90 seconds at 9 am: US Fed raises rates

US CPI and retail sales underwhelm; US Fed ups policy rate on growth optimism; China targets less fertiliser use; China M2 growth slows; EU protects dairy names; UST 10yr yield 2.15%; oil slumps, gold unchanged; NZ$1 = 72.6 US¢, TWI-5 = 76.7

15th Jun 17, 7:28am by David Chaston

Here's my summary of the key events from overnight that affect New Zealand, with news the US Fed has hiked its policy rate, as expected.

But first, data out of the US has underwhelmed. Firstly inflation in May has come in lower than expected and lower than for April at +1.9%. Falls in energy costs drove this outcome. Without food or energy, the data is even lower at +1.7% with the price of used cars and trucks weighing on the result.

Also weak was the data for retail sales. Their advance estimate showed a decrease of -0.3%, coming off a rise of +0.4% in April.

Despite this data, the US Fed has gone ahead and raised its benchmark interest rate by +0.25%. That takes it to 1.25%, its highest level since 2008. They said continued American economic growth and job market strength was why they moved now. And they announced they would begin cutting their holdings of bonds and other securities this year. It is a vote of confidence in the immediate future, one reinforced by the Atlanta Fed's GDPNow real-time indicator that predicts that second quarter growth in the US economy will exceed +3.2%.

Markets are not quite sure what to make of today's Fed action and background data. Equities are drifting lower, benchmark bond yields took a tumble,and the US dollar fell. Of course, some of this reaction may be due to the Washington shooting.

In China, they have a new program to cut fertiliser use by 20% by 2020. Apparently the issues of overuse are serious and affecting the 'quality' of their fruit and vegetable output.

The Chinese also have a program to cut monetary fertiliser. They announced that their M2 money supply grew +9.6% in May, "an unexpectedly low growth rate". They went on to say, get used to lower growth rates in the future.

In the EU, their top court has banned companies marketing dairy alternatives using dairy-type names for their products. Plant-based products can now no longer be marketed as 'dairy' in a straight reinforcement of truth-in-advertising principles.

And staying in Europe, applications to study at British universities have slumped -7% following Brexit, breaking 10 years of growth. And the expectation is that they will fall very sharply from here on, down another -50% or more.

In Australia, and in a legal battle lasting eight years, Air New Zealand has finally been found guilty of price fixing freight rates and fees from Hong Kong and Singapore into Australia. It was the last of 15 airlines the Aussies prosecuted over this type of collusion.

In New York, the UST 10yr yield is sharply lower on the at 2.15%.

The price of oil has slumped overnight to just over US$44.50 a barrel, while the Brent benchmark is now just over over US$47. Overnight the IEA said the global oil glut is here to stay through 2017 despite OPEC’s efforts to restrain production - which they see as largely unsuccessful.

The price of gold however is unchanged at US$1,267/oz.

The Kiwi dollar was sharply higher this morning and at one stage over 73 USc although now it is back at 72.6 USc. On the cross rates we are at 95.7 AU¢, and 64.7 euro cents. The TWI-5 index is now at 76.7.

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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23 Comments

by bw | 15th Jun 17, 7:39am 1497469158

Synthetic DTI's...

Banks are offering first-time home buyers.....substantially lower loan amounts after tightening living expense assumptions and applying more conservative interest rate buffers....In interviews with the banks on the phone and in branches, the analysts told the banks they were on a wage of $105,000, had general living expenses of $1200 a month, were spending $1300 a month on rent, and had no dependents and a clear credit history. The exercise did not progress as far as the application stage....In 2015, the major banks would have lent between $650,000 and $700,000 to such a borrower for an owner-occupier loan, but now are only offering $550,000 to $600,000...

It's the small print on the glossy bank advertisements that are today's DTI's....(NB: Aussie banks are substatially OUR banks, as we all know)
http://www.afr.com/business/banking-and-finance/financial-services/macq…

by sharetrader | 15th Jun 17, 8:00am 1497470408

When they changed the culture of the banks to everyone gets rewarded for sales, thats when credit lending exploded and some of the lending became what is good for me not the company.
bit hard putting that genie back in the bottle
http://business.scoop.co.nz/2017/04/27/report-calls-for-culture-change-…
and this is what happens when the culture of bonuses is let run wild, sales were booked every month whether they were final to make the cut off, and if they didn't the machines were put back in stock and sent out later when the contract was finally signed
http://www.stuff.co.nz/business/93617075/inappropriate-accounting-at-fu…

by Uninterested | 15th Jun 17, 8:41am 1497472879

I worked for a company that initially only paid a fixed salary. You could rely upon this money coming in to pay the mortgage. All was good. Then they brought in a bonus scheme based upon the assumption that staff would work harder in order to earn more. ie The assumption was that it wasn't professional integrity that motivated people any more.
It grated. Trust was lost. It now became a selfish financial motivation thing. The whole reason for coming to work changed. Unfortunately you end up playing the game. You focus on the very narrow things that are in the performance measures and ignore other things which used to be part of the job.Altruistic stuff like putting time into training up others.
That, plus open plan offices plus no drinks after work.....Very low morale. Do the job as per the performance measures to the detriment to any other measures, and go home ASAP.

by grum | 15th Jun 17, 10:13am 1497478437

Yes, this. Once they started with the open plan rubbish (and a few other annoyances), I just went home and stayed there. That was 3.5 years ago - still there, not going back :-)

by gingerninja | 15th Jun 17, 8:53am 1497473611

This will upset the credit crunch deniers.

by Stephen Hulme | 15th Jun 17, 9:24am 1497475495

Markets are not quite sure what to make of today's Fed action and background data

The short end of the US Treasury debt curve is emphatically underwhelmed by the Fed's actions.

4 week Tbills (0.898%) remain below the old effective fed funds rate.

Three month TBills (1.006%) struggle to reach the new fed funds floor and are certainly well below the expected new 1.16% effective rate and well below the 1.25% government subsidy paid to the owners of ~$2.3 trillion excess reserves.

The fed funds rate remains an irrelevant benchmark together with those that persist with pulling it's strings, without effect.

by Yvil | 15th Jun 17, 9:23am 1497475404

Stephen, I struggle to see the Fed being able to lift rates another 4 times over the next 18 months, your view pease ?

by Stephen Hulme | 15th Jun 17, 9:40am 1497476439

The Fed has to unwind what most consider emergency official rate settings, given the forecast outcomes associated with low interest rates were not realised. The trajectory of this reality is hard to discern given the curious nature of past Fed actions.

In any scientific pursuit, failure is welcomed as a means for pointing the scientist in new directions, hopefully toward the correct answers. It’s a bit different in economics particularly in any policy setting because the experiments are not limited to the setting of victimless laboratories; nor are they often neutral (just ask the Japanese), meaning no harm, no foul. That isn’t how the central bank or government handbook is written in the chapters on the economy. Here, there is only one way of doing things and if that one way doesn’t do the things it is supposed to then the only conclusion officially available is the complete abandonment of any solution whatsoever.

This is why the Fed is currently seeking to “raise rates” and maybe even runoff its balance sheet while its models tell policymakers the expected growth rate isn’t even 2%. They currently figure a trajectory of just 1.8% that is very likely, given the latest drop in the unemployment rate without any uptick in wages, about to be downgraded still further at the next statistical update. From that view of the world as it really is, a pitiful state by any standard, let alone that it has happened following the worst economic contraction since the Great Depression, a 3% economy just might sound laughably insane. Read more

by Stephen Hulme | 15th Jun 17, 9:53am 1497477229

The Federal Reserve’s focus on consumer-price inflation, over which it exerts relatively little influence, means it’s ignoring asset prices that are veering dangerously close to bubble territory. The surge in prices this year for virtual currencies such as bitcoin is reminiscent of the technology-stock excess of the late 1990s, and even after a recent selloff, the biggest U.S. tech shares are still up more than 20 percent. Policy makers could rein in the speculation by speeding up the pace of interest-rate increases, but their inflation mandate makes higher borrowing costs harder to justify given that increases remain subdued. Read more

Hmmmmm...

Our modified Q ratio, subtracting the market value of corporate real estate holdings from net worth, also rose sharply despite a small gain for estimated CRE. By whichever Q valuation measure, the market is pushing back toward levels comparable only to the dot-com era or the peak period at the start of the Great Inflation.

Today’s stock prices, in stark contrast to bond prices and yields, seem to embed an expectation that economic growth will accelerate in the future to justify today’s prices. Indeed, current valuations imply a rate of growth for an extended period of time that is highly unlikely given current workforce and productivity trends. Stock investors have been waiting on the Godot of growth for most of this century and one can’t help but wonder at what point they’ll get up and leave the theater. Read more

by MikeM | 15th Jun 17, 8:55am 1497473720

Only about 80bps between 2 and 10 year treasuries. It's the Fed v the market. One has it wrong.

by Stephen Hulme | 15th Jun 17, 9:01am 1497474084

What is the yield curve supposed to look like? It’s a simple question that doesn’t actually have an answer. And because it doesn’t, there is a whole lot of confusion about bond yields. Read more

by Yvil | 15th Jun 17, 9:24am 1497475467

I'd back the market if I was a betting man

by Houses Overpriced | 15th Jun 17, 9:42am 1497476520

thats because markets is all about betting :)

by dtcarter | 15th Jun 17, 8:59am 1497473977

Yet another american shooting. Time we ban entry of all Americans into nz before they spread their terror here.
If I was Canada I'd be building a wall!

by spinach1 | 15th Jun 17, 9:43am 1497476588

It's not all Americans, most are peace loving, just those democratic extremists.

by Zachary Smith | 15th Jun 17, 11:47am 1497484046

It is really a matter of small differences having a big impact. As a hypothetical example if you had two societies where in one 5% were prone to extremist violence and another only 1% were prone to extremist violence then you would be able to observe markedly different social outcomes. Violence is actually very expensive.If you were taking a gamble the correct choice would be obvious however you could still get unlucky and strike that 1% but that doesn't mean that one is the same as the other. Evolution works like this with tiny differences between groups having a huge long term impact, you know, like extinction.

by steven | 15th Jun 17, 3:53pm 1497498814

Only about 8k of Americans die each year by gun homicide (though gun suicide is popular over there as well) and there are 350million of them, so I dont think they are going to go extinct at that rate.

by steven | 15th Jun 17, 3:50pm 1497498602

The ones I know here in NZ left the USA because they were not one of the crazies by and large. In fact I cant think of one I know actually has a gun over here let alone is a 2a nutjob. More then enough NZers over here Ive come across so far worry me far more.

by David George | 15th Jun 17, 10:11am 1497478276

I've been on about the disgraceful state of our fisheries and the collusion between MPI and Big Fisheries for some time. A new report uncovers the lies.
""Many of these fisheries are doing very poorly and causing serious environmental impacts. New Zealand is failing miserably at looking after the majority of our fish stocks for the public."

Another author, University of Otago's head of marine science Professor Steve Dawson, said "world leading spin" on the quota management system was "so often repeated that it is now earnestly believed by the majority".

"While the notion that New Zealand leads the world might promote a healthy spirit of innovation, it can also degenerate into smugness and complacency. Such complacency is rife in MPI and among politicians."

Some of the issues raised in the journal article include a failure to collect independent scientific data, that three-quarters of New Zealand fish stocks have no formal estimates of population sizes, funding for stock assessment is less than half of what it was in the early 1990s, data on ecological impacts is inadequate, widespread illegal dumping and misreporting was distorting catch statistics, and an independent review of fish dumping and dolphin by-catch "demonstrated industry capture of the regulator".
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11876449

by dictator | 15th Jun 17, 10:45am 1497480305

CNBC has a lot of moaning about the Fed rate hike.
http://www.cnbc.com/2017/06/14/markets-doubt-future-rate-hikes-disagree…

CNBC is quite an awful source but it says a lot about the sentiment. The markets can ignore the Fed the same way the banks here are ignoring RBNZ. It's fine and the market can carry on in it's own direction. That is enabled by the flood of money in circulation, and Japan is a huge source of free money right now.

I'm expecting a reaction from the US banks but that's about it.

by Boatman | 15th Jun 17, 2:02pm 1497492170

Okay , so OIL is down way under $50 pbl and the Kiwi$ is UP .

Lets see what happens to the pump price of petrol and diesel which has been increasing steadily this past year

by nymad | 15th Jun 17, 2:40pm 1497494457

I hate this same old sorry argument about price per barrel and pump prices.
If you actually thought about it a little and educated yourself about the stuff, you'd probably be able to reason it out.

The (very) basic NZ process:
- NZ buys/imports by the barrel. (We export the vast majority of ours due to the arbitrage arising from its quality.)
- Shipped to New Zealand.
- Stored.
- Refined at Marsden.
- Distributed.
- Sold at pump.

Some considerations:
- The cost of international logistics.
- Our storage constraints.
- The cost of refinement (normalise for yield, also)
- The cost of domestic logistics.
- At the pump, if prices are $2 per litre, we are paying around $0.95 in tax (combination of many taxes); effectively 45% taxation.

So, within the value chain, there are a myriad of factors that contribute to the cost of a liter of consumable petrol. Expecting that a 10% drop in crude prices should have the same, or even close, effect on pump prices is just crazy.

by Baza-b1 | 15th Jun 17, 9:09pm 1497517769

Anyone else note the anti racism
campeign on this morning on breakfast...? Nationals strategy to tarnish those questioning their immigration policy???!!! To point the finger at the racist is a smart strategy at this point in time as it's the fastest way to kill the anti immigration arguements nz is
now voicing strongly; Tarnish that populis with a racism brush and the arguement becomes deft to the surrounding masses. Interesting times ahead!!!! Reminds me of when the anti foreign purchasing inquiry regarding Foreign names in phone books from 3 years ago.... back then Posts were readily deleted. Now immigration is the forefront of policy debate in this years election as well as on interest.co.nz. Please take strong note that It's very hard to argue immigration policies once you have been tarnished as a racist. Very smart strategy, played at the right time in the right manner. I hope those guys on that video realise that they have been manipulation in their cause. I am not a racist, I have travelled over 35 countries (I am 30 years old)lived in 7, born offshore but a 5th gen pakeha; I have come back to nz late in
My teens; I have been part of the model United Nations and debated political issues in my youth. In this day and age As a pakeha I embrace Maori and their beliefs as well as those culture I have lived amongst over these years. I'm writing this to highlight the "fuzzy boarders" that were portrayed today as the "fuzzing" plays to nationals political interest!! As to what I'm talking about www.givenothing.co.nz