90 seconds at 9 am: "Not in my lifetime"

US consumer confidence up; Yellen not expecting another GFC; another major ransomware attack; IMF downgrades the US; local govt debt risks rise in China; UST 10yr yield 2.20%; oil up but gold stays down; NZ$1 = 72.7 US¢, TWI-5 = 76.8

28th Jun 17, 7:32am by David Chaston

Here's my summary of the key events from overnight that affect New Zealand, with news the head of the Fed is saying there will not be another global financial crisis for a very long time.

First however, and in contrast to yesterday's weak May data, we have much stronger US data today for June. The latest consumer sentiment survey is improved after falling in May. The 'present situation' aspect is very strong; but it is the 'expectations index' that drags it back.

But that survey did not include Janet Yellen in their sample. She said this morning: "Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we're much safer and I hope that it will not be in our lifetimes and I don't believe it will be."

One reason she might not want to be so confident is that there is a very major cyber attack by another ransomware threat going on around the world at present. It is hitting some major enterprises and government agencies. No reports yet of any New Zealand or Australian impact.

Another element came up last night: the IMF has downgraded its growth forecasts for the United States. It is basically saying that the 'reforms' underway in the US are likely to lower potential growth there in the foreseeable future.

Meanwhile in Europe, the ECB boss is starting to hint at ending their stimulus program because he says "growth [is] above trend" in the eurozone and broadly distributed. He also says he is in no rush to end his easy money policies. His comments drove the euro sharply higher.

In China, their Premier has made a claim for leadership on 'free and fair trade'. But he offered no specifics on how China might lower its own trade barriers, which are among the highest of any major economy. He said it was wrong to blame free trade for economic or social problems. “When we sprain an ankle when walking on the road, we should not blame the road and stop walking,” he said, later adding that “in international economic relations, one should not impose unilateral rules.”

In Australia, iron ore prices are rising again, up +5.2% on the day and are almost at US$60/tonne again. The driver seems to be positive comments and data on China's economy which have squeezed short sellers who were riding the recent negative trends.

But there are almost certainly some big bumps in the road coming up in China. Beijing may have "cut the cord" of support when it comes to the country’s troubled local government financing vehicles. Credit rating agencies are expecting a run of defaults and the impact could be toxic.

In New York, the UST 10yr yield is very sharply higher today at 2.20%.

The price of oil is up a little further today and is now just over US$44 a barrel, while the Brent benchmark is now just over US$46.50.

The expected jump back for gold hasn't happened overnight. It is still holding yesterday's sharp losses and still at US$1,248/oz.

However the Kiwi dollar has lost some of yesterday's gains and is now at 72.7 USc. On the cross rates we are lower as well at 95.8 AU¢, and sharply lower at 64.1 euro cents. The TWI-5 index has slipped to 76.8.

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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10 Comments

by Stephen Hulme | 28th Jun 17, 8:34am 1498595668

Re:IMF economic growth forecasts:

The previously forecast “improvement” under “reflation” assumptions from April was to 2.5% growth next year. While that would be better than recent years, even if it did occur it would still be significantly less than the 1998-2007 average which included a full-blown recession in it. That’s not really acceleration except by the technical definition.

More than that, however, nearing a decade later it still doesn’t yet account for the Great “Recession.” The US and global economy contracted violently in late 2008 and early 2009, and there hasn’t been any robust period since to make up for it. Thus, the economic problem remains two parts – the as yet contraction left still to be addressed and then the growth baseline that is substantially less than it used to be. The economy not only shrunk, it got slower, too.

Economists, however, talk about their assessments in only these narrow terms as if the past doesn’t any longer matter; whether or not GDP might accelerate next year as opposed to this year. In some places like Europe, the ECB judges itself on the further appearance of any negative quarters rather than the speed at which the European economy should actually achieve.

Earlier today, speaking in Portugal, ECB chief Mario Draghi “shocked” markets with what seemed to be a more positive evaluation of European conditions. As ever, though, remaining weakness was “transitory.”

"We can be confident that our policy is working and its full effects on inflation will gradually materialize. But for that, our policy needs to be persistent, and we need to be prudent in how we adjust its parameters to improving economic conditions." [my emphasis]

I don’t know what transitory is in Portuguese, but “gradually materialize” is surely close enough. Yet, if we review Europe’s economy from the proper wider perspective, there is instead no basis for that claim. These aren’t “headwinds” so much as a permanent dislocation, again the combination of shrunk and slower at the same time. It is the worst case and leaves Europe in a very precarious state. Read more

In other words, just another round of pretentious, tiresome nonsense from another central banker.

by Stephen Hulme | 28th Jun 17, 9:36am 1498599367

Re:Janet Yellen,

"Would I say there will never, ever be another financial crisis? You know probably that would be going too far but I do think we're much safer and I hope that it will not be in our lifetimes and I don't believe it will be."

Hmmmmm...

...., they aren’t as clever as they might think, and you not as dumb as they believe – or used to. Read more

by Boatman | 28th Jun 17, 9:51am 1498600298

So Yellen does not expect another GFC ?

Are Tui still doing those Billboards ?

This from the chair of the Federal Reserve ......... that august body of highly paid economists and seers who apparently did not see the last GFC coming , when even I had a sense that things had got out of control .

In 2005/6/ and 7, I was putting together a series of Securitisation Proposals for a vehicle finance division of a Multinational Bank to get a whole bundle of loans off its Balance Sheet ( ostensibly to free up capital for more new high risk -high return lending ) and even I could see that something was not right with these " structured finance" deals .

It was too easy .

Fund Managers were throwing money at these deals and almost fighting with each other to buy these securitized loans , and they were being fooled by the big names of the Banks involved .

Everyone wanted a slice of the action and our bonuses were linked to doing these deals

And its happening again although not in the US as much , but Asia has a poor regulatory environment and and endless supply of shady dealers willing to do anything

What if the wheels come off in China sparking another Asian financial crisis ?

Lets not forget that Asia is a major part of the global economy unlike 1997 when it was nowhere near as big as it is today.

What if Greeks really default and tell the EU where to get off ?

What if a whole bundle of European Banks go bust under the weight of bad debts ?

Many Banks have a temporary exemption form Basel 1, 2 and 3 , which means they don't have to write doubtful debts down to their actual value , ( its called Marked to Market ) because they would be insolvent , so we actually don't know whats under the mattress with shonky loans sitting in SPV's and all manner of creative accounting hiding the truth .

by ham n eggs | 28th Jun 17, 10:49am 1498603758

Its just a matter of how long they can delay the inevitable - the next (far worse) GFC is baked in.
What tools are left to reflate the dead horse this time round? ... I dont think anyone knows. But armed conflicts have to be a high probability.

by Cowpat | 28th Jun 17, 10:10am 1498601408

So yesterdays RBNZ data shows new lending down 3.2 Billion for the April/May period. 23 percent lower than 2016, lower than 2015. It is astonishing that last May 41 percent of all new lending was interest only.Well done Graham. Although this May only a third of all new lending is interest only , we are left with a pot of 65 Billion in interest only mortgages, primarily in Auckland. When new lending slumps 23 percent on a year on year basis bells and whistles should be going off. The very sectors that have propelled Auckland's regional growth could all combine devastatingly on the way down.

by dictator | 28th Jun 17, 10:49am 1498603788

I only had a quick look at the figures yesterday. The lending volume seems to be oscillating in such a way that if I believed in chart patterns it would seem to be indicating that a change in direction is coming up.

Contrary to the pump and dump posters it's not all rainbows and unicorns in Auckland. Now stuff is reporting a standard 3 bedroom house on the North Shore has dropped in price, on average, by 13.5%.
https://www.stuff.co.nz/business/property/94154549/house-prices-dive-in…

by Colin | 28th Jun 17, 10:31am 1498602670

Re:Janet Yellen

Really her banking colleagues seem to think otherwise.

http://ahca.ie/great-recession-fears-as-bankers-warn-next-global-crash-…

by Kate | 28th Jun 17, 11:25am 1498605912

Gee, if inflation smothers growth as they predict, we can kiss goodbye to our tourism boom.

by Yvil | 28th Jun 17, 11:50am 1498607417

Hi Kate, can you please explain your comment above, I don't fully understand it. Thanks

by Kate | 28th Jun 17, 12:02pm 1498608141

The linked article states this:

The BIS, which is sometimes known as the central bank for central banks and counts Bank of England Governor Mark Carney among its members, warned of trouble ahead for the world economy.
It predicted that central banks would be forced to raise interest rates after years of record lows in order to combat inflation which will “smother” growth.

The world over, folks have been loading up with debt based on rising real estate asset prices (the 'wealth effect') - many putting the holiday on the house, so to speak. But even more problematic is that rising interest rates, coupled with high inflation with respect to tradeable goods - will severely impact on household discretionary spending. Holidays are the most discretionary of discretionary spending.