US factory orders jump; US construction spending up; US car sales flat; China retail revolution; MIFID II arrives; UST 10yr yield 2.45%; oil and gold up; NZ$1 = 71 USc; TWI-5 = 73.2

Here's our summary of key events overnight that affect New Zealand, with news the EU has launched a new framework to 'protect investors'.

But first, there is more evidence today of improving US factory prospects, with another index up substantially to 59.7 last month, the second-highest reading in six years, from 58.2 in November. It was also powered by strong new order levels both from domestic sources and exports.

And that was backed up by strong construction spending data our overnight as well.

This data has helped Wall Street extend its New Year rally with all three main indexes up solidly.

But relatively unnoticed is the struggles car makers are having with their sales; December sales were ahead of expectations, and unsold inventory is lower, both good things. But overall projections for 2018 are lower than for 2017, and discounting is rife. Those December sales were only held up by good sales at GM and Ford. Chrysler-Fiat reported a -11% drop, Toyota a -8.3% drop, Honda a -7% fall, and Nissan a -9.5% decline. Expectations aren't being set very high for 2018.

Today's release of the latest Fed minutes was a tame affair, bringing no surprises or special insights.

In China, they are rolling out retail stores and restaurants without checkout counters or wait-staff. In the US, Amazon and others aren't far behind. This portends tough times for employment at the bottom end of the retail food chain. But not everything is going without a hitch.

And staying in China, their central bank has set the value of its currency at its highest level against the USD in over 18 months.

In Europe, and in a very EU-style, they have launched a new set of rules around "greater transparency, competitiveness and efficiency in financial instruments, and less scope for fraud and malfeasance". But to do that, these rules are complex and prescriptive and run an incredible 1.4 million paragraphs! And they are taking an American approach, making them apply outside of the EU for anyone dealing in financial instruments originating there. The complexity is immense and will be costly especially for small players. Lawyers are cheering and will get very rich on this.

The UST 10yr yield has settled back a little to 2.45% today (-2 bps). In China, the equivalent 10yr sovereign bond is yielding 3.92% (unchanged) while the equivalent NZ 10yr sovereign bond is yielding 2.77% (+2 bps).

Oil prices are up by more than +US$1 in the US today with the WTI benchmark now just over US$61.50 a barrel, while the Brent benchmark is just under US$67.5. In the natural gas market, China is ramping up its domestic production of fracked shale gas.

Gold is up another +US$3 to US$1,315/oz.

This morning the Kiwi dollar is at a similar position to this time yesterday at just on 71 USc, and on the cross rates it is at 90.6 AUc, and against the euro it's almost a cent higher at 59.1 euro cents. That puts the TWI-5 at 73.2.

Bitcoin has only seen a minor gain in the past 24 hours and is now at US$14,888.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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18 Comments

Isn't leverage wonderful! (Yes, on the way up, but....)

"There's debt of €10.7 billion at the head company and speculation that group debt could exceed €40 billion.... Steinhoff* went .... to $US1.9 billion (market cap collateral against that debt) in the space of a few days in December

http://www.afr.com/brand/chanticleer/lessons-for-australia-from-steinhof...
* Owners of Freedom Furniture in NZ

AJ...More than a fly in the ointment.
There is Plenty of evidence to show that rising oil prices can, often, precede recessions.
https://www.stlouisfed.org/publications/regional-economist/january-2001/...

https://ourfiniteworld.com/2011/03/17/how-close-a-link-is-there-between-...

Venezuela is having a number of problems supplying and refining oil on top of their debt default problems. It's still better than the $120/barrel days.

China won't be short of product.

A second Sino-Russian oil pipeline began operations on New Year’s Day, doubling China’s capacity to import crude from the East Siberia-Pacific Ocean system.

China can now import 30 million tons annually (about 600,000 barrels a day) of Russian ESPO crude via pipeline, up from 15 million tons before the second branch opened, the official Xinhua News Agency reported Monday. The two lines run parallel to each other between Mohe at the border and Daqing in northeast Heilongjiang Province, the state media organization said. Read more

..starting to factor in that we are being primed for Iran? It was always on the list.

All to stop this and create a flight response back to the US$?

https://finviz.com/futures_charts.ashx?t=DX&p=d1

Seems it's inevitable...

Anatomy of the U.S. Dollar End Game Part 1 of 5

https://www.macrovoices.com/

A series of podcasts for those long car trips..

Indeed!!!!

Two weeks ago a memo was leaked from inside the Trump administration showing how Secretary of State and DC neophyte Rex Tillerson was coached on how the US empire uses human rights as a pretense on which to attack and undermine noncompliant governments. Politico reports: Read more

I'ts been happening for years and we wonder why terrorists exist. read this book a few years ago. Both enlightening and depressing.

"Economic hit men (EHMs) are highly paid professionals who cheat countries around the globe out of trillions of dollars. They funnel money from the World Bank, the U.S. Agency for International Development (USAID), and other foreign "aid" organizations into the coffers of huge corporations and the pockets of a few wealthy families who control the planet's natural resources. Their tools included fraudulent financial reports, rigged elections, payoffs, extortion, sex, and murder. They play a game as old as empire, but one that has taken on new and terrifying dimensions during this time of globalization".

https://en.wikipedia.org/wiki/Confessions_of_an_Economic_Hit_Man

Citigroup produced research a couple of days ago stating that NZ is second most exposed country in the world to Bitcoin.
Russia is most exposed at 5% of GDP, followed by NZ at 3.75%.
After that it is Nigeria, Ukraine, Kenya and South Africa.
What salubrious company!
How many mugs and/or money launderers must there be in NZ?

And that was backed up by strong construction spending data our overnight as well.

Hmmm....

The Census Bureau’s estimates for construction spending now through November 2017 show that Non-residential Construction output is in contraction.

Overall, construction spending is growing very slowly, almost flat (+2.6% year-over-year). It would have been about zero in the latest month had Public Construction Spending not reversed sharply the past two months. That might have been delayed activity from several years now of steadily lower outlays, or it might have been related to storm cleanup and rebuilding in Texas and Florida.

Either way, local governments continue to operate without a clear path to tax growth (more on that later). Despite “reflation” in the economy last year, there hasn’t really been all that much of it outside of sentiment.

That may be another reason why Non-residential Construction spending, the very economic baseline (capex) the economy really, really needs to pick up for everything else to finally pick up, has essentially hit a wall. Going back more than a year now, spending has been significantly lower. Read more

Why might interest rates be headed ( stupidly!) lower?

Société Générale’s sold €500 million in 3-year senior unsecured zero-coupon bonds of Veolia, a former water and wastewater treatment provider. The unsecured notes were priced to yield -0.026%. “That’s right, a BBB-rated company managed to convince investors to pay them for the privilege of lending the company money.”

(via John Mauldin)

Today's release of the latest Fed minutes was a tame affair, bringing no surprises or special insights.

Hmmmm....

Last month, the real estate web-firm Zillow published an internal study that showed a scary increase in the proportion of cohabitation among US workers. According to their findings, a stunning 30% of working age adults now live in “doubled-up households.” That’s a nearly 50% increase from 2005 when only 21% did. What happened in between wasn’t Baby Boomer retirements.

As bad as that might be, the primary reason for it should be exactly what the FOMC (or TBAC, for that matter) focuses on each and every policy discussion from here on out.

There is other evidence that doubling up is motivated by affordability concerns. The median individual income of an employed adult in a doubled-up household is $30,000, compared to the $45,000 earned by their non-doubled-up counterpart. In other words, adults living with roommates or family members earn 67 cents for every dollar made by adults who live on their own (or with a partner). This suggests that in many places, employed people who currently live in doubled-up households would not be able to afford rent if they lived by themselves. Read more

I have often wondered if we are one large financial shock away from it happening here too. It would certainly be an unwelcome factor in dampen demand for rentals and sink rents.

When forced, people will cluster to bigger groups in order to survive financially.

It's been happening here for awhile now. Lower income migrants live 2, sometimes 3 families to a rental. Just take a drive through some of the NS neighborhoods and count the cars in front of properties on a Sunday morning when everyone is home. My 2 adult sons, both working, still live with me. Probably part of the reason why rents haven't gone up to the same extent as house prices.

The odd million or so US households who were foreclosed, lost their homes and cars and were financially ruined in the aftermath of the GFC had to go somewhere

Is the US 2-YR about to have a run at 2%....this feels a little scary déjà vu.
Quick google and up comes “The great bond massacre (Fortune 1994) – I remember early that year heading back to Auckland from Christmas break determined to sell a few shares that had gone my way – too many interest rate signals were flashing red to my way of thinking.
Looking back it was relatively easy then – the market was pretty much the market – now it’s bedeviled by all manner of interference.
From a observers vantage 2018 looks simply spectacular.
Oil is misbehaving, financial markets are all in a lather, wage pressures are building and tulips are all the rage.
Thankfully we still have ultra-low interest rates and QE in play to get us through it all…?!?