BIS supports rising rates; strong US non-farm payrolls report; many metals prices jump; low-rate companies and countries fall; oil under $40 on Iran position; UST 10yr yield 2.27%; NZ$1 = 67.5 US¢, TWI-5 = 72.6

BIS supports rising rates; strong US non-farm payrolls report; many metals prices jump; low-rate companies and countries fall; oil under $40 on Iran position; UST 10yr yield 2.27%; NZ$1 = 67.5 US¢, TWI-5 = 72.6

Here's my summary of the key events over the weekend that affect New Zealand, with news the markets now accept rates will rise.

Financial markets are calm ahead of the first increase in American interest rates in nine years. The Bank of International Settlements has called it an "uneasy calm" this morning. It also called for higher policy rates, saying the current low rates fuel market instability.

The final piece of the puzzle was put in place on Saturday when the US non-farm payroll report was released. Payrolls rose fractionally more than economists has expected, and wages increased +2.3% in the year to November. Together, these represent a string of positive monthly results that started over a year ago. In that time, only three rogue low months have been reported.

Stock and bond markets now accept the rise. They had no reaction to this data, rising steadily during the Friday trading sessions.

We also saw rises in commodity prices. Copper and aluminium prices were higher. Gold jumped +$US25/oz. But oil fell, for its own special reasons.

But those parts of the global economy that have been fueled by low rates appear to be on 'borrowed time'. Higher rates depress asset values, and we are starting to see asset values fall in some early-warning sectors. Companies financed by junk bonds have seen the capital values of those bonds fall. Some emerging markets that borrowed heavily when money was cheap look very shaky. Brazil is a flash-point. The transition to a more normal price for money and credit will not be easy.

And it will not be helped by resolute Chinese moves to cut back on industries that have severe overcapacity.

Later this week the New Zealand Reserve Bank will assess its policy rate. Most professional economists pick a cut to 2.50% from 2.75%. However, Governor Wheeler has to assess whether a move like that would actually make any difference.

The rest of the data due out this week is relatively minor, except perhaps for the REINZ results for November. And we get the Chinese trade balance on Tuesday where expectations are for a smaller surplus. We got the equivalent US data over the weekend and that showed little change to their trade deficit.

In New York on Friday, the UST 10yr yield benchmark consolidated at its higher level and starts this week at 2.27%.

The US benchmark oil price is down and importantly is now under US$40/barrel, while the Brent benchmark is at US$43/barrel. OPEC failed to agree an oil production ceiling over the weekend at a meeting that ended in acrimony. Iran said it would not consider any production curbs until it restores output scaled back for years under Western sanctions. The supply glut continues.

The gold price however is up strongly, now at US$1,085/oz.

The New Zealand dollar has also risen broadly against all-comers. It is currently at 67.5 US¢, at 91.9 AU¢ and at 62 euro cents. The TWI-5 starts the week at 72.6, a five week high.

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 ». And don't forget to vote in the Flag Referendum.

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14 Comments

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What could a Fed hike trigger?
Will it be "one & done"?

Doubt it.

Overall population, the pool of potential labor, has expanded by nearly 19 million since November 2007 while the official labor force has grown by just less than 3.5 million – an absolutely astounding gap that screams out just how far the US economy has shrunk. The difference, those 15.3 million, have fallen off the face of official statistics – they don’t count as employed, obviously, and never unemployed, either. The only way to suggest a recovery is to simply forget that they exist as living Americans, somehow being supported by an obviously lesser productive structure.

The real economy itself, however, cannot as economists just ignore this seizing disparity. A permanently shrinking economy is massive trouble on its own, but so much more so where financial burdens are added as if organic growth. Eventually those artificial supports will find their inevitable expiration, as financialism cannot continue to survive upon a permanently reduced base – an action that is found in eurodollar banks all over the world getting out of the eurodollar business as fast as they can. And so that places together more immediate second derivative considerations against the shrinkage of the structural condition. Read more

Crikey - Do we have similar stats for NZ?

Probably - but not for public consumption.

In New Zealand Q3-2007 there were 2,155,400 people employed out of a working age population of 3,291,400. That is an employment ratio of 65.5%.

In Q3-2015 there were 2,329,400 people employed out of a working age population of 3,634,600. The employment ratio is now 64.0%.

Our WAP has grown by 343,200 while the number of people employed has grown by 174,000.

NZ data is from Household Labour Force Survey.

The proportion of the increase in population that is employed is 51% - we are going backwards - the migration program isn't helping - all the skilled migrants are either disappearing or there is a substitution effect going on where 1 skilled import is replacing more than 1 person

A quick check on the US, shows they have 16 million more people over 50 years old than they had in 2005; and of those, they have 9 million more people over 60 than they had ten years ago. I wonder if there is a correlation with this 16 million figure, mixed with new technologies and a recession, and Stephen Hulme's 15 million underemployed or no longer working. Many would prefer to still be working, a number would not. Some will be financially comfortable, some distressed. Many are Donald Trump's core audience.
We will have a similar demographic mix, even if the middle class disquiet is not yet so loud here, other than in Auckland house prices.

it will be an interesting xmas once the Fed rises, could the BOE be next in line, what will happen once interest starts getting put into the system with the amount of debt built up

Companies financed by junk bonds have seen the capital values of those bonds fall.

Just the beginning.

If the junk bond bubble was this week’s most visible inducement toward illiquidity, there have been more than enough indications that might corroborate and explain. With a few more days trading, the huge jump in BofAML’s CCC junk index rate has been confirmed – with another albeit smaller surge again yesterday. At now 16.74%, that is significantly above the prior “cycle” peak from early October 2011. Read more

So whose currency peg breaks next? When does China break their currency peg and cause an earthquake? They are committed to moving to floating rates in order to finally join the IMF basket, but massive capital withdrawal could happen any day, or not.

China is the big question over the next year or two. Plenty of Donald Rumsfeld's "unknown unknowns" festering away there. If capital continues to leave, it will be of interest as to how they deal with their currency among other things........

That's a long 90 seconds DC.

Nurses and teachers and doctors

Just another deflection. Talk about and around everything but the real issues.

NZ has enjoyed exceptional terms of trade for the past 4 years and the govt has spent it instead of salting some of it away for the inevitable rainy day
Now the tide has turned, the govt's coffers are bare (?) and is economising everywhere

Yet it continues to remain silent on the big-ticket issue of multi-nationals not paying tax in NZ
Fix that and we can pay nurses and teachers and doctors more without complaining

This government is wedded to an ideological objective of attaining a fiscal surplus at all costs - what? to save face? And it is doing that by cutting services in all directions - under-funding is emerging at all levels - plus robbing peter to pay paul - evidence is the paltry levels of annual funding of the FMA ($9 mill) and SFO ($9 mill) compared to its AU counterparts of $450 mill pa while expecting results - then there is the sudden closure of the nationwide TB Free program - no indexation of WINZ benefits since 2008 (?) - and now the following from Michael Reddell who calls it under-resourcing

The Ombudsman’s office is badly under-resourced, limiting the extent to which she can do her job properly, even if the inclination was there to do so. Funding choices are made by politicians, who should be – but clearly aren’t – embarrassed by the backlog of complaints and the way in which that backlog deters others from even bothering lodging complaints

http://croakingcassandra.com/2015/12/07/the-oia-a-rather-egregious-abuse/

Watch this development carefully: http://www.bbc.com/news/world-middle-east-35023249
Turkey (sunni, NATO) and isis (sunni) dealings are (like scum) bubbling to the surface; Iraq/Iran (shia) which are effectively one country now, will likely, eventually, react violently to this exposed sunni hegemony. The West will then be funding, arming, both sides and fighting as NATO alongside one -
Milo Minderbinder is back in the Pentagon!