90 seconds at 9 am: US in sweet spot

US economy boosted by good data; markets ignore political tensions; BofE readies 'sledgehammer"; China can't change; RBA has QE plan; UST 10yr yield at 1.56%; oil and gold up; NZ$1 = 71.2 US¢, TWI-5 = 74.9

18th Jul 16, 7:02am by David Chaston

Here's my summary of the key events over the weekend that affect New Zealand, with news of a resurgent American economy.

Confident consumers and a stabilising manufacturing sector is putting the wind in the US economy’s sails as it enters the second half of the year.

American industrial production grew in June at the fastest monthly rate in eleven months on the back of strong car and utility output.

Sales at US retailers rose sharply in June, a sign consumers are spending at a healthy clip after a slow start earlier in the year. Home improvement, building materials and garden supplies rose almost +4% to mark the biggest increase since 2010.

And inflation appears to be rising as housing and medical costs turn higher while the effects of low energy prices and a strong dollar slowly fade. Excluding food and energy, American prices have risen +2.3% over the past year and that is now well above its 10 year average.

This is all very positive in the engine room of the world's economy. But international uncertainties seem to be higher these days with the failed coup in Turkey the latest in a string of them. However financial markets do seem unfazed in the politics of this uncertainty. Economics and earnings seem to be dominating investor views. So far, at least.

The Bank of England's chief economist supports a "sledgehammer" approach to stabilising the post-Brexit British economy as concerns about unemployment and investment levels rise. In a speech, Andy Haldane said he supports easing monetary policy next month and counselled against too timid a response.

In China, the transition from a stimulus-based economy powered by "investment" to a consumer-based one is proving hard to achieve. In fact, China produced record steel production in June and that is an industry chosen by Beijing as one which needs to get rid of surplus capacity. Worse, China's second tier cities have huge housing projects planned and in development - these projects are so over-the-top that they are enough to house almost half the world's population. The leaders in Beijing don't appear to be in control of their own country.

In Australia, the RBA has revealed to Bloomberg in an interview that they have a QE action plan ready if they need stimulus and rate cuts aren't proving effective. "Currency depreciation" seems to be favoured over cheap-money-for-banks.

Back in New York, UST 10yr yields slipped slightly at the close on Friday and are now at 1.56%.

The US benchmark oil price is only marginally higher, now just over US$46/barrel and the Brent benchmark is just over US$48/barrel.

The gold price is also marginally higher, now at US$1,327/oz.

The NZ dollar starts the week lower at 71.2 US¢, is at 93.9 AU¢, and at 64.5 euro cents. The TWI-5 index is now at 74.9. And that is more than 1½c lower than this time last week.

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 ».

Daily exchange rates

Select chart tabs

Source: RBNZ

Source: CoinDesk

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

29 Comments

by sharetrader | 18th Jul 16, 8:11am 1468786262

rate cuts are no longer as effective, its time to try something different.
we can not continue debt fuelled spending forever other wise money as we know it will become valueless

by Caleb | 18th Jul 16, 8:19am 1468786742

Only way to do that, is to stop the banks lending any money which isn't sitting in their vaults.

by Tom Joad | 18th Jul 16, 8:42am 1468788156

The end game for rate cuts is fast approaching.

The so called "wealth effect" which in theory causes people to rush out and spend the increased paper value of their home and pension fund has not worked since the GFC. This is because their is a sense that the coordinated suppression of interest rates by the Central Banks signals all is not well in the financial system and there are storm clouds ahead,

Pension and sovereign wealth funds have benefited from the increase in all asset values due to falling global interest rates. However, with rates now at rock bottom for so long they will soon be forced to become net sellers of assets to meet obligations. The fall in asset prices will become a self-reinforcing loop and CBs have no interest rate ammo left in their arsenal to fight with. We are in uncharted waters.

by ham n eggs | 18th Jul 16, 9:40am 1468791607

the end game is approaching - fullstop. The uncharted waters are waters without a viable financial system, which means no OIL. Thats everyones lifestyle gone.

by Stephen Hulme | 18th Jul 16, 8:54am 1468788877

Don't Auckland house prices already reflect that reality? - I truly pity those working in receipt of devaluing fiat currency. Life is just too short to endure such nonsense.

by Afewknowthetruth | 18th Jul 16, 9:28am 1468790904

The value of money is continuously eroded by central banks. Money does become valueless. That is how the system works (and has been the way system has worked for up to several hundred years, depending on location).

When I was a child farthings (one quarter of a penny) were in circulation and small items could be purchased for farthings; there were 240 pennies in a pound, so a farthing was 1/960th of a pound or roughly 1/500th of a current NZ dollar.

Continuous 'printing' of money by central banks is what continuously devalues money already in the system, and is what covers the interest on previously printed money. It is a toxic system which must eventually end in tragedy but no one in position to do so has any intention of changing it, least of all the bankers who make immense profits by keeping one step ahead of everyone else.

What few people seem to realise is that the entire system is dependent on there always being more energy and resources to extract and use, which is clearly mathematically impossible. What we have been witnessing since around 2000 have been the first indications that the system is hitting the wall. Fractional Reserve Banking is just one of many 'progress traps' humanity has stumbled into or has allowed to be created, and once you're in the trap there is no easy way out (or no way out at all).

No politician or mainstream economist will ever admit that the present system has no long-term future, so we will witness ever-greater desperation to prop up the system by any means possible (historically low interest rates or negative rates, vast injections of digital money into markets etc.) until it does finally collapse.

by ham n eggs | 18th Jul 16, 10:02am 1468792923

Exactly right. I dont really think most politicians are aware of where things are headed and certainly no one is going to campaign on a reality check of minimal income, food & low standards of living.

by Colin | 18th Jul 16, 12:25pm 1468801501

The something different is the current central bankers of the world be sacked forthwith there mad experiment has failed.

by Colin | 18th Jul 16, 12:27pm 1468801675

The something different is the current central bankers of the world be sacked forthwith there mad experiment has failed.

by Ergophobia | 18th Jul 16, 1:41pm 1468806068

Dead right ST. Sooner the goons realise that reducing the reserve rate below an already ludicrous 0.5% will achieve nothing but more debt and risk, the better. Eventually money will have to become valuable again and that adjustment now can only be savage.

by ham n eggs | 18th Jul 16, 1:54pm 1468806842

"eventually money will have to become valuable again"

Impossible. Because that would involve a debt amnesty of sorts to clear a whole lot of debt in the absense of inflation, but the trouble is debt brings consumption forward, and we have already done the consuming part... So any sort of debt amnesty collapses the system even quicker. And then it would be near impossible to restart globally.

by Stephen Hulme | 18th Jul 16, 8:40am 1468788019

And inflation appears to be rising as housing and medical costs turn higher while the effects of low energy prices and a strong dollar slowly fade.

Rent inflation at its highest in 9 years!! - Shelter costs rose 0.3% MoM (but 3.5% YoY - the highest since July 2007) Read more

As for IP and retail sales, maybe a more balanced review is in order? - there are reasons why US T10y bond yields are so low at the moment.

Industrial production in the United States remains caught up in the latest downward shift of the 2012 slowdown. The Federal Reserve estimates that overall industrial production contracted for the 10th straight month, falling 0.7% in June 2016. Read more

Retail sales in June 2016 were up 3.14% from June 2015. That rate is slightly better than the average from the middle of last year, but not significantly so. The 6-month average continues to straddle the 3% range that traditionally marks recessionary circumstances, about 2% less than the average just before the “rising dollar” economy hit in late 2014. Under actual growth conditions, retail sales should average between 6% and 7% (with the occasional 8% or even 10% month) rather than what we find now of a 3% average (with the occasional 2% or even 0% month). Read more

by Chris-M | 18th Jul 16, 9:13am 1468790020

"Chinese 2nd tier cities building enough houses to accommodate half the worlds population"
Something is seriously out of whack here. The level of excess in China's desperate attempts to keep the "miracle" going seems to be increasing at an exponential rate. It can't carry on and something must blow up very soon. My guess is that it will be this that finally crashes the Auckland property market if not the whole world economy.
We need to import some of that excess Chinese house building capacity into NZ. It is probably very inexpensive and efficient. It is crazy that they have such a surplus while we have such a shortage. Something is not working.

by profile | 18th Jul 16, 2:10pm 1468807858

And the towns are building enough to house the other half. I was in boondocks China the other day - smaller towns a sea of half built high rise apartments and not a worker or crane driver in sight. Couldn't see a population to fill them either. For a number of meals go to a restaurant in a 3 storey building and only 1/10 th of building in use with rest idle gathering dust. Nice roads but everything else massively overbuilt/over capacity. Wouldn't want to be in the iron ore business.

by scarfie | 18th Jul 16, 9:12am 1468789975

We need to import some of that excess Chinese house building capacity into NZ

No we don't if we want them still standing in 20 years.

by Kakapo | 18th Jul 16, 9:19am 1468790384

Somewhere I saw a video of one which was crumbling before it was finished, loose sand and rubble falling out of the walls.

Is it completely impossible for NZ to build something that actually lasts? A friend in Germany lives in an apartment building which went up in the 11th century and is still going strong. Her bathroom window has been dated to the Renaissance.

by Afewknowthetruth | 18th Jul 16, 9:44am 1468791856

Local craftsmen working within their own community produced very different results from 'cowboys' looking for the next deal to complete and move on from -which is what characterises much of what happens in the world these days.

by scarfie | 18th Jul 16, 9:59am 1468792751

Craftsmanship is one word that encompasses a lot of what is good about good design. A good design is what it is, and proprietory building products and building systems detract from that. This argument seems lost on the supply siders, low density crowd. It is why even out architecturally designed homes are often quite poor. To make the craftsman affordable the middle men in the building process need to be eliminated, that includes councils and bankers.

by Kakapo | 18th Jul 16, 10:13am 1468793633

Occasionally take a wander around France and Italy via Google street-view, and you can see the individual craftsmanship and problem-solving that went into buildings that are now about 500 years old and still in pretty good shape. There's one, wish I could tell you where it was, but it's some little village in the backblocks of France somewhere, and you can see that the materials were cannibalised from something older. There's a section of the half-timbering made from an elaborately-turned staircase bannister that's way out-of-scale, and probably from a chateau that bit the dust.

by @tony | 18th Jul 16, 11:26am 1468797978

I have built two houses (and other significant stuff in NZ) to European standard (R5 floor, ceiling and walls etc.).
So; I amd very fortunate to live in a very warm house with no need, ever, for an "air" circulation system.
We have central heating (HW) in every room with individual controls on each radiator.
Happy, Warm, Quiet home = happy, healthy life.

Where we skimped it was on the furnishings.... and doing things like putting thick underlay under a cheap hard wearing carpet... These can be easily updated over time... unlike anything "behind the plasterboard"...

The builder was excellent and even allowed me to work as part of the team as a laborer... I did a lot of the wiring/network/audio/tv etc. etc. and put in most of the Polystyrene insulation (as fibreglass into the regular stud is too ineffective to reach R5) and the soundproofing for internal walls..

IF you want better housing stock start with the minimum's as defined by the councils.... People want cheap houses so builders will built to the MINIMUM SPEC they can... it's madness to think they wouldn't as the other builders are also quoting against the min spec ! - Also people are not going to look whats behind the plasterboard and estate agents... well.... no comment...

This is NOT rocket science!

by Kakapo | 18th Jul 16, 12:38pm 1468802302

One of the major downsides with all the new subdivisions with covenants is that it cuts out the option of putting the budget into quality rather than size. My preference would be to build smaller, like cottage-sized, but with better materials, and better quality. But first have to get a plot that isn't subject to the whims of some control freak who's going to insist that it be stupidly huge, made of cardboard, and have ugly, pretentious fake columns on the front.

by kiwimm | 18th Jul 16, 4:59pm 1468817985

I am doing exactly this. I have purchased a section privately and I am building a high-quality 140m2 house for my family. It will be a passive house so no heating or cooling required. Materials have been chosen for longevity and low maintenance. Walls are 8 inches thick with no thermal bridging, triple glazed windows are R1.3 (compared to R0.26 in the building code). It is possible but you meet resistance at all turns.

If I had my way, I would mandate passive houses for all new buildings. The cost savings to the healthcare system alone would be worth it.

by PocketAces | 18th Jul 16, 5:14pm 1468818859

These days you'd be lucky to find such a section that you can do this on. Can't imagine it is a new subdivision and imagine its not anywhere near Auckland.
I reckon our building regs need tipping out so that being a bit out of the box with your ideas was encouraged. Look at all those used tyres looking for a good home, literally.

by kiwimm | 19th Jul 16, 9:47am 1468878422

You could do this on a subdivision but would need to meet minimum sizing although your high quality building will be surrounded by cheapest possible McMansions. Any back section should be fine. Chch is the golden spot right now with many full sections for sale in existing areas.

by scarfie | 18th Jul 16, 5:47pm 1468820878

Amen to that.

by MikeM | 18th Jul 16, 9:37am 1468791435

The US expansion would have to one of the most drawn out in history. Is it about 8 years old? Nothing startling in the numbers but chugging on nonetheless.

by Stephen Hulme | 18th Jul 16, 10:50am 1468795831

The Bank of England's chief economist supports a "sledgehammer" approach to stabilising the post-Brexit British economy as concerns about unemployment and investment levels rise. In a speech, Andy Haldane said he supports easing monetary policy next month and counselled against too timid a response.

Where has this fellow and his remedies been hiding in recent years?

Did they cause this or was the chosen metaphorical hammer just not big enough?

Let’s be clear. The economy is fragile. It was slowing down even before the referendum date was fixed and it is ill-prepared for the shock of Brexit. The UK has a budget deficit of 4% of GDP, a balance of payments deficit of 7% of GDP and the worst recent productivity record of any G7 country bar Italy. The idea that George Osborne “fixed the roof while the sun was shining” is fatuous. Read more

by Afewknowthetruth | 18th Jul 16, 10:49am 1468795768

.....'It is clear for all to see but the Ph.Ds. that frequent elitist policy circles that the massive misallocation and consumption of capital such a perverted system enables will eventually collapse on itself. Debt used to be productive, id est. self-liquidating, but now it is used for consumption backed by future income projections based on historical experience. However, one should not extrapolate future income streams from a historical regime when the new one is fundamentally different. The promised incomes obviously never materialized and the world reached peak debt. The credit Ponzi is dead.

Consider the following chart that depicts decennial change in average real earnings for the UK worker. It shows an unprecedented development. Not since the 1860s have the UK worker experienced falling real earnings over a ten-year period. Such dramatic change obviously does something to the so-called social contract people have been tricked into. People no longer believe in a brighter future and there is nothing more detrimental to a human being than that. No longer vested in the status quo, people opt for radical change, hence; Brexit, Trump, Le Pen, Lega Nord, 5MS. Old rules does not apply anymore.'.....

http://bawerk.net/2016/07/15/brexit-or-not-the-pound-will-crash/

by Roger Witherspoon | 18th Jul 16, 11:21am 1468797704

Interesting summary of the long term destruction of real wages and productivity in Britain wrought by the mutually supporting fantasies of the EU, immigration, and financialisation. Well worth a read. The charts are stunning.
http://www.zerohedge.com/news/2016-07-17/credit-ponzi-dead-brexit-or-no…