Bond markets skittish; investors expect more US Fed rises; IMF and World Bank warn; China yields tumble, curve narrows; UST 10yr at 2.92%; oil unchanged and gold down; NZ$1 = 72.7 USc; TWI-5 = 73.9

Here's our summary of key events overnight that affect New Zealand, with news investors are watching bond markets.

And the bond markets are wondering what the narrowing of the yield curves signal. Typically, a yield curve flattening is a prelude to an inversion which has been a reliable signal that a growth phase is about to end and a period of retrenchment and recession is imminent. The last time there was a rate inversion (that is, long term rates lower than short term rates) was in 2005 and that lasted to 2007 before the 'prediction' became true in 2008/9. But there was a noticeable lag.

Today, that yield curve is shrinking but is not yet inverted. The Fed's push to raise benchmark rates to 'normal' is gathering steam and markets are accepting there will be at least two more rises in 2018, possibly three, and now some are talking of four. That is putting strong upward pressure on the short end. The long end is also rising, but not as fast, so the difference is narrowing.

The economic growth phase in the world economy has now extended to approach ten years and it is unusual growth can be maintained longer without a sharp and often painful correction. The fact that the US authorities are squandering their recession-fighting firepower is of special concern, so investors worry that the next downturn will have extra bite.

In China other factors are at play including the effects of the trade tussle with the US. But their yield curve is falling fast. The authorities there have capricious powers to shift market signals, but this is one they will find hard to manoeuvre over the long term.

The World Bank and the IMF are having their annual meetings at present and they are both singing warning songs; songs that seem out of tune with the real global economy. Their own forecasts show growth next year will expand.

But they know the tide will turn at some point and that time is closer than markets think, they argue.

A sudden rise in commodity prices recently is unlikely to be sustained and can itself signal a sharp reversal.

Rising debt levels, both household and Government, are also behind their concerns. Without monetary and fiscal tools available, the official responses to the next downturn will be weak.

New Zealand is in a particularly good position however. We do have plenty of fiscal headroom. And household debt is overstated by including some substantial business debt (mainly for residential landlording businesses) so the real load is lower here (136%) than comparable other countries (Australia = 200%). And we have some monetary policy headroom. But given our exposure to trade, that headroom won't actually last very long if the US, China, and Europe sneeze.

We need grownups operating the world's largest economies and sadly that is lacking. Other than us, no-one is repairing the roof while the sun is shining.

At least in Australia they are tackling the corrosive issues in their financial services industry. That patch will have important implications here.

The UST 10yr yield is still rising and now at 2.92% (+5 bps). The US 2-10 rate curve is holding today. The Chinese 10yr is still sinking fast and now at 3.53% (-8 bps) while the New Zealand equivalent is at 2.87% (up +3 bps). The sinking yield in China is now catching up with them; their 2-10 curve has shrunk markedly today.

Gold is at US$1,345/oz in New York, and down -US$6.

Oil prices are basically unchanged overnight and now still just over US$68/bbl and the Brent benchmark just over US$73.50/bbl. 

The Kiwi dollar has retreated further and this morning is at 72.7 USc. That is down 100 bps in a week. On the cross rates we are at 94 AUc and 58.9 euro cents. That puts the TWI-5 at 73.9 its lowest in three weeks.

Bitcoin is now at US$8,267 which is a +1.8% rise from this time yesterday.

This chart is animated here. For previous users, the animation process has been updated and works better now.

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