Fed wary of weak inflation; Fed policymaker warns unwinding banking regulations 'extremely dangerous'; CEOs ditch Trump; Fitch says NZ banks in good position; UST 10yr yield at 2.26%; oil down, gold up; NZ$1 = 73.2 US¢, TWI-5 = 75.7

Here's my summary of the key events overnight that affect New Zealand.

Federal Reserve policymakers are increasingly wary of weak inflation, with some calling for a halt to further interest rate hikes. Minutes from the US central bank’s meeting in July reveal some officials think it’s likely inflation will remain below 2% for longer than expected, with others arguing delaying a hike could cause an overshooting in inflation "that would likely be costly to reverse”. The minutes show the Fed is increasingly ready to start reducing its US$4.2 trillion portfolio of Treasury bonds and mortgage-backed securities.

A prominent Fed policymaker is standing up to Donald Trump, calling his plans to unwind banking regulations a “terrible mistake”. Trump has wants to repeal a major piece of post-GFC legislation to make it easier for banks to lend. Yet Stanley Fischer says doing so would put institutions back in the boat they were in before the financial crisis 10 years ago. “I find that really, extremely dangerous and extremely short-sighted," he says.

Staying with Trump, he’s been ditched by the US’s top CEOs. They have stepped down from two of the Government’s advisory councils to condemn his defiant remakes about violence at a white nationalist rally. Shortly after their move was revealed, Trump took to Twitter to announce he’d be dissolving the groups.

Back home, Ratings agency Fitch says our four major banks are in strong positions with AA- ratings. It expects their performance to remain “robust” over the next year. Yet Fitch warns macroeconomic risk is high, with New Zealand households very indebted. While an improving dairy sector and slowing house price growth in Auckland are a reprieve, we’re still susceptible to rising unemployment and interest rates. Fitch also notes banks’ reliance on offshore funding, due to a lack of deposits. Nonetheless it says funding remains “stable”.

Over to the UK, its labour market looks a bit like ours. Employment in Britain has hit a near record high, but workers’ pay packets are still being squeezed as their productivity slides. In the three months to June the unemployment rate fell to 4.4%. Meanwhile average weekly earnings grew 2.1% year-on-year.

In New York, the UST 10yr yield has eased back today to 2.26%.

The US benchmark oil price is down a little to just under US$47 a barrel, while the Brent benchmark is at US$50.

The gold price has increased to US$1,282/oz.

The Kiwi dollar has strengthened to 73.2 USc. On the cross rates we are down a little to 92.2 AU¢, and up to 62.2 euro cents. The TWI-5 index has jumped to 75.7.

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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47 Comments

Our ( and so Australia's) Big 4 banks may not be as 'strong' as we think. I I suggested the other day, growing a balance sheet with 'receivables' is easy. Collecting them, not quite so....

"The CBA suffered a spectacular failure of its risk assessments....by the start of 2009 Viking owed the bank $14.4 million. In the next two years, CBA would loan another $41 million to Viking, most of it through the section in Narev's division which provided loans on "receivable finance facilities"....By August 2010 the Viking companies (had) chronic cash-flow problems ....Commonwealth Bank loaned $55m to the group..The bank did not respond to questions about the loss by The Australian Financial Review.."

http://www.afr.com/business/banking-and-finance/commonwealth-bank-loaned...

Tks bw, quite scary, especially as can imagine this sort of scenario not limited to one example in one bank. And to recoup of course it easy to resort to relentlessly & remorselessly exploiting costs at retail to Joe Public and manipulating the ratios between lending (mortgage) & investment (term deposits) rates of interest.

One of the things that's easy to concern when there's lots of money around via low interest rates is bad debts. The loans will be assets on the book and the interest will be a part of the bank profit. When the money disappears assets disappear and losses accumulate. I'm pretty sure there will be a default timebomb hidden in all of the big 4 banks.

The banks only need less than 2% of their assets to vanish to end up like Deutsche Bank which is virtually illiquid and in violation of the banking regulations as it has effectively no net assets.

All debt is backed by Energy.
If the energy isn't there, the debt is worthless.
The energy simply isn't there.
http://www.reuters.com/article/us-oil-exploration-idUSKBN1521TA

The current Financial system is based on debt.
Debt is based on a promise.
A promise's worth comes down to trust.

Question is - who do you trust?

The real economy is based on energy flows ... the debt says where to send the flow. But without the energy, the debt reverts to pixels or empty promises.
The key is the net energy in the system... you cant continue spending all day picking berries if you get less energy than you burn in picking them..

ham n eggs,

Serious question. From many of your posts,it is clear that you believe the our current economic system is not just creaking at the seams,but in dire straits,soon to collapse.
How have you arranged your affairs to best survive the apocalypse?

linklater - Well i am more than happy to be wrong but I don't see how we can just keep making promises which we cant keep indefinitely ... (make America great again/interest rates will normalise /Tesla will be profitable/Shale will be profitable/venezuela is good for the money/growth & inflation will kick in etc there is a finite amount of time till the masses/investors will realise its just not happening) ...the exact trigger or timing of collapse is very difficult to predict because everything is interrelated. If we knew it was next week and supplies might dry up quick we would act accordingly...Re arranging your affairs there's an obvious limit to what any individual can do ... especially if others know you have stockpiled stuff of value ... so as a simple rule you want some backstop and be in a community which is likely to pull together

I was talking with a friend (ships engineer) that has been involved in the oil exploration industry. Been out of work for nearly two years, doesn't reckon things will pick up for the industry until oil is back up well north of $100/B for a sustained period. I didn't have the heart to suggest that sustained over $100 dollar oil is liable to collapse the economy and, of course, the oil price. Back to square one. These deep offshore wells are hugely expensive and high risk.
Sad for him as other work in general shipping is being outsourced to very low wage Asian nationals. He's trying to get work at base level stuff - retail etc. but those jobs are not going to 60 year old Kiwis anymore.

Yip thats exactly the problem. There is "expensive" Oil out there, but our economy doesn't run on expensive energy ... or not for long. And it is fossil fueled industry that gives us employment and social stability...

I like your almost mystical views on energy and its direct relationship to money.
I always thought money is a game of musical chairs fueled by the greed of the players.
Do think there are better or worse forms of energy, for instance water falling on the ground, over a waterfall on its way to the sea versus sun falling on the ground?

The mystical part is the money part ... its funny that we are at a point where to most people (and economists) Money is considered SOLID & SAFE & RELIABLE & of guaranteed to be of VALUE ... whereas energy is not important. But its always just a claim on the available energy sources otherwise we would be printing our way to riches.

Not so sure about that because 200 years before the miracle of fossil fuels society assigned the same role to tulip bulbs.
Dont get me wrong, I have nothing against tulips
Im inclined to agree with Dictator that nothing values money except the trust, which tends to vanish in a panic.
Its consistent with what we observe.

Faith or trust is absolutely key to giving any money/debt value - totally true - it is the faith/trust that you can exchange it for something of value down the track ..
And that value always represents either embedded energy (a product or a building or a food source etc) or something which provides or captures future energy ...labour or land)...
But i agree on your conclusion - it is the collapse of the trust factor which comes first - because we need the debt (the pay forward aspect) to actually get Oil out of the ground ... Oil is of no value at all unless we are burning it... as the Saudis are finding

Noting your points and as a matter of idle speculation, what would be your prediction of the impact on economies, if some bright boffin came up with a formula to say cheaply produce hydrogen as a safe and abundant form of energy. Hypothetical I know but if the source of energy that drives economies became say uncompetitively available, everything would be stood on its head? Just a thought, but it sort of illustrates how vulnerable our world has become over the last century or so by every thing shape and form being driven by oil.

sorry only just saw this - Any "cheap" abundant energy source which works with the existing infrastructure or with minimal transition required is all we need ... but this is proving very elusive

For 250 years we have been inventing ways to utilise energy, now we are trying to invent the energy. Hydrogen is just another invented energy.

Until the fusion reaction that we orbit runs out of energy, or grows so large that the earth becomes uninhabitable there's plenty of energy.

Debt is money which is backed by nothing but trust. We're more likely to run out of trust before energy.

Sunlight is diffuse energy. Have you tried powering an Airbus on sunlight?

You might find theres a small intermediate stage of MILLIONS of years of sunlight breaking down bacteria to condense it into an energy power pack we call fossil fuels.

The 6 billion boe discovered last year is only enough to keep the wheels turning for an extra 60 days. Expect consumption to rapidly deplete the supply on the downside.

Discoveries of oil over the last 20 years versus current consumption makes for pretty grim reading.

Fitch also notes banks’ reliance on offshore funding, due to a lack of deposits,. Nonetheless it says funding remains “stable”. [my emphasis]

LOL - will somebody reveal their present whereabouts?

They were last seen entering the bank in the form of interest payments on debt.

Federal Reserve policymakers are increasingly wary of weak inflation, with some calling for a halt to further interest rate hikes.

Hmmmmmm.....

I have written consistently that markets don’t care whether or not the Fed raises or lowers the federal funds rate (now corridor). What truly matters is why. In the nineties, the Greenspan Fed could get away with predictions, meaning that if they raised rates before inflation was evident the market went with them because it respected what it thought was expertise. It isn’t the nineties anymore.

What is clear even from the bland, sanitized minutes is that the FOMC is voting for “rate hikes” because they are voting for rate hikes and no other reason. They are moving policy and they really don’t know why. They can’t come up with the proper justification for it, yet they move anyway. “Data-dependent” was always a sort of pejorative sneer, and the committee is living right up to its fullest meaning.

The primary issue is inflation. It’s not about consumer prices except as one window into what is really going on out there in the real economy. The unemployment rate says one thing, the rest of the macro stats another. Economists can claim, as they have, the former applies to the future economy, but they’ve been saying that for years now. Transitory has run out of slack.

To put it quite simply, the Committee is wholly confused and now publicly so. The minutes show what was likely a serious debate about inflation. There is no reason it should still linger well below the 2% target, not at 4.3% unemployment. If you believe in the Phillips Curve, as they do, one has to follow the other else “something” must be very wrong. Read more

It would be a blessing if central bankers fled the corridors of power in concert with their US CEO counterparts.

Trump's constituency is shrinking at such a rapid rate he has no choice but to condone the appalling behaviour of neo-Nazis, white supremacists and the like. Desperate times, desperate measures.

Why did the 'neo-nazis' get a permit to march in protest at the removal of the statue in the first place? Aren't the authorities that granted the permit more to 'blame' than Trump? (Answer: Because it's their First Amendment Right to do so.) How is the resulting fracas Trump's fault?

The ACLU went to court to obtain the permit to protest - as per everyone's right to freedom to assembly and expression - as the Governor originally denied a permit unlawfully.

Correct and technically Trump is correct as well. But obviously he is not politically correct. But with no wish to appear glib, it does take two to tango. Trouble is so much is flying off the wheel ex and around Trump that in the confusion, it provides fermentation and fuel for radicals, extremists from all directions. He goes well beyond what used to be called polarising, just seems to be able to bring out the worst in people and circumstances with quite some ease.

Silly question, but if your cause is worthy of protest then why would you need to pay $25 per hour to get people to show up? Read more

Believe if that had appeared in a paper around 1863 Lincoln would have had the advertisers & publishers in jail for sedition.

That's a confusing article - Charlotte, NC (where the ad was recruiting folks) is a four hour drive from Charlottesville, VA (where the protest was taking place).

While trump remains an oaf, albeit a presidential oaf and the right wingers terribly misguided, those of opposing views brought their own intolerance, violence and willful destructive vandalism with all too much glee. I cannot approve of the behaviour of either side but do note that the media is true to current form in putting only one side in the stocks. Right there is your polarisation I look forward to seeing in the dock those on both sides that have been party to the many crimes on the day and since. If it is good enough to absolve Islam for the sins of the militant extremists claiming their faith then neither should the right wingers be universally blamed for the individual crimes of those who simply identify with them. I doubt you could have a rational discussion with some people about this and that in itself is a greater problem than they themselves would recognize.

I cannot approve of the behaviour of either side but do note that the media is true to current form in putting only one side in the stocks.

Yes, they effectively deified Putin by their own actions.

"The mythical figure of Vladimir Putin should’ve retained its human limits. He should’ve been portrayed as the kind of cunning and crafty villain that could still be beaten; a figure inferior to the forces of good. But the image of Putin created by the advanced countries’ propaganda simply outclasses any Western figure in terms of omnipotence and omnipresence, making all available ‘punishments’ that may be implemented against him and his country look like pathetic half-measures. And since the US can’t handle Russia the way it handles lesser evils, it remains unclear what can be done about Russia at all." Read more

spinach 1,

"and the right wingers terribly misguided". These sound suspiciously like weasel wordfs to me. We are talking about people waving Nazi flags-they are fascists,not right wingers. The Republican party is to the right of centre,but they are poles apart from these thugs.
If any on the left committed unlawful acts,then they too should be subject to the law,but don't try telling me that both sides are as bad as each other.

I object to spinach 1 calling them "terribly misguided" too.

I cannot believe what I am seeing in the USA. People, and often young men, waving Nazi flags and defending or at least trying to justify Hitler's actions. Their grandfathers and great grandfathers will be spinning in their graves. They are here as well, whatever happened to "Lest we forget", there seems to be a lot of forgetting going on from where I sit.
Trump has given a tacit okay to these actions all along, so it should come as no surprise that they have become so emboldened. The world has no place for anybody spouting anything that even remotely suggests that Hitler was an okay guy and I think everyone and anyone is just about duty bound to stare anyone who does square in the face, no matter how heavily armed they are/were. Those militia are a bunch of creeps, Trump is a creep, exactly as I called him to be before he was elected.

Don't disagree with your view & what you have said but best sit down for a moment. It is even worse. It's not just the young. This is not new. Remember Rockwell in the sixties (gunned down by one of his own I recall) called themselves Nazis, nothing neo about them. While living in the USA around 2000, had a very unpleasant and disturbing encounter face to face with two of this ilk. That was until the barman threw them out. But these were men in their late sixties or so.These deep rooted violent extremes seem to be never have been far from the surface and agree when a President such as Trump comes on the scene it just allows opportunity for them to vent. Very scary set of circumstances over there now, internationally & domestically in my opinion.

Maybe we could have them rounded up into camps? then you could go about changing their minds.

Only so long as you right-leaners don't push them into the ovens first, eh.

No need for that and impossible in terms of the constitution, parts thereof, right of free speech & civil liberties. But true, that has not always been so. Thousands of Russian immigrants, mostly at least second generation, were deported in the early 1920's and whilst not the same as camps, the constitution did not provide much protection for that.

Neither of my comments were anything other than intentionto simply observe some aspects of the preceding history and it's setting, and recount our experience of meeting some of it first hand not so long ago. It did have an unwelcome affect on us, so too did some other experiences in entirely different circumstances. Didn't think had gone any further than that, but my regrets if misunderstood.

I'd heartily recommend reading Hillbilly Elegy, Strangers in Their Own Land.

When I watched the Vice documentary on the Charlottesville goings-on having read these books, I felt I could understand some of the origins of this sort of movement.

And it made me worry about the way we're fostering inequality and reducing opportunity and social mobility in New Zealand.

When we try to understand the actions of Adolf, Josef, Atilla, I thing we should try to understand the social pressures of the time.
As Henley of the Eagles says, the american dream isnt far from the american nightmare.
These people in Charlotteville were fed the american dream and live the nightmare.
In my opinion....

RickStrauss,

I read Hillbilly Elegy a while ago,excellent book. I will look out for the other one.

Trump has given a tacit okay to these actions all along, so it should come as no surprise that they have become so emboldened. The world has no place for anybody spouting anything that even remotely suggests that Hitler was an okay guy and I think everyone and anyone is just about duty bound to stare anyone who does square in the face, no matter how heavily armed they are/were. Those militia are a bunch of creeps, Trump is a creep, exactly as I called him to be before he was elected..

Hmmmmmm....

The US Obama regime was one of only three governments throughout the world that voted against a resolution that had been introduced in the United Nations condemning fascism, racism and denial of the Holocaust. The two other pro-Nazi nations were Ukraine, whose US-installed regime felt the resolution to be personally offensive even though it wasn’t specific to Ukraine and didn’t even mention Ukraine, and the other country was Canada, which is a US vassal-nation and also has a powerful community of Ukrainian Nazis who escaped Ukraine right after WW II ended in 1945. Canada’s current Foreign Minister, appointed by the Liberal Party’s Prime Minister Justin Trudeau, is Chrystia Freeland, a racist-fascist who is proud of her Nazi grandparents and who championed in Canada the fascist takeover of Ukraine. Read more

The US is stuck with the first amendment, and you might cast your mind to how far he was able to get with the 2nd. As for Chrystia Freeland, where is your proof, I cannot find anything other than what you supplied which could very well be fake news. Btw she is neither the PM of Canada nor is she the PotUS

The US is stuck with the first amendment,...

He [Obama} could have abstained as he did in a UN resolution critical of Israel, which caused much consternation.

Will Chrystia Freeland Finally Ruin Canadian-Russian Relations?