Here's our summary of key events over the weekend that affect New Zealand, with news markets are pricing an expanding economy differently now.
Firstly, the equity market rout may not be over. The S&P500 was down another -1.5% on Saturday and taking the drop in the past week to a massive -8.1%. But then things changed with Wall Street ending up on the day. It is a calm that may last until Thursday when the US reports its January CPI data. A high figure could reignite the sell-off that started a week ago. Markets are expecting +1.9%, or +1.7% excluding food and energy.
All this comes after Shanghai dropped -4% on Friday for a -10.2% collapse over the week. The NZX50 got off lightly with a weekly drop of -2.3% with the local FBU issues a good part of that. Openings today may be tame compared with the volatility we saw last week. And the IMF sees last week's market corrections as 'necessary'.
A US Government shutdown has been averted with a new two year deal that will keep the Federal Government funded. But the compromises involved are toxic. As signed into law by Trump, the huge corporate tax cuts and large defense and social spending increases will be paid for by massive debt increases that amount to an extra +US$800 bln in 2018 and yet another +US$1.2 tln in 2019. That will take the public-debt-to-GDP ratio from about -77% now on track for -109% in ten years. From here on out they look to have locked in extra debt at the rate of more than $1 tln/year (an extra -5.5% of GDP per year).
Watch out this week for the US Administration's 2018 Budget. It is expected to assume high, sustained levels of growth and low, sustained costs of debt. Markets may not look kindly on its assumptions.
US wholesale trade data out on Saturday was surprisingly strong for December. While growth (+1.2%) wasn't as high as in November (+1.9%), it handily beat estimates. Inventory-to-sales ratios fell again, a healthy sign.
We should also note that 2018 has started out with record orders for heavy trucks in the US. In January, trucking companies ordered the most new big rigs in nearly 12 years, as they rushed to take advantage of one of the hottest freight markets in recent memory.
North of the border, Canada has reported disappointing employment numbers. The number of jobs actually fell which has surprised observers who expected a small rise (it was driven by a very large fall in part-time work, greatly offsetting a good rise in full-time work), and their unemployment rate rose to 5.9% which was also unexpected.
China reported lower consumer inflation in January, at 1.5% as analysts expected. Industrial inflation slipped to a 14 month low of 4.3%.
It's finally happened for HNA - they have got their Chinese Government bailout. SOE Citic Bank has 'loaned' them US$3.2 bln to pay off debts from other lenders. No word yet on shareholding or control changes, but in the usual Chinese (crony capitalist) way, there are unlikely to be any.
Chinese New Year will start at the end of this week. As in the past, this year will bring their holiday migration of gigantic proportions. What will feature more prominently will be overseas travel, and more travelers will be going independently, rather than in groups.
The UST 10yr yield moved around a lot over the weekend but ended the week on Wall Street at 2.86%, up just +1 bp from this time from when we last checked.
The volatility index, the VIX, ended at 29, although on Saturday it spiked as high as 41. The 2018 average until last week was just 11.5.
Gold continues to be sidelined. This morning it is at US$1,316, down -US$2 from Friday.
Oil prices are down sharply again today from Friday with the US benchmark now over US$59/bbl and the Brent benchmark over US$62.50/bbl. However, these levels are marginally higher than those we reported on Saturday.
This morning, the Kiwi dollar opens at 72.3 USc. On the cross rates we at 92.7 AUc and 59.2 euro cents. That leaves the TWI-5 at just on 74 and plum in the middle of its 2018 narrow range.
Bitcoin is at US$8,327 a +US$180 rise from this time Friday.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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16 Comments
Fonterra invests in Russia, sees no opportunity in NZ?
http://www.nzherald.co.nz/the-country/news/article.cfm?c_id=16&objectid…
That would be nice... Much better than doing the dumbest thing they could ever do....which they have done..
Fonterra seems to like investing in Countries that do not have a strong regard for property rights nor a solid judicial/legal system.. nor strong regulatory systems that can be trusted to make players, play by the rules...
Buffetts first rule of investment.... " Never lose Money"...
Go for it Fonterra..!!
Jaw-dropping examples of unequivocal central bank nonsense.
‘Surely we can do better than 4.7%’
Of Rules And Slack, And The Real Rule of Slack
Fed's Kaplan Makes A Stark Admission: Equilibrium Rate May Be As Low As 0.25%
Forget Rate Hikes, It’s Really The ‘Neutral’ Interest Rate Now
Thanks for the links, excellent as always.
I came upon a couple of articles (one of which I can't find...) recently that suggested that the dreaded Velocity may be increasing. The logic being that as interest rates rise so too does bank underlying profitability and thus their ability to lend.
https://www.zerohedge.com/news/2018-02-08/inflation-alert-velocity-mone…
It seems to me that sudden inflation that "no one saw coming" is a real possibility, 1960s style, as the Global Bankers Ramp moves into the next stage. It just needs a few kinks in the supply chain, eg a ship ripping up an oil pipeline or an explosion in a big refinery, or just a civil war in DRC, you know, the normal sort of stuff.
The money supply is the ultimate measure of inflation. Velocity does drop as credit expands and interest rates drop, so it will return if the reverse happens. But everything gets reversed, including the inflated asset prices the excess credit created. This can be seen as debt concellation, and since debt is an asset in this perverse system then it is also wealth destruction to cancel it.
It was useful that you made me think about this :-)
This implies that the unprecedented monetary base increase driven by the Fed’s large money injections through its large-scale asset purchase programs has failed to cause at least a one-for-one proportional increase in nominal GDP. Thus, it is precisely the sharp decline in velocity that has offset the sharp increase in money supply, leading to the almost no change in nominal GDP (either P or Q)."
US banks failed to mobilise the QE reserves via the money multiplier reserve ratio, set at 10%. Currently, banks are meeting their LCR demands with free reserves and are paid IOER from the Fed's Treasury coupon income.
Your kind words are appreciated.
Velocity is measured in relation to the total money supply. If you print, but lock that money up in inflating assets prices, then of course the velocity will drop. To a degree this masks the effect of inflation asset prices on the P.Q side of the equation, and is what I predicted. What would be interesting is to see velocity measured by subtracting GDP from M3 money.
Yes, but wasn't QE just taking the bank reserves from a savings account to a current account? That is, before QE the bank reserves were in, say 10 year Treasuries yielding 3%, after QE they were in overnight deposit yielding zero. So, a sort of base of profitability was taken away; that and More Regulation curtailed the banking systems' ability and desire to lend to all and sundry.
What just changed?
https://www.oftwominds.com/blogfeb18/what-changed2-18.html
Everyone just needs to get into New Zealand housing since that is risk free.
Funny thing with this risk, which is related to the perceived fear of loss. A lot of money has been made for nothing, or compound unearned interest, but in peoples minds the risk still applies, or doesn't apply as the case may be.
CHINESE buyers will this week descend on Melbourne for a property frenzy with the city’s outer suburbs and university precincts in their sights.
Chinese Lunar New Year is driving the influx with up to 125,000 Chinese nationals Melbourne-bound to celebrate the Golden Week holiday.
http://www.news.com.au/finance/real-estate/melbourne-vic/chinese-buyers…
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