. Not sure what this means though;

HSBC's Mr King says the global authorities face awful choices if the world economy hits the reefs in its current condition. The last resort may have to be "helicopter money", a radically different form of QE that injects money directly into the veins of economy by funding government spending.

I'm assuming what they mean is rather than the corporate welfare that they've been running so far with QE .. instead of actually going after those corporates to get back the largesse they have so blatantly avoided paying any resultant tax on - they (governments) will give up on getting any tax on corporate profit as a means to fund government spending and instead do it through borrowing more?

My point being - didn't most economies actually borrow to finance the corporate largesse in the first place?

by steven | 25th May 15, 3:39pm 1432525188

yep, the thing is the ppl that will be doing the paying (you and I) have not as yet really started to pay ie the problems have all been kicked into the future assuming the future will pay (it cant). When that starts to hit home I wonder no just how well we'll accept corporates theft, not well me thinks.

by Stephen Hulme | 25th May 15, 3:45pm 1432525540

The last resort may have to be "helicopter money", a radically different form of QE that injects money directly into the veins of economy by funding government spending.

Nonetheless, the liability on the central bank balance sheet undertaking such a process remains underwritten by the recipient tax payers - a circular process?

Moreover, he makes other claims where the veracity of the premise is more than dubious.

The authorities are normally able to replenish their ammunition as recovery gathers steam. This time they are faced with a chronic low-growth malaise - partly due to a global 'savings glut', and increasingly to a slow ageing crisis across most of the Northern hemisphere.

A global savings glut - I think not.

Hogwash! Since the turn of the century the major central banks have purchased upwards of $15 trillion worth of government bonds and other fixed income assets. Yes, these reckless money printers have suspended common sense, but they have not repealed the law of supply and demand, nor even suspended its relentless operation for a nanosecond.

So in adding massively to “demand” for something that sells at a price (the interest rate), the big fat bid of the central banks has caused fixed income markets to clear at much higher prices (lower yields) than would otherwise be the case. That’s just economics 101.

By contrast, were the market dependent solely upon the savings of America’s hand-to-mouth middle class, Europe’s legions of socialist pensioners, Japan’s mushrooming retirement colony or the millions of former peasant girls who labor for comparatively meager in Foxcon’s sweatshops, one thing would be certain: There would not be trillions of government bonds trading at negative nominal interest rates this very moment, or tens of trillions trading close to the zero bound and therefore at negative rates after inflation and taxes.

In a word, there is a $100 trillion bond market out there that has been priced by a handful of central bankers, not a planet teeming with exhuberant savers. The mad descent of the former into the whacky world of QE and ZIRP has caused a double whammy distortion in the bond markets of the world. Read more

by Roger Witherspoon | 26th May 15, 7:30am 1432582216

There is the view that QE has the opposite effect of what we are told. It is in effect a tax increase. Before QE the government pays 3% to the private sector on its borrowings. After QE the government pays 0.25% on its borrowings. Therefore QE is equivalent to a 91.67% tax (ie 2.75x100/3.00) on private sector savings.

by cowboy | 26th May 15, 7:58am 1432583887

correct. It inflates away the governments debt, thats why they used it.
that's the way economists work, they identify what they want to do, they plot a crooked path to get there.

by Stephen Hulme | 26th May 15, 9:07am 1432588050

Moreover, there is little incentive for banks etc to undertake risky/messy private lending activities when repo financed bond inventories are seemingly returning higher (riskless?) net present present values that can be unloaded without much undue endeavour to greater fools such as ourselves, or at least our government funded central bank proxies.

Roger, in practice the government is committing covert default. Keep in mind that NZ's most recent annual GDPE growth rate came in at ~5.65% whilst the government debt servicing costs on a redemption (not yield) basis is ~4.63%. Read more

by cowboy | 25th May 15, 7:57pm 1432540638

I have yet to see the difference between "helicopter money" (government printed cash) and non-claw backed tax reductions.

by Roelof | 26th May 15, 11:55am 1432598119

Kate,
As an example of helicopter money, think of gareth morgans big kahuna, where the govt pays a universal wage..
Consumer spending is a direct way to support an economy.
Govt would fund this by "creating money out of thin air".
Ie. Central bank would create the money.