US inflation stirs on strong retail; China's trade surplus slips; NZ exports too much cheese; India bars PwC; Merkel nears deal; key US and China rates jump; oil slips and gold up; NZ$1 = 72.5 USc; TWI-5 = 74.2

Here's our summary of key events overnight that affect New Zealand, with news some key benchmark interest rates are on the move higher.

Firstly in the US, a rise in consumer prices in December and solid growth in retail sales which were up +5.4% in a year bolstered expectations that inflation is firming after a long run of softness. The CPI increases were their largest increase in 11 months on strong gains in the cost of rental accommodation and healthcare. Analysts suggested this is the start of an accelerated inflation track.

China’s exports and imports both increased for the first time in three years in 2017, but trade tensions with the US and cooling domestic demand are clouding prospects this year. Their trade surplus shrank -14.2% in 2017 following a -9.1% reduction in 2016. China's exports increased +7.9%, the fastest growth since 2011, but imports surged +15.9%, also the strongest rise since 2011. But China reported its largest-ever annual trade surplus with the US which is sure to raise tensions, especially as it is a stronger American economy that is partly driving the changes.

And China also noted that New Zealand has exceeded its cheese shipments to the country more than what is provided for in our free trade deal. So MFN duties are now applying.

In India, PwC has been debarred from auditing any listed company following its failure to detect fraud at one of them in 2009. The move may result in major losses for the firm in the country.

Commodity demand is in the ascendancy these days with prices rising across the board especially for 'hards'. Of special note are the rising prices for aluminium and zinc.

In Germany, Angela Merkel looks like she has the basis of a deal with a left-leaning party to form a grand coalition government. Remember, Germany had an MMP election on the same weekend we did; coalition negotiations there have taken much longer.

The UST 10yr yield is unchanged at 2.56% today. However, the UST 2yr yield jumped above 2%, a key psychological level last seen almost ten years ago. And in China, the equivalent 10yr sovereign bond has jumped to 4.03% (+7 bp) its highest since September 2014, while the equivalent NZ 10yr sovereign bond is unchanged at 2.87%.

Oil prices slipped a little today with the WTI benchmark now just over US$64 a barrel, while the Brent benchmark is just over US$69.50. But essentially they are holding at a very high level.

Gold however is up strongly, up +US$13 to US$1,330/oz.

The Kiwi dollar is unchanged 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 59.6 euro cents. That puts the TWI-5 at 74.2.

Bitcoin has slipped again over the past 24 hours, by -US$150 this time to US$13,542, a -1% decline. That is the smallest daily move we have seen in a while.

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

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End of day NY time
Source: CoinDesk

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The higher short term rates go, the greater the chance many skeletons will eject from the closet and possibly all at once! Interest rates cannot rise much this time around.

Solutions to the next crisis?

Devalue the nzd and increase wages significantly

and interest rates

Devaluing the NZ$ will eat any wage rises alive! As an importer of much of what we need to live; oil products of all kinds etc. a lower NZ$ is the last thing we need. Interest rates? Put them up of course! That will bolster the NZ$ and take the pressure of imported prices....a lower NZ$ may assist our exporters, but that's only a few of us. The rest....would suffer from a lower NZ$.

Surely we must first export goods and services in order to have cash for imports rather than our stupid policy of borrowing to pay for them. Perhaps we need to find ways to exist on less imports. How many of the things we import are really necessary. A good start is not to import junk products that soon end up in landfills.

Lots of industries benefit from lower NZD. Lower NZD attracts more tourism. NZ film and media industry also employs a lot of NZ staff, using NZ resources so this would be benefit from lower NZD. NZ media and film is highly exportable. Lower NZD might incentivise Kiwis to create,innovate and produce more and in turn shop locally, rather than import.

"Lower NZD might incentivise Kiwis to create,innovate and produce more and in turn shop locally, rather than import." Yes Gingerninja, that is the sort of change I would like to see, after all necessity is supposedly the mother of invention. And probably with more equality in our society we would import less over the top luxuries.

I suggest that one thing is sure to happen in the event of another crisis is a race to devalue currencies on a global scale, more QE and negative interest rates. A full on race to the bottom involving beggar-thy-neighbour policy responses to combat the flow-on effects of massive deleveraging. I think Trump's America First policy is a taste of how inwardly focussed policies could become the new normal. How NZ responds to this as it navigates its way to recovery - only future will tell.

I wonder how ineffective QE will be when each downturn of recent decades has involved more aggressive stimulatory measures that just set the stage for the next crisis.

Will it soon be the time to pay the piper once and for all?

The last talk in this TED podcast is about reducing poverty. Its quite fascinating and something property speculators should listen to.

Poppy you do know devaluation impacts on import payments ?

we have borrowed a lot from the future, lets hope the gamble pays off.

A Devalued Currency is evidence of a poor economy. Strong economies have a strong currency. For those who want to devalue our way to prosperity (all the tired old examples of the film industry; tourism; export growth - whatever), none of it matters if the fundamentals of an economy are - weak. And New Zealand's now is. It didn't have to be this way, and it wasn't, but what we have now is a speculative, debt-soaked nation, reliant upon foreigners to keep us alive - one way or another, and devaluing our way out of our current hole is no long-term answer. In fact, it is digging ourselves in deeper. Remember that when you go the petrol station and buy your $5 per litre revalued, imported fuel...and take comfort in the fact that at least we made some good movies!
(PS: It used to, and should, work like this:
Strong economy = HIGH exchange rate + LOW interest rates. Weak economy = LOW exchange rate and HIGH-interest rates.
That we now all want a low exchange rate + low interest rates is symptomatic of the economic lunacy that has swept the planet)

Right on. But debt changes everything. Whether its govt debt or private debt.
Take one example. Ak council debt. Its taken on on the assumption (you know the logic) that the debt "is to spread out the cost of the infrastructure so that current ratepayers are not lumbered with the full cost". The problem therein (for this ideology wherein the debt is never actually paid off), is that interest rates may not remain low. So the economics of the projects may end up to be incredibly, completely and utterly negative.
On a personal level, most prudent people budget within their means and this idea of interest only mortgages is an abhorrent recent aberration. That is one reason why the council is such a despised organisation.

I wasn't suggesting a devalued currency, just saying that many industries benefit from a lower NZD. And it's not about making good movies, it's about what those good movies contribute to jobs, GDP and NZ's standing globally. There is a probably an optimum balance for NZD dependent on what NZ is producing, creating and affecting GDP at different times. Economies and industries change and develop after all.
There are of course times when NZD has been devalued and that has been related to recession but equally, NZD has been believed to have been damagingly overvalued for example, and highly traded for carry trade etc.
And besides which, hopefully we'll be all less dependent on oil in the future. I don't think it's as simple as you are suggesting it is.

I have already admitted that in matters of our economy I am a dunce. This has changed my above opinion that was based on my ignorance.

Solutions to the next crisis?

Lower interest rates

Whenever analyzing monetary factors through inflation, we begin with a basic problem. Economists of generations following the Great Depression have an intense fear of deflation that didn’t uniformly exist before it. The Great Collapse starting in 1929 was a shock, to be sure, but not all deflation is monetary in origin.

In fact, the successful practice of capitalism should always lead in the direction of lower consumer prices. That’s the beauty of it, where via the right combination (the invisible hand) of labor and capital (machines or intellectual property, not cash) we consumers are able to buy more for less. It’s exactly why the CPI sub-index for Wireless Telephone Services debuted for December 1997 at 100 and is now about 48 – approximately twice as much service for the same price.

The CPI for December 2017 rose by just 2.11% year-over-year, a little more than two-thirds of what it is supposed to be (remember, the PCE Deflator is targeted for 2%, and CPI methodology is different where it has a higher overall beta). And the only part really keeping it near 2% is the energy sector and the boost from marginally higher WTI. Read more

The T2s vT10s spread settled at 55 bps.

Love the “special” font so different from rank & file
Almost anoint worthy aren’t you Stephane

I know there have been instances of crying wolf re inflation and interest rates but if inflation returns things are going to get bad quick for some investors.

Over the last few months serious moves in the US 2yr – 10yr not buying it though.
However I disagree – too little too late (once again) by the authorities me thinks – a head of steam that now simply cannot be persuaded otherwise – it’s all good apparently!
Will be interested to see how this plays out – but I do struggle to see how a relatively moderate rise over such historically low interest rates should make that much difference to the way of the world – i.e. bring the whole show to a crashing and calamitous end – really, are we that indebted, that leveraged - it’s that finely balanced, surely not – if that is indeed the case then “what on earth”?
I still think there is a meaningful correction to come though – but not as the result of some sort of subtle revision of risk.
The world has become a rather unstable and inwardly focused place – and thus I think a breeding ground of swans, darker hues and all.