US markets stay down; shutdown consequences get complicated; Japan lowers inflation expectations; China tax flows slow; Australia struggles with integrity; UST 10yr at 2.76%; oil holds, gold up; NZ$1 = 67.9 USc; TWI-5 = 72.1

Here's our summary of key events overnight that affect New Zealand, with news American markets can't seem to turn positive.

After nervous weakness yesterday on Wall Street which saw the S&P500 fall a chunky -1.4%, Asian markets shrugged off the signal closing unchanged. Overnight European equity markets were little-changed as well (except London which was -0.9% lower). But Wall Street is back at its losing ways and down -0.4% in mid-day trade although the day's losses are being trimmed somewhat in the latest trade.

As the US Federal Government shutdown drags on, even the White House is conceding it will take a severe toll on Q1-2019 growth.

And the consequences are getting dizzyingly complicated. Although ordered back to work (without pay), IRS staffers aren't showing up in sufficient numbers to process tax refunds. That means cash is staying in Government coffers and UST bill auction requirements are much lower which may drive down yields. But when the situation returns to 'normal' (?) the sudden new outflow could well precipitate a new debt-limit crisis.

And staying in the US, Boeing has successfully tested its VTOL autonomous air taxi. It is working with Uber to see if it can zip passengers to local destinations by air.

In Japan, their central bank kept its policy settings unchanged and lowered its inflation forecasts - for the umpteenth time.

In China, as we have reported previously, they booked +6.6% economic growth in 2018 after inflation that averaged +2.1% in the year. But their tax revenues rose only +8.3% in 2018, while their government spending rose +8.7%.

And some fascinating new details have emerged about the policy debate that are going on inside the tightly controlled Beijing central government.

In Spain, house prices there are rising and by the most since 2006.

In Australia, the independence and ethics of regulators (a minority) are being challenged - not to mention the behaviour of some large corporates (a minority). Conflicts of interest are a pervasive problem in the financial services world. Maybe Hayne will be addressing some of them in his upcoming Report. There will be implications for the way New Zealand financial services are delivered - especially in insurance and especially by brokers.

And staying in Australia, the heatwave cascading over them is taking a toll on its electricity supply. Two brown coal generators are now out of action and that dramatically raises the risk of power cuts - just when air-conditioning is desperately needed. Victoria and South Australia are especially vulnerable.

The UST 10yr yield is firmer at 2.76%. Their 2-10 curve is still at +16 bps. The Aussie Govt 10yr is at 2.28% and down -2 bps, the China Govt 10yr is up +2 bps at 3.15%, while the NZ Govt 10 yr is at 2.37% and up +1 bp.

Gold is up +US$2 to US$1,285/oz.

US oil prices are holding lower today at just on US$52/bbl while the Brent benchmark is just on US$60.50/bbl. And see this.

The Kiwi dollarhas risen about +¾c and is now at 67.9 USc. On the cross rates, we up strongly against the Aussie at 95.2 AUc and a gain of almost +1c while also firmer at 59.6 euro cents. That puts the TWI-5 up at 72.1 and the same level it was on Christmas eve.

Bitcoin is at US$3,568 and little-changed from this time yesterday. This rate is charted in the exchange rate set below.

This chart is animated here.

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

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50 Comments

“In Japan, their central bank kept its policy settings unchanged and lowered its inflation forecasts - for the umpteenth time.”
Well if it ain’t broke, don’t fix it....

I don't get the American system. So they expect workers to turn up to work and not to pay them, well that is fine if you get BACK PAY but do you seriously expect people to turn up to work and NOT GET PAID at all for the shutdown period ? This could go on for months, would you work for free ? I would be giving Trump the middle finger. Americans really have some weird ways. If the 800,000 people decided to all not turn up to work, there simply couldn't be a government shutdown in the first place as the entire country would grind to a halt.

The simplest solution is just to stop the salary payments of Senate and Congress and President until they do their job and agree a budget.

It is a baffling system, to us, as we confer the duty of administration on the group that has control of the purse, whereas they do not. Personally, I think our system has evolved more than theirs, whereas theirs is stuck in their ideological reverence to their constitution.

The President runs the administration but does not have control of the purse (budget). The purse is controlled by the Senate and by Congress, both have to agree it (the President has a veto, but it is largely symbolic as Senate and Congress can just override it). The Senate is made up of 2 delegates from each state, who are there to defend the interests of their state (ie not the interests of the US). It is sort of similar in conception to the old House of Lords. The House of Congress is most similar to our conception of parliament, ie the House of Commons, each member is there to represent their constituency, in the national interest.

This stuff really matters. It is not at all obvious why things work better under one system than another. Listen to anything by Jacob Rees-Mogg and you start to get the reason why he has such a respect for the Westminster system. It has evolved over centuries by dealing with countless crises, so it is a fabulous record of what has been tried and failed and what has worked, often for reasons unknown. There always seems to be a very convincing argument for the things that were tried and failed. They seemed like a good thing at the time.

This is the fundamental problem with democracy and the EU, they are fundamentally incompatible. The EU doctrine is based on the French idea that only the grauates of the elite schools of France should be entrusted with power, either in government or corporations. They revere the intellectually compelling argument.

Most lists of the most civilised countries are mainly those with a constitutional democracy like ours. It works, but we don't know why.

That is as good an explanation that I have read anywhere Roger. I am not sure either system is better than the other, both are locked into ideaology that I see as flawed. Both systems would be better without the ideology.

Thanks, it is a deep subject, I added a few sections to throw a light on how I see this stuff affecting New Zealand. Basically, you are right, ideology is a problem, but the problem is the ideology of intellect. Our system is an evolved one. It works, but we don't know why.

More intellectually appealing systems, like republicanism, communism, seem to usually degenerate into tyranny. It is a strange recursive problem, we have to use the intellect to continually adapt the system, but often the most intellectually convincing changes cause the most disastrous results.

From my looking into it, it seems that a cumbersome, slow, inneffective government was exactly what the American founder fathers were after. They recognised the utility in giving the citizen maximum power and the benefits of small government. The three parts of gov were introduced to essentially combat each other on most things and allow only things which enjoyed a large majority of support to pass.
Despite their best efforts, somehow the US gov is now absolutely massive and far too systemically important to the US overall. My take on it anyway.

Is it the system that degenerates into tyranny or certain types of people? What impact does the overarching system have ie, the Govt/democratic system is part of the capitalist/economic system and subject to those beliefs/ideology or vise versa? Does our system really work?

Maybe the intellect alone isn't enough and one needs a deeper wisdom? The "rational" mind is not rational when subject to emotions, desires, ego, experiences, etc. It's obvious that our current systems are not rational.

Is it a cultural issue? Is it a lack of values or too much focus on the "wrong" values?

An alternate perspective What is the Great Law of Peace? https://upliftconnect.com/great-law-of-peace/

Humans are the problem
You can set up any system of governance you wish & ultimately it will fail because of human frailty wether it be lack of ethics or sheer stupidity
The US loves to admire its Madisonian system yet we are witnessing even their great system of checks & balances being abused by its human operators
Check Out NZs Muldoon years under the Westminster system of government
Obscene as Trumpism with sycophants in the National party allowing a mini dictator to reign in NZ albeit for elected terms by a gullible voting public

The Senate and Congress can override a presidential veto but it takes a two-thirds majority! The veto is certainly not "symbolic"!

"The Senate is made up of 2 delegates from each state, who are there to defend the interests of their state (ie not the interests of the US)." Really? You reckon that's all their constituents are looking for? And how does that compare to the Congress?

The Senate, like the House of Lords, is there to protect the interests of "the 1%":

" The landed interest, at present, is prevalent; but in process of time, when we approximate to the states and kingdoms of Europe, — when the number of landholders shall be comparatively small, through the various means of trade and manufactures, will not the landed interest be overbalanced in future elections, and unless wisely provided against, what will become of your government? In England, at this day, if elections were open to all classes of people, the property of landed proprietors would be insecure. An agrarian law would soon take place. If these observations be just, our government ought to secure the permanent interests of the country against innovation. Landholders ought to have a share in the government, to support these invaluable interests, and to balance and check the other. They ought to be so constituted as to protect the minority of the opulent against the majority. The Senate, therefore, ought to be this body; and to answer these purposes, they ought to have permanency and stability." (President James Madison, 1780)

What a wonderful quote.

They do get back pay;

https://www.vox.com/policy-and-politics/2019/1/10/18176849/furloughed-fe...

But, yes, it's an amazingly dumb system that allows for such a shutdown. Here's some further background and a suggestion going forward;

https://www.vox.com/policy-and-politics/2018/3/21/17144504/government-sh...

The outcome of yesterdays CPi ( with hobbies and rental cars leading the charge ) in effect came down to the average price of 91. A drop of 0.6 percent over the September quarter was insignificant. The Interest charts among others provide a great data source, and although the data inputs may be at minor variation the end result usually provides in percentage terms the change in petrol price. Yesterdays Stats NZ 91 average did not correlate as closely as previous. However one thing for certain unless the price of 91 is to rise significantly ,given its starting point, there will be a significant drag on CPI this quarter.

House prices have started rising in Spain. From the link -" it is important to note that it is still -36.7% below the maximum levels reached in 2007. Even in the areas where it rises the most, that difference is still very large: -27.4% in the Community of Madrid or -34.2% in Catalonia"

There must be many trapped in negative equity.

PIGS, soon it will be PINGS

Don't forget about our mates across the ditch

PINGAS

And Canada: PINGCAS

And the prime London market is also on the slide. Oh how the banks change their tune when the sacred property cow starts to look 'a bit over the hill'

https://www.bloomberg.com/news/articles/2019-01-23/a-prime-london-homes-...

Panic is on the agenda at Davos – but it’s too little too late

https://www.theguardian.com/commentisfree/2019/jan/23/panic-davos-inequa...

..the pitchforks are coming.

maybe these days its AR15s....but yes. Could be why so many rich are buying property in NZ as hidey holes. Of course I dont think NZers will put up with these parasites lording over them at all....

Written by a young man with a hang-up about Maggie. No mention of the Uk she took over with its 3 day weeks, garbage in the streets, decades of econimic decline. No mention of why the UK Labour party did not reverse her reforms - put the UK coal industry back into the pocket of the miners union, allow dockers to control would could unload a truck miles from the sea, etc.
Pity he has a decent argument to make but he ought to leave his personal devil out of it.

Sounds like how people talk about David Lange and Roger Douglas here.

Some of the comments were telling. Like (paraphrase) he seemed very upset that, its harder for a Govn to govern these days with the Internet in existance. Oh like now the Govn or the rich dont control all the media ppl are more informed and wont stand for sh*te.

Record Defaults by Chinese Companies: Fake “Cash” & Fake Accounting
Painful moment of truth for banks & investors. “Uncertainty over the accuracy of the companies’ books and disclosure of pertinent information”: Fitch Ratings.

https://wolfstreet.com/2019/01/23/record-defaults-by-chinese-companies-f...

I suspect it won't be long before we start to see an exodus of expats from China.

It's happening according to this expat who runs a youtube channel covering life in China. https://www.youtube.com/watch?v=HrzJcnK_c-4

They bought in the westerners to copy their skills and industry knowledge. Now they're forcing them out. Easy.

Personally I dont think there is any un-certainty, simple, its all faked.

Dark clouds are brewing

The democrats should be absolutely ashamed over this shut down. What the republicans want is reasonable and long over due. Walls work, and america needs one.

Trump 2020 is a lock in at this point.

..the democrats were elected to represent. Trump does not have enough support from elected representatives to get what he wants. Why should they buckle to one man who is operating by force?

You have to admit it though, how can Trump be the best when you have like 330 Million people in America to choose from ? Just like Bush Jnr, this clown will probably get a second term. There is no helping Americans.

If he gets a 2nd term then there is no helping America.

The world actually.

The president isn't there to make decisions or do anything in the US. They're basically a cheerleader.

Rubbish, its right wing extremists only asking for the wall and this shutown is is down to Trump bullying tactics, he has no idea how to really negotiate. PS Only 29% want the wall, that isnt enough to get him elected in 2020. On top of that just look at how the right is panicking over AOC. Then Elizabeth Warren is looking to throw her hat in the ring for 2020. The poor who voted for Trump in desperation in 2016 is looking to have significant options in 2020, plus he hasnt delivered, just shafted them.

Trump is a lockin for the GOP, sure which means defeat for them and big time.

Assumes he isnt impeached of course, pretty unlikely Congress will not go for it if Mueller's report stacks up. Then it passes to the Republican controlled Senate and like Nixon the republican senators will be looking down the barrel of un-employment if they dont impeach him.

wasn't the problem originally the Clintons trying to take down Sanders?

The Australian electricity shortfall in VIC and SA has a sad, simple cause: SA blew up its Playford and Northern coal-fired power generators, and VIC closed its Hazelwood coal-fired power generator, both because Coal Bad. So without the reserve capacity of these dispatchables, both states are essentially reliant on QLD (where excess generation capacity seems to exist most of the time) and thence on the long string of transmission lines QLD-VIC-SA. One trip, and the whole thing enters a failure cascade, exactly as happened a couple of years back in SA. View the real-time Australian (excluding WA) system status and prices here. A sample of the fun this causes grid operators is in the Notices issued:

Market Notice 66581
AEMO ELECTRICITY MARKET NOTICE

The Forecast LOR1 condition in the Victoria region advised in AEMO Electricity Market Notice No. 66553 has been updated at 0730 hrs to the following:

1. From 1530 hrs to 1630 hrs 24/01/2019.
2. From 2000 hrs to 2030 hrs 24/01/2019.
The forecast capacity reserve requirement is 1120 MW.
The minimum capacity reserve available is 634 MW.

This ~500MW shortfall will be rectified by one or both of two events:

  1. Operators will bid in, at eye-watering prices, generation capacity
  2. Demand Management measures will be taken: the grid operators will shut down supply to entire industries, blocks, areas or remotely managed devices (e.g. water heating)

yet solar and battery are now cheaper than new coal plants and of course with CC we/they dont have any choice anyway.

Really? How much does it cost for a solar and battery setup big enough to keep Hamilton running thru a week of overcast days in the middle of winter?

How do they compare to old coal plants?

America is a Republic, not a democracy as such. You'd hardly call their ''presidential electoral college'' voting system democratic. It's constitution was designed specifically so no one layer - presidential, congressional or senatorial - would have power over the others. In theory at least two of them would have to agree. But as we see, it has its faults. Ours is not much better to be fair. Ideology based, with very little real world experience in some cases, poorly executed & equally poorly managed by the statists. Ho hum.
The best form of government by far is a benevolent autocracy but exactly what benevolent means is the issue. One thing I do know, that is democracy as it was first designed is aging fast. The world has moved on and trust has broken down between the elite and the rest. I think, as I've said here before, that central government should be halved with regional governments put in its place, although we need to up those regional levels of competency substantially before implementation. I would also suggest that successful business people form the core of these regional groups with others added as needed.

The Media Botched the Covington Catholic Story
And the damage to their credibility will be lasting.
https://www.theatlantic.com/ideas/archive/2019/01/media-must-learn-covin...

The is now commonplace for CNN which I now consider tabloid news

Great article. I noticed the headlines in the Herald but had read no further. I wonder how many world wide have totally the wrong (fake fact) idea about what happened and how many will read this explanation.

Which major bank just hiked its mortgage rates ?

Private Firms Squeezed By Brutal Credit Crunch As China Struggles With Unprecedented Slowdown

https://www.zerohedge.com/news/2019-01-21/private-firms-squeezed-brutal-...