Yellen says Fed on track; US inflation tame; PBoC claims control; US retail sales strong, confidence surges; Aussie double-dipping; UST 10yr yield at 2.28%; oil and gold up; NZ$1 = 71.8 US¢, TWI-5 = 74.3

Here's my summary of the key events over the weekend that affect New Zealand with news an Australian first-home-buyer grant scheme has been abused mercilessly.

But first, in a speech earlier today Janet Yellen signaled the US Fed would be looking past the inflation data that came out on Saturday. She said the American economy is strong and tightness in their labour market justifies staying on the gradual rate hike program they have set.

That US inflation data reports prices are up +2.2% in the past year, boosted by a +10.1% rise in oil prices. Food prices rose +1.2%. Inflation other than for food and energy was up a tame +1.7% and that was a tick lower than expectations.

Also in Washington DC was the governor of the People Bank of China. He claimed that China has the capacity and confidence to control systemic risks while "maintaining steady growth". Chinese hubris will need to be watched. But we will get more of this in the next week; delegates to the 19th Chinese Communist Party National Congress are now starting to arrive in Beijing.

The Australian Treasurer is also in Washington and he claimed the Aussie interest rate and exchange rate settings are about right for their economy.

Meanwhile, retail sales in the US rose a strong +1.6% in the month of September although not quite up to market expectations (+1.7%). They are a healthy +4.4% higher than the same month a year ago, way more than inflation which shows strong real gains.

That strength was underpinned by a strong consumer confidence reading also out over the weekend in the US.

Singapore announced that its economy grew by +4.6% in the September quarter and far stronger than had been expected.

In Australia, there has been a sharp lesson for politicians who try and game the real estate markets by 'helping first home buyers'. In fact, the main beneficiary seems to be the developers, and the Aussie scheme just encouraged buyers to rort the scheme with rampant double-dipping. These types of schemes just create a honey-pot for the unscrupulous.

In New York, the UST 10yr yield will open lower at 2.28%, down following the US CPI data.

The price of crude oil is higher today by nearly +US$1 and now just under US$51.50 a barrel, while the Brent benchmark is just under US$57.

The price of gold is also higher, up +US$10 at US$1,302/oz.

And the Kiwi dollar will start the week higher again, up another ½¢ at 71.8 US¢. On the cross rates we are at 90.9 AU¢, and at 60.7 euro cents. Our TWI-5 index is now at 74.3.

If you want to catch up with all the changes on Friday 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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I'm interested to see if the US inflation figures manage to hold up, or is it propelled by debt. I'm not hearing as many stories of people drowning in debt in the US but I'm seeing more in Canada so I'm wondering what's really going on.

i find in interesting that yellen who before was all about the data and would rather wait than do something.
is now looking "past" the data, does this have anything to do with her term is up and she is trying to correct some of the waiting too long at times.
interesting Q & A yesterday where it was stated now smells very much like 2007 with all assets over valued due to cheap credit and most reserve banks no longer have the wiggle room to help out if we get GFC2.
the best the NZ RB could do is lower 1% in the worst case, then we hang on for dear life.
also last big correction of NZ house prices was 40% in the 70's and whilst the rest of the world recovered quickly over a couple of years it took NZ a decade.
as they say those that dont learn from history are doomed to make the same mistakes

She was afraid to act. The Fed is almost disabled by the lack of board members and once she goes there's going to be a lot of questions if no one is appointed. The administration doesn't seem to be focused on maintaining a functional central bank.

If you look closely at the inflation data the overproduction of cars is obvious. Second hand vehicle prices are tanking too. During the GFC it didn't take long for car manufacturers to ask for hand outs. Defaults in car loans and credit cards will become more prominent next.

Although there's not too much reason to look at what happened historically; there's a number of new problems this time around.

Yes - capacity everywhere, demand nowhere. In spite of record low interest rates. Big problem.

'When it becomes serious, you have to lie' - Jean-Claude Juncker.
We know that; it's been requoted ad nauseam, and call me a cynic, because all the stats. coming out at the moment, that shows great news, are likely to be 'suspect'. I'll let Jean-Claude echo my view....because....anywhere you's Serious.....

(eg: Just a view, of course! “Fake news” is a matter of opinion. Fake data is a matter of fact." )

Oh, so giving someone $10,000 towards their deposit puts up the amount they can bid for a property by $50,000 if the deposit is 20% and by $100,000 if the deposit is 10%? Surely not?

If you apply for the $5000 grant five times you have most of your deposit too.

I was sincerely indebted to Yellen.

I was even more indebted to previous idiots.

Then I stopped borrowing. No problems.

Meanwhile, retail sales in the US rose a strong +1.6% in the month of September although not quite up to market expectations (+1.7%). They are a healthy +4.4% higher than the same month a year ago, way more than inflation which shows strong real gains.

Hubris indeed.

Retail sales were added in September 2017 due to the hurricanes in Texas and Florida (and the other states less directly impacted). On a monthly, seasonally-adjusted basis, retail sales were up a sharp 1.7% from August. The vast majority of the gain, however, was in the shock jump in gasoline prices. Retail sales at gasoline stations rose nearly 6% month-over-month, so excluding those sales retail sales elsewhere gained a far more modest 0.6%.

Six percent growth used to be the level for concern, the lower range of average. Only three times since May 2012 have retail sales been above that level, just slightly so in each case. Of the remaining 61 months, the rate of growth has tended to be around or less than 3%, which is consistent with past recessions (the average rate in those 64 months is just 3.5%).

Because of that, 4% is practically indistinguishable from 3% especially where it is consistently that way – as it has been throughout this year. The 6-month average for retail sales is just less than 4%, not even matching the average gain in 2014 (a year most comparable to the current circumstance).

Excluding gasoline, retail sales year-over-year (NSA) rose by just 3.5%. Read more

Yellen Leads World in Betting Inflation Will Soon Accelerate

Chinese Cities Buy Off Housing Glut With Borrowed Money

"Debt doesn't matter"

"In the past whenever a country didn't manage its fiscal spending and budget, debt sustainability was in question, you would be massively punished by the market. Bond curves would steepen, credit spreads would widen and the currency would weaken. Today, nobody seems to care. That is the new paradigm."

That is the new paradigm. Famous last words?!

Nonetheless, large US banks stiil seek the refuge of US government debt to maintain a liquidity preference due to an absence of viable growth opportunities.

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It's going to be an interesting next decade. Potential retreat from globalisation and rising nationalism in many places?

Will robots enable the rise of nationalism? They can be installed anywhere. Who then needs cheap foreign labour, either via imports or by immigration?

Retreat from globalisation / rising nationalism is to be expected as we move to scarcity of resources

Chinese imports rose 18.7% in September 2017 year-over-year. That’s up from 13.5% growth in August. While near-20% expansion sounds good if not exhilarating, it isn’t materially different from 13.5% or 8% for that matter. In addition, Chinese trade statistics tend to vary month to month.

Less than 20% growth, following a serious and extended contraction no less, just isn’t going to carry the global economy where “reflation” was supposed to go. The numbers are deceiving outside of context.

They are much less so on the export side. Chinese outbound trade with the rest of the world expanded just 8% (according to the Customs Bureau, to be revised by NBS) in September. For the quarter as a whole, like imports, Chinese export growth stalled in Q3. Rising by 6.2%, it’s almost exactly the same as Q2 (6.3%) and appreciably less than before the “rising dollar.”

In fact, the rebound in trade, meaning global demand, has been so tame that the total value of China’s exports in September 2017 remained almost 7% less than the total from September 2014 as the “rising dollar” was just getting started. Again we find where the economy gets knocked down for these monetary events and isn’t able to get back up in either absolute or relative growth terms. Read more

If the debt doesnt matter, then if paying it back starts to not matter, which will eventually start to happen, doest that mean collecting the debt wont matter too????

A lot of the debt is newly created (out of thin air) money that ends up as banking profits anyway. Its a disaster waiting to happen. we just dont know where the tipping point is.

Imagine a future state where as a 60yr old owes 20 times their income, have an amazing house and car but wants to stop working, their parents are still alive. All you need to do is stop working, get bankrupted, go live somewhere cheap in the country. Your debt is cleared and when your inheritance comes through you've got it made.

food for thought

What you're effectively talking about is a situation where the bank owns literally everything. They may "sell" a property to someone, but the borrowing to finance the deal will mean that the bank holds papers over the property, and in the meantime they are busy fleecing the debtor for the loan and interest. In a small number of cases the debtor might actually find a way to pay off the debt, but the banks will stack the odds against them like they do today with break clauses, that mean you can't pay off a loan early unless you compensate the bank for their "loses"!

Worth repeating from my link above:

On 30 September 2008, the US National Debt clock installed at New York's Times Square ran out of numbers as it ticked over $US10 trillion......few noticed that a month ago – moments after the electronic clock recorded $US20 trillion – it was taken down.

Lets' remember that the $10 trillion racked up in 2008 was the sum total of all American Debt since the War of Independence in 1783! It's taken less than 10 years to double it. And 'they' aren't worried ??!!!

Try this one - hasn't stopped

I think that is just a man-in-the-street problem with large numbers. US$10 tln is only 54% of GDP. US$20 tln is 108% of 2016 GDP.

Measuring debt (a stock) against GDP (a flow) is always problematic. Debt should be measured against another stock - like assets.

Then there is the issue of owing oneself. The US Treasury record of Federal debt (US$20.2 tln as at 30-Sep-17) also shows that $5.6 tln is owed to itself (Intragovernmental holdings). One simple journal entry would reduce the US Federal debt to US$14.7 tln, or 79% of GDP. And that is not an excessive exposure by world standards.

However, the detail is always brushed aside by end-of-the-world types and their partisan narratives. Debt clocks usually shout the wrong message, aimed at those wth no tolerance for context.

Maybe. But who knows ( as I've posted above) what the true figures really are?

"Revised ONS figures showing that Britain is £490bn poorer than had been ­assumed and no longer has any reserve of net foreign assets, depriving the country of its safety margin..."

Not so simple - the figure may appear irrelevant but belief in the viability of the system (fiat money) is everything.

If the man in the street doesn't believe its a fair game, he'll take to trading with something other than monopoly money.

I am sceptical of the vs GDP metric since GDP includes an inflationary component of the debt itself.

if debt doesnt matter, capitalism cant be said to exist.
Which is probably where we are almost at.

Looking at that debt clock. If my annual income was $33,232 and my annual expenditure was $40,112 would any financial institution allow me to wrack up a debt of $203,731. I suppose when you are a Government and you can print as much money as you like out of thin air it doesn't matter. Of course only until it becomes perfectly obvious that you are never going to pay that debt back. I suppose we can always rely on Dick Cheney's philosophy that Government debt doesn't matter.

But eventually it does matter to other countries ...Arguably, Japan's high Govt debt doesn't concern anyone while they continue to run current account surpluses ... but if that changes...
ie as soon as confidence in what your currency is worth is eroded, it gets a lot tougher to trade for real stuff
The US is a special case, in that it gets to maintain its currency with the barrel of a gun