90 seconds at 9 am: Market mood darkens

US Govt deficit jumps; Canada cautious; China producer prices race higher; iron ore prices tanking; UST 10yr yield at 2.28%; oil down, gold stays high; NZ$1 = 69.2 US¢, TWI-5 = 74.5

13th Apr 17, 7:34am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news Wall Street is down again as the risk-off mood grows.

The American federal government had a -US$176 bln budget deficit in March. It is growing fast. Spending rose +17% from the same month a year ago while tax revenues fell -5%. A year ago in March 2016 the budget deficit was -US$108 bln. For the twelve months to March 2017 the total deficit is -US$653 bln (+12 higher than for 2016), and is now running at -3.6% of US GDP.

In Canada, their central bank left its benchmark rate unchanged, at 0.5% overnight, but it raised its 2017 outlook for the Canadian economy as job growth has impressed recently. But in its Monetary Policy Statement, it tried to hose down expectations, saying it is too early to conclude that the economy is on a "sustainable growth path".

In China, inflation may be about to spill out to infect the rest of the world. Producer prices in March are up a whopping +10.0% from the same month a year ago. Apart from a brief spike in 2009, that is the highest rate in over twenty years. Back then, Chinese inflation did not matter; it matters now. It seems implausible that Chinese producers can absorb cost increases of this level, especially as they have come fast. This time last year, Chinese producer prices were falling -5.2% pa, so the shift has been huge. (Chinese consumer CPI is up +0.9% year-on-year, but that is only because food prices are down by -2.4%. It's not their CPI that matters to us, it is that pesky PPI.)

In Australia, prospects for their iron ore mining industry have taken another sharp turn - this time down. Prices have slumped today by another -8.5% and the downward momentum is growing - it is now down -28% since the recent high on February 21. Buyers are pulling back, opting to tap either their own stockpiles or those already at Chinese ports, anticipating prices will fall still lower. It is turning into a bit of a rout.

In New York, the UST 10yr yield is noticeably lower again at 2.28%. This is the lowest we have seen since mid November last year.

Oil prices are down a little today and now just under US$53 for the US benchmark, while the Brent benchmark is now just over US$55.50 a barrel.

The gold price is holding at its new higher level of US$1,274/oz.

However the New Zealand dollar is continuing its slow slide and is now at 69.2 USc. On the cross rates the Kiwi dollar is at 92.5 AU¢ and against the euro is at 65.3 euro cents. The NZ TWI-5 index is now at 74.5 and we haven't been this low since July 2016.

If you want to catch up with all the changes 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

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.

26 Comments

by Groen_mamba | 13th Apr 17, 9:33am 1492032835

FINALLY! The day for the much anticipated "best selling month of the year" data update by REINZ has arrived.

Also looking forward to this upgrade soon: https://www.reinz.co.nz/reinz-hpi

by Chris-M | 13th Apr 17, 10:32am 1492036370

Interesting. In the last week the aggregated number of sections listed on Trade me and RealNZ has risen 3.09%. It is the shortage of land that has primarily driven the house price rises in Auckland.

by Roger Witherspoon | 13th Apr 17, 8:30am 1492029000

US government running a decent sized deficit is a very good thing all round. Government deficits put money into the economy, as the government spends more than it taxes back. It should help push up employment and wages over there. People can then afford to borrow more to buy a bigger house, and so we should finally get better growth out of the US.

The main reason the US had such a poor recovery is because the government was unable to run a big enough deficit to counter the reduction in spending caused by the last collapse. The funny thing is, they have elected the very people who held back government spending under Obama. This is why Trump wants tax cuts, because he stands to benefit personally, and because it causes a bigger deficit without increasing spending.

by Stephen Hulme | 13th Apr 17, 8:48am 1492030123

Federal Reserve Bank of Dallas President Robert Kaplan had lots to say this morning that, for now, the market has chosen to ignore. He warned "we are highly leveraged" implicitly warning President Trump that the country’s ability to boost growth through debt is limited. Read more

by Roger Witherspoon | 13th Apr 17, 10:07am 1492034855

My take is the angst over US government debt levels is really about shooting the messenger. The last collapse was caused by structural weakness leading to unrepayable private debt levels. The government deficit is the result of trying to salve the symptoms of the disorder.

The Trump is the result of people feeling that the causes have not been dealt to, but rather they have been carefully ignored by those in office. Classic Hayek, the experts don't solve the problems so the call goes out for a strongman who can "Get Things Done".

by scarfie | 13th Apr 17, 1:38pm 1492047506

It always comes back to the interest Roger. And the consumption of resources. Doesn't matter how you consume them in the grander scheme of things, public or private driven, but it does matter how to provide the means of exchange in order to fund it. If there is interest attached to the money that is printed, then it requires exponential growth in the consumption of resources to keep the party going. If the government sells debt to fund it, then some pension fund somewhere needs a return on that.

by ham n eggs | 13th Apr 17, 9:02am 1492030955

true - but the US has been doing this for years anyway. Given the world economy is now a debt ponzi and we are running out of takers for more debt, governments running unpayable deficits is the only way forward ... until it all blows.

by Roger Witherspoon | 13th Apr 17, 9:11am 1492031484

That's just propaganda, rather convincing propaganda, but propaganda nonetheless. The government can print as much of its currency as it chooses, so government debt can always be repaid, provided it is in its own currency. The consequence of government just issueing money, ie spending without taxing its spending back again, is that the value of the currency may go down. This may be a good thing in moderation, or a very bad thing if done to excess.

by KH | 13th Apr 17, 9:40am 1492033242

Yes Roger they can do it but they shouldn't. Because it's nuts. The idea that there is some magic that makes government deficit different is just that - magic thinking. I'm not even sure it's a short term benefit for a long term gain. Short term even it just distorts everybody's decisions and conceals what needs to be done.

by Roger Witherspoon | 13th Apr 17, 10:05am 1492034754

Yes, I guess my point was that the propaganda is there in order to conceal what needs to be done. It seems to me that some sectors of society have gained excessive privilege at the expense of others, and the debate about how that has arisen has been aborted.

by Andrewj | 13th Apr 17, 10:09am 1492034968

https://www.youtube.com/watch?v=Op6Qr7uuMy8

by Roger Witherspoon | 13th Apr 17, 11:19am 1492039183

Thanks Andrew, I enjoy your links. I love a good conspiracy theory but I think I'm learning to take them lightly. Yes, the world is full of conspiracies and groups acting in their own interests. There are many wrongs to be righted. An army needs an enemy otherwise it has no purpose.

I seem to keep coming back to the idea of what is fair and reasonable, and that small imbalances that are ignored become major issues as the years go by.

Over the years, the left have done a good job in portraying small misdemeanours as symptoms of demonic intent (a relic of Soviet subterfuge perhaps). So the smallest manifestation of tribal behaviour is decried as "racist" wherever possible. People need something to grumble about, a simple explanation why life is not all roses, and people of a different tribe are an easy target. It doesn't necessarily mean that you want them all killed (although it might).

It was Eisenhower who warned about the military industrial complex and it seems to actually be the military/bureaucratic/political/financial complex that has amassed too much power and privilege. Thankfully, it is riven with factions and in-fighting, not at all the coherent beast the conspiracy theorists would have us believe.

by Stephen Hulme | 13th Apr 17, 8:51am 1492030306

People’s Bank of China Governor Zhou Xiaochuan’s shift toward new tools to steer the economy has swollen a targeted lending program to such a level that outstanding funds are now worth more than the annual output of the Malaysian and Danish economies combined.

The Medium-term Lending Facility has increased to 4.1 trillion yuan ($594 billion), with 3.2 trillion yuan coming due from April to December this year, according to data compiled by Bloomberg. About 2 trillion yuan matured in the same period last year.

While the monetary authority has shown a willingness to roll over the funds, with new loans extending maturities in each of the first three months of 2017, the ballooning amount illustrates the challenge Zhou faces as he tries to reduce leverage in the financial system while keeping the monetary base big enough to avoid a credit crunch. Read more

by Boatman | 13th Apr 17, 12:30pm 1492043401

CHINA ............ is a real worry , and the world seems oblivious to the risks it poses

by linklater01 | 13th Apr 17, 1:11pm 1492045913

Boatman,

I think you are right to worry about China;the unreliability of their GDP figures,levels of bank debt,etc. One aspect of their economy that gets less attention is how technology=and robotics in particular-will affect the economy and the country's social fabric.
It's official policy,articulated by President XI Jinping in 2014 when he called for a robot revolution to transform China. Since 2013, the country has bought more industrial robots than any other country. Last year,Foxconn replaced 60,000 factory workers with robots. As this move gathers pace,what will happen to the millions of replaced workers?

by Stephen Hulme | 13th Apr 17, 8:52am 1492030367

Weekend reading?

by James007 | 13th Apr 17, 9:36am 1492032996

Are you sick?

by Henry_Tull | 13th Apr 17, 12:37pm 1492043838

Just think about this bit Jimmy.

Market adaptations include the expansion of end users’ access to central
counterparties and intermediaries’ greater focus on netting transactions, but also the
growth of transactions that, though similar to repos, do not affect the size of banks’
balance sheet.

might need a stitch this.

by Chris-M | 13th Apr 17, 7:50pm 1492069857

Well it is going to be a pretty miserable weekend?

by scarfie | 13th Apr 17, 1:43pm 1492047828

How does the return on repo's fit into the overall trend of decreasing yield across all asset classes? Can't say I have taken the time to fully understand repo's, and I am not sure I want to. I just like a general outline of their function in order to assess the effect.

by Yvil | 13th Apr 17, 9:24am 1492032241

"UST 10yr yield at 2.28%" how much longer until local interest rates go down ?

by Cowpat | 13th Apr 17, 9:44am 1492033473

With the recent demise of Huishan Dairy, and my continued interest in Shanghai Pengxin, a 'private' company with two billionaire brothers at the helm , who burst into New Zealand to pay inflated prices for Crafer farms, I note that its flagship agricultural company Hunan Dakang, is again suspended from the stock exchange, awaiting further announcements. Its sister arm , the minerals company Pengxin International mining, has also been suspended , only for a much longer period.Like Huishan, it has the habit of share pledging . Also noted is that Shanghai Pengxin has not bothered to update its website in over 4 years, and that one of the brothers has disappeared from the billionaires list. The OIO supported the sale of the Crafer farms , because of the brothers business acumen,and that it was a private entity, what could be further from the truth. There is a lovely photo of John Key with the Chinese premier, and the CEOs of Shanghai Pengxin, and the Elon Musk of China , the CEO of Kuangchi Science ( of Martin Jetpack fame), signing an agreement for the Chinese companies to test drive the 'Traveller ' balloon in New Zealand airspace. All hot air.

by Henry_Tull | 14th Apr 17, 12:14pm 1492128849

Classic case study. Looks kingswood now - as if it was ever there!

The group’s Hong Kong-listed shares have been suspended since they plunged 90 per cent with no warning late last month, shortly after which Huishan confirmed it was late on loan payments, that its treasurer had gone missing and that its chairman and controlling shareholder Yang Kai had pledged 71 per cent of the company’s shares as collateral for loans.

https://www.ft.com/content/18f6707c-1e52-11e7-b7d3-163f5a7f229c

http://www.muddywatersresearch.com/research/huishan/mw-is-short-china-h…

by Boatman | 13th Apr 17, 12:26pm 1492043193

We really worry about strange things here in New Zealand . Our parliament is debating a draft law to outlaw window washers .

For Goodness sake !

Don't we have more serious problems than this ?

Why not instead deal with real problems like microlenders and cash lenders' predatory lending to the poor, which is both reckless and impoverishing ?

Some countries have "reckless lending " laws to protect the vulnerable from predatory lending practices , and they even limit interest and penalty charges which may not exceed the principal sum borrowed ( for cash loans up to 60 months).

by Zachary Smith | 13th Apr 17, 12:41pm 1492044102

That is good news...about the window washer law. Fingers crossed it gets though.

by Boatman | 13th Apr 17, 1:41pm 1492047703

Sure its good news , but surely it could be dealt with either at a local council level with Bylaws , or through an amendment to the existing Land Transport Act 1998 ?