Wall Street up strongly; US tax cuts likely; US incomes rise strongly; Korea raises key rate; big German jobs growth; reports UDC sale in trouble; UST 10yr yield at 2.43%; oil up and gold down; NZ$1 = 68.5 US¢, TWI-5 = 71.3

Here's my summary of the key events overnight that affect New Zealand with news the sale of UDC may be off.

Firstly however, Wall Street has taken over the mantle of a bubble frenzy. The S&P500 is up more than +1% to a new alltime record. Other markets are similar. Tax cut prospects that favour wealthy Americans and companies are behind the euphoria. John McCain has said he will vote for them.

Also helping is that US personal income rose strongly in October, up +2.8% from the same period a year ago. Meanwhile US personal consumption expenditure is up +1.6% over the same period.

Separately, the US President is nominating Marvin Goodfriend, an economics professor, to one of the Fed's vacancies.

Last night the Bank of Korea raised the base rate for the first time since May 2011. It was increased by 25 basis points from a record low of 1.25%. Korea is doing another interesting thing as well.

In Germany, their jobless rate fell to 5.3% and the number of people in employment rose strongly, up +650,000 in a year, to 44.7 mln.

In Australia there are reports that the sale by ANZ of UDC to HNA is on the rocks. They cite the tougher OIO stance, HNA's issues, and the fact that no-one else is prepared to pay the premium HNA offered. The likely endgame is that ANZ will keep UDC, no doubt pleasing David Hisco greatly.

In New York, the UST 10yr yield is still rising and is now at 2.43%. That is a very strong rise and back to levels we haven't seen since March.

The price of crude oil has firmed a little overnight, now just over US$57 / barrel, while the Brent benchmark is just under US$63.50. OPEC and a Russia-led group of big-oil producers agreed to keep limiting their output through the end of 2018

The price of gold is down another -US$11 to US$1,211 oz.

And the Kiwi dollar is also down. We are now at 68.5 US¢. And on the cross rates we are at 90.5 AU¢, and against the euro at 57.6 euro cents. That puts the TWI-5 back at 71.3. And bitcoin is sharply lower today, now at US$9,587 which is down -US$1,570 from its peak just over a day ago. Such huge volatility just seems normal for bitcoin these days. And you might note that the cryptocurrency has actually never closed a daily session over US$10,000.

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

Fed to raise this month as well

It's been a given for quite some time the Fed will raise this month; seems to be an annual theme over the last few years of leaving the markets with a Christmas rate hike. Interesting the PCE remains stubborn against rising incomes.

But a bigger concern flagged by DBRS is that the growth in consumer debt is raising concerns when viewed in the context of the existing wage stagnation hampering the current economic environment. The rating agency cites a paper published in October 2017 by the Harvard Business Review which stated that the inflation-adjusted hourly wage has grown by only 0.2% per year since the mid-1970s and labor’s share of income has decreased to its current level of 57% from 65%.

Meanwhile, in the second quarter of 2017, wages were only 5.7% higher than they were a decade earlier. In comparison, the Federal Reserve Bank of New York/Equifax data shows that consumer debt growth over the same period was 9.3%.

In other words, the purchasing power of US households has been largely a function of rapidly rising debt, which over the past decade has risen 60% faster than wages. Read more

"The good news: total mortgage debt has decreased since 2008, to $8.743 trillion from $9.29 trillion"
It's still TRILLION, though! And we reckon The Fed is going to increase rates?!

Grant Robertson this morning on the economic direction of NZ (https://www.interest.co.nz/news/91183/finance-minister-grant-robertson-a...):

"There is a consensus of a stronger growth track through 2019 and 2020 which is expected to be supported by government policies such as increasing R&D tax credits, increased wages and export growth.

"In other words, we'll be swapping out population growth and the buying and selling houses to each other as our two main growth drivers for much more sustainable ones. That sounds like a good description of our plan.

"If that means slightly lower growth for a year while the transition to a productive economy occurs, then that will be a price worth paying."

Sounds good. At least there's acknowledgement at top level of the main problems in our economy and society. Whether everything's implemented to everyone's satisfaction is another matter, but at least it's a start.

I would have named it the 'Bank of South Korea'.

HNA may actually start divesting: https://asia.nikkei.com/Business/Companies/China-s-HNA-Group-accelerates....

I wonder if HNA will end up being a much smaller beast after this, or whether there will be Chinese government support from behind the scenes. Anyway, it certainly bit off more than it could chew.

I would have thought that HNA would want a cash-generating machine like UDC to help it meet its debt payments (assuming it pays back more than the debt to purchase it). Better to keep UDC and flick of some speculative plays.

The US has filed a legal submission to the WTO as a third party, intervening in a case that China has brought against the European Union. The US rejects China’s argument that under the 2001 agreement, which confirmed China’s WTO status, it would should automatically be considered a “market economy” fifteen years after joining. The dispute could affect both America's and China’s future within the international body and, as the New York Times contends, “shape the global trading system for decades to come.” It goes without saying that this will only ratchet up the current tensions between the US and China over trade, which has been a cornerstone of Trump’s rhetoric since he launched his election campaign.

Briefly, the US submission sets out the legal arguments explaining why China should not be designated as a market economy, which would give it preferential treatment under existing WTO rules. China is currently designated a “nonmarket economy” which allows the US, EU and other countries to decide whether China is dumping products at unfair prices under a WTO framework. If they decide that China is dumping, countries can add an extra duty to protect domestic manufacturers.

According to the Financial Times, "the Trump administration has opposed China’s bid for recognition as a “market economy” in the World Trade Organization, citing decades of legal precedent and what it sees as signs the country is moving in the opposite direction under Xi Jinping. The US opposition to China’s efforts to be recognised as a market economy in the WTO came in a legal submission due to be released on Thursday in a case brought by Beijing against the EU. Market economy status would make it more difficult for the US to prove anti-dumping cases against Chinese companies at the WTO." Read more

Inevitably, NZ faces some stark choices.

Heres an idea , where we could all win

I always wondered why ANZ ever wanted to sell a good business like UDC in the first place

It would be much better for everyone to list UDC as a separate entity with joint listings on the NZX and ASX and ANZ could then exit in a managed fashion ( likely at a premium) and the ownership stays in Australasia with local shareholder such as NZ Super and Kiwisaver funds buying in to a good business as well as enabling another PIE share for older investors