Here's our summary of key events overnight that affect New Zealand, with news of floods - of Chinese travelers, and US debt.
First up, however, the US Fed is about to report on its first meeting of 2018 and the last one chaired by Janet Yellen. After this it is to be chaired by Trump appointee Jerome Powell who is regarded as a bit of a rate hawk. We will update the results when they are available after 8am NZT. Markets are expecting the next +25 bps rate hike at their March 22 meeting.
This weekend we will get the next US non-farm payrolls report. And today we got the pre-cursor ADP report which was strongly positive, handily beating market expectations. It showed employment gains in the service sector as particularly strong.
Right on expectations was the December home sales report. Volumes were +0.5% higher than in the same month a year ago. But most of this growth is coming from Southern states; other regions saw volumes declines. Prices are up +5.8%. The latest tax code revision has lowered individual tax incentives for housing.
North of the border, Canada reported stronger economic growth in November. GDP there is up +3.5% and above market forecasts. It is across most of their economy's sectors. A curious pattern is developing where the US's main trading partners are reporting stronger growth than for America which is turning out to be the laggard.
In China, they reported that the expansion of their manufacturing PMI grew less vigorously in January than December. It isn't expanding at a particularly impressive rate anyway so a slowdown will worry them.
But their consumers are in an expansive mood. In a hard-to-believe but eye-catching report, it is claimed that 92% of "Chinese consumers" plan to travel overseas in 2018. That is 154 miln Chinese international travelers, up from 122 mln last year. A real flood is coming to many parts of the world.
In Germany, they will be worried about an unexpected stumble in their retail sales. They were expecting slower growth, but in fact they got a year-on-year decline in December. To be fair, it is data that can be reasonably volatile, but the size of the reported 'real' drop in sales is a concern.
Meanwhile, EU inflation came in slightly higher than expected at +1.3% in January. It might have been higher than expected but it is still at its lowest level in 13 months. Core inflation however did pick up.
Back in the US, the Federal Treasury is hiking the amount of new debt it needs to raise. Basically, that is because it needs to pay for its stimulatory tax cuts. And the new extra debt is not insignificant. Expect a blowout in their overall Federal debt levels. It is only a matter of time before markets see American fiscal policy as irresponsible and that realisation will buffet financial markets for some time. Buyers of that debt will demand higher risk premiums. And don't forget we are just two weeks away from the next budget resolution in Congress (yes, a Budget resolution for October 2017). Given the hardened partisan positions in yesterday's State of the Union speech, it seems they are in for a rocky period again.
Meanwhile, the rest of the world is trucking on. In fact global trade is in a real purple patch with airfreight volumes up +9% in 2017, the highest level ever and the highest growth rate in seven years.
The UST 10yr yield is still firming and is now at 2.74%, a gain of +1 bp in the last 24 hours. The equivalent 10yr China sovereign bond is down however, just a little at 3.94% (-1 bp). The equivalent NZ 10yr sovereign bond is down -3 bps to 2.93%.
Oil prices are down marginally today and still just under US$64.50 a barrel, while the Brent benchmark is now under US$69.
Gold is unchanged and still at US$1,340/oz.
The Kiwi dollar starts today higher however at 73.7 USc. On the cross rates there are also small rises and we are now at 91.4 AUc, and against the euro at 59.4 euro cents. That puts the TWI-5 just on 74.4.
Bitcoin is now just under US$10,000 and unchanged this time yesterday. It is having a hard time deciding which way to go now. South Korea has decided not to ban the trade, but it has uncovered large fraud on some exchanges.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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Back in the US, the Federal Treasury is hiking the amount of new debt it needs to raise. Basically, that is because it needs to pay for its stimulatory tax cuts. And the new extra debt is not insignificant.
Indeed.
The view that the repatriation of U.S. corporations’ offshore cash balances will
lead to a stronger U.S. dollar and tighter money markets is wrong, in our
opinion. It is wrong because offshore cash balances are in U.S. dollars already
and are invested mostly in one to five-year U.S. Treasuries and term debt
issued by banks.
The move from a global to a territorial tax system marks an inflection point in
fixed income markets. The territorial system marks the end of corporations’
decades-long habit of putting surplus cash accumulating offshore into bonds.
As the corporate bid for U.S. Treasuries and bank debt disappears, yields,
Swaps spreads and banks’ term funding costs could see upward pressure.
In a year where Treasury supply will increase significantly, that’s bad enough.
But things can get worse: corporate treasurers add to that supply by selling their
Roughly $300 billion hoard of U.S. Treasury notes, rates could move big. In fact,
we believe this corporate “echo-taper” could be worse than the Fed’s taper... Read more
Corporate evidence associated with claims made in the above linked article:
Dow leader Boeing jumped 5%, set for a new all time high with a market cap north of $200 billion, after reporting earnings that blew away expectations, bolstered by surging deliveries of the 737, the planemaker’s biggest profit-center, and an unexpectedly large one-time gain from U.S. tax cuts.
The company reported adjusted Q4 earnings of $4.80 a share, or $3.06 a share excluding the tax gain; both numbers were comfortably above the $2.90 consensus estimate. Revenue for the aircraft maker rose 8.9% to $25.4 billion, also beating the $24.7 billion analyst estimate. The company announced a $1.74 per share benefit in Q4 from the lower corporate levy and said it expects more benefits to come this year. In more good news, the tax reduction is taking effect just as the company starts to see large, taxable cash gains from its 787 Dreamliner after a decade of losses
The company's forecast was just as impressive:
- Sees FY core EPS $13.80 to $14.00, estimate $13.38 (range $12.93 to $14.81) (Bloomberg data)
- Sees FY revenue $96.0 billion to $98.0 billion, estimate $93.58 billion (range $90.23 billion to $95.52 billion) (BD)
- Sees FY operating cash flow about $15.0 billion
But perhaps most importantly, in Q4 Boeing generated record operating cash flow of $13.3 billion; and repurchased 46.1 million shares for $9.2 billion Read more
Just a shout out, noting your contribution Stephen.
I enjoy reading & clicking through your links, though as I'm not in the market the terminology does sometimes wash over me (I do vaguely remember the greeks though from Finance at Uni when referenced in the last few days).It prompts me to look at some trading options, which I'm sure you are also doing.
Thanks Again
stephen... check out this interesting comparison between now and 2000.
Graph of yield spread between 2 and 10 yr treasuries is similar.
https://www.economicperspectives.co.uk/the-us-investment-clock--does-an…
Looking very cool in your summery shirt there , David !
... it's 34 'c here in Canterbury ... the Nor Wester is barreling through at 100 kph ...
Down in Dunedin they've had the mother of all tropical torrential downpours over night ...
... and up in Wellington there's a political blue-blood moon as the journalists attempt to stir up a revolt over the Gnats leader Wild Bill English ...
... geez it's great to be in Kiwi Land at this time ... so much fun !
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