US Fed signals rate hike, balance sheet shrinkage; China reacts to Moody's downgrade; world trade in upswing; AU banks face ratings risks; UST 10yr yield 2.26%; oil slips, gold up; NZ$1 = 70.3 US¢, TWI-5 = 74.6

Here's my summary of the key events from overnight that affect New Zealand, with news credit rating changes are shaking whole economies.

But first, the latest US Fed minutes release is getting market attention. These show that the Fed thought it would “soon be appropriate” to raise short-term interest rates again and markets are taking that as meaning the next hike will be in June. These minutes also show a consensus on a plan to shrink its US$4.5 tln stockpile of Treasury and mortgage securities.

In China, it is all about the Moody's credit rating downgrade. Moody's says it expects the financial strength of their economy will erode in coming years as growth slows and debt continues to rise. Essentially, the downgrade is over the unrestrained growth of debt which has grown far faster than economic output. And MSCI, a key index firm, is publicly refusing to include paper from mainland China firms in any of its indexes in another sharp rebuke to the way the Chinese are managing (or more accurately, not managing) their debt risks. China has directly dismissed the Moody's downgrade, basically saying "but China is special' and they see no problem with their rampant debt growth.

The initial impact of the downgrade will be rising costs for Chinese companies who have raised debt outside the country. And that will push them back to raising it at home, potentially creating a negative feedback loop.

More broadly, world trade flows grew in the first quarter, continuing a recovery that began in the second half of last year in an indication that the global economy may be set to enjoy a year of stronger growth. The revival in trade flows has also been noted by freight companies. Airlines have reported that demand for airfreight was +11% higher in the first quarter than the same period a year earlier, while large shipping lines have said container volumes were up +10% during the same period.

In Australia, the smaller banks are fretting about their recent credit ratings downgrade. And there is growing concern that there are changes afoot for the Federal Government to put some distance between it and the implied guarantee/support for the four pillar banks. That move will see those banks having to raise significant new capital - a shift already signaled by APRA. But that implied support is the basis for the current credit ratings of those large banks and without it their ratings will likely fall. And that is even as they will have bolstered their capital position at the behest of their government.

In New York, the UST 10yr yield is lower today at 2.26%. The yield inversion (5-10) in China got flatter overnight. It is still there but now -2 bps, even as rates rose across the board following the credit ratings move.

The price of oil is just a touch weaker today. The US crude benchmark is now just under US$51.50 a barrel, while the Brent benchmark is just under US$54.

Gold is up slightly however, and now at US$1,257/oz.

Meanwhile, the Kiwi dollar has been holding its own, buoyed by yesterday's strong trade balance data and is now at 70.3 USc. On the cross rates the Kiwi is at 94 AU¢, and 62.8 euro cents. The TWI-5 index is at 74.6, and up to a one month high.

And bitcoin has risen even higher over the past day, rising steadily to US$2,477, another +9% in 24 hours.

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 ».