Dairy prices up +2%; US Fed quells market pressures; US industrial output flat; China house price rises modest; PBoC holds benchmark rate; UST 10yr yield at 1.81%; oil down and gold higher; NZ$1 = 63.5 USc; TWI-5 = 68.7

Dairy prices up +2%; US Fed quells market pressures; US industrial output flat; China house price rises modest; PBoC holds benchmark rate; UST 10yr yield at 1.81%; oil down and gold higher; NZ$1 = 63.5 USc; TWI-5 = 68.7

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Here's our summary of key events overnight that affect New Zealand, with news of an unusual market intervention by the US Fed to stem a sharp yield rise.

But first up today, we had another dairy auction and this one delivered a positive result. In USD, overall prices rose +2.0% and in New Zealand dollars they were up +1.6% from the prior auction. The gains were broad based across most products with butter (+3.7%) and SMP (+3.4%) rises the most. Volumes sold were a respectable 37,345 tonnes. While the gains in NZ dollars wasn't special given our lower currency, it did represent the fifth auction in a row of such improvements and that has accumulated to +6.5% since July and takes prices back to levels we last saw in May. Of special note, the NZ dollar prices for SMP is now just over $4000/tonne and its highest in five years. WMP prices are now just under NZ$5000/tonne and their highest in slightly longer.

In the US, the Federal Reserve had to step into financial markets yesterday to keep market pressure from pushing their benchmark interest rate from rising above its target of 2.25%, the first time they have had to carry out this type of “market operation” since the global financial crisis. And it wasn't minor; they had to buy US$53 bln of securities to damp down the rising yield. Some see a structural flaw at work here.

American industrial output increased solidly in August from July, but that only puts it up +0.4% in a year. It was boosted by rising oil patch output, but factory output declined -0.4% year-on-year. The outlook for factories remains weak amid rising headwinds from trade tensions and slowing global economies.

Canadian manufacturing sales fell even more in the July data they have just released.

In China, they are preparing to release reserves of pork ahead of a national holiday to ease some of the food price pressure there.

China's home-price growth eased for a third consecutive month in August, with new home prices growing at their slowest pace in nearly a year.

And the Chinese central bank surprised markets by keeping its benchmark interest rate unchanged at 3.30% and effectively withdrawing liquidity. Shanghai equity markets fell -1.7% on the news.

In Germany, investor sentiment recovered all of its August decline in September in an unexpected improvement. But overall sentiment is still negative.

The UST 10yr yield is lower, down -3 bps and now at 1.81%. Their 2-10 curve slipped a little to +7 bps. Their negative 1-5 curve is is back out to -21 bps. Their 3m-10yr curve is more negative at -28 bps. The Aussie Govt 10yr has settled back -5 bps to 1.14%. The China Govt 10yr is up +1 bp, now at 3.12%. The NZ Govt 10 yr is now at 1.30%, a fall of -6 bps from yesterday.

Gold is marginally higher again today, up +US$3 to US$1,502/oz.

US oil prices fallen back -US$4 and giving up half of yesterday's gain to be now just over US$59/bbl. The Brent benchmark is now just over US$64. Saudi Arabia says oil production will now be "fully restored" by the end of September.

The Kiwi dollar is little-changed, up marginally to 63.5 USc. On the cross rates we are firmer too at 92.6 AUc. Against the euro we are down to 57.4 euro cents. That puts the TWI-5 at just on 68.7.

Bitcoin is now at US$10,264 and little-changed since 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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45 Comments

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The Fed lost control of the short end of the US interest rate market. The supposed IOER collar was set at 2.10% and the RRR floor at 2.00%

Fed funds rate data
Fed open market operations data

Nasty Number Four: Repo Chaos, TAF Makes A Comeback, and EFF Shows Us How Inept Officials Really Are

You can’t lose control of a money market rate. You just can’t. The Fed did that in 2008 and it didn’t work out so well. While it may not mean much to the layperson on the street, this stuff matters a great deal where it counts the most. Already under suspicion, a clear escalation in the liquidity situation can only lead to even bigger problems than we’ve already witnessed this year.

As a consequence of EFF, the Federal Reserve’s New York branch has already conducted an “overnight repurchase agreement operation” this morning (concluded as of this writing). The 24 primary dealers are the only firms eligible to participate in it.

The real problem, as we’ve been writing about for more than a year and a half, isn’t really federal funds. This latter market is a shell of its former self, the sparest of spare liquidity. Therefore, if that last piece of liquidity finds itself under such huge demand that it is close to violating targets, what does that say about everything else?

Repurchase Agreements primer material:

Quick look: The Repo Market -Bloomberg

Longer look: Reference Guide to U.S. Repo and Securities Lending Markets - PDF

Please confirm.
Westpac has a blanket rule of not lending against commercial property at the moment, unless you have very good LVR's.
Friends were told this yesterday when applying for a commercial loan.

Gee, now why would they be so scared of commercial property?.. it's almost like they think a recession is on the way and commercial occupancy and rents will take a hammering.

YEP!
Had a heads up from a couple of mates that this is going to happen with residential early next year. Took that with a grain of salt but not anymore.

There have been moves by residential property investors into commercial property due to fewer sufficiently attractive returns in residential real estate (especially in Auckland residential property) for investors.

https://www.landlords.co.nz/article/976513789/is-commercial-the-answer

There are some potential fault lines in portfolios of property investors if they also own commercial property in their portfolio. If there is a recession and if the tenant in the commercial property leaves or goes into bankruptcy, then the commercial landlord may face financial stress in servicing the mortgage. Given the lower liquidity of the commercial property market relative to the residential property market, property investors may choose to sell their residential property investments to lower the mortgage on the commercial property. Those residential properties in their property portfolio that they choose to sell could be located anywhere in New Zealand.

For example a property investor with a residential property portfolio concentrated in some smaller cities and towns (e.g. areas with recent high interest by property investors such as Invercargill, Kawerau, Masterton, Palmerston North, etc), also owns a commercial property in some other location, then there could be a large number of residential properties listed for sale in these small towns, potentially putting downward price pressure in these markets if there is an absence of active buyers.

FYI, REINZ announced August 2019 there were record median prices were recorded in:
• Otago with a 21.7% increase to $505,000 up from $415,000 at the same time last year
• Southland with a 20.0% increase to $300,000 up from $250,000 at the same time last year.
• Manawatu/Wanganui region saw a record equal median price achieved of $370,000 the same as June this year, up from $295,000 at the same time last year.

https://www.reinz.co.nz/Media/Default/Statistic%20Documents/2019/Residen...

Yes a residential in investor in Dunedin, going commercial. You smashed that out of the park. Cheers

If banks are reducing their lending against commercial property investment, then this is likely to significantly reduce the pool of potential active buyers for commercial property (as they can't finance the purchase).

This makes it even more difficult for existing owners of commercial property to sell if they face a loss of tenant and rental fall, and the bank demands a reduction in the mortgage.

Yes. It could also impact on their current lending against the building. Low LVR and a price decrease and da bank gets nervous.

Can anyone explain in layman's terms what this NY Fed $53.2 billion repo operation is all about/means/significance etc.

I'm with you, no idea what the heck but know it's not a good sign as my silver went up.
More cracks appearing / getting bigger is all I need to know...

I read the links - maybe trust is breaking down between the banks (guess)?

Use this link for a simpler explanation of what the problem is.

Rastus, I'm going to take a stab. A repurchase agreement is short term lending with something like a treasury bill as security. One party agrees to sell a T-bill to another, and agrees to buy it back from them at a price in the near future. This generates some short term cashflow.

If the value of the underlying security (T-bill) decreased drastically, the lender may not want to repurchase the security and complete the agreement at a loss. Or, the lender could have a lack of liquidity and be unable to make the repurchases. In any case, to me the Fed stepping in here says that repurchase agreements are not being completed in some fairly large numbers. T-bill values have fallen in the last week or two, so that could be part of it. Liquidity issues would be something more serious.

thanks ST, the complexity surrounding finance never ceases to amaze me.

Finance is no longer finance; rocket scientists seem to be running the show now.

Most banks and hedge fund managers in US and UK release results from summer internship and FT hiring sprees on their official websites.
The hiring trends show an increasingly larger proportion of tech and math-related majors. Advisory and transactional functions still recruit MBAs and accountants but everything else is quickly being broken down into 1s and 0s.

When I was in Uni about 6-7 years ago, people in my stage 3 math papers were getting job offers from finance firms for eye watering sums for a graduate position. Finance/Accounting majors looked relatively poor by comparison.

I interpreted the Alhambra article as suggesting liquidity issues are the core problem - hence their reference to a potential TAF 2.

https://www.investopedia.com/terms/t/term-auction-facility.asp

But it's all a bit beyond me as well.

During the GFC, as I understood it, the need for TAF arose because letters of credit were not being honored, and this had the potential to result in billions of dollars of goods transaction to fall over. In other words, many global trade transactions came to a halt given letters of credit were not being transacted/accepted between buyer and seller banks.

https://www.investopedia.com/terms/l/letterofcredit.asp

the interest rates are so low it's just not worth taking the risk. Investing in bonds is more about not losing money than making money.

Shortage of cash resulting in a rapid rise in repo rates - driven by high demand by securities dealers

Securities dealers are buying more new issue US government bonds
They have to borrow money to pay for these bonds.
They give the government bonds as collateral for loans - typically a LVR of 95%.
The repo rate is the interest rate that they pay to borrow the funds from banks & money market funds.

In order to lower the repo rate, the FED lent cash to securities dealers (and hence took government bonds as collateral)

Good explanation on this thread - https://twitter.com/lebas_janney/status/1173947325661757440

I thought these were the best of times?

That's what they are selling. Buy buy buy, borrow away, safe as houses.... The problem is that people are better informed now days with a phone in their pocket.

Your not wrong. Smart phones are a very powerful piece of gear

10 years ago if we had 10 mins free time, it was a quick game of 'snake' or 'tetris' on the phone. Now we read about world events as they happen.
Sure it's all still highly manipulated from all over the field but we get to take it all with a grain of salt and figure out what we believe will or won't happen.

Today's "Watershed" Repo-calypse Is "One Of The Worst Things That Can Happen"

https://www.zerohedge.com/markets/repo-calypse-ruins-bank-run-oil-magedd...

Repo mark of 2.25 has not been achieved.
The latest rate in public domain is 3.82
The credit market in USA is sending a message and QE4 may well be coming.
I note that China also decided not to cut rates.
China is focused on domestic consumer development.

"Debt-Wracked Chinese Companies Dump US & Other Foreign Assets, Become Net Sellers Overseas for First Time"

https://wolfstreet.com/2019/09/17/chinese-companies-dump-us-other-foreig...

Interesting Stuff article on Robert Shiller's latest utterings here.

https://kunstler.com/clusterfuck-nation/a-view-from-the-brink/

"If that happens, the world will never be the same. You can kiss the global economy goodbye for good. Let’s hope some people don’t do something".

It'll happen. There isn't enough for everyone now

interesting choice of language in it!

"A correspondent suggests that the missiles were fired from a pro-Iranian military base in Iraq, with the Houthis brought in on flying carpets to push the launch buttons."

Re the missile / drone attacks on the oil refinery...
Something isn't stacking up in my head. A while ago there was some issue in Syria and the US, with all of it's high tech war machine launched a lot of missiles and hit hardly anything. Something in the 5% to 10% actually hit the intended targets.
Now we have a relatively small unorganized rebel force that launched by far fewer missiles with a very high 'hit' rate. The satellite photos show containers with holes in them that are in the same location as the other ones.
What's not stacking up here....

we need to send someone round to convince you, he's on his way.

Lol. Nar nar all good I've seen the light... No more commonsence from this corner.

Amazon have announced that they will begin filming their " Lord of the Rings " series in NZ ... wonderful news for our film industry , my precious ...

it's over 5 years too, I have a daughter in in the industry. Auckland and Scotland.

https://www.odt.co.nz/regions/central-otago/massive-hydro-storage-plan-b...

Interesting, given the recent discussion hereabouts. Coincidence?

LOL - if so, where do those interest.co commentators go to collect their "influencer" cheques?

Influencers get paid in kind.. ergo, you get a free trip down the hydroslide once they build it... Weeeee!!!!

"He said transitioning to a low-emissions economy in New Zealand would require a "significant increase" in energy storage capacity."

Should read

He said transitioning to a low-emissions economy in New Zealand would require a "significant decrease" in energy consumption".

NZX50.. off to a slow start, now marching steadily downhill.