Eyes on US inflation; Fed stays with hike plan; claim the VIX is fixed; US household debt rises modestly; airline profits boom; RBA says wages stable for a while yet; UST 10yr at 2.85%; oil down and gold up; NZ$1 = 72.9 USc; TWI-5 = 73.9

Here's our summary of key events overnight that affect New Zealand, with news all eyes are now focusing on tomorrow's US inflation report.

Today, Wall Street's main indexes are lower for the first time in three sessions as caution builds in ahead of that crucial data on inflation tomorrow, a root cause of the recent sell-off. The expectation benchmark is +1.9% pa and variations will likely set market directions for a while. Meanwhile, the US dollar is falling against its main trading partners.

Despite the recent bumpy ride, the new boss of the US Federal Reserve said today that the track of gradual rate rises will go ahead as he seeks to push to 'normalizing''.

It has been alleged in a claim to both the SEC and CFTC that the widely quoted VIX volatility index is being manipulated. The host CBOE refutes the claim saying it can't happen.

American household debt in the year to December 2017 rose +4.5% to reach US$13.2 tln. The mortgage component, which makes up 68% of this debt, rose +4.5%, car loans rose +5.5% although they only make up 9% of the total. And credit card debt rose +7.1%, making up 6% of the total debt. Student loans account for 11% of household debt and they rose +5.2% in the year. On a population and inflation adjusted basis, this household debt is up +1.7% real. US GDP grew +2.3% in the same period.

Booming airfreight and passenger levels are translating into improving profitability at airlines, a sector that has long struggled on that front. But it is also drawing higher pay claims from staff. Embedded costs are rising and that will make for a brittle future when the inevitable downturn comes.

In Australia however, their central bank says it may be a while before their improving economy delivers meaningful wage rises.

In New York, the UST 10yr yield has paused and is now at 2.85%, awaiting that US CPI data.

Measures of market volatility have settled back further today.

Gold is continuing to move higher. This morning it is at US$1,327, up another +US$3.

Oil prices are down with the US benchmark now just over US$59/bbl and the Brent benchmark over US$62.50/bbl. American shale production is growing faster in 2018 than it did even during the boom years of $100 a barrel oil prices from 2011 to 2014, according to the IEA.

This morning, the Kiwi dollar opens up nearly ½c at 72.9 USc. On the cross rates we at 92.8 AUc and 59 euro cents. That leaves the TWI-5 at just on 73.9 and still within its 2018 narrow range.

Bitcoin is at US$8,630,US$8,760, a -1.5 fall from this time yesterday.

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

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11 Comments

Mycoplasma bovis suddenly becomes a very big deal, %30 loss of livestock! Out of 1400 calves he lost 300 plus %10 of his older cattle.

http://www.nzherald.co.nz/the-country/news/article.cfm?c_id=16&objectid=...

I will put this simply for people. We have 6 million cattle in the country, if %10 of our older animals die we lose 600,000 cattle worth up to 2k each Then we have millions of calves, if we lose %23 of those then we are looking at a million dead calves.
Think of the production loss.

This could change the face of cattle farming and dairy in NZ, it's huge, it's our own foot and mouth type nightmare.

MPI have done a huge fail. Who knows how it got here talking to people most likely is second hand machinery imports. NAIT is useless and most farmers know it. We had the disease and yet no movement control, we know this because of this accident, after the outbreak.

http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11897663

Sounds like a Varoa Mite replay.

Varoa was small fry, you think about the scale of the production loss to rural NZ. Someone in Parliament should be panicking, if only they new what was going on.

All will be well, we are going to take our dairying skills to Russia and teach those pesky russians a thing or two about biosecurity.
..sarc

Factor in exponential cattle population growth too, Andrew...
A mortality rate of 23% today means an overall loss rate of >23% next year.
Mr farmer budgeting (accepted, not their strong suit) on future offspring is going to be hit hard.

It may also be worth challenging the assumption that customers here and elsewhere will be willing to continue buying and eating meat from cattle possibly infected with mycoplasma bovis. The implications of this outbreak have a great distance yet to run.

Funny how excitable and easily deceived those Americans are. Interest rates are rising and you get inflation! Who would have thought? "No one saw that coming" they cry.

I revisited Fekete yesterday, a chap I have previously found somewhat hard to follow, although I love his approach and his great respect for Double Entry Bookeeping. He says that rising interest rates actually cause inflation in goods and deflation in asset prices. Let me repeat that. Interest rates rises cause inflation in goods prices.

If I am a manufacturer and the price of my raw materials goes up, I am forced to put up prices. If I don't then before long I will go bust. If I am a manufacturer I have a lot of money tied up in stock. If the cost of holding that stock goes up it is exactly the same and I must put up my prices or before long I will go bust.

It is counterintuitive on the face of it, but Fekete is right. Another way to look at it is the price of money. If there is a surplus then the price goes down. This isn't actually that contentious. https://www.investopedia.com/ask/answers/040715/how-does-money-supply-af...

So I have been warning here that rising interest rates will contract the money supply. A shortage means less ability to buy inflated assets. But the system doesn't like going backwards.

VIX cannot be manipulated

The VIX indicator has been around for a long time. What hasn't been around for a long time are High Frequency Trading Systems and Algorithmic Trading Systems. The Dow Jones Index can now be moved 1000 pts up and down in a mere minutes

It can be ambushed

If you think we have got problems - spend a couple of hours listening to Kotlikoff as I did yesterday.

Pretty gloomy on the US and other major economies futures. Debt Debt and more debt into the never never.

Compound interest working it's magic coupled with 1 Trillion $ deficits.