Fed rate review; US inflation slips; China targeted at WTO; CBA offers laundering defense; Moody's happy with NZ banks; UST 10yr yield at 2.36%; oil slips, gold up; NZ$1 = 69.9 US¢, TWI-5 = 73

Here's my summary of the key events overnight that affect New Zealand with news the US Fed has delivered the expected December +25 bps rise in its official interest rate.

The rate has been raised to 1.50% and have signaled that three more similar rises are due in 2018 taking the Fed Funds rate to 2.25%. Remember, two years ago it was at just 0.25%. This is a relatively dovish statement and the UST 10yr yield fell on the news. The USD also retreated. No mention was made of the impending fiscal stimulus from Congress's corporate tax cuts and the impact that may have on inflation, but it did raise its estimate for GDP growth in 2018 to +2.5% from +2.1%.

Meanwhile, underlying American inflation fell in November to +2.2% pa, on lower healthcare costs and the biggest drop in clothing prices in nearly twenty years. This is the sort of data that could impact the pace at which the Fed raises interest rates next year.

At the World Trade Organisation meeting in Argentina, the US, Japan and the EU issued a joint statement aimed at China, criticising it for requiring foreign firms to transfer technology to locals, and for subsidising its industry. China is sure to bridle at the accusations as it wants to be declared a "market economy" at the WTO and this seems less likely now. Essentially, the "market economy" status allows China to use its own local prices in defending anti-dumping cases brought against it in the WTO disputes framework.

In Sydney, the Austrac legal action against CBA is moving along with the bank filing its defense position. It admitted it was late in submitting some suspicious-transaction reports but will contest most of the other charges.

Moody's has published a review of the state of banks in the Asia-Pacific region and they say ours are in a stable position. They flag the possibility of declining profitability as a risk. In Australia they see the risk in declining asset quality - although they say the Aussie bank's capital improvements will be a positive. New Zealand bank asset quality and capital support are seen as 'stable'. New Zealand and Australian banks are noted as "an exception" because of the high reliance on wholesale funding.

In New York, the UST 10yr yield has slipped back to 2.36% after the Fed announcement.

The price of crude oil is lower again today, now just under US$57 / barrel, while the Brent benchmark is down to just under US$62.50. In an updated OPEC report, they said member oil production fell to its lowest in six months. But American production was surging faster than expected, meaning oil markets may not rebalance before the end of next year.

The price of gold is up+US$7 to US$1,245 oz.

The Kiwi dollar higher and up about ½¢ at 69.9 US¢. And on the cross rates we are holding up too at 91.9 AU¢, and against the euro at 59.4 euro cents. That puts the TWI-5 up further to 73 and its highest since NZ First chose the Labour Party as the election winner.

Bitcoin is now at US$15,985 and down -7% from this time yesterday. And this is a useful review of what central bankers think about bitcoin. The views are diverse,

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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14 Comments

Crack up on RNZ this morning when Gareth Morgan admitted to Guyon Espiner that charm might have a part to play in politics, citing voter reaction to JA, and that he might not have that skill set!

Makes you wonder how some of the others survive?

Meanwhile, underlying American inflation fell in November to +2.2% pa, on lower healthcare costs and the biggest drop in clothing prices in nearly twenty years. This is the sort of data that could impact the pace at which the Fed raises interest rates next year.

indeed.

In late February this year, FRBNY President Bill Dudley (it’s always Dudley) went on CNN and said, “There’s no question that animal spirits have been unleashed a bit post the election.” He and his fellow FOMC compatriots then spent the balance of 2017 so far wondering where they went.

Unlike the mid-sixties, the only thing driving inflation indices right now is the price of oil; and not even that, it’s merely the base effect of oil prices being somewhat higher now than from lows in the year ago lookback. There is no broad-based indication of rising let alone out of control consumer prices. Despite CPI Energy being up almost 10% year-over-year in November, the headline CPI remains at just above 2%. The core CPI rate fell back to 1.7% again. Read more

From Bloomberg:

What Our Economists Say...

Analysts should ignore the headline -- as the Fed will dismiss this as a pure energy distortion. The weakness in the core is a validation of Bloomberg Economics’s view that the inflation soft patch of 2017 continues to be deeper and broader than policy makers have anticipated -- and it is likely to stretch further into 2018 than many currently expect. As a result, this also reinforces BE’s estimation that the Fed will continue on a gradual path in 2018 -- they are not on the cusp of moving toward a more aggressive interest-rate trajectory.

 -- Carl Riccadonna, Bloomberg Economics
Read more

The general consensus is that the Fed will hit neutral at 2.75. If that's correct there's five more moves to go. Could be more if Trump and his cohorts get hold of the national overdraft.

As noted yesterday:

For the U.S., the specter of cooler Chinese demand comes at an inopportune time, with the Federal Reserve tapering its portfolio of Treasuries and Congress debating a tax-overhaul plan that could increase the federal deficit by $1 trillion over the next decade. The U.S. debt burden was already forecast to swell by $10 trillion in that period even before any tax changes.

“It puts Treasury in a tough spot,” said Thomas Simons, a senior economist at Jefferies LLC in New York. “We have two very big domestic forces putting pressure on the market, and at the same time, our biggest global subsidy is pulling back.”

China owns almost $1.2 trillion of U.S. government debt, more than double the level from a decade ago. The bulk of the buildup came as the Chinese boosted foreign-exchange reserves to help offset a strengthening yuan.

The U.S. could rely on that appetite as the Treasury market soared above $14 trillion this year, from less than $5 trillion in 2007. Read more

1.5% now and a possible 2.75% ceiling - it's like the Wild West out there.

It wasn't that long ago that people didn't believe the rate would go up. Everytime things seem strong enough they've moved the rate. This is going to put a lot of pressure on market rates despite the EU and Japan. It's a good time to pay down debts before the 5%+ rates return.

First China, now NZ.

Recently renounced New Zealand citizen Barnaby Joyce has said his former homeland should back off on its offer to resettle refugees from Australia’s offshore detention regime.

In an interview with Newstalk ZB in New Zealand, the recently-reinstalled deputy prime minister of Australia issued a veiled threat to the NZ prime minister, Jacinda Ardern, that her commitment to the offer could jeopardise the two countries’ relationship.

Asked if New Zealand should “back off” on its refugee offer, Joyce warned: “I think it’s best if you stay away from another country’s business. I find that. Otherwise they’ll return the favour at a time they think is most opportune for them. Read more

He cannot demote NZ as one of Australia's major trading partners and ally - politicians don't wield that sort of power - witness the demise of prime minister Kevin Rudd. Hence, what is the real story behind such public aggression, other than failing nation status?

There is enormous antipathy in Australia towards illegal immigrants thus polititians there will, indeed must, cater to their people if they wish to survive politically. Economic migrants have an enormous potential to swamp those nations considered to provide better opportunities, thus possibly creating similar conditions to those that they hoped to get away from. I wonder if do gooder attitudes may actually be counter productive and create enormous future problems. Although world population increases are slowing, we still have a long way to go.

There is enormous antipathy in Australia towards illegal immigrants thus polititians there will, indeed must, cater to their people if they wish to survive politically.

But not towards supporting NATO/US creating massive northern hemisphere immigrant issues following the wilful destruction of Iraq, Libya, Afghanistan and Syria.

I totally agree. American policies and actions STINK.

At what point do these increases impact NZ interest rates?

Continuously, in terms of the yield on US treasuries (cost of longer duration NZ mortages).

Less so in terms of floating rates.

Longer term, if the US continues to increase rates and New Zealand doesn't, the NZD will probably fall as the spread between US and NZ rates grows. Lower NZD = higher tradable inflation = more pressure on RBNZ to hike.

U.S. companies on balance already are paying well below the 20 percent tax level targeted in the Republican reform plan, according to an analysis by Yardeni Research. In fact, the typical effective tax rate - the amount paid minus deductions - could be as low as 13 percent over the past years, Yardeni concluded when looking at a cleaner number of how much the government is really collecting. That's well below other estimates that sought to clarify the impact of the tax reform proposal that would take the current nominal rate from 35 percent to 20 percent. Multiple firms have concluded the benefits will tilt to specific sectors and provide a limited aggregate windfall. Read more

Who will pay for much needed US infrastructure spending? Certainly not Boston's poor - That was no typo: The median net worth of black Bostonians really is $8

" If Myer (Australia's largest department store?) is struggling this badly – with all its marketing dollars and the discounts it has been running in recent weeks – then it must be truly ugly out there in the broader retail market. Heavy hitters say there are tens of big chains out there hanging on by their fingernails in the hope a decent Christmas would come. It clearly won't and you'd have to think there will be collapses – with the attendant job losses – in early 2018"
http://www.afr.com/business/retail/the-grinch-has-stolen-more-than-myers...