90 seconds at 9 am: US Budget fantasy

New US budget faces sceptical reception; US new house building rises; US retail malls face rating downgrades; Aust. signals house building push; UST 10yr yield 2.29%; oil and gold up; NZ$1 = 70.2 US¢, TWI-5 = 74.4

24th May 17, 7:28am by David Chaston

Here's my summary of the key events from overnight that affect New Zealand, with news of government budgets and new house construction.

In Washington, the new Administration is proposing an austere Federal budget. It is one that will slash spending sharply, especially for programs involving their social safety net, will increase military spending by about +3% (and far less than the campaign promises), and will cut tax rates especially for high income earners. At the same time, it promises to balance their budget by 2027. It achieves all this by assuming economic growth in nominal terms will rise quickly, from +4.1% this year to +4.4% next year, then a stable +5% growth thereafter. The initial market reaction is scepticism of these assumptions.

Meanwhile, the US housing market is still showing some strength. The volume of sales of new houses in April are +11% higher than in the same month a year ago, even as they slipped slightly from the record high levels in March. The median price of a newly constructed American house was NZ$442,000.

But things are starting to unravel in traditional retail. The latest sign is that ratings agencies are downgrading debt for companies with exposure to retail malls as their anchor tenants struggle and start pulling back from these locations.

In Australia, one consequence of their recent Federal budget will likely be a sharp increase in the number of houses being built. The first independent modeling of some budget measures shows that as many as 100,000 new dwellings in the next four years will be built. That will involve construction activity of almost NZ$5 bln and create an estimated 5000 permanent jobs. This increased activity will mean that New Zealand won't be able to look to Australia for workers or construction firms - we will be competing with their higher demand.

The New Zealand budget, with an expected focus on increasing our housing supply, will be released tomorrow.

In New York, the UST 10yr yield is higher again today at 2.29%. The yield inversion (5-10) in China got flatter overnight. It is still there but now -4 bps.

The price of oil is slightly firmer today as well. The US crude benchmark is now just on US$51.50 a barrel, while the Brent benchmark is just over US$54. The new US Budget calls for halving their Strategic Oil Reserve now that the US is no longer reliant on imports. At the same time, OPEC is set to extend their output cut agreement.

Gold is up slightly too, at US$1,255/oz.

Meanwhile, the Kiwi dollar has joined the rising trend and is now at 70.2 USc. On the cross rates the Kiwi is at 93.8 AU¢, and 62.7 euro cents. The TWI-5 index is at 74.4, and up to a one month high.

And bitcoin has had a wild ride over the past 24 hours. Yesterday it reached US$2,273, then fell by almost -10%, and today it is back up to near yesterday's high.

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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Source: RBNZ

Source: CoinDesk

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6 Comments

by Stephen Hulme | 24th May 17, 8:22am 1495570929

The yield inversion (5-10) in China got flatter overnight. It is still there but now -4 bps.

The economic future looking a little brighter?

When crisis first struck China in the middle of 2008, there were two RMB of foreign reserves for every one RMB in bank reserves. That was not by accident, as even under the more flexible currency regime following the partial float in July 2005 the PBOC endeavored to maintain such a cushion for legitimacy and therefore stability. The global eurodollar markets, however, stopped cooperating so that in the years of “recovery” since then the Chinese central bank has been essentially diluting RMB.

They would have to balance their “dollar” problem against RMB growth of however much. Bank reserves were put back on an upward trajectory last February, but it wasn’t the same as in the prior period. Constrained by again overall dilution potential, China’s internal monetary policy has clearly sought to balance the two conditions, the result of which has been a large injection of RMB but not so large as to totally de-dollarize.

As you can see in the first chart at the outset, the RMB injections were held low right at 1.0, meaning 1 RMB, roughly, in forex reserves for 1 RMB of internal bank reserves. That level was met in December, meaning that for January 2017 forward the central bank has apparently been trying to keep CNY and therefore the outward “dollar” conditions as steady as possible while at the same time limiting the amount of RMB growth so as to keep at this level of its “dollar” basis. Again, round numbers are usually no accident for that central bank.

These are, however, far from cost-free tradeoffs and transactions. By maintaining a ceiling on RMB reserve growth the result is as you see above; increasing messiness as nominal money rates rise but do so in hugely volatile fashion. The mainstream confuses this condition for intentional policy, which it is but of a very different kind. This is not, as it is widely proclaimed, intended tightening as a matter of direct monetary policy but instead the (still rising) costs of trying to give “reflation” whatever best chance it may ever have. Read more

by jfree | 24th May 17, 8:48am 1495572522

Coming soon...

http://www.radionz.co.nz/national/programmes/ninetonoon/audio/201844661…

by nzteapot | 24th May 17, 9:35am 1495575327

The median price of a newly constructed American house was NZ$442,000? How about new zealand?

by Yvil | 24th May 17, 9:56am 1495576611

Does that include the land or is that construction cost ?

by Stephen Hulme | 24th May 17, 9:37am 1495575439

I have always found it unsettling that the Chinese communists have known more about the dollar than anyone at the Treasury Department. What PBOC Governor Zhou had specifically warned about in March 2009, writing out his thoughts for publication by the Bank for International Settlements, was for world leaders to first understand the true nature of the problem before setting about to create solutions to it. The world didn’t run on dollars, but credit-based currencies that were linked in ways unimaginable to almost every other policymaker. Read more

by murray86 | 24th May 17, 10:21am 1495578109

I can only - no shit! this level of sagacity is what we expect from all our leaders. Instead they mostly fumble, reaching for sticking plasters, rather than seeking to reach full understanding to create genuine, effective solutions. If the philosophy Governor Zhou espouses had been followed, then much of the neo-liberalist policies would have been junked years ago, before much of the damage had been done. Even today our pollies quail before the onslaught of vested interests and fail to do their basic duty - act on behalf of the people who elected them to office and pay their wages, not the people who shout them fancy lunches and trips!