90 seconds at 9 am: Oil prices shift higher

US Fed sees trade cutbacks, more rate hikes; US PPI falls; EU factory production falls; euro as reserve currency; China pumps in liquidity; UST 10yr at 2.98%; oil and gold up sharply; NZ$1 = 65.6 USc; TWI-5 = 69.4

13th Sep 18, 7:34am by David Chaston

Here's our summary of key events overnight that affect New Zealand, with news oil prices are up sharply today.

But first, in its latest Beige Book review of economic conditions around the country, the American Fed reports businesses have scaled back or postponed investments due to concerns about international trade tensions. Overall, this survey sees the American economy expanding at a "moderate pace".

And the Fed is continuing to signal that rate hikes, even if gradual, will continue for the next few years. Pointedly they say that this will be the case even if their rate curve inverts. (On that, they say this time is different.)

American producer prices fell in August from July is a surprise shift lower. This was the first month-on-month drop in about 18 months. And it happened for services. Overall, it means that year-on-year, producer prices are +2.8% higher and a big reduction in annual growth from July when they were +3.3% higher.

Also shifting lower are American mortgage applications. They fell in August, and they are still falling in September and by larger levels than analysts were expecting.

EU industrial production also fell in July, and that slippage has been cumulative so that year-on-year levels are now lower.

But the president of the EU is still sounding positive. In his State of the Union address earlier today he called for the euro to be new dominant global reserve currency, saying the US is abrogating its international responsibilities and the EU is ready to step up.

On the trade front, Canada's leaders are huddling trying to figure out their response to a recalcitrant US position on NAFTA. The Mexicans say they are prepared to go it alone, and the Americans say they are reaching out to China in "one last attempt" before new higher and broader tariffs are imposed.

In China, their central bank is back injecting money directly into their economy, supposedly to cover a short liquidity strain while tax payments are due, but more likely as part of an overall campaign to shore up lending and demand, as they try to keep the adjustment hurt from surfacing.

Today, the UST 10yr yield is lower at 2.96%, a -2 bps dip in a day. However, their 2-10 curve is tighter at just +21 bps. The Aussie Govt 10yr is at 2.59% (up +1 bp), the China Govt 10yr is at 3.70% and also up +1 bp, while the NZ Govt 10 yr is at 2.62%, up +2 bps.

Gold is rising today, up a chunky +US12 at US$1,208/oz in New York.

US oil prices are up sharply for a second day in a row and now just over US$70/bbl. The Brent benchmark is also higher, now just on US$80/bbl. These are big, fast rises brought about by a sharp fall in US crude inventories, the Iran sanctions, the expected impact from the US hurricane, and the growing fears a big typhoon will hit Hong Kong, Taiwan, and the Philippines.

The Kiwi dollar is starting today firmer at 65.6 USc. On the cross rates we are at 91.5 AUc, and at 56.4 euro cents. That puts the TWI-5 at 69.4.

Bitcoin is marginally firmer at US$6,280. Also this. This price is tracked in the currency charts below.

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29 Comments

by scarfie | 13th Sep 18, 8:07am 1536782842

I have made the statement on this site before that money fullfuls the requirement for a criminal fraud. Here is Professor of Economics Richard Werner saying pretty much the same thing, watch him talk about the term deposit. Maybe I am not such a crackpot afterall.

https://www.youtube.com/watch?v=EC0G7pY4wRE

You have a misrepresentation accompanied by a pecuniary advantage.

(Link from AndrewJ the other day)

by Andrewj | 13th Sep 18, 8:47am 1536785265

In 2017 Russia's gold buying activities accounted for two-thirds of the total 10.95 million ounces of net gold buying by central banks during the year.

by Andrewj | 13th Sep 18, 8:50am 1536785455

“It is absurd that Europe pays for 80% of its energy import bill ~300B euro a year – in USD when only roughly 2% of our energy imports from US. It is absurd that European companies buy European planes in dollars instead of euro,” EC President JC Juncker, State of Union Address

by bw | 13th Sep 18, 8:56am 1536785805

The irony is that the Euro, the very currency Junker wants to use to replace the US$, is itself priced in, and so derives its value from...US$'s !!

by Roger Witherspoon | 13th Sep 18, 9:05am 1536786355

Juncker is a very dangerous man. He is an entitled imperialist to the core. The whole idea of the Euro all along was to destroy the US dollar's global hegemony (exorbitant privilege, according to De Gaulle). However, as Ireland and southern Europe found out, if you use another country's currency you are a colony. The loss of sovereignty is extreme. As the founder of the Rothschilds banking dynasty put it "Give me control of a nation's money supply and I care not who makes the rules".

by Andrewj | 13th Sep 18, 9:06am 1536786391

Roger, I meant to post this to a comment you made last week, sorry for the tardiness

"Our view is that no form of investment risk is always worth taking without regard to valuations, fundamentals, economic conditions, or market action. The strategy of buying and holding index funds for the long run is essentially a strategy that says that market risk is always worth taking. Yet the iron law of investing is that a security is nothing but a claim on a future stream of cash flows. Valuation is a crucial determinant of long-term returns. The higher the price an investor pays for those cash flows today, the lower the long-term rate of return earned on the investment.

The corollary is also true. The lower the long-term rate of return demanded by investors, the higher the price moves today. So clearly, changes in investors' attitudes toward risk will strongly affect short-term returns. If investors become more willing to take market risk, it is equivalent to saying that they are demanding a smaller risk premium on stocks (that is, a lower long-term rate of return). Prices rise as a result. Now, the fact that current stock prices are higher also implies that future long-term returns will be lower, but that's part of the deal".

https://www.hussmanfunds.com/wmc/upd02d.htm

by Roger Witherspoon | 13th Sep 18, 9:59am 1536789570

Yes, it is as if someone had a cunning plan to substitute debt for all capital in the hands of those outside the inner circle. Banking functions by using interest to transfer equity from borrowers as a group to creditors as a group. In its current form it has evolved into a subtle fraud based on watering the milk. We save dollars into a giant vat but when a loan a drawn from the vat it is very carefully replaced with exactly the same amount of water. The regulators go to great lengths to make sure this watering is done accurately, thereby enabling the fraud.

by Andrewj | 13th Sep 18, 11:04am 1536793464

News of $1T deficits needs to be put into context of the total tax base of the US gov't, which are the figure below. $1T deficit's are the equivalent of spending like you had a 33% tax INCREASE but not billing for it.
FY 2017 - $3.32 T FY 2014 - $3.02 T FY 2009 - $2.10 T

by Roger Witherspoon | 13th Sep 18, 11:41am 1536795713

Actually I rather like deficit spending through tax cuts. It leaves money in the pockets of the workers who get to spend it as they see fit. So it gets everyone back in a job fastest after a crisis.

The alternatives in a downturn are worse, the one everyone seems to prefer is to increase government spending - this is almost always wasted by the most powerful bureaucrats. In the US case that would be the military, who seize the day to invade somewhere or other, anywhere will do, as there is lots of money and lots of unemployed young men available. If not, then some other wasteful project is usually chosen to ensure the benefits flow mainly to those with their snouts in the trough. All politicians prefer this option.

The other even worse way is to keep interest rates low for an extended period, thereby enslaving as much of the population as possible as debt serfs. This eventually leads to a virulent, often violent, backlash some years later.

There are no good options.

by Andrewj | 13th Sep 18, 8:33am 1536784408

Lumber still signalling a slowdown

https://finviz.com/futures_charts.ashx?p=d1&t=LB

copper is trying to catch up
https://finviz.com/futures_charts.ashx?t=HG&p=d1

by Andrewj | 13th Sep 18, 8:34am 1536784495

Is it a shortage of workers, or a shortage of work? Structural issues with Americans and who they are, or macro issues about which Americans have been fed a load of crap for more than a decade? You can see why those who may have been manufacturing raw manure might have an interest in swaying the debate toward the structural. Or preventing the debate from happening at all.
http://www.alhambrapartners.com/2018/09/12/a-simple-choice/

by J.C. | 13th Sep 18, 12:06pm 1536797197

I think NZers and Australians have been fed their share of crap about macro issues too. The vast majority seem to believe what they've been told.

by Andrewj | 13th Sep 18, 8:37am 1536784661

Over the weekend, another European nation turned toward the populist direction. It was enough to get one’s attention when Italy did it, but Sweden is something else altogether. The country has been long held out as an exemplar of everything that is right with globalization. They have industry, youth, etc. How in the world could another “far right” party score so much?

These elections are, obviously, confusing for the mainstream. UK’s leftist Guardian newspaper declared, Real Story of Sweden’s Election Is Not About March of the Far Right. Meanwhile, Politico Europe said, Why Sweden’s Election Was All About the Rise of the Far Right. The only thing any of them really know is that they despise the “far right.”

http://www.alhambrapartners.com/2018/09/12/yes-sweden-is-a-domino/

by Roger Witherspoon | 13th Sep 18, 10:03am 1536789799

The intelligentsia have always looked down on the vulgar proletariat and sought to rule over them. It is their divine right, and the lower classes are only useful for cooking, cleaning and cannon fodder after all. At least that is how they see it, although they do their best to hide it. It is a scary sort of caste system they would impose on us all.

A footnote from history. The US commissioned the IQ test so they could identify which immigrants to sterilise on Staten Island. This thinking has a long history.

Personally I think intelligence is overrated, achievement often goes to those of more modest academic intellect who have a more practical form of intelligence; and courage and compassion are greater virtues.

by Andrewj | 13th Sep 18, 10:40am 1536792015

Undoing Extraordinary Monetary Policy
https://www.grantspub.com/files/presentations/FISHERGRANTSREMARKS15MAR1…

by scarfie | 13th Sep 18, 11:13am 1536794033

I think the more important aspect is the type of intelligence. One measure is the nine types. Factual, Analytical, Linguistic, Spatial, Musical, Practical, Physical, Intuitive, Interpersonal. Which ones do you want in our leaders? In a democractic system we get top heavy with people that are good at rhetoric, more the Interpersonal.

JP Guilford also did some useful work in types of intelligence, what I like in particular is the difference between divergent and convergent. Some a good at the ideas, others are better at bringing it into the real world.

This is of course on top of my fascination with MBTI. 73% of the population being Sensing makes them easy pickings for the intelligensia, even the otherwise intelligent ones.

by Roger Witherspoon | 13th Sep 18, 11:55am 1536796535

As a society we tend to honour bravery as the highest virtue and everyone respects nurses. So I think a bit of humility is in order. In a dangerous situation do you want to be with mates who can handle themselves or with geeks? Do you want compassionate nurses or coldly clinical ones?

by YoungTel | 13th Sep 18, 1:37pm 1536802647

Yes these are depressing times for us minority Intuitives...

by meh | 13th Sep 18, 1:48pm 1536803322

"and the lower classes are only useful for cooking, cleaning and cannon fodder after all"

Do we not also collectively apply this caste system on each other? You're unskilled therefore you're of no value and you don't deserve the same standard of living as I who is skilled.

The "intelligentsia" are now the ultra wealthy with the same attitude.

by Kate | 13th Sep 18, 9:59am 1536789557

I love all their concluding remarks:

The way out is, therefore, right where it’s always been: central banks. Not in the next big central bank idea (that’s just recycling what Japan has already failed at), but in cleaning house and rethinking the whole thing from the ground up. The only question is which breaks first: Economists’ collective conscience, or the political structure?

by saving4AUhouse | 13th Oct 18, 11:30am 1539383435

Populism is just the medias term for 'democratic result we don't like'.

by Advisor | 13th Sep 18, 9:20am 1536787239

Looks like Kiwibuy is in full swing. The Labour party really tricked its people into thinking new houses will be built under their management from the first year on. Instead, here we have PH running around with KB stickers and slapping them onto homes that would've been built by private developers anyways.

https://www.stuff.co.nz/business/107039928/kiwibuild-adds-25-apartments…

by Roger Witherspoon | 13th Sep 18, 9:27am 1536787653

Yes, a lot of it is just rebranding what National were doing anyway, but if they keep building through the next downturn it could turn out to be money well spent. Being an optimistic sort of chap, I expect this government to do something really useful by accident rather than design. Kiwibank is the inspiration, one government sold Postbank to ANZ and a later government reestablished it under a new name as a payback for one man's vote. Yet, despite it's dodgy origins, it has turned out to be a very good idea, so far at least.

by Jock Silver | 13th Sep 18, 12:48pm 1536799715

This is the way I think new electricity generation should be built.

by Pragmatist | 13th Sep 18, 9:50am 1536789016

So if the developer was all ready to go build, why would they tie themselves up in kiwibuild? Price caps and whatever govt interference comes along with KB must be a real pain, along with all the public scrutiny seems like a real drag.

by Kate | 13th Sep 18, 9:39am 1536788369

IRD chasing student debt but not bright-line compliance;

https://www.newsroom.co.nz/2018/09/12/234245/ird-chases-students-while-…

Interesting article. The bright-line will be pretty easy to catch up on as the transactions remain on the LINZ database forever.

Where student debt is concerned, we really need a re-think in terms of rules/process with respect to overseas travel for NZ government debtors. For example, evidence of an A/P being set up with respect to that debt should be a pre-requisite of travel and the government ought to be a required signatory to any cancellation of that A/P.

Not needed of course for those with employment in NZ that they are returning to after a short holiday, as in that case the A/P is already established.

And to me, if a student working overseas has established an A/P and makes the payments agreed at a level set as appropriate by IRD - there should be no interest charged on that loan (they should be treated the same as for students working onshore here).

by Boatman | 13th Sep 18, 10:44am 1536792291

The middle class in Auckland are going to become restless over the cost of fuel , mark my words .

by Roger Witherspoon | 13th Sep 18, 11:53am 1536796410

Particularly if the US military manage to create a conflict with Iran and oil goes up to $300 a barrel. You know they want to.

by Wrong John | 13th Sep 18, 1:38pm 1536802722

Some great comments guys & gals. I'm not sure I really fully understand the financial world, every time someone owes money to someone else, it's this here and that over there. All I know is that we have too much unproductive debt in this country. With over a quarter of the banks loan books in residential mortgages - versus 17% in the UK and 11% in USA - our debts are not working hard enough. But to get bank support for your business requires 'form filling for Africa' and you get the feeling they're not that keen to lend you the money at all. We're slowly replacing the second tier finance that was decimated over the past decade, and the angels and local PE are doing a decent enough job, but it's not deep enough (or wide enough) as we all know. Anything with any real promise disappears offshore in a flash, which gets up my goat a bit. But hey, that's life in the small nations, right?