Here's my summary of the key events overnight that affect New Zealand, with news regulators are on the back foot in both China and Europe.
But first, as expected, the US Fed increased its official rate by +25 bps today. They also signaled that they will be raising rates faster in future than they had previously expected. They plan three 2017 rises. You can read there decision and rationale here.
US advance retail sales for November showed them +3.8% higher than the same month a year ago, but level pegging with October and that was lower than expected. It was car sales that took the shine off the month-on-month data.
US industrial production as reported in the Fed survey showed some unexpected weakness, although previous data was revised higher. Capacity utilisation also fell more than expected. These two data releases have shifted the forecast for US Q4 growth down to +2.4% pa.
In China, it is becoming clear that regulators there have been unsuccessful reigning in their shadow banking sector and a renewed spurt in credit expansion from this source is a growing threat to Chinese financial stability.
In Europe, Greece’s creditors have suspended proposed debt-relief measures after the Greek government surprised them by announcing it would boost welfare benefits for low-income pensioners, a sign of escalating tensions over the country’s bailout, a deal that only just been finally agreed on December 5.
And in the UK, they are moving to make loans provided by the "bank of mum and dad" subject to their inheritance tax. This is not a risk in New Zealand because we don't have death duties or an inheritance tax.
And staying in the UK, their central bank is wrestling with the issue where the major banks compute their own risk-weighted capital requirements whereas the smaller banks have to go with higher default levels. This creates a strong competitive advantage for the majors, and is a distortion we have here as well. The Brits look like they want to give the smaller banks the advantage of lower capital levels for mortgages rather that raising capital to more sensible levels for the majors.
In Australia, traditional retailers are feeling the squeeze. Consumers are feeling uncertain following the surprise fall in Q3 GDP and everything is now 'on sale'. The Boxing Day sales markdowns are in full swing in the prime holiday selling period. It is not a good look and reveals a surprising leakage of confidence.
In other news, after a successful rollout in Pittsburgh, Uber has launched self-driving cars in San Francisco. And Amazon has made its first package delivery by drone. In Amazon's case, it was 13 minutes from the customer order to delivery of the goods.
In New York today, the UST 10yr yield has jumped to 2.50% on the Fed decision to go for a faster set of hikes.
Oil prices have fallen overnight, now just under US$52 for the US benchmark, while the Brent benchmark is now just under US$55 a barrel. OPEC has warned that their oversupply situation may remain unless the ouput cuts are deeper than many members are expecting. And oil demand is changing quicker than expected as the components of the world economy change to less energy-intensive industries.
The gold price is up +US$7, now at US$1,163/oz. [ The gold price has subsequently fallen sharply, now at US$1,151/oz ]
The New Zealand dollar is lower on the Fed announcement but up against most other majors, now at 71.9 US¢. On the cross rates it is at 96.2 AU¢, and against the euro up at 67.8 euro cents which is a 20 month high. Against the Japanese yen we are at a 18 month high. The NZ TWI-5 index is up to 77.9 and we were last at this level in May 2015.
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 ».
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16 Comments
Just goes to show how powerful the belief in normal interest rates is. What people really mean by normal is a rate that allows the free lunch of unearned income to continue. Little thought ever that the system if flawed and that if you look at a chart normal is actually a range that points down not sideways. But I did suspect the FED had forced itself into a corner and had to rise.
Think of it this way, normally interest rates are hiked when an economy has overheated, that is the whole point of interest rate control. But it hasn't overheated and rising rates now will shrink liquidity at a time when more is necessary. Now the narrative has changed from overheated to "normalising policy". Did you all see that subtle change over the past few years?
Actually, I don't agree. The Fed is focused on the future, not the past. I suspect they see the new US Administration's plans as quite inflationary. Heavy infrastructiure spending, high fiscal debt growth, and tax cuts. They probably see this as dramatically raising inflation risks. Which is why they have signaled three 2017 rises.
Nonetheless, Federal Reserve Vice Chair Stanley Fischer recently added his thoughts to the mix.
First, and most worrying, is the possibility that low long-term interest rates are a signal that the economy’s long-run growth prospects are dim. Later, I will go into more detail on the link between economic growth and interest rates. One theme that will emerge is that depressed long-term growth prospects put sustained downward pressure on interest rates. To the extent that low long-term interest rates tell us that the outlook for economic growth is poor, all of us should be very concerned, for–as we all know–economic growth lies at the heart of our nation’s, and the world’s, future prosperity. Read more
A pre-emptive strike, good luck with that. Be nice if the waited until it actually happened, seems to me they are just acting on their pre-conceived ideas. I don't think I am the only one that believes this either, but my reasons are a little different and based on the nature of compound debt.
Richard Duncan is one economist that highlights how much liquidity is needed to reflate the system, you don't do that with higher interest rates.
Good to have you engaging on the topic, it is of paramount importance to global trade. You might have seen my posts in the past that talk about consumption of resources being the key, and that if the private section won't participate the obvious answer is direct government spending. The question there though is does direct government spending support the yield on investments?
It's just getting clearer and clearer the system is rigged. Extend the QE program/cheap money to directly benefit the banks by loading up the world populous with huge debt and over-inflate the sharemarkets. Once all the vested interests made their exorbitant amount of gains by loading up the plebs with debt, increase the cost of money to enslave them for the rest of their lives. Perfect system I'd say!
3 rises next year? BS. They said there would be 4 rises this year, there were only 2. I'd say 1 rise next year, maybe two. They will talk, they will find reason not to. Next year has the potential to be very turbulent with a change in president so trying to give forward guidance is pointless.
What if the economy is unable to handle the lack of cheap credit and they have to back off? Expansive monetary policies are a failure but if the economy cannot work with increasing borrowing costs then what?
I think we will see a credit crunch without growth and the "helicopter money" will be eventually a reality.
The Fed hiking rates has been a long time coming , and the reasons are many -fold
Firstly , the US economy is seemingly quite robust compared to the first few post GFC years
Secondly , Trump seems hell -bent on spending up large to '"Make America Great again " which means it will run a deficit and could be inflationary
Thirdly , you cannot weaken one of the four factors or production without consequence , in this case Capital
We also know that the savings of today are the Capital of tomorrow , a very important fundamental principle
From a purely moral point of view , savers and financially prudent folk have been gutted between low rates , tax and inflation to the point there is not just a disincentive to save , but we are actively discouraged from saving , and we know from history that :-
"You cannot bring prosperity by discouraging thrift."
Abraham Lincoln is credited with these words , but it was in fact a Presbytarian ( basically a Calvinist) minister who said :-
You cannot bring prosperity by discouraging thrift.
You cannot help small men by tearing down big men.
You cannot strengthen the weak by weakening the strong.
You cannot lift the wage earner by pulling down the wage payer.
You cannot help the poor man by destroying the rich.
You cannot keep out of trouble by spending more than your income.
You cannot further brotherhood of men by inciting class hatred.
You cannot establish security on borrowed money.
You cannot build character and courage by taking away man's initiative and independence.
You cannot help men permanently by doing for them what they could and should do for themselves.
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