US CPI inflation eases; survey sees recession chance low; no shutdown progress; US deficit swells; market volatility eases; UST 10yr 2.69%; oil slips and gold firms; NZ$1 = 68.3 USc; TWI-5 = 72.3

US CPI inflation eases; survey sees recession chance low; no shutdown progress; US deficit swells; market volatility eases; UST 10yr 2.69%; oil slips and gold firms; NZ$1 = 68.3 USc; TWI-5 = 72.3

Here's our summary of key events over the holiday that affect New Zealand, with news a lower oil price is pushing inflation down and the NZD up.

In the US, one of the few pieces of official data being released is the monthly inflation numbers. That showed December consumer prices fell from the prior month for the first time in nine months and taking the year-on-year rate to +1.9% as a sharp fall in petrol prices (-2.1%) was recorded, but underlying inflation pressures remained firm as rental housing (+3.2%) and healthcare costs (+2.6%) rose steadily.

There is now fresh updates about the US Federal Government shutdown, but border security officers who are being expected to work unpaid are increasingly refusing to do so. Some airports are shutting sections of their arrivals halls. As this spreads, it may become difficult to travel to the US, but so far no airline is reporting issues.

Today we are due the December update on the US fiscal deficit. It is likely to record a 2018 deficit of over US$900 bln, the highest ever, and driven by tax revenues that are not growing because of tax-cuts-for-the-wealthy, but spending that is up more than +5% in the same period. It is likely to get worse and US$1 tln deficits are forecast. New net borrowing in the year exceeded US$1.1 tln. (Yes, some spending that needs funding doesn't run through their deficit calculation.)

A Bloomberg survey of the odds of a recession in the US in 2019 still has them at a low 1-in-4 chance, but that is its most elevated level since 2011.

On Wall Street, the S&P500 index is sagging in the final session, down about -0.3%. Earnings worries trimmed the outlook. This follows a similar drag in Europe overnight. Yesterday in Asia, most markets ended the week on a positive note with Tokyo up +1%, Shanghai up +0.7% and Hong Kong up +0.6%. The ASX200 was down -0.4% while the NZX50 was up +0.5%.

In China, S&P is reporting that US$10 bln of local government USD debt is due to mature in 2019, about a third of the total issued. As the Chinese currency is now falling quite sharply, pressure will be mounting on these local governments for these repayments.

The UST 10yr yield is lower today at 2.69%. Their 2-10 curve is unchanged however +16 bps. The Australian Govt. 10yr yield is also little-changed 2.31%, down -1 bp. The China Govt. 10yr yield is unchanged at 3.14%, and the New Zealand Govt. 10yr yield is also unchanged at 2.36%. Local swap rates have stayed down although they are marginally off their lows.

Gold is up +US$2 to US$1,290.

The VIX volatility index has pulled back somewhat and now at 19. The average over the past year has been 17 however so this level is now not that unusual given that uncertainty was a feature of 2018. The average for 2017 was only 11. The Fear & Greed index we follow is now out of the 'Extreme Fear' range where it was last week, and just in the 'Fear' quadrant.

US oil prices have slipped slightly for a second day and are now just under US$52/bbl while the Brent benchmark is just under US$61/bbl. The US rig count is unchanged.

The Kiwi dollar starts today noticeably firmer at 68.3 USc which is almost a +½c gain overnight and a full +1c gain for the week. On the cross rates we are stronger too, up to 94.8 AUc, and are up at 59.5 euro cents. That puts the TWI-5 at 72.3.

Bitcoin is holding its recent lower level at US$3,638. This rate is charted in the exchange rate set below.

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

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14 Comments

But the game rolls ever onward anyway. When the BoJ runs out of financial assets to purchase so as to create inert, useless bank reserves perhaps it can start buying up parcels of ocean water or clouds that pass over Japan in the sky. The results will be exactly the same.
https://www.alhambrapartners.com/2019/01/11/insight-japan/

"Your money for nothing & your kicks for free!"

So the US government shuts down and the market settle… interesting

Roger Kerr proved right again
NZ$ is Good
NZ stable economy stable politics stable welfare state
Love NZ$
In case you missed it Trump is causing major chaos here & he’s not finished yet
Jacinda & Winston are far more stable

Big announcements next week from some major US banks.Could shape the US sharemarket for the following months.
IMO earnings will be good.

Firstly, if domestic banks extend credit mainly for consumption, then final demand increases by the amount of loans, but there is no increase in available goods and services. Hence prices have to rise. This consumer price inflation scenario is the first one would normally think of when considering an expansion in the money supply. But it is a special case. In the UK, more common is the second case: The majority of bank credit creation in the UK is not even used for transactions that contribute to and are part of GDP, but instead is used for asset transactions. They are not part of GDP, since national income accountants require a ‘value added’ for inclusion in GDP, not just the shifting of ownership rights from one person to another. When bank credit for asset transactions rises, asset prices are driven up, because the loans do not transfer existing purchasing power, but instead constitute an increase in net purchasing power: money is being created and injected into asset markets. When a larger effective demand for assets is exerted, while in the short-term the amount of available assets is largely fixed, the price of assets must rise.

Such asset inflation can go on for several years without major observable problems. However, as soon as the credit creation for non-GDP transactions stops or even slows, it is ‘game over’ for the asset bubble: asset prices will not rise any further. The first speculators, requiring rising asset prices, go bankrupt, and banks are left with non-performing loans. As a result they will tend to reduce lending against such asset collateral further, resulting in further drops in asset prices, which in turn create more bankruptcies. When asset-based lending had become a major part of bank portfolios and when banks had already driven up asset prices by several hundred percent due to their excessive asset-based credit creation, then it is inevitable what will follow: bank equity is usually less than 10%, and thus asset prices need to fall only by a little more than that – which is not difficult, after rises of several hundred percent – and the banking system is bankrupt: losses from non-performing loans have to be made up from equity (if no other funds are available, which is usually the case in such situations).

Thus a full-blown banking crisis must follow after a bank-credit driven asset bubble. One does not need to be a central banker to know this very well.

This one has gone on for 4 1/2 decades. This also highlights my prediction that the velocity of money falls over time, it is tied up on assets an not being rotated through the economy.

How does money get “tied up” in an asset? For the owner maybe when they buy but the seller now has money to spend.

Maybe the velocity of money in New Zealand falls over time because we have institutions that ship pallets of the stuff over to Australia every year.

So does the seller live under a bridge while he spends his million dollars?

Why would the seller live under a bridge if they’re selling a surplus house? Or a factory? Or a company?

Video from Winston Sterzel on foreigners leaving China
https://www.youtube.com/watch?v=HrzJcnK_c-4