China faces up to unsustainable local Govt borrowing; China changes tack on outbound investment; Japan CPI up; US data strong; UST 10yr 2.47%; oil and gold jump; NZ$1=US$0.703; bitcoin staggers then recovers

Here's our summary of key events from over the holiday period that affect New Zealand, with news the violent bitcoin selloff seems to have stopped.

But first, Chinese officials are starting to embrace the idea that bankruptcy for local authorities may be the only way investors will get the message that their profligate borrowing won't be bailed out by Beijing. A PBoC official has floated the idea publicly, and that follows a Financial Ministry official suggesting the same thing.

In China, HNA's woes continue. HNA is now the poster-child for dodgy excessive expansion by Chinese companies overseas and its financial arrangements are becoming more desperate. We followed HNA because of its links to the ANZ sale of UDC, but now that has failed to gain approval, our focus will be less. But that doesn't mean HNA's troubles are over at all.

Not all the news is of tightening and pullback. New rules "to streamline administrative procedures and improve oversight of Chinese companies’ outbound investments" have been announced to take effect on March 1 and they remove provisions that requires firms to officially declare any overseas investment worth more than NZ$400 mln. or get specific approval. However, the Government is setting up a supervisory mechanism to regularly monitor companies’ overseas operations, to regulate their business practice and control risks. It is a change that makes it easier for Beijing to extend its political influence through its companies.

In Japan, household spending rose faster that was expected, as did consumer prices (but their CPI is still rising at less than +1.0%). However, the rises in Tokyo are faster, indicating a building trend that regulators will like.

In the US, new orders for manufactured durable goods rose +9.0% year-on-year in November of 2017, and previous month data was revised upward. But month-on-month rises were much less than markets were expecting and got all of the media attention. Transportation equipment led the rises.

US housing starts showed an equally impressive rise year-on-year, up +12.9% on that basis.

The UST 10yr yield is up to 2.47% today. In China, the equivalent 10yr sovereign bond is yielding 3.90% while the equivalent NZ 10yr sovereign bond is yielding 2.75%.

Oil prices are sharply higher in the US today with the WTI benchmark at just under US$60 a barrel, while the Brent benchmark is just under US$67. A pipeline blast in Libya combined with a bullish Saudi budget forecast boosted crude prices to levels not seen since mid-2015. Our already high prices touching NZ$1.969/L after discounts (pump price NZ$2.12/L) are about to get a new shove higher.

Gold is up US$10 to US$1,285/oz.

This morning the Kiwi dollar is just over 70.3 USc, and on the cross rates it is at 91 AUc, and against the euro it's at 59.2 euro cents. That puts the TWI-5 at 73.

Bitcoin had been in a bit of a holiday hangover mode, holding on at US$14,028 and a very long way down from its December high of US$19,695 at 10 pm on December 17, 2017. In fact, that works out at more than a US$5,000 drop or -29%. Then Asian 'investors' got interested again and we have seen violent swings in the price with the digital currency rising more than +10% in thin trade to be now at US$15,771.

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

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3 Comments

Ultimately, it comes down to income; always, always income. The BEA reported last week that Real Personal Income excluding Transfer Receipts was up 2.2% year-over-year in November 2017. That rate is actually on the high side for this year, driven upward by the base effects of being compared to worse conditions for real income last year (oil price effects).

In other words, it took a rather large and alarming (for the unbiased) drop in income in 2016 just to push the recent growth rate up to about half of what it was three years ago.

That level in 2014, a little over 4% growth on average, should have been enough to begin with for anyone seeing the economy still clearly constrained, therefore in no condition whatsoever to be set free for recovery. Four percent growth isn’t good, though it may seem that way now as far as income growth has fallen.

In November 1998, for example, Real Personal Income excluding Transfer Receipts was gaining on average 7.2%, a rate consistent with an actually robust labor market. Even in November 2000, just prior to the onset of the dot-com recession, the 6-month average was 6.1%. Read more

The tax reform legislation approved by Congress (will see) Citigroup take a $16 billion to $17 billion hit

https://www.americanbanker.com/news/heres-what-tax-reform-bill-will-cost...

Barclays and Shell used the first day of trading since the festive break to signal the likely impact of the Tax Cuts and Jobs Act, which was signed into law in the US on Dec 22, as UK markets were shutting for the Christmas break.

http://www.telegraph.co.uk/business/2017/12/27/barclays-warn-huge-hit-pr...

Swings and roundabouts, I guess.....but it will affect Australasian companies too.....