US inflation rises; markets calm; US debt a national security risk; Japan grows modestly; India hit with bank fraud; EU growth accelerates; APRA tightens capital rules; UST 10yr at 2.91%; oil and gold up; NZ$1 = 73.3 USc; TWI-5 = 74.3

Here's our summary of key events overnight that affect New Zealand, with news of growth and calmer markets.

Firstly in the US, data out overnight shows inflation rose faster than expected in January, stoking expectations that interest rates rises will accelerate this year. The CPI rose +2.1% versus expectations of a +1.9% rise. The rises are widespread, other than for food and cars. Earlier this month jobs data accelerating US wage growth. And that triggered the equity and bond market volatility of the past ten days. After today's data release, the US dollar fell and benchmark bond yields rose. But the equity markets have taken the news more calmly. In fact, the S&P500 is now up +1% in mid-day trade.

Markets are accepting that the Fed will push ahead with its rate hike 'normalisation', that bond prices will fall, and that life will go on.

And this is despite somewhat disappointing retail sales numbers for January.

In Washington, a top intelligence agency boss has told lawmakers that the US Government debt levels are a major security risk, one able to be exploited by rivals. But few lawmakers or Administration officials are listening.

Japan is also reporting good, if modest, economic growth. That run now extends to eight straight quarters, the longest streak since its heyday in the late 1980s. Growth was +1.7% in all of 2017. Analysts generally expect the modest expansion to continue this year.

In China, Standard & Poor's has lowered its credit assessment of HNA to CCC from B, the second downgrade in three months, saying it now needs official support to survive its unbalance liquidity position. The company is furious with the downgrade.

In India, fraud at a major regional bank is causing jitters in their banking system. The scandal at the state-owned bank risks drying up the very loans that are needed for the country’s small- and medium-size businesses to help steer the National government’s ambitious growth programs.

Meanwhile the EU grew at its fastest rate in a decade, data out overnight confirms. This growth was broadly based across most countries, led by Germany, France and Spain. But eastern Europe countries also caught up a little faster. Only the UK posted an annual growth rate below 2%.

In Australia, regulator APRA has signaled that banks will have to hold more capital against higher-risk property loans. This is a position that will be much tougher for smaller banks to accept than any of the majors.

In New York, the UST 10yr yield has resumed it rising trend and is now over 2.91%, following that US CPI data and that is its highest level since January 2014.

Measures of market volatility have settled back further today.

The gold price has jumped +US$23 today. This morning it is at US$1,350.

Oil prices are up marginally with the US benchmark now just under US$59.50/bbl and the Brent benchmark over US$63/bbl.

This morning, the Kiwi dollar is up nearly ½c again at 73.3 USc. On the cross rates we higher too at 93.1 AUc and 59.2 euro cents. That puts the TWI-5 at just up to 74.3 but still within its 2018 range.

Bitcoin is at US$9,273, a sharp +7.5% rise from this time yesterday and the first time it has been over US$9,000 in eleven days.

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5 Comments

Continuing USD weakness is interesting given the US interest rate environment is changing. Equities are going to look more and more expensive if rates are headed up.

Yesterday on RNZ National

Professor Laurence Kotlikoff: The US is broke, ready for new world order?
http://www.radionz.co.nz/national/programmes/ninetonoon/audio/2018632011...

He's described the US as broke and is predicting its economy to go the way of the British Empire. Kathryn Ryan talks to the outspoken American economist Professor Laurence Kotlikoff https://www.kotlikoff.net/ about why he thinks that the biggest world hitters by the end of the century will be sub-Saharan Africa, then India, then the Middle East, followed by China.

He is a long-time bear. See this interest.co.nz 2012 interview with our own bear.

The issue I have with the "sub-Saharan Africa, then India, then the Middle East, followed by China" idea is you need to accept a) climate change won't have any impact and growth trajectories will mimic the ones in the past, and b) age demographics are everything.

I doubt both. On demographics, age profiles are really important, but on that basis the US will still be a heavy hitter by 2100, and way more so than China.

In my view, you may be able to modify the demographic effects with technology (and Japan is the poster child here), but public policy can never beat the effects of a warming climate once it gets to a certain level. Tech may dekiver some mitigation for a short time for some people, but in the end the costs will overwhelm it. Temperate latitudes will always win in the long term.

Who was the interviewer on that vid David?

To begin with, real wages declined -0.3% for ordinary workers, and they are now down -0.8% from their July peak:
https://seekingalpha.com/article/4146953-bad-real-wages-declined-january...