Inflation expectations turn higher; yields rise in EU and US; US service sector expands strongly; Aussie bank treasurers face higher costs; UST 10yr yield at 2.53%; oil higher, gold drops; NZ$1 = 72.3 US¢, TWI-5 = 78

Inflation expectations turn higher; yields rise in EU and US; US service sector expands strongly; Aussie bank treasurers face higher costs; UST 10yr yield at 2.53%; oil higher, gold drops; NZ$1 = 72.3 US¢, TWI-5 = 78

Here's my summary of the key events overnight that affect New Zealand, with news we may be at an inflection point in interest rate markets.

Holders of high grade corporate and sovereign bonds are seeing their capital values fall. Yields are rising. We saw that in the recent NZGB tenders where demand is brisk but that investors want, and are getting, higher yields. It is also reflected in the steepening of the interest rate curves. For committing long, investors want higher compensation because they now think rates will be higher in the future.

This trend was started with the end of additional QE by the US Fed and the beginning of official benchmark rate rises. Briefly, the Trump effect boosted yields. Now is it the European markets that are leading the way. German bund yields are rising, and those for other major economies in the region are rising as well. Behind all this is rising current inflation, and rising inflation expectations. And ECB members are now starting to talk about exiting their QE programs.

The higher European rate rises cannot be sustained on their own, but if rates also keep rising in the US, together this can move markets in the intermediate term. For us here, expect our Kiwisaver funds exposed to bond prices to struggle to maintain their unit prices. And higher yields will likely hurt other asset prices - like real estate. Commercial real estate first, but residential as well if the interest rate rises are sustained for a few quarters.

The giant American service sector is expanding in January at its fastest pace since November 2015, fourteen months ago. This is being driven by faster rises in business activity and new work. Input cost inflation however has slowed since last month. Firms are reporting their strongest business outlook in nearly two years. That input cost inflation could turn up quickly if the trend is sustained.

Sales of newly constructed American homes reached 563,000 in 2016 which is +12.2% higher than for the previous year. However the year ended on quite a soft note.

In Australia, bank treasurers will need to raise AU$135 bln of funding in debt markets this year, mostly replacing existing arrangements that are expiring. So far in January, they have placed A$5.3 bln in local markets and AU$8 bln in international markets. That is a quicker pace than usual but there is still more than $120 bln to go. There are two risks for them other than rising rates: the likely downgrade of the Australian sovereign credit rating will probably add 0.2% to their costs, and the portion they would normally source in the US private placement markets will find lower demand and higher costs due to new American rules on what risks fund managers there can take.

In New York, the UST 10yr yield is holding at 2.53% today, after some solid rises recently. We should also note that credit spreads for Australasian investment grade debt are actually at their lowest level since November 2007. In other words, their lowest in more than nine years. Wholesale interest rates may be rising - and they are - but banks can currently access funding at tighter spreads than we have seen in a long time.

Oil prices are higher today by between 50 USc and US$1, now just under US$54 for the US benchmark, while the Brent benchmark is still just under US$56.50 a barrel.

The gold price is sharply lower however, falling -US13 to US$1,186/oz

The New Zealand dollar also a little lower at 72.3 US¢. On the cross rates we are at 96 AU¢, and against the euro at 67.8 euro cents. The NZ TWI-5 index is still high at 78.

If you want to catch up with all the changes on yesterday, 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 »

The 'US$' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'AU$' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'TWI' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '¥en' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '¥uan' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '€uro' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'GBP' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'Bitcoin' chart will be drawn here.
Loading...
USD 
NZD
End of day UTC
Source: CoinDesk

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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.

20 Comments

Comment Filter

Highlight new comments in the last hr(s).

And Mexican-US tensions escalate. Advantage: China.

http://www.bbc.com/news/world-us-canada-38760671

Time for China to buy some more influence, this time right on America's doorstep. Will anyone be surprised if China announces a big infrastructure project in Mexico?

Trump's already scored an own goal within the first few days. The next four years will be interesting.

Actually I think Trumps strategy is simple, make America great again. The question is, when was America great ? in the 50's and 60's. Has a global economy helped America ? the answer is no. Basically now the plan is to shut the boarders and they have enough population and land to go back in time. Start buying American made again, sure its more expensive but then it creates jobs and income growth. America has been going backwards for decades and its pretty obvious just doing more of the same is not going to fix it. If you want to do trade with the USA its going to be on their terms or your going to get the middle finger. If Trump really gets it together they don't need the rest of the world.

Regarding Interest rates , thank goodness savers are going to be getting a fairer deal , after a long dry run

I hope you're going to use the extra income to prop up the economy once mortgage holders are less able.

I'm still waiting for Deposit rates to increase. The fairer deal maybe a while off yet.

The rate of new house sales in US, if applied to NZ, would mean that 6,750 new homes would be built in NZ in 2016.
As we know the rate we need for just Auckland is around 13,000 to 26,000/year (depending on who you follow) - this means 100%- 200% higher housebuilding than the US. Maybe we should invite some Mexicans over to help.....

In New York, the UST 10yr yield is holding at 2.53% today, after some solid rises recently. We should also note that credit spreads for Australasian investment grade debt are actually at their lowest level since November 2007. In other words, their lowest in more than nine years. Wholesale interest rates may be rising - and they are - but banks can currently access funding at tighter spreads than we have seen in a long time.

A trend not restricted to Aussie banks.

Investors’ appetite for the lowest rated segments of the corporate debt market touched a fresh peak on Wednesday, when a triple-C rated company came close to selling bonds with a yield of just 6 per cent. Last February, triple-C paper traded with a yield of 18.57 per cent, according to Bloomberg Barclays Indices. That figure has nearly halved to 9.36 per cent today. Read more

The Federal Reserve is about to go rapid-fire on interest rates, boosting them in the second half of this year, and following that with a rise in every single quarter of 2018, according to BNP Paribas SA, which expects the tightening to strengthen the dollar and push gold down toward $1,000 an ounce.

The U.S. central bank is seen raising borrowing costs later this year given the fiscally expansive policies proposed by Donald Trump, and the new president’s agenda may help to lift wages in 2018, hoisting labor costs, the bank said in a Jan. 25 report. BNP was the top gold and precious metals forecaster in the fourth quarter, according to data compiled by Bloomberg.

“Gold may yet find support from higher inflation in the first half of 2017. But the Fed will pursue rates hikes in the second half of the year, keeping the dollar strong,” commodity strategists Harry Tchilinguirian and Gareth Lewis-Davies wrote. “In 2018, BNP Paribas expects the Fed will hike every quarter.” Read more

Top wage earners last year made 5.05 times what their lowest-income counterparts took home, the widest gap in data going back to 1979, according to the Labor Department. What’s worse, it shows the most recent improvement -- in 2014 -- was just a blip, and the trend is again moving in the wrong direction seen over almost four decades.

Resilient economic growth and a solid stretch of hiring the past few years had raised expectations that the gap between rich and lower-income workers would shrink in a sustained manner. The reality was disappointing. The growing divide underscores the angst that helped land President Donald Trump in the White House, with his appeal to working-class voters feeling left behind in the economy. Read more

Does housing reflect this reality?

With soaring mortgage rates and plunging mortgage applications, it should be no surprise that new home sales crashed in December. Analysts expected a modest 0.7% decline but sales crashed 10.4% - the most since March 2015 - and at 536k SAAR, this is the lowest since Feb 2016.

The supply of homes for sale increased to 5.8 months, the highest since September 2015, from 5 months in November. There were 259,000 new houses on the market at the end of December, the most since 2009.

And Median home price surges to $322,500, second highest in series history, just lower than the record $323,700 in September Read more

“Twenty-five hedge-fund managers make more money than all of the kindergarten teachers in America combined,” he told the New Yorker. “Being one of those twenty-five doesn’t feel good. I think they’ve developed a heightened sensitivity.”

If anything, Osnos wrote, inequality is widening, noting recent statistics from the National Bureau of Economic Research that showed that while incomes for the top 1 percent of Americans have nearly tripled, half of the population was earning at the same level they did in 1980, comparing America’s wealth gap to that seen in the Democratic Republic of Congo.
http://www.nakedcapitalism.com/2017/01/johnson-elites-eying-exits-signal...

Lies , statistics and alternative facts .

Comparing the US to the Democratic Republic of Congo on ANY measure has got to be the worst example of media sensationalism , lies, deceit and its the reason we can no longer trust the media for any sense of balance , fairness or ethics in the nonsense they write or say .

Trust me , I have been to Kinshasa , albeit 30 years ago , and its a chaotic hell-hole that no one in their right mind would ever choose to visit .

From the news I have read since then , it only seems to have got worse .

According to Trump, that is what Chicago is like

The problem that faces the entire world is how to get the entitled (and powerful) to accept that others are just as entitled and prise their grasping claws off the coffers.

The debate around the gap between the top wage earners and the rest has been going on for years now, and there are so many holes in the justification for CEOs pay that you could drive a truck through, but they still get what they want, they still get their bonus's even when the company doesn't perform. Politicians are no better. It all needs to change.

I'm with you, unfortunately we now have layers of bureaucracy at local government level. Resulting in lot of very well paid people who now believe they can create wealth and growth by decree, receiving top level private sector salaries while passing risk on to ratepayers and stifling growth and development.

Donald Trump and Your China Business: Double Down, Ditch It or Die

http://www.chinalawblog.com/2017/01/donald-trump-and-your-china-business...

Thanks Andrew, most interesting. Draconian! And some here, Government included, worry about offending the Chinese over the slightest thing - restrictions on foreign ownership, that sort of thing.
Little wonder that there is such a (intentional?) high failure rate for our outfits trying to get a toe hold into the place.

For those who have the time to read a long analysis piece ... see this.

No mention of the implications of the ISDS provisions of the TPP. - the thing that most worried/concerned academics critical of the agreement (e.g., Elizabeth Warren in the US and Jane Kelsey here).

Also, here the copyright provisions would have been a huge negative for us for many generations to come - good of course for the US ag chem and pharma corporate majors.

Fewer Americans working means lower proportional demand for houses; thus, prices can rise and precipitously while volume does not. This is not a condition that most people are unaware, unlike economists who have convinced themselves none of this matters (Baby Boomer retirement, or something). The housing market, like the overall economy, looks somewhat healthy with its positive numbers but only in isolation relative to those positive numbers. Read more

David, I like you dude, But you need a bit more practice at reading. Perhaps read at least once or twice before recording. (it is only 90seconds after all).