US inflation eases; US federal deficit jumps to -4.5% of GDP; ECB lowers growth forecast; Turkey hikes rates sharply; UST 10yr at 2.97%; oil and gold prices fall; NZ$1 = 65.7 USc; TWI-5 = 69.3

Here's our summary of key events overnight that affect New Zealand, with news the American Federal budget deficit got sharply worse in August.

But first, consumer CPI inflation in the US slipped slightly, and came in a little lower than expected at 2.7% pa for August. It was 2.9% in July. It is being held up by petrol and rents, and held back by food. Interestingly, medical care services are rising slower than the average at +1.9% pa. (By comparison, the New Zealand "hospital services" component in our CPI series - the bit patients pay for - rose +2.2% pa in the year to June.)

That slip in inflation allowed American "real earnings" to rise in August, but the gain is only +0.2% over the whole year, Yes, wages are going up, but inflation is keeping pace.

The American Federal budget got much worse in August, even more so than the expected deterioration. It came in at a deficit of -US$214 bln for the month (!) taking the 11 month year-to-date total to just on -US$900 bln, a level it will probably end up for their full fiscal year to September and racing up closer to GFC-level deficits (which reached -US$1.4 tln bln in 2009). The 2018 deficit will be -4.5% of GDP. The Americans certainly aren't repairing the roof while the weather is 'fine'. And at this new level, they are about -$100 bln worse that the CBO estimated in June. No-one could say this deficit track is responsible management of public finances.

The ECB rate decision brought no changes and no surprises. This is the last month of their €30 bln of bond buying. From October it steps down to €15 bln/month as previously announced. One thing the EBC did do however, is it lowered its growth forecasts on trade war fears.

There were no changes and no surprises at the Bank of England rate review either. And overnight Turkey also reviewed its rates in the middle of its currency crisis and decided to raise them by a massive +6.25% to 24%. Their strongman president is not happy, but markets are, as the Turkish lira immediately rose in value.

Today, the UST 10yr yield is marginally lower at 2.97% and their 2-10 curve is tighter at just +20 bps. The Aussie Govt 10yr is at 2.60% (up +1 bp), the China Govt 10yr is at 3.68% and down -2 bps, while the NZ Govt 10 yr is down at 2.57%, -5 bps lower.

Gold is lower today, down -US$7 at US$1,201/oz in New York.

US oil prices are down as sharply today as they rose yesterday. They are down about -US$1.50/bbl and now just over US$68.50/bbl. The Brent benchmark is also lower, now just under US$78.50/bbl. The weakening of the US storm and the shifting of its track might have something to do with the pullback on prices.

The Kiwi dollar is starting today marginally firmer at 65.7 USc. On the cross rates we are at 91.3 AUc, and at 56.2 euro cents. That puts the TWI-5 at 69.3.

Bitcoin is firmer at US$6,491 which is +3.4% higher than this time yesterday. This price is tracked in the currency charts below.

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12 Comments

Nothing Has Changed Since Lehman
https://app.hedgeye.com/insights/70168-nothing-has-changed-since-lehman-...

"Again, nothing has changed in a decade. Most of the "sales" of securities done on Wall Street are not true sales at all. For example, how does a lender transfer the ability-to-repay (ATR) risk in a prime, non-QM mortgage to an end investor?"

And why would it have changed? The lessons from the GFC were clear, take wild risks, be reckless and... someone else will pay the price

"But that’s just not enough. Eventually those who take risks need them to pay off; or, more accurately, they need the plausible path for the payoff to remain, well, plausible.
If instead things start to look like they’re tilting back toward the downside, dealers become nervous and then nervousness is transformed into a full-blown monetary pull-back. At some point, it can develop into self-reinforcing processes; the monetary system “tightens”, the economy slows, increasing perceptions of downside risks; leading to more tightness and economic slowing; and so on.

The ECB’s Governing Council can always choose to ignore reality, it’s almost their default position by and large. The rest of us don’t have the same luxury.
http://www.alhambrapartners.com/2018/09/12/europe-starting-to-reckon-eur...

It's all rather fascinating in a shocking sort of way, as the great empires of the world fester and decay. The US overspends on its military and its people start to object to the Orwellian Everwar policy of its ruling classes. The lower classes, tired of providing the cannon fodder, find a strange champion in the hope or delusion that he will be able to change the direction the country has taken. Can the decline be arrested or merely delayed? At the moment the US and Britain (and the Canadians, Australians and us) are odds on favourites to survive the currently unfolding crisis, with major collapse the likely outcome for both the Chinese and German/French empires.

The contest is primarily through the banking system. Unless you are in the Middle East, that is, where any state that resists the US has either been reduced to rubble or is in imminent danger of becoming so. The remorseless transfer of wealth from debtor to creditor that is at the core of the banking machine at the best of times has been turbocharged during the Cold War, and contrary to the impression of Mission Accomplished in the 1990s, it seems the war never ended. So we have reckless currency debasement, and a global banker's ramp orchestrated via New York and London turning the bloodless machinery of banking into a super weapon. The weakest fall into economic chaos first, so Venezuala, Argentina, Turkey, South Africa, Indonesia, Brazil, India..... China and the EU. Interestingly, the Russians seem to have learned from their experience and appear to have become remarkably self sufficient, but they may well shatter anyway. All of these countries are major regional powers, not lightweights.

Am I making this up, or is it for real?

The banker's ramp:
https://fred.stlouisfed.org/series/USD3MTD156N
https://www.zerohedge.com/sites/default/files/inline-images/stifel%20rec...
https://www.zerohedge.com/news/2018-09-12/whos-naked-ranking-most-vulner...

"The monetary hegemony of the Anglosphere" is how I like to describei it.

Great post RW

US debt to GDP is at 105%, GDP growth at 4.2%, so a 4.5% deficit is only 107% of GDP growth, meaning it will barely increase their debt to GDP level. There has obviously been a big economic policy change in the US, with business expected to prosper, so after shock of changes deficit may yet stabilise at a lower level. Reason for concern certainly, but also perhaps some reason for hope.

Is Trump playing a long game here? Getting tax cuts is good for him, his dynasty, and the country at large. Leaving money in the pockets of the workers instead of stealing it for unnecessary military adventures and bloodshed sounds good to me too. Of course, in reality, in order to get his personal tax cuts he had to bribe the political classes with lots of pork. So pork for the military is an absolute necessity, as well as increasing his chances of not getting poisoned or shot. At some point the US citizenry will get outraged enough to try to cut the military waste that is hollowing out the capital base of the country, but why should Trump care about that?

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=121...

The 4.2 per cent economic growth rate that gets brandished reflects the peculiar American practice of taking the latest quarter's gross domestic product growth, multiplying it by four and calling that the annual rate. The June quarter's GDP growth was a touch over 1 per cent, making 4.2 per cent on this annualised basis.

But in March the same needle pointed to 2.2 per cent, and in the December 2017 quarter 2.3 per cent. Less to crow about there. It is a volatile, noisy and eccentric way of expressing annual economic growth.

"For Economists, anyway, the reasons are simple. To admit the existence of the eurodollar would be to undermine the very thing they’ve spent their lives working toward. Each and every DSGE model, those that are at the heart of econometrics, would be rendered obsolete, made invalid by an unrestrained exogenous monetary input. To acknowledge eurodollar and offshore would be to put modern Economics back on Square One."
https://www.realclearmarkets.com/articles/2018/09/14/the_global_economy_...

What is money? That is a very good question. I have come to the conclusion that any asset the commands a yield is a derivative of money, and therefore becomes money like. But the very existence of the derivative changes the nature of money.