Turkey risks batter Wall Street and banks; US inflation jumps, real wages fall; US Federal deficit rising; Canada jobs grow; Japan grows again; UST 10yr at 2.87%; oil up and gold down; NZ$1 = 65.8 USc; TWI-5 = 69.8

Here's our summary of key events over the weekend that affect New Zealand, with news investors have been jolted by more capricious policy stances.

Wall Street ended last week down sharply as investors reacted negatively to the way the American Administration is dealing with its relations with Turkey. The Turkish lira is being pressed lower, quicker, by a culture war spat. That is undermining investment in the country, especially by some large European banks, and that in turn is unnerving investors in other systemically important banks. Wall Street was down -0.8%. US bank stocks were down as much as -2.5%.

Meanwhile 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 be reflected there too showing US inflation is rising quite quickly now. Even without food and energy, US inflation is up +2.4%.The US Fed will likely raise rates sooner and probably next in September.

But their inflation is now rising faster than wages as new 'real income' data shows, 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.

And 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.

In contrast, 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 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. Friday 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 the previous day 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 the previous day's -6 bps and the day before's -9 bps. That is a major reset.

Gold is down another -US$1 and now a just on US$1,211/oz in New York.

US oil prices are higher 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 relative calm, a storm might be looming later this year when new American sanctions work to slash supplies of Iranian oil.

The Kiwi dollar is starting the week very much weaker at 65.8 USc, after a -5% fall last week. On the cross rates we are now just under 90 AUc again, and at 57.6 euro cents. That puts the TWI-5 at 69.8 and a three year low.

Bitcoin is now at US$6,299 which is -1.7% lower than where we left it on Saturday. In the past two weeks bitcoin has lost more than a fifth of its value (-22.1%).

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