Powell gives hawkish signals; investors of USTs worried; US sentiment high; US trade deficit rises, durable goods orders drop; Germans go anti-diesel; China home sales drop; UST 10yr at 2.92%; oil and gold lower; NZ$1 = 72.4 USc; TWI-5 = 73.7

Powell gives hawkish signals; investors of USTs worried; US sentiment high; US trade deficit rises, durable goods orders drop; Germans go anti-diesel; China home sales drop; UST 10yr at 2.92%; oil and gold lower; NZ$1 = 72.4 USc; TWI-5 = 73.7

Here's our summary of key events overnight that affect New Zealand, with news of what is starting to look like an unstable economic situation developing in the US.

First, new Fed chairman Jerome Powell has been testifying before Congress and his remarks have been taken as a relatively hawksih signal - that there are likely to be four US rate rises in 2018 as the US central bank tries to take the edge off overheating from the US corporate tax cuts.

He is not the only one worried about the policy track. Reports are that Japanese investors are selling USTs over worries that current policy will result in fx losses for them if they hold these bonds. The impact may become self-fulfilling.

And evidence of unrealistic optimism can be found in a widely-watched consumer sentiment survey out today. It is now at its highest level since November 2000. Pay may be rising quickly in many places, but investors worry that it is not being matched by productivity, and they know that is the only sustainable way higher pay can be held - unless inflation reignites. The signs are not good for US productivity, so that is why investors see - and fear - inflation. Bottom line; there is a move to sell out of US Treasuries which will raise yields.

The American trade balance worsened in December to an monthly rate of -US$74.4 bln and well above market expectations. That is only the 'goods' portion; they run a surplus in 'services' of about $21 bln per month.

The January data on durable goods orders are not too flash either, down -3.7% and far lower than the expected -2.0% decline. Unsurprisingly, inventories, both retail and wholesale, rose and by more than expected.

In Germany, a landmark court ruling gives cities the power to ban diesel cars. These have been shown to be a major cause of pollution. Some say it is a death warrant for diesel cars. (New Zealand is full of such older diesel-powered vehicles.)

And staying in Germany, the head of their central bank, and a persistent critic of the ECB, said that QE bond purchases could end this year if the economic upswing continues, another step on a long road to unwinding unconventional stimulus. He is seen as a possible successor to Mario Draghi whose term expires in 2019.

In China, home sales in 21 major cities surveyed fell -29% year-on-year in February as the Lunar New Year holiday threw cold water on property transactions across the country, state media reported.

In New York, the UST 10 yr yield is up +6 bps to 2.92% on the Powell testimony.

The gold price is down sharply by -US$16 to US$1,315/oz probably for the same reason.

Oil prices are a lower by about -US$1 today with the US benchmark now just over US$63/bbl and the Brent benchmark over US$66.50/bbl.

The Kiwi dollar will also start today about ½cent lower at 72.4 USc. On the cross rates we lower too at 92.8 AUc and at 59.2 euro cents. That puts the TWI-5 down at 73.7.

Bitcoin is now at US$10,610, up +4.2% from this time yesterday.

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15 Comments

It seems we have it all wrong with regard to productivity: wage rises lead to productivity improvements as they make automation worthwhile:

Recently, I’ve been reading Robert Allen’s 2009 book on the British industrial revolution, which tackles the perennial problem of economic history: why did the industrial revolution start here, on this rainy island? Historians and economists have run through all sorts of explanations, from political shifts (the end of serfdom, property rights, Parliamentary sovereignty) to cultural (Britain’s embedding of rationalist, scientific norms, the Protestant work ethic) to individualist (genius inventors).

Allen argues that while all of these might have been necessary, they are not sufficient to explain why it happened here. Other European countries were also going through cultural and political changes. The key question, he argues (convincingly in my view), is why it made sense for British businesses to invest in technological innovation, whereas there wasn’t the same incentive for French or Italian business owners to do the same.

And here’s a big part of the answer: in 1725, the average worker in London ate about twice as much meat as his counterpart in Florence. In other words, wages were high in London. Labour was so expensive that it made sense to invest in labour-saving devices. Hence, the spinning jenny, the steam engine and so on.

This inverts the usual argument. Typical debates on the industrial revolution often have things the other way around: agricultural innovation freed up labour from the countryside, whereupon people moved to towns and became available for factory work.

In fact, Allen suggests, this is entirely backwards. The demand for labour was so intense that people were lured from farms into towns and workshops and even then, the huge risk and cost of inventing new machinery was still worth it.

https://www.telegraph.co.uk/business/2018/02/26/first-great-economic-lea...

My personal view is that rising interest rates, rising wages, rising goods prices and falling asset prices (in real terms) go together and reinforce each other. It seems I should add rising productivity to the list.

The period we have been in saw the opposite - falling wages in real terms (leading to Trump), falling goods prices (eg smartphones), falling interest rates and rising asset prices (eg house prices). I think that period is over and we are starting to have an inflationary period like the 1960s and 1970s.

This story is just so very seventies:
Taiwan retailers have seen a rush on toilet paper over the weekend, as word spread of an imminent sharp price rise. Shoppers used social media to post pictures of empty shelves where the product would usually be.
http://www.bbc.com/news/business-43195467

Canada,Mexico,Australia,UK,,US,NZ all post either unexpectedly large trade deficits,or record or largest since whenever,for January.. Anyone expecting a lower NZD ?

Quote from the article:
I think this time your real estate will come back 20, 30, 40, 50 per cent.

Well, that covers a few bases.

Dent, who is currently touring the country to promote his new book Zero Hour, incorrectly predicted a 50 per cent wipe-out in Australian property prices in 2014, but believes this time it's the real deal.

Zachary, would you believe it if the article said they were eminently set to rise 20, 30, 40, 50 per cent?

Personally I know which way the odds are neatly stacked. I guess that's old news - right?

I just think it is a bit sensational, even false, to proclaim that Dent says Aussie house prices to tumble by half without mentioning that he thinks it might be 20% or 30% or 40%.

Lets hope it is false ;-) It's been one hell of a good run to get to where we are today. No doubt he makes a good living selling books.

Harry Dent is an appropriate sign of our times. He's a modern-day villain to the masses who clutch to the revolving cycles of manufactured booms. Therefore, in their continuous consumption of media, the masses are always given a little Dent, Shiller, or Faber (well not anymore) now and then. Essentially it's a never-ending barrage of emotional hooks.

The problem with Dent is that most don't actually understand his methods to forecast what's going to happen. They don't have methods -- and that includes the the armies of people who rely on property transactions as a means of survival, self esteem, and future prosperity.

So Dent tells us something about our society and current predicament: If falling house prices didn't matter to our financial well-being or emotional state, his POV would not packaged by the media.

DC, here's one out of left field: NZ has just lost a legal challenge to phosphate imports....

File under Farming Business Confidence.

Oh no, where will get the Cadmium to poison our soils with now?

I like this, but The Bureaucracy does not. They prefer to buy in the Cadmium laced stuff from people who it seems may have been stealing it all along:
http://www.rockphosphate.co.nz/

Don't worry, we have a grand plan to stock up on non recyclable lithium as an environmental replacement. As an added bonus because of the fire danger lithium can be thrown into landfill like regular toxins.

Tally ho!

I wonder which City in Germany will be the first to actually ban diesels .

Its quite impractical to do this if you look at it from a sensible rational viewpoint .

Petrol engines are way more 'dangerous' in terms of toxic emissions and use fuel less efficiently than diesels, hence the reason all big engines are diesel powered .

So how will the city's critical supply chain work if diesels are simply banned ?

Electric busses have not worked , so how will electric trucks ever work ?

its a case of TINA .........There Is No Alternative ...........to using big diesel engines in trucks

Carbon emissions up as diesel sales dive
http://www.bbc.com/news/business-43204734

Not quite true about electric truck impracticability: the issue is not the Motors but the Batteries. What widespread use of EV's needs is interchangeable packs, with a swap time approaching that of a conventional truckstop re-fuel. For a number of reasons - proprietary systems being the main one - universally swappable packs are a long way off. E.g. my neighbour's Nissan Leaf's battery is ID'ed to the car. On boot, the first thing the main unit does is verify that carID and Battery ID are simpatico. If no handshake, the car is a brick.

This sort of thing played out for decades with early electricity - AC or DC, AC frequency, AC voltage, power receptacles - and still is not quite universal.

Same with EV's. There's always an argument to be had that My System is technically better so I'm gonna Stick with it, Standards be damned.

Call it human nature.....

Even allowing for the lunar new year's distortions, Chinese PMI data is a disaster,

https://www.zerohedge.com/news/2018-02-27/japanese-chinese-data-disaster...