90 seconds at 9 am: An ECB 'tantrum'

Draghi disappoints with minimum action; Yellen upbeat about US economy; air travel growing very strongly; UST 10yr yield 2.27%; oil and gold prices stable; NZ$1 = 66.4 US¢, TWI-5 = 71.4

4th Dec 15, 7:29am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news markets have been roiled by unexpectedly tame decisions from Mario Draghi and the ECB.

Equity markets are falling, as are bond prices.

Early this morning the ECB announced it has held all rates unchanged except its deposit rate, which it reduced to -0.3% from -0.2%. That is, banks will now be charged 0.3% of deposits they place with the central bank. This action was the minimum expected by markets and is essentially, 'more of the same'. They were disappointed. It was nowhere near dovish enough for their taste. The euro rose sharply.

At the same time, Janet Yellen was testifying before Congress and she gave a very upbeat assessment of where the US economy is at present.

Overnight data showed American services sector activity expanding faster in November - especially on the jobs front - and the level of jobless claims came in at the expected low level and well below the 300,000 that worries markets and extending a 9 month trend. Later, a rival services survey has the sector expanding at a slower rate.

Around the world, passenger air travel is growing strongly, +7.5% overall year-on-year, boosted by an average 5% fall in the cost of fares. Domestic travel is up, and more importantly for us, international traffic is growing strongly too, especially in the Asia region. But going against these trends, Australia is seeing a reduction in domestic air travel.

In New York, the UST 10yr yield benchmark has raced higher up to 2.27% which is quite a jump from yesterday. We will probably see a similar adjustment to long-end swaps in local markets today.

The US benchmark oil price is up $1 at US$41/barrel, while the Brent benchmark is at US$44/barrel.

The gold price is also up slightly at US$1,058/oz.

The New Zealand dollar has slipped back a bit on the sharp jump in the euro. It is currently at 66.4 US¢, at 90.7 AU¢ and at 60.8 euro cents, a fall of 2 cents. The TWI-5 starts the day at 71.4.

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

The easiest place to stay up with event risk today is by following our Economic Calendar here ». And don't forget to vote in the Flag Referendum.

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12 Comments

by Henry_Tull | 4th Dec 15, 8:17am 1449170259

Not a sign of wellness.

All of which raises the question, why is this occurring? If wage growth is so weak, how are households funding the extra spending?

The experts reckon one reason spending is solid is that as asset prices have risen, especially house prices, consumers have been dipping into their savings to fund the extra consumption.

http://m.smh.com.au/business/the-economy/wages-are-weak-so-why-is-spend…

by David Chaston | 4th Dec 15, 8:39am 1449171579

Or, perhaps the answer is deflation. 'Lower wage growth' can buy more of many types of goods (electronic, clothing, furniture, even food, etc.) for the same money.

And what is 'low wage growth' ? In the US, wage growth is running on average at +5.4% pa, while in New Zealand it is running at +4.3% pa. In Australia, it is +2.3% pa.

If these are 'low' what do you think is 'normal' ? How far ahead of inflation do you think it needs to be to be 'normal' ?

I think the 'low wage growth' meme has turned into urban myth. It will be true for some, but not for most.

by steven | 4th Dec 15, 8:59am 1449172794

Can you justify why you seem to not be printing the truth please?

--edit--

"Median weekly income from wages and salaries, 2.2%"

So not 4.3% "wage" growth? but income growth.

ie where is that 4.3% coming from? also taking a median doesnt show if in-equality is actually increasing or not? in fact it suggests it is as un-employment seems to be up.

To answer looks like,

"this increase was due to the rise in full-time workers, and the increase in full-time earnings. "Hourly earnings were up 3.8 percent – the largest increase in the last six years," Ms Ramsay said.

An increase in weekly income from government transfers also contributed to the increase in weekly income from all sources. Government transfers include income received from benefits, working for families tax credits, paid parental leave, student allowances, ACC payments, New Zealand Superannuation, and veteran’s and war pensions. "

http://www.stats.govt.nz/browse_for_stats/income-and-work/Income/NZInco…

by Stephen Hulme | 4th Dec 15, 9:07am 1449173269

Furthermore, in the US an increasing reliance on consumer credit to consume the deflated value of custom made Chinese tat simply outpaces stated national income growth.

Consumer credit increased at a seasonally adjusted annual rate of 7-1/2 percent during the third quarter. Revolving credit increased at an annual rate of 6-1/2 percent, while nonrevolving credit increased at an annual rate of 8 percent. In September, consumer credit increased at an annual rate of 10 percent. Read more

by Stephen L | 4th Dec 15, 10:51am 1449179505

It is disingenuous to claim he is not telling the truth, when income growth was up 4.3%. So, it was not strictly wage growth, but it will be income growth that drives consumption. Income inequality is a different issue. Median (as opposed to average) incomes are usually a reasonable proxy for incomes generally, but it's true that at the ends of the curve there can be more marked changes one way or the other.

by steven | 4th Dec 15, 9:01am 1449172907

Deflation is damaging, just as an example, the impression I have of fewer and fewer staff in DSE, briscoes. ie increasing un-employment...

by Andrewj | 4th Dec 15, 10:09am 1449176994

Most of my friends haven't had wage growth except for those in the heath care industry. My Dr friends are doing nicely thank you.
Obama care is becoming a big deal for my hunting buddies, they were 'Insurance free', young and fit and prepared to live with the consequences, now its a big deal paying for Obama care.
In the Bay area it's different for those with skills but lots of competition from immigrants on H1B visa's.

http://www.cringely.com/2015/06/15/the-h-1b-visa-program-is-a-scam/
http://www.theatlantic.com/business/archive/2015/06/disney-h1b-visas-im…

there really is two America's, one vibrant and hi Tech, one in the low wage service sector , how ever Tech bubble two, looks like it's getting ready to bust.

>>>
Many people think that they ring a bell at the top of a bull market. Ding-a-ling-a-ling.

That is indeed often the case. The bell was rung in 2000 at the top of the dot-com bubble—I like to think it was 3Com spinning off Palm that broke its back.

But sometimes there is no bell, no catalyst, no story to tell. A bull market becomes a bear market, and it happens just like that.

Silicon Valley has been in a food fight for about three years now. Everyone knows it’s going to end, except for the folks in Silicon Valley. These guys are funny. I met a few of them in the last cycle. They really thought it was going to go on forever.

There are now 145 unicorn companies (private companies with a valuation of $1 billion or more), with a total combined valuation of $506 billion.

We are watching the top happen right before our eyes.

by Stephen Hulme | 4th Dec 15, 9:32am 1449174741

..... Janet Yellen was testifying before Congress and she gave a very upbeat assessment of where the US economy is at present.

Well, she would, wouldn't she?

Inventory, as noted even by GDP in Q3, has suspiciously only grown more out of alignment. Sales are obviously then, by simple math, falling faster than production which means that either sales need to surge or production needs to collapse even more. It is difficult to interpret the current inventory imbalance as anything other than an expectation for the former, and that businesses appear to be still holding out for Janet Yellen’s version of the economy even though it has already failed so much so far for this long already. Read more

by Stephen L | 4th Dec 15, 11:00am 1449180002

You wonder if there is an acknowledgement among central bankers that ZIRP is not in fact working in the way they have assumed or pretended for so many years; and that while it encourages more debt, it also encourages a lot more capacity to either be built or sustained, that should not be built or sustained. So at very low interest rates, sustained over some time, you will get deflation rather than inflation. It will need some interest rate pain to take some capacity out of the system.
In the meantime central bankers will always want to paint an optimistic picture (correctly in my view) as their half full or half empty views of the world become self fulfilling. So they are better to be half full.
Draghi has now fallen into the global tightening (or at least no more easing) line. Wheeler will surely follow.

by Roger Witherspoon | 4th Dec 15, 12:29pm 1449185367

It's the increase in the total debt load that worries me. I know total debt to GDP is supposed to be coming down in NZ but I have a nagging worry that it's really the total nominal $ debt that matters. I think we are caught in a debt trap, not as nasty as the one Greece is in but one that steadily sucks the life out of the country. There seems to be no plan to get the current account sorted and stop being a debtor nation.

It's one thing to be able to keep up with the interest payments by borrowing more, but it's not the same as being out of debt and in charge of one's own destiny.

by Stephen L | 4th Dec 15, 12:12pm 1449184356

The current account should indeed be a key focus. We haven't taken it seriously for over 40 years, so no surprise that we lose wealth through a loss of ownership and or increase in debt.
I read yesterday in the AFR that Australia- which has the same problem- has had its currency higher than it would otherwise have been, due to asset sales. The higher currency causes a loss of competitiveness which in turn leads to a need for more debt or asset sales for the same level and mix of consumption.
If the current account was a priority of monetary policy, you could easily enough stop this vicious cycle.

by Roger Witherspoon | 4th Dec 15, 12:34pm 1449185699

I have yet to hear any official mention of any plan at all. Nick Smith did put up a slide showing exports, imports and net investment flows at a conference in Nelson at the height of the GFC but I have heard nothing since.

Michael Reddell over on Croaking Cassandra blames excessive immigration for many of our problems as it causes the need for a lot of new infrastructure spending which increases the debt load and pushes up our interest rates.