90 seconds at 9 am: Yellen's inflation 'mystery'

US durable goods orders slip; confidence high; Yellen frank; China pulls back EV subsidies; Canada raises minimum wage; Australia frets about US and China; UST 10yr yield at 2.34%; oil up, gold unchanged; NZ$1 = 68.6 US¢, TWI-5 = 71.5

23rd Nov 17, 7:32am by David Chaston

Here's my summary of the key events overnight that affect New Zealand with news that Janet Yellen is bowing out with some frank admissions.

But first, elsewhere in the US, durable goods orders in October are reported to be -1.2% lower than for a revised-higher September. But they are still +2.5% higher than the same month a year ago.

And the latest consumer confidence survey has that holding at a strong level going into the holiday shopping season although it is off its 13 year high of last month.

And in an appearance overnight, Janet Yellen described low inflation as "a mystery", conceding that the Fed is unsure of why it is persisting. She also hinted that "tightening too quickly" might leave the inflation rate stranded below 2%..

China is reported to be recoiling at the cost of subsidies for electric cars. Authorities says they will slash subsidies by -20% next year, a year earlier than originally planned, with the end of subsidies scheduled for after 2020.

Canada has agreed to institute a C$15/hour minimum wage - but not until 2019. (NZ$17.20) New Zealand is moving to a NZ$20/hr rate by 2021 with the rate going from the present $15.75 to $16.50 from April 2018.

In Australia today, they will release a new policy about how they are going to navigate their way in a world where the US is pulling back and China is asserting itself. The Aussies are worried about these shifts and reinforcing their aim to be sovereign and not reliant on China to its detriment. This review will drive their policy positioning over the next decade - and no doubt ours too.

In New York, the UST 10yr yield is at 2.34%. And something to watch; yields in China are rising.

The price of crude oil is noticeably higher today, now just under US$58 / barrel, while the Brent benchmark is just under US$63.

The price of gold is basically unchanged at US$1,283 oz.

However, the Kiwi dollar will start today a little higher again. We are now at 68.6 US¢. And on the cross rates we are at 90.4 AU¢, and against the euro at 58.2 euro cents. That puts the TWI-5 index at 71.5.

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 murray86 | 23rd Nov 17, 8:26am 1511378760

I have a question for the more experienced financial observers of the blog. Regarding Yellen's inflation mystery; could this be a consequence of the equity gap? Bear with me as I think this is quite complex. Much of a society's expectations around consumerism is dependent on populations to spend money to buy goods. But in this modern world, many organisations use efforts to drive down wages to control their costs and improve profitability. this results in reduced overall living standards, through reduced disposable income. This has been commented on many times here and elsewhere. But today consumerism, due to reduced disposable income is funded by debt, something that must still be paid from that disposable income. There is a limit to the amount of debt that people can bear, and banks will continue to support. When that limit approaches, demand for goods must surely start to dry up, thus putting pressure on prices. Population growth will compensate partially, but only to a small degree. Thus ultimately the "low inflation" problem is something the banks and corporations is something they have done to themselves out of greed?

by RickStrauss | 23rd Nov 17, 10:49am 1511387341

I absolutely agree. We're seeing self-defeating behaviour driven by short-term thinking. The middle classes are being hollowed out by off-shoring of profit into tax havens and the use of zero hour contracts and other punitive approaches to pushing wage costs down, rather than recycling of money into the consumer base for them to spend it. It's the exact opposite of Henry Ford's $5 per day tack to create buyers of his cars.

I think we'll see more and more people entering self-imposed austerity, increasing their saving rather than spending, as Japan saw. The question will be whether governments try to punish these people for saving in order to protect those who have binged on debt to drive asset prices higher.

There's a really interesting book that I recommend called "The Retreat of Western Liberalism", by Edward Luce. Absolutely worth a read, including for some great insights into the populist retaliation against condescending elites (Hilary, Boris Johnson et al) who have stopped looking after the interests of those they were supposed to represent.

by scarfie | 23rd Nov 17, 1:12pm 1511395955

You have come to the correct conclusion. Well done, it is refreshing to see you reach this conclusion independently. Many here can't, or won't, see the simplicity of compound debt.

Now that you know this you must, like a number of us, suffer the interminable waiting for the inevitable collapse.

Just also realise you are facing a double barrel. Compound debt is closely related to resource limits, and in fact all economic growth is underpinned by (unsustainable) energy consumption. Consumer consumption is resource consumption.

by Retired-Poppy | 23rd Nov 17, 9:14am 1511381683

Hi murray86, I'm very much a novice compared to some here ok. I agree entirely that wealth inequality is a big culprit. As illustrated earlier in the week here:
https://www.interest.co.nz/opinion/91008/jacob-shapiro-warns-when-next-…
It's larger than it was in the roaring 20s! Noting that there was also hardly any inflation in the 20s, see here: http://www.usinflationcalculator.com/inflation/historical-inflation-rat…
Eerily similar pattern and vulnerabilities. I think a lot of the answers to this disinflation mystery are in the 1920s era. More efficient manufacturing techniques, ever cheaper goods in larger quantities - competition. I wonder if the wealth gap may close in an abrupt way as it did after the 1929 bust. Quickly ushering in deflation? It won't be pretty.

by ham n eggs | 23rd Nov 17, 9:15am 1511381721

Yes the missing inflation is really weak consumer demand / weak buying power. The only way you can increase buying power (aside from the "easy" methods of issuing free money / or lowering interest rates which is effectively raiding the balance sheet) is by increasing output per worker. With diminishing returns everywhere, that is not so easy.... now globalisation (of which labour arbitrage is a big part) is hitting its limits too.

"all economic activity requires exchanges of energy. Productivity per capita has been a function of energy leverage. As the energy per capita declines we enter an energy deleveraging situation. This basically makes it impossible to pay back debt. What can’t be paid back won’t. At some point very soon the system will crack under it’s own weight. It seems in the last few years to paper over the crisis all surplus value has been tapped to perpetuate the present system. There was really no choice. So values have been stripped from retirement systems. The bond market is turning negative. Consumer debt has skyrocketed. Corporations have borrowed to buy back their own stock. It’s all evidence of capitulation. The oil majors are in liquidation.
All the while we see the top 1% bursting in “wealth”. But really what else can be done? Without real economic growth working because energy is shrinking per capita the printed capital is stranded in equity valuations. Is has to go somewhere. PEs are now completely ridiculous. Zombie companies are all over the planet. The biggest losers like Tesla, Amazon and Uber have the biggest valuations. Strangely people think this is a new normal.
Sadly there is no way out. Particularly for the industrialized economies, particularly as their demographics are aging and the youth have been snared by educational debt. This will lead to a crash as there are no future buyers for investors to sell to. The ECB and Fed as well as all central banks have done a fantastic job of papering over this reality by becoming the buyers of last resort. This will eventually end in a currency crises."

by custard | 23rd Nov 17, 10:29am 1511386189

Globalisation of supply / capacity will be playing its part.
I was surprised to learn a while back that Thailand was the biggest supplier of new vehicles to the New Zealand market.
This “cheap” supply game can probably play out for some time to come.

by ham n eggs | 23rd Nov 17, 10:31am 1511386286

an alternative perspective on how we got here
http://www.resilience.org/stories/2011-01-20/onset-catabolic-collapse/
.."the gap between your maintenance needs and available resources spins out of control, until your society no longer has enough resources on hand even to provide for its own survival, and it goes under."

by murray86 | 23rd Nov 17, 10:39am 1511386776

So taking into account all of the above, Yellen cannot solve the mystery because she cannot see the trees for the forest? Or is she just unwilling to tell the truth? Or too enamoured of her own opinion and unwilling to admit she (and a few others) might have been wrong?

by Retired-Poppy | 23rd Nov 17, 11:52am 1511391168

murray86, Yellen knows full well and the last thing they want to do is to draw any parallels with the 1920s - it might trigger a selloff. Maybe their method is that by gently withdrawing QE it might slowly deflate the bubbles! We are in the midst of the peak stage of speculators denial. The price we pay is expensive when it comes to its root cause - the yawning wealth gap. I feel that when greed turns to fear, it creates a tsunami of tears, no matter the century.

by scarfie | 23rd Nov 17, 1:15pm 1511396121

Cognitive Dissonance. The tension between what her mind tells her should happen, and what she wants to happen, and what actually is happening (even after she has fiddled the data).