Wall Street hits all-time record highs; inflation ticks up; eyes on US Fed's Great Unwinding; Americans stay at home; China signals reform; Aussie arrears rise; UST 10yr yield at 2.23%; gold drops; NZ$1 = 72.5 US¢, TWI-5 = 74.7

Here's my summary of the key events overnight that affect New Zealand, with news equity markets are all risk-on.

The three major American equity indexes are trading at record-high levels today, powered by gains in financial, technology and industrial stocks. Part of this is due to an eye on the Federal Reserve and the recent uptick in inflation, part of it a scale-down in the rhetoric over North Korea.

In Europe, they are also reporting an uptick in inflation, albeit to only +1.5% pa.

The US Fed is now widely expected to be about to start on what is being called, the Great Unwinding, a plan to shrink its holdings of bonds built up during the GFC. Financial markets are taking this prospect in stride so far, but this is uncharted territory.

And staying in the US, a new report shows a surprising demographic change: Americans are moving far less than they used to. They were famous for being highly mobile, but that has changed. Millennials are the least likely to shift, even for work or job prospects. Oddly, it is retirees who are now the most mobile. This latest data turns the traditional view on its head.

In China, they are moving to open up their financial services industry to foreign institutions. They have previously said that too much protection for domestic institutions weakens the industry and can lead to financial instability. Now, new reforms may allow foreign companies to control their local finance-sector joint ventures, as well as raising the current 25% ceiling on foreign ownership in Chinese banks.

Portugal has gotten a rating upgrade with S&P pushing its rating back up to investment grade, BBB-. Its government debt now yields under 2.5%. Remember, it yielded 16.4% at the height of its GFC crisis. Economic growth the developing faster than analysts had expected.

In Australia, Moody's says that the proportion of Australian residential mortgages more than 30 days in arrears rose to 1.62% in May 2017, the highest rate in five years, and up from 1.50% in May 2016. They also say they expect this arrears rate to rise further from here through the rest of 2017.

In New York, the UST 10yr yield has resumed its pre-Fed meeting upward track and is now at 2.23%.

The price of crude oil has slipped just slightly to be under US$50 a barrel, while the Brent benchmark is just under US$55.50. The US EIA is forecasting rising output from American shale fields, continuing a long term trend.

The price of gold is down sharply, down -US$14 at US$1,307/oz.

And the Kiwi dollar has also slipped on a rising US dollar. It is now at 72.5 US a ½c fall. On the cross rates pretty much unchanged at 91.2 AU¢ however, and 60.8 euro cents. And the TWI-5 index is now at 74.7.

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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18 Comments

Why is the NZD so low against the AUD?
It was near parity not long ago.
And NZ interest rates are higher than Australia.

because their economy is recovering and ours is plodding along.
Australia's economy grew 0.8 per cent in the three months to June, and 1.8 per cent over the past year, according to the official gross domestic product numbers from the Bureau of Statistics.
The June quarter growth rate was a big pick-up from the 0.3 per cent growth recorded in the first quarter of the 2017 calendar year.

Iron ore, gold, real estate.

The 'consensus' expectation is that NZ's June quarter growth (data out on Thursday) will be +0.8% q-on-q, and +2.5% year-on-year. (Both ANZ and Westpac think it will be better than that.) That is way better than Aussie's +1.8%. Seems you have the 'recovering' / 'plodding' labels the wrong way around.

Simplistically, Aussie was not in too bad shape under Howard & Costello. Did not the Rudd lot & subsequent Labour mess, lay waste to that economic strength? Perhaps it takes time to get your feet under you again. Perhaps as simple as that when you do have core mineral and other resources to fall back on.

I Have a few Aussie investments so the lower it goes the better - increases my return.

Higher uncertainty in NZ?

Certainly risk seems "on" at the moment.

Better stick to the day job Murray.
Higher NZ $ vs A $ equates to lesser value from offshore returns.

The near term trend is the A $ is increasing as compared to NZ $... offshore investments in OZ are appreciating due to the depreciating NZ $.

That's not what Murray said, JB. Read again carefully.

Having said that, there may be support around AUD .90 or so for a while. Last time under the AUD was under .88 was the end of 2013.

Wrong - it is exactly what i said.

Of course, that depends if you are buying or selling. Buying when NZD is strong and selling when it is weak is the best combination. Efficient market hypothesis says that overall the strength of the currency will be balanced by the strength of the economy but still arbitrage opportunities exist with individual companies.

The three major American equity indexes are trading at record-high levels today, powered by gains in financial, technology and industrial stocks. Part of this is due to an eye on the Federal Reserve and the recent uptick in inflation, part of it a scale-down in the rhetoric over North Korea.

Indeed.

The latest CPI update despite another monthly “gift” in rising oil prices remains underneath 2%. Since the Fed prefers the more understated PCE Deflator as its standard, because the CPI so often exhibits a higher beta (more so why it does), the 2% target is in CPI terms more like 2.75% or 3%. Though gasoline prices were up 10.4% year-over-year in August, the index rose in total by only 1.9%. Read more

Moreover,

Materially, U.S. households’ disposable risk-adjusted incomes are lower today than they were in 1999. That explains why American households are drowning in debt: the demand for income vastly exceeds the supply of income, even as the official median household size shrinks and cost of housing is being deflated by children staying in parents’ homes for decades after college. The rosy times are not upon us, folks. Read more

I guess price discovery mechanisms are discounting greater transfers of wealth from labour to capital for the next generation as well.

Come mid-2018, just one entity -- the Bank of New York Mellon Corp. -- will be responsible for ensuring almost two trillion dollars of securities financed by so-called repurchase agreements are cleared and settled each and every day. With its lone longtime rival, JPMorgan Chase & Co., exiting the business, BNY Mellon began the process of moving over clients this summer.

The problem isn’t so much that BNY Mellon might abuse its position in what’s become a highly regulated, utility-like part of the repo market. After all, JPMorgan threw in the towel after post-crisis rules made the business costly and onerous. Instead, traders are worried that relying on a single bank for all clearing and settlement -- which involves checking every transaction is valid, transferring money from one account to another and safeguarding collateral backing each contract -- could mean big trouble if something goes wrong.

And it’s hard to overstate how important the repo market is to modern American finance. The short-term loans, which dealers usually get by putting up U.S. government debt as collateral, serve a crucial role in day-to-day trading on Wall Street. Not only do repos support liquidity in the $14.1 trillion Treasury market, but the financing they provide also helps grease the wheels of trading in assets as varied as stocks, corporate bonds and currencies. Read more

The repo market explained -- a QuickTake

If They Wish To Replace LIBOR With Repo, They Should Already Start Thinking About Repo’s Replacement

Or, better yet, solve this conundrum:

... the BIS says no one has yet worked out why inflation has remained so subdued while economies have approached or surpassed estimates of full employment and central banks have provided unprecedented stimulus.

“All this puts a premium on understanding the ‘missing inflation’, because inflation is the lodestar for central banks.” Read more

It's an indefensible travesty that bank depositors continue to pay for such woeful global central bank inadequacy.

Going risk on when the Fed is about to enter the unchartered territory of stimulus unwinding, is an interesting strategy. I've been slowly rebalancing towards risk off over recent times. Reducing emerging markets in favour of mature economies. A bit less NZX in favour of fixed interest.

Go Nationals - Party of Economic Management - And how National won the Grand Surplus Steeplechase
Frugal management of police resources by National Government in NZ
Monday night an armed kidnapping incident in Hanmer Springs 134 km north of Christchurch
From Cristchurch to Hanmer Springs is 130 kilometres and elapsed time 2 hours driving time
On Monday, about 10 police cars and members of the Armed Offenders Squad (AOS) were seen heading north out of Christchurch about 9.30pm.
https://www.stuff.co.nz/the-press/news/96981782/reports-of-shots-fired-a...

Keystone Cops?