90 seconds at 9 am: Pressure rising

US debt ceiling talks struggling; reliance on USTs 'dangerous'; China inversion grows; London threatened with clearing shutout; UST 10yr yield 2.21%; oil and gold unchanged; NZ$1 = 72.3 US¢, TWI-5 = 76.5

14th Jun 17, 7:34am by David Chaston

Here's my summary of the key events from overnight that affect New Zealand, with news of pressures building up in all the major economies.

In Washington, the negotiations for raising the debt ceiling are not going well. The President is not shying away from letting the Federal Government shutdown in mid-August, calling the prospect a "good shutdown", and that sentiment was echoed today by his Treasury Secretary. Markets will start to take more notice of this game of chicken soon.

This adds to risks, because with the world economy improving everywhere at the same time, there is now suddenly a shortage of safe-haven assets and that leaves a dangerous reliance on US Treasuries. And with an unstable White House, that danger has only increased. Perhaps one marker for this new risk is corporate CDS spreads. The US version is now at its lowest in almost a decade and since before the GFC. Other than this imbalance, there seems little reason for this pricing to be so low. And imbalances have a way of correcting themselves in an unstable way.

The pressure is going on the Chinese financial system as well. A stubborn anomaly in China’s US$1.7 tln government-bond market has worsened, as an odd combination of tight funding conditions and economic pessimism is pushing long-dated yields well below returns on one-year bonds, the shortest-dated government debt. It is a situation unseen since 2013. The yield-curve inversion first surfaced a month ago, when the yield on less actively traded five-year bonds broke above that on their 10-year bonds. The anomaly deteriorated two weeks later and took on a rare, new form: the yield on the illiquid seven-year bonds rose above those on both the five-year and 10-year paper. An inverted yield curve usually reflects investor pessimism about a country's long-term growth and inflation prospects.

On the other side of the world, pressure is also going on London as a financial centre. The EU is about to end its right to clear euros. Clearing houses are a key part of the financial system's plumbing, with trillions of euros being handled every year, mostly out of London. The Brits have done little negotiating since they triggered Brexit, and Brussels isn't waiting around for them. A separation without an agreement is not unthinkable now. Britain is about to get the full consequences of its actions.

Locally, we will get the May data from the REINZ this morning, followed by the first quarter current account result. That is not expected to show any special pressure, rather a small surplus in the quarter, with the annual deficit stable at -2.7% of GDP. Tomorrow we will get the GDP data for the March quarter.

In New York, the UST 10yr yield is unchanged at 2.21%.

The price of oil is very little changed today with the US crude benchmark is still just under US$46.50 a barrel, while the Brent benchmark is still over US$48.50.

The price of gold will start also unchanged at US$1,267/oz.

The Kiwi dollar is also unchanged this morning at 72.3 USc. On the cross rates we are at 95.9 AU¢, and 64.5 euro cents. The TWI-5 index is now at 76.5.

If you want to catch up with all the changes yesterday, we have an update here.

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

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19 Comments

by MikeM | 14th Jun 17, 8:09am 1497384577

An excellent collection of charts from Bloomberg showing the shift in energy use. Beginning of the end for coal. Oil will eventually follow IMO.

https://www.bloomberg.com/news/articles/2017-06-13/the-seismic-shifts-t…

by nymad | 14th Jun 17, 9:25am 1497389146

... Don't let Ham & Eggs see that.

by Gummy Bear Hero | 14th Jun 17, 1:19pm 1497403159

Tony Seba's book " Solar Trillions " is worth a read ... if you want to delve deeper into the seismic shift occurring in worldwide energy use ..

by dictator | 14th Jun 17, 8:15am 1497384953

The US politicians act like children when there's a risk of a shutdown. I think they've forgotten the negative backlash from the last shutdown. Given that most employees live from pay to pay when Federal employees go home they'd be in a financial emergency in short order.

by dtcarter | 14th Jun 17, 8:42am 1497386520

Will the Republicans try to blame it on the democrats as usual?

by dictator | 14th Jun 17, 8:53am 1497387185

They will make every dumb excuse and Trump will tweet about it. There's no reason for the debt ceiling as they have no intention of balancing the budget at any point.

by Noncents | 14th Jun 17, 5:27pm 1497418050

In a two party system, there isn't anyone else to blame... ;-)

by Stephen Hulme | 14th Jun 17, 9:02am 1497387742

Lamenting the onset of the new normal era, Gross says that "because of the secular headwinds facing global economies, currently labeled as the “New Normal” or “Secular Stagnation”, investors have resorted to “making money with money” as opposed to old-fashioned capitalism when money and profits were made with capital investment in the real economy"

... instead of making money by investing in the real economy, savers/investors increasingly are steered toward making money in the financial economy – making money with money. And that, thanks to nearly $8 trillion of QE asset purchases from major central banks and the holding of short-term borrowing rates near zero or even negative, has made this secular shift in monetary policy extremely profitable. Read more

Unfortunately, as noted yesterday, the returns from such endeavours translate into diminished dollars spent against a rising level of unearned wealth.

In Q1 1995, Household Net Worth was a quaint $27.3 trillion compared to $7.6 trillion in (nominal) Final Sales to Domestic Purchasers. That’s a ratio of $3.60 in “wealth” for every $1 in (nominal) spending. The latest estimates now suggest $4.85 in “wealth” for every $1 in (nominal) spending. Read more

Isn't the consumer the supposed bedrock of the western world's economy?

by murray86 | 14th Jun 17, 9:38am 1497389921

This reading comes across to me that the "modern economies" are just a huge ponzi scheme. It seems to prove the smoke and mirrors that modern economists have turned the economies into. We see regular seismic shifts in political thinking that changes the way our economies are structured and managed, all stemming from some "new" theory, but is really just a new way for the wealthy and powerful to get richer and more powerful at the expense of the masses.

by Stephen Hulme | 14th Jun 17, 10:18am 1497392293

Yes indeed.

Re Corbyn:

Even if he hasn’t won, he has publicly destroyed the logic of neoliberalism – and forced the ideology of xenophobic nationalist economics into retreat.

Brexit was an unwanted gift to British business. Even in its softest form it means 10 years of disruption, inflation, higher interest rates and an incalculable drain on the public purse. It disrupts the supply of cheap labour; it threatens to leave the UK as an economy without a market.

But the British ruling elite and the business class are not the same entity. They have different interests. The British elite are in fact quite detached from the interests of people who do business here. They have become middle men for a global elite of hedge fund managers, property speculators, kleptocrats, oil sheikhs and crooks. It was in the interests of the latter that Theresa May turned the Conservatives from liberal globalists to die-hard Brexiteers. Read more

by Noncents | 14th Jun 17, 1:30pm 1497403833

Technically the financial system is nothing more than a Ponzi/pyramid Scheme.

The top guy can only get rich if the guys below give him money, repeat for the next level. Problem is the bottom have no money (and no ability to get more), so now the flow is stopping.

Basic incomes? Living wages? Universal Incomes? Taxing the rich? are all the same thing - a means to try and stop the foundation from crumbling. It's not for the betterment of those at the bottom, but rather a means of keeping the money rising up the pyramid.

The big question that everyone is avoiding is - How long until the foundations crumble? and the pyramid collapses?

by dictator | 14th Jun 17, 10:26am 1497392800

Asset inflation is killing the consumer economy. In the US they have destroyed the middle class with recent MIT research indicating the 80% of workers are low income and 20% are high income. There's no middle ground. Poor and heavily in debt, versus high income either investing or heavily in debt.

I see no way to grow a consumer society when 80% can't afford to consume. You see this change in society with the rise of minimalism and many people picking up side income in the US. The only way they see to get ahead is to spend very little or to be more productive. That's a producer economy.

by gingerninja | 14th Jun 17, 9:51am 1497390701

You gotta hand it to the EU for ruthless negotiating! The UK at an all time low, a country divided, zero leadership, zero political stability on the horizon and the EU uses the opportunity to deal a low blow. Rewind back 12-18 months and the UK (predominantly EU-sceptics obviously) was crowing how the EU's fracture was imminent, that the UK would simply the first domino to fall and instead, the EU has strengthened, and the UK has weakened yet further.
Some London bankers are crapping their pants right now and perhaps, just perhaps, the reality of the economic sh%tstorm facing the average Brit is starting to enter the consciousness.

by Boatman | 14th Jun 17, 9:53am 1497390821

The UK will be fine in the long -run , it always has been , the Pound needs to weaken to stimulate the domestic economy , and they really dont need Brussels telling them what to do

by gingerninja | 14th Jun 17, 10:10am 1497391849

Sure, China will be fine in the long run, NZ will be fine in the long run, hells even Syria will be fine in the long run. Doesn't change the imminent hurt.

by Noncents | 14th Jun 17, 5:14pm 1497417272

Even Syria? Just how long is your long run? they are ticking up 2,000 odd years in conflict and still going strong.

by nymad | 14th Jun 17, 10:12am 1497391926

How much more can it weaken?
Obviously the UK imports a lot more than you think it does..

by gingerninja | 14th Jun 17, 10:19am 1497392353

Financial services in London alone account for 10% of UK GDP, that's not even taking into consideration all of the business that flourish around the financial sector and the overall contribution that London itself makes to the UK in other ways.
Many EU-sceptics are quick to dismiss this contribution, and what the financial sector in London will lose if it loses clearance rights and becomes a diminished trading centre. But this is a major factor powering the UK economy before you even take into account potentially unfavourable tariffs on imports/exports.

by Gummy Bear Hero | 14th Jun 17, 1:37pm 1497404259

... lettuces are $ 5 a piece in Orc Land ... $ 5 for a greenish lump of tasteless crunchy rabbit tucker ....

$ 5 !!! ... it looks to me that the horticulturists in Pukekohe are the only ones in this economy who're still getting a head ...