US PPI falls; China catches US retail crown; air travel booming; China corporate debt wall; China growth rises; China deny's UST move; UST 10yr yield 2.53%; oil and gold up; NZ$1 = 72.5 USc; TWI-5 = 74.5

Here's our summary of key events overnight that affect New Zealand, with news the global growth engine is being duplicated.

But first in the US, producer prices actually fell in December for the first time in more than a year, a sign inflationary pressures remain modest even though their economy appeared to pick up steam last year. Prices for both goods and services fell, and interestingly, prices for services fell more.

Retail sales in the US are forecast to hit US$5.8 tln in 2018. Demand from the American consumer is what drives the world's economy. Well, that has been the fact for over a century. But new data out recently shows that consumer retail demand in China will match that of the US this year. The world now has two growth engines and we are witnessing an important transition. The US consumer will remain important, but the Chinese consumer is about to take centre stage.

Yesterday we reported strong growth in global airfreight volumes and today we can follow that up with equally strong passenger air travel data for November. International volumes are up +8.1% year-on-year. In the Asia/Pacific region these volumes were up +10.1%.

Europe's strengthening economy has the ECB thinking about when to end their bond-buying. Traders are speculating September 2018. In their December meeting minutes, the ECB Governing Council said there was a "widely shared" view among officials that communication "would need to evolve gradually". This is being taken as a signal that change is underway.

In China, a giant wall of debt repayment obligations loom in 2018 for corporate borrowers. Scheduled is a repayment obligation of more than US$600 bln. Plus there are buy-back options in place for another US$140 bln and analysts say these are likely to be exercised, making the repayment load even higher. These looming obligations are probably what is behind the rising Chinese interest rates.

China’s Premier has revealed their economy grew by +6.9% in 2017, just days before the government is due to officially release the numbers. That is the first rise in their growth rate in seven years and way ahead of the official target of +96.5% set in March. Analysts are saying it will give officials confidence to push ahead with long-promised reforms and economic overhauls, especially in the SOE sector.

China has also taken the unusual step of denying that is about to turn away from buying US Treasuries. They called the reports "false news". China is the world's second largest holder of UST debt (after Japan), holding about 7% of all Treasuries on issue.

The UST 10yr yield has failed to hold and settled back at 2.56% today (-3 bp), supported no doubt by the China statement. In China, the equivalent 10yr sovereign bond is at 3.96% (+3 bp) while the equivalent NZ 10yr sovereign bond is also on the way up and now yielding 2.87% (+2 bps).

Oil prices are up strongly today with the WTI benchmark now just under US$64.50 a barrel, while the Brent benchmark is just under US$70. The combination of strong global growth and producer output cuts are said to be behind the move.

Gold is up +US$2 to US$1,317/oz.

The Kiwi dollar is ½c stronger this morning at just on 72.5 USc. On the cross rates it is at 91.8 AUc, and against the euro it's at 60.2 euro cents. That puts the TWI-5 up at 74.5.

Bitcoin has slipped again over the past 24 hours, by -US$850 to US$13,687, a -5.8% decline. Planned South Korean restrictions, based on "great concerns", are said to be behind the falling sentiment. They are not the only ones concerned.

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

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27 Comments

I missed this..as I think msm did too. And it' significant -

"China launched a nationwide carbon-trading scheme on Tuesday, solidifying its role as an emerging leader in the fight against climate change."

http://www.scmp.com/news/china/policies-politics/article/2125016/china-l...

National didn't let our scheme 'work' (allowing th epurchasing of Russian mafia credits being a disgrace - see https://www.stuff.co.nz/business/farming/83230321/companies-revealed-for...)

The new govt needs too crank up our scheme up or we will be viewed as a pariah. We need to get with the program (denialists or not)...

The government will have difficulties hitting their CO2 target. Unlike other countries we have the majority of our electricity produced from hydro so minimal potential savings moving to Solar or wind and someone forgot to make our commitment 'per capita' so we have a target based on a smaller population and need to save 2% per year just to stand still. The only solution will be to start killing cows and that will further hit the rural economy.
I think despite the Greens our government like its predecessor just hopes the issue will go away. You are right - it will not.

While you point out that killing cows will further hit the rural economy which is correct our next step is to make our vehicle fleet more efficient. This is our 2nd biggest contributor to green house gases. getting more people to car pool, take buses, walk/cycle to work is a start as well as converting our vehicle fleet to electric/hybrid.

You are right. The move to more efficient cars has helped but then car ownership has exploded. Encouraging electric cars makes sense too. Nobody seems to mention planes.

Jevons Paradox?

Had to look that up. Thanks for the education.

It makes no sense whatsoever to measure per capita emissions.

We could reduce our emissions / capita by shutting down the smelter which with demand unchanged, increased production would them come out of Asia with likely coal fired generation.

Net effect is increased global emissions - the exact opposite of the global problem we are addressing.

Boeing could move a few miles up the coast to Vancouver - US emissions / capita fall as building aircraft is highly energy intensive - Canada's increase. Net effect zero.

We really have to have much better thinking than repeating the mindless mantra's on this issue.

While you are completely correct in saying what matters to the future of the world is CO2 emissions and we almost certainly agree that each country needs to commit to a target it is impossible for a government of any composition to make the appropriate changes if our population is so variable. Last year was one or two percent population growth; doesn't sound like much but apply it to the 13 years before our 2030 target of a 15% reduction and it becomes really significant. You are leaving our countries success or failure to the performance of Australia absorbing or rejecting Kiwis. You can't blame our government if it fails. A per capita target (as per other countries targets) make sense. It then means that my family will have to reduce our emissions by 15% and we can plan accordingly (PT use, composting, electric car, etc).

.... you have just identified why all countries need to be involved and why the big players such as China, will insist that all, including minnows like NZ, must be on board. Whilst we can moan and groan and criticize this is the chosen route.

The time for little analogies like yours are well over. NZ is not exempt, wont be exempt and will be heavily punished if we don't get on with it.

Our chosen route requires purchasing offshore credits - on borrowed money as we are already running current account deficits into the never never - to offset emissions which are grossly overstated as agriculture is measured on a gross basis - and ignores the massive CO2 absorption from our grasslands and crops.

A moments reflection will see that we cannot all purchase credits off each other - by definition - so this is simply a cop-out by NZ appearing to meet emissions targets by sleight off hand.

If we were to measure agricultural emissions scientifically on a net basis our target would be dramatically reduced as agriculture is stated to emit roughly half our total emissions when in fact net emissions from agriculture are only roughly half that figure.

We do it for forestry and all we have to do conceptually is think of grass as a small tree.

NZ is thus far from the common label of a high emitter when calculated scientifically.

I am not confident of making many future projections - but I am comfortable with betting the carbon cycle will still be here in years to come.

It is very difficult to get one's head around policy settings that plan on borrowing billions as we don't know the quantum or the future price of credits to offset emissions that simply don't exist.

Zero emissions in 2050 - while aspirational I agree, is simply a con to appeal to voters who have little idea of the implications.

Governments don't emit CO2 - individuals, companies and other entities do and if we are to reduce emissions we each personally have to make the change. And more so if we grow the population requiring ever greater sacrifices from individuals as pointed out above.

These actions are what will be required if we are serious about reducing emissions - none of which are going to happen.

No sports team travel offshore
Nuclear powered cruise & freight ships ( They are a large and growing emitter )
No holidays offshore
A very expensive all electric car fleet
No more concrete produced
No more steel products
No more aluminium - windows / doors / soda cans
No more Methanol production
No more Grab a seat for a week end away

Assuming all will be settled with credits is a straight out scam !

Thanks for a thoughtful contribution. Climate change is with us; rather like prostitution the public know it is bad but just don't want to know the details. The problem is 2030 will arrive and either we meet the target or we pay foreigners large sums of taxpayers money. The latter will be very irritating when we discover other countries have either dropped out of the system (as per USA) or set themselves easy targets (not too hard to move from 100% coal/oil electricity generation to solar in a hot country).
Meanwhile we need to reduce CO2 emissions by 15% and after 10 years despite several factors in our favour (such as more efficient cars, investment if recycling waste, etc) our population has gone up and just about balanced all the good work done to date. It seems our only hope is vast numbers of Kiwis moving to Australia which of course just passes the problem to them.

PS. I found it on this website last year - easily the best book on climate change is "No Place to Hide" by Jim Flynn. Only 85 pages; an easy read; you may choose to disagree with him but he lays out the relevant facts clearly with references. A 2nd printing is out containing more up to date info. I called the library asking for it earlier this week.

Bettina Warburg describes how the blockchain will eliminate the need for centralized institutions like banks or governments to facilitate trade, evolving age-old models of commerce and finance into something far more interesting: a distributed, transparent, autonomous system for exchanging value.
https://www.ted.com/talks/bettina_warburg_how_the_blockchain_will_radica...

But first in the US, producer prices actually fell in December for the first time in more than a year, a sign inflationary pressures remain modest even though their economy appeared to pick up steam last year. Prices for both goods and services fell, and interestingly, prices for services fell more.

Hmmmm...

For economists obsessed with regressions and therefore correlations, it becomes irresistible to see inflation and economic growth as one and the same. Read more

China has also taken the unusual step of denying that is about to turn away from buying US Treasuries. The called the reports "false news". China is the world's second largest holder of UST debt (after Japan), holing about 7% of all Treasuries on issue.

Indeed!!!!

China Doesn’t Want UST’s? I’ve Heard That Somewhere Before

".... as a flood of job seekers holding bachelor degrees dilute their own buying power..... the increased supply of university-educated candidates leaves 38% of graduates in part-time work... in 2017 male graduates were far more likely to be employed part-time than the overall male workforce."

“I used to hold out hopes that the situation would return to pre-GFC levels of strong employment outcomes for new graduates but it looks like the GFC has dislocated many industries and patterns of doing business world-wide and it might be that we’ll never get back to those levels of demand."
https://tinyurl.com/y99pqvt6

How are interest rates going to 'normalise' if this pattern is exhibited across the Globe - and it's likely to be?

When that educated, but idle unemployed class start to agitate and start revolutions and wars perhaps?

The UST 10yr yield has failed to hold and settled back at 2.56% today (-3 bp), supported no doubt by the China statement.

Possible. Nonetheless:

Well, if China isn't buying US Treasurys, someone else certainly is.

After yesterday's stellar 10Y reopening auction, today's just concluded sale of $12 billion in 29-year, 10-month paper was an absolute record breaker in terms of foreign demand for the ultra long end. Read more

NZD now back to where it was at start of September against the USD and Euro and higher against the AUD so change of government has made no real difference - if anything we were weakening under National from July to September. Swap rates also down - lower interest rates for longer. Crypto still well up so far in January despite the overnight drop.

USA tax cuts go through & employers pay out bonuses
https://www.usatoday.com/story/money/2018/01/11/list-companies-paid-bonu...
The USA economy doesn’t seem to be suffering under the Trump Administration.

William Dudley at the NY Federal Reserve very uninterested in giving tax payers back their money:

https://www.reuters.com/article/us-usa-fed-dudley/key-fed-official-slams...

Over the eight years of the Obama administration the US deficit increased by 9 trillion dollars, but give a tax cut and suddenly 'fiscal responsibility' is an issue. I don't quite get that argument.

Your being a bit hard Ralph - Obama was facing a GFC meltdown when he assumed office and the correct Keynesian approach was followed to avoid a global depression.

In fact the deficit as a % of GDP fell over the later years to quite low levels.

Bush started wars he did not fund and then introduced tax cuts - that's where the increased debt levels originated.

Perhaps JB, everything needs context. However, it was more a comment on Dudley than Obama. They are massively in debt out their eyeballs - why now?

I agree - include the US NPV of future pension liabilities, Military, Post office etc and the numbers are horrific !

Makes dear old NZ look a model of probity - exclude our not insignificant external liabilities but most in NZ $'s so we are in pretty good shape due to the structural reform of earlier years.

Fiscal responsibility Act
SOEs
Dividend Imputation
GST
Kiwisaver ( After a late start thanks to Muldoon )
ACC
Balanced budgets
Low unemployment
Low Crown debt and falling
Universal Health Care

Ours is not a perfect world - just better than all the rest - and we just mustn't stuff it up.

And now Trump is set to add another trillion plus over and above what the debt would've been by simply maintaining Obama's status quo. That's kinda the issue, eh.

You know what they say Rick, here a trillion - there a trillion. Pretty soon it adds up to real money!

Meh, we'll just print some more, eh :) We'll do it on the promise of future growth that's surely going to roll around sometime, somehow...even if all our companies are actually reporting most of their revenue elsewhere...

If all else fails and debts are called in, we just go to war.