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US Fed no longer 'patient', but holds off rate cut anyway; Canada inflation rising; China liquidity stress grows; iron ore price rises again; UST 10yr yield at 2.03%; oil down and gold up; NZ$1 = 65.4 USc; TWI-5 = 70.3

US Fed no longer 'patient', but holds off rate cut anyway; Canada inflation rising; China liquidity stress grows; iron ore price rises again; UST 10yr yield at 2.03%; oil down and gold up; NZ$1 = 65.4 USc; TWI-5 = 70.3

Here's our summary of key events overnight that affect New Zealand, with news the US Fed is backing Powell over Trump.

At its latest rate review, the US Federal Reserve has kept its policy rates unchanged. This is on the basis that the US has a low jobless rate and is likely to stay low, and most inflation measures are near its target 2% level. But it did acknowledge that "uncertainties about this outlook have increased". The decision was nine to one, with the dissenter a long-time dove.

Having said that, they did remove the word 'patient' from their Statement, and their dotplot suggests one rate cut by the end of 2020 and none in 2019 - far slower than many observers had been assuming. However, this dot plot is different because the prior one saw more chance of a rate hike in 2020. But if you actually take a look at these two dotplots you might find it hard to conclude a rate cut is a firm part of their thinking.

The US dollar fell. US Treasury bond yields fell. Equity markets moved from negative territory into positive territory in a smallish jump.

Overnight European markets were little changed, although UK equity markets fell on political uncertainty. Yesterday Asian markets were all up strongly.

In Canada, inflation is rising, coming in at 2.4% and well above the +2.1% that markets were expecting.

In China, they are approaching their annual period where banks face seasonal liquidity stresses. But this year, these stresses are magnified by the contagion of a key small bank failure and spillover into the non-bank finance sector. There is a growing sense that Chinese financial regulators are losing control of the situation. If they don't regain it soon and before the annual liquidity squeeze, financial stability in the Middle Kingdom could waiver.

In Australia, the iron ore price just keeps on rising and rising. It is up to over US$106/tonne and that is more than a +50% rise since the start of the year. For months, observers have been saying it can't last and yet it is moving higher relentlessly. Strong Chinese buying is at the centre of this, but Brazilian supply issues are also playing a part. High prices for coking coal are evident too.

The UST 10yr yield is now just under 2.03% and down -3 bps from yesterday. Their 2-10 curve is slightly wider at +24 bps while their negative 1-5 curve is slightly narrower at -23 bps. Their closely-watched 30 day-10yr yield is sharply negative now at -13 bps. The Aussie Govt 10yr is unchanged at 1.36%. The China Govt 10yr is also unchanged, still at 3.26%, while the NZ Govt 10 yr is down -3 bps to 1.62%. We should also note that the New Zealand 1-5 swap curve is almost completely flat at +1 bps.

Gold is up +US$3 today to US$1,349/oz.

US oil prices are softer today as high American inventories overwhelm supply tensions. They are now just on US$53.50/bbl. The Brent benchmark is now at US$61.50.

The Kiwi dollar is firm against a downward adjusting greenback after the FOMC decision, now at 65.4 USc. On the cross rates we have risen too to be at 95 AUc. Against the euro we are up to 58.4 euro cents. That puts the TWI-5 up at 70.3.

Bitcoin is little changed at US$9,140. The bitcoin 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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17 Comments

Are our falling bond rates just playing tag along with the rest of the world or are they a genuine reflection of how pathetic the path forward is for our NZ economy? If the later then hard times coming.

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In Australia, the iron ore price just keeps on rising and rising. It is up to over US$106/tonne and that is more than a +50% rise since the start of the year. For months, observers have been saying it can't last and yet it is moving higher relentlessly

Special Report: 'Ghost collateral' haunts loans across China's banking system

In some cases, collateral that has been pledged simply doesn't exist. In others, it disappears as borrowers in financial distress sell the assets. There are also instances in which the same collateral has been pledged to multiple lenders. One lawyer said he discovered that the same pile of steel was used to secure loans from 10 different lenders.

Read more and more

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Financial Accounts of the United States

What most people may not realize is that the foreign sector had long ago become a pivotal piece of the domestic financial picture. Eurodollar growth was more than just dollars offshore; they may have started there and may have been traded in these long chains of bank liabilities stretching around the world, but more and more over time eurodollars landed onshore, too.

In figures recently update to include those from Q1 2019, the Z1 estimates tally the amount of financial assets of all kinds held by domestic depository institutions (a class which today includes both the traditional types of banks, which always had fallen under this label, as well as what used to be known, and treated separately, as commercial banks; also called investment banks). The total for the first quarter was $19.3 trillion.

The total amount of financial assets held by the Rest of the World (ROW)? An astounding $28.6 trillion. If we only include credit market assets (as shown in the charts here), excluding stocks and mutual funds, it’s still $15.3 trillion – nearly as much as all the country’s domestic banks. There’s an awful lot of domestic activity in the eurodollar system.

Link

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paywalled, any chance of a brief synopsis?

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Speaking on a conference panel this morning, Cornelius Riese, co-CEO of Frankfurt-based DZ Bank A.G. (Germany’s second-largest by assets), observed that negative rates indeed “have a huge impact on banks.” Riese ventured to offer some gentle criticism of Draghi & Co.’s grand policy experiment: “Maybe at the end of the story, in three to five years, we will notice it was a historical mistake.”

Link

The Rule of 72 is a handy guide for guesstimating the amount of time it takes one’s principal to double when invested at a certain rate of interest. Thus, for money invested at 1%, the doubling time is about 72 years. At .01%, it’s more or less 7,200 years.

It works in reverse, too. At minus 2%, your principal would be chopped in half in approximately 32 years. There’s nothing bond-specific about this particular calculation. At the 2% inflation rate that the central bankers actually strive to achieve, everybody’s principal is on the chopping block.

Link

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What time is the GDP announcement? It's an important one moving forward.
My pick is +0.5%

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The .ics file on the stats site says 10:45.

And the number is 0.6%

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ohhh, close!
I thought it would be middling-good. Projects under construction will still be stimulating growth, it's what is following in 6-9 months that is the worry

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No it isn't. GDP counts 'bads' as 'goods' and avoids externalities. The difference between GDP and a lie, then, is somewhat difficult to ascertain.

I prefer real counts - stocks rather than flows, kind of thing.

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It's an important one within the current political paradigm and policy framework.

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Will Roger get a break ?

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On Monday he said:

'The likely detractor to positive growth in the economy will be the construction sector, which has severe capacity constraints and cannot expand any further.'

He was wrong. Construction was quite robust, although as I have said it's rear view mirror stuff really. In 6-9 months it will be weaker.
I think Roger might need to broaden his networks if he wants to provide more accurate advice.

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I think the capacity constraints idea has come from KiwiBuild excuses. Too much listening to a department that has no idea how to get anything built, and has only acted as an underwriter. There are constraints in some areas but the amount of active projects has still increased.

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