ECB restarts QE, EU factory production drops; US core CPI rises; US Govt deficit tops US$1 tln; trade talks conciliatory; UST 10yr yield at 1.79%; oil lower and gold firmer; NZ$1 = 64.2 USc; TWI-5 = 69.4

ECB restarts QE, EU factory production drops; US core CPI rises; US Govt deficit tops US$1 tln; trade talks conciliatory; UST 10yr yield at 1.79%; oil lower and gold firmer; NZ$1 = 64.2 USc; TWI-5 = 69.4

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Here's our summary of key events overnight that affect New Zealand, with news both monetary and fiscal policies in the largest economies seem not to be working.

In Frankfurt, the ECB has lowered the interest rate on the deposit facility by -10 basis points to -0.5% but left its other benchmark rates unchanged. This is as markets expected. In addition and more importantly, it has restarted its QE program. It will make bond purchases at a monthly pace of €20 bln starting in November. This is a pretty modest restart, but important all the same. And it came with a promise of indefinite stimulus until growth returns, essentially tying incoming Christine Lagarde to the policy setting as Mario Draghi bows out. These decisions weren't unanimous however with dissent at the need for a cut and the restarted QE.

Continuing insipid economic growth has been their trigger. In fact, as they met, Eurozone industrial production data for July came in -2.0% lower than for the same month a year ago and their capital goods component fell by even more. In fact, EU countries are the laggards in the G20 data released by the OECD today. That review was also held back by the US and Japan. The countries with rising expansions included Canada, China, Indonesia and Korea.

In the US, consumer inflation came in at +1.7% in August and that was less than expected (+1.8%). However core inflation rose to +2.4% and that is a one year high. Most observers expect the Fed to turn a blind eye to this and cut their benchmark rate next week by -0.25% to 2.00%.

And in a landmark event, the US Federal budget deficit widened to more than $1 tln in the first 11 months of the fiscal year, the Treasury Department said, the first time deficits have topped that mark in seven years and the first time ever in a non-recessionary period. It came much quicker than expected. The eleven month outcome is -36% worse than the full twelve month 2018 result. That means it has jumped from -3.7% of GDP in 2018 and has now breached -5.0% of US GDP in 2019 - and there is still one month to go. At some point, markets will notice the risk. Tax cuts for the rich haven't worked in the way they were sold.

But today, they are ignoring it and noticing the ECB. QE juice has markets on both side of the Atlantic up about +0.6% today. Yesterday in Asian equity markets, Shanghai and Tokyo both rose +0.8% although Hong Kong fell -0.3%. The ASX200 was up +0.3% but the NZX50 was down -0.2%.

Also encouraging equity markets are more conciliatory tones in the pre-positioning ahead of October trade talks between China and the US. There are reports the US Administration is trying to find a face-saving exit plan. The IMF has said that this chronic dispute, which doesn't seem to be resolving anything, will cut world economic activity by -0.8% in 2020. That is more than US$0.5 tln of loss and twice the total GDP of New Zealand.

The UST 10yr yield continues to rise, up another +2 bps and now at 1.79%. Their 2-10 curve is unchanged at +6 bps. Their negative 1-5 curve is narrower at -18 bps. Their 3m-10yr curve is also narrower at -24 bps. The Aussie Govt 10yr is up +2 bps at 1.16%. The China Govt 10yr is also up +3 bps at 3.09%, while the NZ Govt 10 yr is up +4 bps, now at 1.32%.

Gold is again higher today, up +US$4 at US$1,499/oz.

US oil prices are lower again today, and now just over US$55/bbl. The Brent benchmark is also down at just on US$60.

The Kiwi dollar is unchanged at 64.2 USc. On the cross rates we are softish at 93.4 AUc. Against the euro we are lower at just under 58 euro cents. The TWI-5 has dipped to 69.4.

Bitcoin is now at US$10,296 and +2.1% higher than this time yesterday. 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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29 Comments

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"Policies not working"

The quote from Einstein about insanity comes to mind in regards to the usage of MMT.

MMT is pretty much the opposite of what is currently being used - QE and negative interest rates. The world is relying on monetary policy (which isn't working) but "MMT advocates argue that the government should use fiscal policy" (https://en.wikipedia.org/wiki/Modern_Monetary_Theory)

You are correct, they are not the same thing, although they have a strong family resemblence. MMT injects money into the economy via direct spending by the govt, QE injects money into the economy via lowering the cost of money. The quote from bernanke about using proverbial helicopters to drop money was about QE, but could also be describing MMT spending.

Tax cuts for the rich never work, other than enriching the rich.

The rich are more likely to spend on their imported cars, luxury holidays overseas and stash what's remaining in an offshore bank account.

A significant proportion of low earners in the US believe that lower taxes on the rich bears benefits for the wider society. Part of the reason for that is these low-income earners consider themselves 'soon-to-be rich' individuals (American dreamers), so they obviously don't want their future wealthy self paying higher taxes.

The Rich (to use your term) are likely to have arranged for their earnings to go into that offshore bank account before they start! What local spending they do is likely to come the other way - from that offshore bank account, onshore.

There's great quote that speaks to that, I think from Ronald Wright -
“Socialism never took root in America because the poor see themselves not as an exploited proletariat but as temporarily embarrassed millionaires.”

Something is working. "...over the last half-century, the share of US households earning incomes of $100,000 or more (in 2018 dollars) has more than tripled."
http://www.aei.org/wp-content/uploads/2019/09/incomeshares2019.png
http://www.aei.org/wp-content/uploads/2019/09/censusb.png
http://www.aei.org/publication/animated-chart-based-on-todays-census-rep...

Men’s “Real” Earnings Below 1973 Level: Census Bureau

The median earnings of men working full time year-round in 2018 ticked up to $55,291. Adjusted for inflation, this was below the amount they earned in 1973, according to the annual data trove released by the Census Bureau today. In other words, there has been a “real” income decline for men over the past four-plus decades!

Which goes to show you howm much women are killing it in the workforce. ""...over the last half-century, the share of US households earning incomes of $100,000 or more (in 2018 dollars) has more than tripled."

Tripled from what baseline?
Furthermore, women wanting children free from the chore of paid work cannot be amused.

1967. 2018 dollars. Perhaps have a squis at the links above? Given how women are killing it in the workforce and at Universities I think their preferences have been borne out. But perhaps you know best what amuses them.

Experts, Roger Kerr and why the All Blacks will not make the final stages.
I have a healthy distrust of all proclaimed experts,(we all should) . For a Friday 13 morning ,and as we approach peak housing rutting season a review of Mr Kerr's 2019 predictions felt appropriate. Possibly , Mr Kerr could take note on Monday after a well deserved drink of milk.
.https://www.interest.co.nz/currencies/97511/roger-j-kerr-end-year-some-s...

11
up

So, in sum: OECD is fine except for EU, USA and Japan which in total make up about 65% of world GDP. And China GDP figures are mythological anyway, as you well know.
Next cuts in tax for rich "don't seem to have worked" - perhaps because they have not same propensity to spend as rest of 85% of pop?
Then, also, QE and fiscal policies are not working. you say? That has been so (if looking at resuscitation of 3% pa growth) since 2009. But then that does not stop you saying that what EU is doing is important and a good start, after just saying it is to working as a policy.
GDP will not return to 3% pa growth in non Asian economies because they have skewed wealth too far to those who do not spend it plus they are getting older faster than immigration can counter effect of.
What does not work is "independent" banks which are no such thing as they favour capital over labour, and governments failing to serve society rather than finance. Financialisation is a machine for securitising debt risk and making rich richer. Neo-liberalism is a paltry mask for making this look like a rational economy policy of "there is no alternative." Well, it is high time one was found because the majority of the population is getting screwed.

I guess thats why theyre rich - they have financial discipline that the majority lack. You dont get rich by spending all your money

MA in political economy there. Not

Nothing to do with inheritance and multi-generational wealth, nosiree.

When they say rich they're not talking about people who are merely "doing fine", the grafters and savers and owner of the odd rental.

Refer to Senator Ted Kennedy: "But I don't really understand your last point. What do you mean about the dangers of hereditary wealth and power?" And all the senators roared with laughter.

Fully agree with you on that one

In contrast to the EU the UK is pumping - who in their right mind would want to remain with the EU carcass. "Meanwhile, the rate of unemployment is at its lowest in 45 years, driven by a record low in the percentage of women who are unemployed. ...Average earnings, which include bonuses, had the fastest rate of growth since May 2008 as they increased by 4% compared with 3.8% in the previous month."

All this after the experts stated that by merely voting for Brexit there would be an immediate recession and 800,000 umeployed.
"Publishing Treasury analysis, he said a Leave vote would cause an "immediate and profound" economic shock, with growth between 3% and 6% lower.
David Cameron said it was the "self-destruct option" for the country.
But Boris Johnson dismissed the study as "more propaganda" from the Remain side which he claimed was "rattled".

https://www.itv.com/news/2019-09-10/uk-employment-rate-hits-record-high-...
https://www.bbc.com/news/uk-politics-eu-referendum-36355564

In other news:
1 The European Union of Socialist States continues to show long term decline, presumably as a result of excessive centralisation of policy making and the excessive bureaucratic overhead and regulatory inefficiency this requires.
2 The US, whilst highly polarised politically and continuing to badly underperform its potential, keeps chugging along ok, fueled by fiscal profligacy. Tax cuts work, presumably because they help individuals sort out their own problems.

2 ...and fueled by oodles of cheap energy supplies. "U.S. natural gas production continued to increase in August, setting a new daily production record of 92.8 billion cubic feet per day (Bcf/d) on August 19, 2019, according to estimates from IHS Markit. Natural gas production also set a new monthly record in August, averaging more than 91 Bcf/d for the first time."
More gas than they can pipe.
"Prices at the Waha Hub in West Texas traded as low as negative $5/MMBtu, a gaping $8/MMBtu discount to benchmark Henry Hub in Louisiana."
https://www.eia.gov/todayinenergy/detail.php?id=41273

It is funny how we think about the US. Lots of contradictions. They are far, far, more dynamic economically than the far more fashionable EU. Both have massive chronic inequality, a partial failure of the system of representative democracy, a somewhat compromised judiciary and an excessively manipulative administration.

In other words not much democracy at all for the masses:
Breaking Up the Democratic Party

When neoliberals shout, “But that’s socialism,” Americans finally are beginning to say, “Then give us socialism.” It beats being ground down into debt peonage

.

Their ancestors fled from Europe to get away from oligarchy. Now the descendants find themselves beaten down by oligarchy while the Europe their ancestors left doesn't bankrupt people for medical care, allow fire at will employment, or exploit through for-profit education and single-use textbook codes.

This trader does the job on Draghi and the whole charade of non-utility that is QE and its accompanying lies.https://www.zerohedge.com/markets/giant-policy-failure-trader-slams-drag...

RE ECB: This is a pretty modest restart, but important all the same. And it came with a promise of indefinite stimulus until growth returns, essentially tying incoming Christine Lagarde to the policy setting as Mario Draghi bows out.

The bond market thinks central banks are out of juice and inflation will stay below target for, well, ever. The longest-dated Treasurys are priced for inflation to average 1.6% for the next 30 years, and German bonds for just 1.3% inflation.Link

Bond buyers know that QE is coming especially and Europe, and that in all likelihood because of this predicament central bankers will have to get creative with it, like Japan, so how could they possibly not be pricing long run success? What the bond market really thinks is beyond the ridiculous assumptions about R*. The Fed and ECB aren’t out of juice, they simply don’t have any at all. That’s just what long-term bond yields and inflation expectations are saying. It doesn’t matter where the Fed starts with Fed funds, or the ECB with its MRO-Deposit Rate corridor, there’s no money in policy even when getting to bank reserves. Link

In Frankfurt, the ECB has lowered the interest rate on the deposit facility by -10 basis points to -0.5% but left its other benchmark rates unchanged. In addition and more importantly, it has restarted its QE program...it came with a promise of indefinite stimulus until growth returns.

Have we ever before seen a few generations borrowing prosperity to such a great degree from those who would follow after them? Staggering. Whatever happens, one must avoid discomfort to one's own self!

And in a landmark event, the US Federal budget deficit widened to more than $1 tln in the first 11 months of the fiscal year, the Treasury Department said, the first time deficits have topped that mark in seven years and the first time ever in a non-recessionary period...Tax cuts for the rich haven't worked in the way they were sold.

My, my, just look at those fiscal conservatives go!

Wow , Britain has Margaret Thatcher to thank for engineering a deficit to ensure the Pound was not canned into the Euro .

Now its time Britain disconnected itself from the looming trainwreck that is the EU