EU factory output up strongly; US QE wind-down 'going well'; US PPI up; Fed warns on China debt; China car sales strong, services deficit jumps; UST 10yr yield at 2.33%; oil down, gold up; NZ$1 = 71.3 US¢, TWI-5 = 73.9

Here's my summary of the key events overnight that affect New Zealand with news regulators are feeling happier about their moves to wind back QE.

Firstly, we should report that EU industrial production was up +3.9% in August from a year ago, with an impressive +1.4% spurt from July. This was much stronger than expected (+2.6%) and comes at a time the ECB is pondering the timing and wisdom of scaling back its QE program. Today's data may give it some spine.

Meanwhile, a US Fed official says their QE unwinding program is going well, in part because of the US economy "is on a solid footing". The latest indication is that US growth is running at +2.5%. In fact, some analysts are predicting real annualised quarterly GDP growth to exceed +3% in both Q3 and Q4. The first estimate of US Q3 GDP comes on October 28.

And there is another hint that US inflation is picking up. The latest producer price index data shows it up +2.6% but within that there has been a much faster rise recently in the price of goods which are up +0.7% in just the last month to September.

And remember the Houston storm and the resulting floods? Unconstrained development, much of which was on flood-prone land has a price, even if it was not in the original cost of the houses. Not only were homeowners unable to buy flood insurance, after the damage opportunistic 'investors' are now only offering about 40% of their pre-storm values. "Affordability is rising in Houston" !!

And another US Fed member said overnight that emerging market economies were vulnerable to heavily-indebted corporate sectors as global interest rates rise, and singled out China as a source of particular concern.

China of course doesn't agree. Overnight they released data showing car sales up +5.7% in September. And separately, data shows that their services deficit with the rest of the world continues to grow, offsetting their strong goods trade surpluses. That services deficit is growing fast, up +20% compared with the same period a year ago.

In Japan, a snap election forced on Prime Minister Abe looks like it will turn out well for him. The latest polls show him cruising to another good win, with his opponents who forced the election roundly trounced.

In New York, the UST 10yr yield has opened slightly lower at 2.33%.

The price of crude oil is also lower today by nearly -US$1 and now just under US$50.50 a barrel, while the Brent benchmark is just over US$56.

The price of gold is marginally higher at US$1,292/oz.

And the Kiwi dollar is noticeably higher as well, up ½¢ at 71.3 US¢. On the cross rates we are also slightly firmer at 91.1 AU¢, and at 60.2 euro cents. Our TWI-5 index is now at 73.9.

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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26 Comments

"And there is another hint that US inflation is picking up." Could be, and let's hope so, because if it's not....

There is a crisis of confidence in central banking. Their economic models are failing and there are doubts whether they understand the effects of interest rates and other monetary policies on the economy. In short, the new masters of the universe might not understand what makes a modern economy tick and their well-intentioned actions could prove harmful....The ability of central banks to resolve these questions does not just affect growth rates, but is fundamental to the health of the democracies of advanced economies...Amid this forecasting nightmare, some frank talk is breaking out.

If it was not bad enough that the link between the economic cycle and inflation has broken down, the fundamental problem in central banking is that estimates of the neutral rate of interest — seen as the long-term rate of interest that balances people’s desire to save and invest with their desire to borrow and spend — appear to have fallen persistently across the world.

Central bankers have no effect on inflation or the economy other than to increase the level of debt.

https://www.ft.com/content/333b3406-acd5-11e7-beba-5521c713abf4

neutral rate of interest — seen as the long-term rate of interest that balances people’s desire to save and invest with their desire to borrow and spend — appear to have fallen persistently across the world.

This definition seems out of touch with reality... I dont see the neutral interest rate, in this world of Central bank contrived/manipulated interest rates,.. as having anything to do with saving vs spending ..

I perceive the neutral interest rate as an indication of the level of "debt burden" in an economy.. ie. it is the interest rate where credit growth is , kinda , neutral.

In that context, a persistently falling neutral interest rate is an indication of the level of debt burden in an economy, as each recession forces Central banks to lower interest rates even more, in order to stimulate demand ( credit growth ),,

For me, a persistently falling neutral %, is a sign of a "paradigm".... that will eventually fail, and then we change.

exactly right - this Tim Morgan article spells it out

https://surplusenergyeconomics.wordpress.com/2017/07/09/100-defining-times/

"a functioning market in futurity has been undermined – indeed, virtually destroyed – by monetary policies geared solely to the management of existing debt... Artificially low rates, therefore, destroy the equilibrium between the present and the future. (They also block the essential process of “creative destruction”, miss-price risk, and manufacture bubbles).
Moreover, artificially low rates mean that our provision for the future deteriorates at exactly the same time as our future obligations to repay debts increase. If you add to this a third ingredient – an inability to organise the provision of care for an ageing population – the result is a potentially lethal cocktail.
We can call this toxic mix “triple D” – debt, deficits and demographics."

Agree

Nicely put Roelof, right on the money there IMO. Perhaps we need a new saying: "right on the credit growth". :-P

Thx for that.
A bit concerning though!

A period of stagflation followed, typically for about 50 or 60 years, as the economy tried to continue to grow, but bumped against increasing obstacles. Wage disparity grew as wages of new workers lagged. Debt also grew.

Eventually, collapse occurred..... Much of the population died off.

Yes that part isnt so good ...
the key point really is the complexity of the network / interconnectedness is very easy to underestimate and very difficult to model ... there are feedback loops all over the place.

In many ways QE (and low interest rates) can be viewed as putting a patch over some "ugly feedback" (ie resources are straining) ... but theres always unintended consequences

I think we should qualify this to most ppl dont think, ie there is no limit on how much oil can be extracted, or have simply never considered it.

Of those that do not fall into the above category, yes I think there was a view that all the oil could be extracted as we'd pay whatever it took to get the last drop out, ie if its was $500US a barrel we'd pay it. I think until maybe 2008 or a bit later that is certainly how oil companies looked at it.

"Most people believe that the amount of oil in the ground is the limiting factor for oil extraction. In a finite world, this isn’t true. In a finite world, the limiting factor is feedback loops that lead to inadequate wages, inadequate debt growth, inadequate tax revenue, and ultimately inadequate funds for investment in oil extraction. The behavior of networks may lead to economic collapses of oil exporters, and even to a collapse of the overall economic system."

Certainly now it looks like the limiting factor is our [economy] ability to pay. The Q is what the sustained rate of that is, except of course "sustained" implies stability or a steady state condition, which was can clearly see our industrialised capitalist system is not.

So you could argue for instance its $100US a barrel, but unless a Govn steps in to set that price (correctly no less) that simply cannot happen and no voter would I think tolerate a Govn doing that, they'd want the cheap oil when prices dropped.

The Q then is of the half of the oil left how much can be extracted and what time scale does it give us. Certainly it looks a lot shorter and a more severe drop in output on the downward side is more likely. Following on from that the Q is how likely is ".......a collapse of the overall economic system." Way more probable IMHO, we've built a house of cards as making a proper house "costs too much".

Yes given we are burning through 10 times what we discover we are basically free wheeling off the best legacy Oil fields ... for how long we dont exactly know.

Its interesting many companies promoted as the new success stories perfectly reflect this downslide ...
http://fromfilmerstofarmers.com/blog/2015/june/the-uber-disguise-of-indu...

"UBER
For the fact of the matter is, the underlying issue here (of which Uber is but a symptom) is that voraciously energy-consuming industrial civilization is butting up against the limits to growth and the effects of encroaching peak oil. In short, what is unfolding as we speak, and under many guises, is the collapse of industrial civilization.
As a result, some people, in a desperate attempt to maintain their profligate ways of life, are doing whatever they can to earn an extra buck (by driving for Uber) and to save an extra buck (by riding with Uber).
In other words, Uber is not simply the result of clever, 21st century business acumen, but is rather, almost by default, the shrewd adaptation of industrialism and its technological "progress" to the resource shortages of tighter times. Call it an unintentional disguise of industrial civilization's collapse if you'd like"

Yes and Uber is really a new wave of cost cutting just like globalisation was. A way to make manufacturing cheaper so we could afford to do things that were becoming no longer economic to do/afford. The Q is then what do we start to do with that casualties? taxis drivers frankly have no hope if the present technological roadmap is achievable, ie with 5 at most 10 years many of us will catch a Uber driverless car as we need to. Then the knock on effects? insurance industry? if a huge % of us no longer owns a car just how big will the (car) insurance business be? substantially smaller and way more costly? Garages? we wont need most of them and EVS need less work as well. Road maintenance? a lot less money coming in to pay for looking after roads so charges have to rocket?

in other words a deflationary spiral

No, worse. The problem is as prices collapse no one invests and produces the goods, so at some time in the future there is no product. Looks like this is happening with oil exploration and development. So as the oil companies cease to develope "too expensive" oil fields with the 5~8 year lead time where does this put us in 5~8 years?

Also leading on from this I wonder when we are seeing so much "privitise the profits and socialise the losses" so really is capitalism even viable today? let alone in the future.

is capitalism even viable today?

I think ever lower interest rates & central bank manipulation through QE and asset purchasing says its hasn't been for a while. Capital gains & valuation bubbles is a last throw of the dice to give the illusion of viability.

I think the answer is basically is here central bankers policies have resulted in malinvestment on a massive scale
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/108763...

Not really, central bankers are the ambulance at the bottom of the cliff, the mal-investment is really bad private investment on a huge scale.

That includes everyone buying a house.

No the central banks are the problem the price of capital (money) is the heart of capitalism they have suppressed the price of money (interest rates) and flooded the system with essentially free money the markets responded this has lead to massvie speculation and debt growth, over investment on an unprecedented scale much of it for capital gains. You might say so what however watch the out come as the central banks try and normalise interest rates and we will see just how many investments are economically sound. The article by Tim Morgan above re ham n eggs pretty well nails it

i would agree but its done deliberately to buy time

I think the answer is basically is here central bankers policies have resulted in malinvestment on a massive scale
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/108763...

With inflation returning all those bonds with a 2% yield are going down the toilet. At least banks and institutional investors will be able to sell them to a central bank. So far the Fed only seems to be unwinding at a rate of around $10b per month from what I've heard (not verified). Centrally planned debt bubble creation is going to come apart at the seams.

Interesting view about driverless Uber I have thought for a while that in the future will instead of having property investments they will invest in fleets of cars using the Uber model to generate income. Every now and then just click on the ‘home’ button To count and assess your fleet.

Except houses appreciate in capital value where driverless cars will drop. In terms of having fleets of cars I wonder if like taxis and indeed many other sectors that there will be huge over-investment and price collapse and losses as a result. if there are any winners it will be the ppl who get in and exit early and Uber themselves who simply take a % off the top with no capital investment as such.

Following Professor Brady's recently released paper "Magic Weapons " as outlined on Interest.co, where mention of the November 21 2014 meeting between President Xi and PM Key, signing of a MOU in Auckland, , involving Kuangchi Science,( Liu Ruopeng,) Shanghai Pengxin, (Jiang Zhaobai) , Pengxin International Mining, and NZ Airways, a book has been released on October 10 by Daniel Gordon, " Spy Schools, How the CIA, FBI , Foreign Intelligence secretly exploit America's universities'. 'A chapter is devoted to a graduate , at Duke University PhD student Liu Ruopeng, who siphoned off US government funded research to Chinese researchers. The failure to acquire the Lochinver station must have been a tough political decision for the Chinese, and it is unsurprising how far they were willing to take matters.. It still is perplexing/coincidental that the current Honorary Chairman of Shanghai Pengxin, and Director of Pengxin International, Changming He, was a former director of the failed Crafer bidder Natural Dairy.The Chinese will obviously play the long game, was the Crafer farms merely a sweetener, where strategically it was never about dairying but the land..( Daniel Gordon has previously been awarded the Pulitzer prize.)

Heres some deflation at work ...

http://www.cbc.ca/news/business/sears-canada-liquidation-closing-employe...

"Sears Canada workers are feeling confused and angry after learning on Tuesday that the retailer plans to close its remaining 130 stores. If Sears gets court approval, it would start liquidating the stores as early as Oct. 19, putting the retailer out of business and about 12,000 employees out of work."