US inflation up, real wages down; US Federal deficit swells; Canada jobs grow; Turkey and Argentina at the brink; Wall Street recoils; UST 10yr 2.87%; NZ swaps dive; oil up and gold down; NZ$1 = 65.8 USc; TWI-5 = 69.8

Here's our summary of key events overnight that affect New Zealand, with news markets are recoiling as public policy mistakes compound business cycle pressures.

US inflation rose +2.9% in the year to July. This is the largest annual increase since September 2008. Even though the US Fed prefers the PCE inflation measure, today's CPI data is sure to follow showing US inflation is rising quite quickly now. Even without food and energy, US inflation is up +2.4%. The bottom line: investors see two things ahead: The US Fed will likely raise rates sooner and perhaps more aggressively. That has resulted in a leap in the value of the US dollar. But they also see stagflation - inflation without growth, and something we haven't had since the 1970s. Bond investors are rushing to 'safety', bidding down yields of US Treasuries.

On the American payroll front from there is good news, and bad. The good news: pay is up +2.7% in the past year. The bad news: their cost of living is up even more, +2.9%. This means, that American workers' take-home pay buys less than it did a year ago. The cost of petrol actually rose an eye-popping +25.4% in the past year. Fuel oil rose more than a third. These are serious jumps and will impact how households allocate their spending. More worries for investors.

Another worry; the US Federal deficit came in slightly worse than analysts expected. The July deficit was -US$76.9 bln, making the full deficit for the past twelve months an eye-popping -US$784 bln. In fiscal 2017 the deficit was -US$665.8, so this current year is running -18% worse and will reach -3.9% of GDP. That will make it the highest ever for a non-recessionary period.

North of the border, Canada reported strong employment growth in July (+54,100) and well above analyst forecasts. Their jobless rate dipped as well. Pay rose +3.0%, a little less than in June, but well above their inflation rate of +2.5%.

In a nasty piece of 'cultural war' policy, the US is punishing Turkey with severe sanctions. Turkey, who has its own strongman leader adept at using the culture-war himself, is buckling. That is generating substantial investment losses, especially among some EU banks and there is a threat of contagion. Turkey is on the brink. Financial markets are very uneasy. In fact, European equity markets fell almost -2% overnight. That flowed through to Wall Street which is down almost -1%. Markets are losing confidence in the way public policy is being run, and quite quickly.

Argentina is under new renewed pressure as a major corruption investigation bursts into focus. This new confidence blow could take them to the brink as well.

In China, their car market shrank in July, the first drop in fourteen months as consumers shifted away from American cars due to the escalating trade spat.

Japan's economy returned to growth in the April-June quarter after having contracted in the first three months of the year. The turnaround was due to a rise in household spending and an increase in corporate investment.

Locally, the big news is the sharp re-calibration of the wholesale interest rate market. Yesterday brought sharp falls across the whole curve on top of those on Thursday. That takes the two year rate back to levels we last saw in August 2016. The five year swap rate is now back to levels last seen in October 2016, and the ten year is back to November 2016 levels. One thing that hasn't reverted however is the curve; we are now just under +90 bps for the 2-10 curve and it has been like that for more than a year.

Meanwhile, international rates are on the move lower for their separate reasons. The UST 10yr is weaker and now at 2.87%, down -6 bps from where it was this time yesterday and pushing their 2-10 curve lower, now under +26 bps and erasing the steepening of the past month. Remember this curve was positive +120 bps at the start of 2017 so its been basically downhill since then. The Aussie Govt 10yr is at 2.59% (down another -4 bps), the China Govt 10yr is at 3.57% down -1 bp, while the NZ Govt 10 yr is at 2.61%, dropping -2 bps on top of yesterday's -6 bps and the day before's -9 bps. That is a major reset.

Interestingly, the VIX has risen to its highest point of the week at 13.5. The average index level over the past year is 12. The Fear & Greed index has is moved a little back toward neutral, but sill on the 'greed' side.

Gold is down another -US$1 from yesterday and now a just on US$1,211/oz in New York and that is a -US$2 fall for the week.

US oil prices are higher today from yesterday and now just over US$67.50/bbl. The Brent benchmark is now just over US$72.50/bbl. The US rig count is sharply higher this week chasing those higher oil prices.

The IEA is warning that even though oil markets seem to be in a period of calm, a storm might be looming later this year when new American sanctions work to slash supplies of Iranian oil.

The Kiwi dollar is ending the week very much weaker at 65.8 USc, and a -s.5% fall for the week representing a -1¾c drop. Overnight, the shift has been the strengthening greenback, but earlier in the week it was domestic data that drove the currency down. On the cross rates we are now at 90.2 AUc, and at 57.7 euro cents. That puts the TWI-5 at 69.8 and a three year low.

Bitcoin is now at US$6,411 which is little changed since this time yesterday but over the whole week the cumulative drop is an eye-watering -13.2%. And that is on top of a -10% drop the previous week.. In the past two weeks bitcoin has lost more than a fifth of its value (-22.1%).

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

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14 Comments

Lovely picture to accompany the article, are they both investors looking for the nearest cliff to jump off?

Uh, thats the Mount right?

Nic Johnson

Indeed, they seem so.Still climbing until they reach the end which is the steepest part of the cliff to jump off from!!!!

North of the border, Canada reported strong employment growth in July (+54,100)
The full time job growth receded by 28k but 82k part time jobs created creamed up the overall employment growth at 54.1k. That’s called underemployment, not employment.

Their jobless rate dipped as well
Due to falling participation rate and more part time jobs being created at the cost of full time ones falling by 0.1 percentage points.

And finally, I would not go as far as calling a 3% wage growth against 2.5% headline inflation as strong.

Your optimism bias is evident. If these were the figures coming out of the US labour market, there would be negative commentary written all over it.

Is Nic Johnson actually Zachary Smith?

Turkey is now losing its security and economy. Although not an Arab state it has been (up to recently) a strong pillar between Europe and the unstable Arabic countries.
Travellers now warned against many parts of Turkey.
http://www.hurriyetdailynews.com/opinion/serkan-demirtas/how-will-turkey...
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Reconsider travel to Turkey due to terrorism and arbitrary detentions. Some areas have increased risk. Read the entire Travel Advisory.

Do not travel to:

Areas along the Turkey-Syria border and the southeastern provinces of Hatay, Kilis, Gaziantep, Sanliurfa, Sirnak, Diyarbakir, Van, Siirt, Mus, Mardin, Batman, Bingol, Tunceli, Hakkari, and Bitlis due to terrorism.

Terrorist groups continue plotting possible attacks in Turkey. Terrorist organizations explicitly target Western tourists and expatriates for kidnapping and assassination. Terrorists may attack with little or no warning, targeting tourist locations, transportation hubs, markets/shopping malls, local government facilities, hotels, clubs, restaurants, places of worship, parks, major sporting and cultural events, educational institutions, airports, and other public areas.
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It is host to millions of Syrians fleeing that failed state as well. It is a sad story.

It's horrible what's happening over there. I couldn't imagine being one of the millions men fleeing Syria, let alone being a woman or child left behind in Syria.

I don't think Syria is a failed state currently. It came close but has rallied and turned things around quite a bit lately. Just last month Israel said it can live with Assad in control. Some sort of "agreement" has been reached between Assad, Putin, Trump and Netanyahu that doesn't include a failed state scenario.

It's hard to know whether to climb the hill and celebrate or to jump. All I know is that we've got no debt, no shares & no outstanding accounts. Sure the land values may go down a bit but we all need homes to live in. I can also see gardening come back into fashion - we all need to eat as well. PS: I've been to Turkey. Once was enough.

Fake news!

Foreign buyers can easily use legal proxies to avoid the ‘ban’.
Anyway they only ever bought only 3%. Lol.

Sharetrader, a quote from an Australian based commentator "again our intelligent neighbours show commonsense and pragmatism. I wish we had some of the same in this neck of the South Pacific"

Some myopic commentators will argue that the Coalition is meddling, I call it a ballsy move tipping the scales in favour of New Zealand citizens.