US economy expanding 'modest-to-moderate'; IMF sees debt binge risk; Indonesian voters choose hard-line religion; Aussie bank pay review attacks commissions; UST 10yr yield at 2.21%; oil and gold lower; NZ$1 = 70 US¢, TWI-5 = 74.9

Here's my summary of the key events overnight that affect New Zealand, with news the way bankers are paid is about to get a major shakeup.

But first, the US Fed reports their economy expanded at a modest-to-moderate pace between mid-February and the end of March, and inflation pressures remained in check. This is despite more difficulties in attracting and retaining workers that is putting broad pressure on wages as firms increasingly report trouble filling low-skilled jobs. In a couple regions, “worker shortages and increased labor costs were restraining growth in some sectors, including manufacturing, transportation and construction,” the Fed said in their latest Beige Book review.

The IMF's latest Financial Stability review has pointed out that a quarter of American firms have gone on a debt binge to take advantage of low interest rates and they make up a significant threat to financial stability in markets and for banks if there is a significant rise in interest rates. The ability of companies to cover interest payments is at its weakest since the 2008 financial crisis, according to one measure. The situation also undermines the Trump assumption that tax cuts would lead to higher corporate investment. In an era of rising rates, they may just allow some to hold on, leaving the Government with higher debt levels and not seeing any economic upside.

Voters in the Indonesian capital of Jakarta have ousted a close ally of the country's president in mayoral elections, replacing him with a candidate riding a wave of hard-line religious support that has up-ended politics in the world’s largest Muslim-majority nation. This result will have policy-makers in Canberra reassessing their positioning in Indonesia.

And staying in Australia, major changes on how retail bank employees are paid are about to happen. Sales and commission payments are 'out', and very large changes are about to hit mortgage brokers. In a major review that has been accepted by the industry, banks will scrap performance incentives based on meeting sales targets. It recommends banks immediately cap the contribution of sales targets to 50% of any incentive, falling to 33% by 2020. It also recommends banning any form of accelerated commission structure and a host of payments for mortgage brokers in anticipation of a fee for service model emerging. 'Soft' incentives like overseas travel and 'sales conferences' are out. It is all about addressing the fast declining level of trust customers have in traditional retail banking, and comes at a time when banking distruptors are gaining strength.

In New York, the UST 10yr yield is back up today and now at 2.21%.

Oil prices are down sharply by more than -US$2 and are now just under US$50.50 for the US benchmark, while the Brent benchmark is now just under US$53 a barrel. This is due to the combined impact of high-than-expected American petrol inventories and data that shows producers aren't cutting production at the rate they said they would.

The gold price is also lower, by -US$8 and now at US$1,282/oz.

The New Zealand dollar is marginally lower as well at 70 USc. On the cross rates the Kiwi dollar is up again at 93.4 AU¢ but against the euro we have slipped a little to 65.3 euro cents. The NZ TWI-5 index is down to 74.9.

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 ».

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As usual the IMF do an excellent job with one hand and completely mislead with the other. The decline in the ability of US companies to pay the interest on their loans because they have borrowed recklessly is identified as a worry. Roughly a quarter are identified as being in trouble if interest rates rise. They ignore the fact that it was US policy to get them to do this by holding interest rates at very low levels. To cap it all, they then say that it is dangerous to do anything that might cause interest rates to rise (which would seem to be the simplest and most effective remedy).

They are just so good at spreading confusion by using up brain bandwidth, whilst making themselves appear learned and expert in these matters at the same time.

Traders are pulling back from bets the Federal Reserve will raise interest rates in June as inflation expectations crumble.

The odds of a hike have fallen back to about 44 percent from more than 60 percent earlier this month, based on a gauge compiled by Bloomberg. Yields on federal funds futures contracts for June and July are retreating as investors scale back forecasts for a move. Two-year Treasuries, among the most sensitive to Fed policy expectations, are poised for their first two-month rally in a year. Read more

Corporates and their banks administer self-serving pressure?

In the past month and three days we have run into the same sort of contradiction. The FOMC voted in mid-March to “raise rates”, but all it really did was increase the upper and lower boundaries for the federal funds rate. Unlike the pre-crisis era, there is today much more looseness as money market hierarchy was obliterated (not by regulations or bank reserves) by the paradigm shift of bank balance sheet behavior (risk vs. reward). Federal funds are completely irrelevant, but for practical purposes they might as well be. Therefore, as little as a “rate hike” might have meant in 2005 or 2006, it means even less in 2017.

That doesn’t necessarily leave, however, monetary policy changes as completely benign and totally extraneous; it merely means that whatever effects it might create aren’t likely to be what is described of them. With rates falling and the eurodollar curve collapsing again, we know without fail that “rate hikes” deserve fully the quotation marks. Read more

It will be interesting to see if Mr Trump can indeed pull off his tax cuts, thus causing money to flow directly into the economy via people's pockets. I think he has a fair chance of pulling it off.

He has made his opponents look like idiots in the last few weeks. First, he made the Republicans look like idiots by not touching Obamacare because they refused to pay his price, the price being tax cuts. Then he made the Democrats look like idiots for pretending he was Putin's chum, when he dropped bombs here and there. The bombing made him look decisive, an effective leader who gets things done.

Politicians really, really, dislike being made to look like idiots, so my guess is that they will do what they are told when his tax cuts come up for the vote. I mean everyone benefits from tax cuts, what's not to like, they just need to be able to justify them so they look wise and reponsible at the same time.

The bombing made him look decisive, an effective leader who gets things done.

The Fed is certainly encumbered with a bunch of dithering appointees.

The Fed has not even announced the framework of what its balance sheet "normalization" would look like, and already Boston Fed president Rosengren is talking about the next Fed QE program.

In a speech titled “The Federal Reserve Balance Sheet and Monetary Policy” delivered to Bard College on Wednesday afternoon, Rosengren said that structural changes in the macroeconomy "may necessitate more frequent use of large-scale asset purchases during recessions" and he said it is "quite likely" that the use of central bank balance sheets will be necessary in future economic downturns.

The reason? A combination of low inflation, low rates of productivity growth, and slow population growth may imply an economy "where equilibrium short-term interest rates remain relatively low" by historical standards. In other words, the natural rate, or r-star, is so low, the Fed will only be able to hike rates a handful of times before it tip the economy over into contraction, requiring a new easing regime.

As a result, reductions in short-term rates to combat recessions will encounter the zero boundary and "will not be sufficient," Rosengren said – so "it is likely to be more common for central banks to engage in asset purchases to stimulate the economy by reducing longer-term rates."

"So balance-sheet expansions – and exits – are likely to become more standard monetary policy tools around the world." Read more

We can certainly expect banks will not commit to productive investment projects while buying and shorting sovereign bonds with zero capital risk weightings present profit opportunities.

Talk about double-extra long speech, sorry, I mean exponentially enhanced extended communication mode. What he should be saying is:
"We will buy as much government debt as we can get away with so the government can run the biggest budget deficit they can get away with. This will put money in people's pockets, reduce the value of the currency, and reduce unemployment as quickly as possible."

Why not just tell the truth, even if it is unpalatable.

But he doesn't know where one of the Navy's aircraft carriers is heading......

>"He has made his opponents look like idiots in the last few weeks. First, he made the Republicans look like idiots by not touching Obamacare because they refused to pay his price, the price being tax cuts. Then he made the Democrats look like idiots for pretending he was Putin's chum, when he dropped bombs here and there. The bombing made him look decisive, an effective leader who gets things done."

This is like reading some sort of parallel reality...

Yesterday it was mentioned on this site, and stated as fact that the RBNZ Household debt to household disposable income stood at 169.7 percent , somewhat lower than Australia . My question is what is the average New Zealand household debt and average household income used to derive the above percentage.

You won't get confirmation from this RBNZ graphic depiction link because the referenced C6 data series is discontinued.

Stephen, thanks for reply . A cached C6 series is accessible . The reason why I posed the question, is the C6 data does not include student debt, when it patently is a 'household ' debt. Australia includes student debt in its Household debt series and when calculating household debt/income. New Zealand with 16 Billion in student debt would skew the data, if added. Using the Stats NZ ,the number of households is readily obtainable, I'm unsure what disposable household income is used however.

That is just not correct. You can see the RBNZ chart on this current page:

and you can get the data from this MSExcel link at the top of that page. It is not 'discontinued'.

David what is incorrect. Stephen said the C6 data series has been discontinued. According to the RBNZ this is correct Nonetheless it is the C6 data that the RBNZ used in calculating household debt The C6 data never included student debt , within its overall household debt measure. The RBA includes student debt in its calculation.If comparisons are to be made between countries, including Australia/ New Zealand surely the measures of calculation should be aligned ( although there will always be some minor variation ) so comparisons have some factual basis.

Suggest download "Key Household financial statistics" C21 from RBNZ
See rows 21, 53, 54
It will be updated for Q1 in early June.

I don't think Mr Baswedan, the newly elected govenour of Jakarta is a hard line religious leader and that Indonesians have chosen "hard line religion" as said in your headlines . This is what the BBC/Reuters wrote about him:
■ Anies Baswedan is a respected academic and a former university rector, who studied in the US under a Fulbright scholarship
■ Known to be a moderate Muslim, but attracted criticism when he met publicly with Islamist groups during his campaign. His team insists he remains a pluralist
■ Former education and culture minister dropped from President Joko Widodo's cabinet last year in a reshuffle
■ Has pledged to improve public education, contain living costs and end forced evictions
Please don't confuse him with some of his followers who belong to "hard line Islamist groups".
His opponent who is a Christian, is also of Chinese descent and this may have contributed to his defeat. There is no doubt that this election has been divisive.

So just to be clear, non-selection of someone on the basis of religion and ethnic background is a valid thing in the real world now? Or is it still only allowed if you are non-european/white/christian as previously?

So Trump is making " America modestly to moderately great again ".

Pity its a debt - fueled growth , because at some time in the future the return on Capital is going to have to get back to a reasonable rate , and then the borrowers like will have problems .... a bit like addicts suddenly not having ready and cheap access to their poison

The brilliant Michael Pettis on China:
As long as China has debt capacity, it can achieve any GDP growth rate Beijing requires, simply by allowing credit to expand. But debt levels are already high, and credit must expand at an accelerating pace to maintain growth. China is probably still a few years away from reaching its debt limits, but the more debt grows, the lower the country’s growth rate average will be over the long term.

No B&T auction results this week?