Wall Street rally stalls; US growth tame; Fed dividend smaller; global airfreight jumps; Canada dobs in rogue US actions; China CPI up; UST 10yr yield 2.56%; oil and gold up; NZ$1 = 71.9 USc; TWI-5 = 74.1

Here's our summary of key events overnight that affect New Zealand, with news the bond market yields are rising and China is messing with investors heads.

Wall Street's major indexes are falling today, stalling the rally that marked the start of 2018, after a report that China is considering slowing its purchases of American government debt. One consequence may be that the additional debt the US will need to take on to pay for its tax cut will be more expensive.

American wholesale inventories rose more than initially estimated in November, suggesting that inventory investment will probably contribute to their GDP growth in the fourth quarter. The Atlanta Fed's latest estimate of that growth is now +2.8% (and which is below the Trump Administration's +3% assumption necessary for avoiding a blowout in the Federal budget deficit).

And not helping, remittances from the Fed to the US Treasury declined by almost -US$12 bln for the second straight year in 2017 as rising short-term interest rates weighed on its profit. The Fed sent US$80.2 bln to the government last year, all but US$0.5 bln of its net income. Interest costs are expected to be higher in 2018 as well, limiting this bounty.

(But the US Fed isn't in the same league as the Swiss. The Swiss central bank made a record annual profit of SFr54 bln equal to about 8% of the country’s GDP. If the US Fed were to run a profit of similar scale relative to the American economy, it's profit would be about US$1.5 tln.)

Global airfreight volumes rose an impressive +8.8% in November from the same month in 2016, extending a strong run of growth. The international component rose +9.0%. Airfreight capacity only rose half as fast and that will put upward pressure on freight rates. If you have been watching the Baltic Dry index of sea freight demand you will have seen that at near its highest in four years and it has doubled in six month. Global trade is growing fast.

Canada has filed an expansive complaint with the WTO, accusing the Americans of breaking international trade rules. The complaint challenges the ways the US investigates products for subsidies and below-cost sales in the US. The US called the claims "unfounded" and "ill-advised".

China's consumer price index rose +1.8% year on year in December, slightly up from 1.7% for November. China's producer prices were up +4.9% and that was the slowest rate of increase in well over a year.

A leading Chinese investment bank CICC has raised its forecast for China’s economic growth in 2018 and 2019 to +7% and +6.9%, respectively, from a previous +6.9% and +6.8%. They cited stronger external demand and strength in consumption and manufacturing investment for the rising forecast. Tax cut plans in the United States will boost demand for Chinese exports. Others see a sharp fall in rail freight volumes, and in steel production, keeping growth lower than that.

In Australia, job vacancy data shows it was surprisingly strong in November, up an impressive +16.3% from the same month a year earlier. We will get ANZ NZ's local job ad monitoring report later this morning.

The UST 10yr yield has continued its move higher overnight to 2.56% today (+2 bps). That is its highest level since March 2017. In China, the equivalent 10yr sovereign bond is at 3.93% (+1 bp) while the equivalent NZ 10yr sovereign bond is also on the way up and now yielding 2.85% (+4 bps). We should also note that the CDS index for Australasian investment grade corporate debt is now lower than the equivalent American index - the first time that has happened in about eleven years.

Oil prices are little changed with the WTI benchmark now just over US$63 a barrel, while the Brent benchmark is just over US$68.5.

Gold is up +US$5 to US$1,315/oz.

The Kiwi dollar is marginally stronger this morning at just on 71.9 USc. On the cross rates it is at 91.7 AUc, and against the euro it's at 60.1 euro cents. That puts the TWI-5 unchanged at 74.1. And the Chinese central bank has made some change s to how it sets its exchange rate, trying to make it more market sensitive. That brought a sharp drop in the value of the yuan yesterday and the expectations are that much more volatility will be seen in the future.

Bitcoin has slipped over the past 24 hours, but only by -US$400 to US$14,551.

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

Daily exchange rates

Select chart tabs »
The 'US$' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'AU$' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'TWI' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '¥en' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '¥uan' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '€uro' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'GBP' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'Bitcoin' chart will be drawn here.
Loading...
USD 
NZD
End of day NY time
Source: CoinDesk

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

8 Comments

David - can you reword this?
"One consequence may be that the additional debt the US will need to take on to pay for its tax cut will be more expensive"

That implies the US will take on more debt due to China's scale back AND will be more expensive whereas the need for increasing debt is internal to US to pay for tax cuts while China's scale back might make it more expensive

Does that mean US needs China in order to have tax cuts

So, China is finding ways to let its currency decline and finding ways not to buy more US Treasury declining value bonds. What is the mechanism I wonder, buy more euro bonds, or maybe just issue more Yuan in the smoke and mirrors of their banking system? They will have to do something with their current account account surplus, buy more Africa and Australasia perhaps.

They will have to do something with their current account account surplus, buy more Africa and Australasia perhaps

LOL - BTFD!!!!!

Overall, if anyone wanted proof that foreign demand for US Treasurys is as strong as ever, then today's auction was the place to find it. Read more

(But the US Fed isn't in the same league as the Swiss. The Swiss central bank made a record annual profit of SFr54 bln equal to about 8% of the country’s GDP. If the US Fed were to run a profit of similar scale relative to the American economy, it's profit would be about US$1.5 tln.)

The Fed is certainly not in the same league.

By comparison, the Fed has earned an annual profit of about $100 billion in recent years, although the SNB's return is equivalent to a much larger slice of its GDP, as a result of the different types of asset holdings: the Fed is long Treasurys and MBS while the SNB has been buying pretty much everything, including tens of billions in US stocks. Read more

But as I noted previously, there are associated risks attached to the SNB's investment policy decisions. Read more

The Swiss CB nailed it, print money buy stocks, a no brainer.

Or did China just whisper in Trump’s ear as to who really pulls the purse strings before his threatened table thumping begins.

Possible.

In the past years, Russia’s foreign policy has been focused on expanding influence in the most remote corners of the planet. In particular, the Russian party has successful relations with the small island states of Oceania located in the South Pacific and with Fiji in particular.

Thus, Oceania is still a rather exotic corner of the planet for Russia, but its far territories are getting closer in the light of a new geopolitical reshuffle that is weakening the positions of the USA and its allies – Australia and New Zealand – amid China’s growing influence in the region. The successful cooperation between Russia and China at the international level as a whole contributes to the creation of a favorable image of Russia and the strengthening of its political weight in Oceania in particular. Read more

Microsoft settles with ATO and restructures its Australian operations:

https://www.crn.com.au/news/microsoft-settles-with-ato-over-taxes-brings...

A reasonable record of traditional company structure in this article. Looks like the ATO is forcing some industry restructuring. No comment from the the Singaporean tax authority.