90 seconds at 9 am: US uses tariffs to reward favoured firms

Chinese decline rural visit during trade talks; US grows its exemption list; ; China trims bank rates; India cuts corporate tax rate; UST 10yr yield at 1.72%; oil unchanged and gold up; NZ$1 = 62.6 USc; TWI-5 = 67.9

23rd Sep 19, 7:21am by David Chaston

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Here's our summary of key events over the weekend that affect New Zealand, with news the Kiwi dollar has fallen sharply and is now at a ten year low.

But first, the Chinese delegation to the seemingly endlessly revolving trade talks in Washington has declined an invitation to go to a US farm state. That surprised the Americans.

That saw Wall Street fall in its final Friday session, ending down -0.5%.

And that contrasted with Shanghai which ended Friday with a +0.3% gain.

The Americans are talking tough with the usual Presidential bluster, but quietly they have announced that more than 400 additional Chinese exports had been excluded from their tariff regime. Those growing exclusion lists are now huge. This is the new game in Washington - get your Chinese imports on one of these lists, all very crony-capitalist. Apple is apparently one 'winner' after support from the President.

In China, global banking giant HSBC has launched a public-relations offensive aimed at leaders in Beijing, reflecting worries that its position as the biggest foreign bank in China is at risk. This comes as there are calls in China to place it on its "unreliable" blacklist.

And the Chinese central bank lowered the new reference rate for bank loans by -5 bps to 4.2%, indicating that monetary conditions remain loose.

Meanwhile, China's giant sovereign wealth fund (NZ$1.5 tln) revealed that profits on its international portfolio fell more than -2%, a sharp reversal for this portion which earned more than a +18% gain in 2017. It is opaque about the split between international and domestic investment, but the international portion contributed to the overall fund value actually falling in the year.

In Hong Kong, the weekend protests continue, now with a harder edge and without any sign they are fading. The police are now searching public transport electronic records trying to track down protesters.

Back in the US, new Fed data shows that household net worth grew only marginally in the June quarter, but at least it grew. It was near its slowest growth in the past twelve quarters.

In New York, the Fed pumped yet another US$75 bln into its money markets on Friday, taking the total to US$275 bln in four days. Plus it has added new capacity to deal with the issue. And it seems these measures have calmed their repo market pressures.

In India, they have cut their corporate tax rates in an effort to spur investment and boost growth in the country's faltering economy. The base corporate tax rate is to be lowered to 22% from 30%.

In staying in India, their Federal government is about to open up roading development to PPP investment. The plan is to build nearly 1000 kms of highway, worth about NZ$7 bln.

In Europe, the British seems to be getting more serious about the necessity to compromise, but Brussels seems sick of them. And Dublin is't impressed either.

In Australia, it has been revealed that incoming NAB chief executive Ross McEwan will officially take up his new role at the beginning of December. That may trigger some serious reshuffling at the bank.

The UST 10yr yield is lower today, at 1.72% and down -4 bps from where we left it on Friday. Their 2-10 curve more positive now at +4 bps. Their negative 1-5 curve is wider -24 bps. Their 3m-10yr curve is also at -24 bps. The Aussie Govt 10yr is down sharply to 1.02%, and a weekly fall of -21 bps. The China Govt 10yr is at 3.12% although in a week it has risen +3 bps. The NZ Govt 10 yr is now at 1.18%, a -17 bps drop for the week.

Gold is up +US$18 at US$1517/oz.

US oil prices are little-changed today at now just on US$58/bbl. The Brent benchmark is just over US$64.

Our currency is currently at 62.6 USc and the last time it was this low was in June 2009. This represents a -4.5% devaluation since the surprise -50 bps OCR cut on August 7.

We are lower against most others as well - near a one year low against the Aussie and the euro. On a TWI basis it's a four year low.

On the cross rates we are softer too at 92.5 AUc. Against the euro we are at 56.8 euro cents. That puts the TWI-5 back down to just on 67.9 and a -100 bps fall in a week.

Bitcoin is now at US$9,982 and that is -1.7% lower from where we left it on Saturday. 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

by Roger Witherspoon | 23rd Sep 19, 7:33am 1569180786

Crikey. Whatever next? A current account surplus? Is the ship turning around? Are we moving from a country besotted with selling assets to foreigners and borrowing money from abroad to compete against each other to push our house prices to new levels of ridiculousness; to a sensible sort of place that earns more than it spends? Surely, not?

by profile | 23rd Sep 19, 7:54am 1569182050

Despite evil growth US air pollution levels have continues to fall. I wonder if Greta can see pollution too? "Between 1970 and 2018, the combined emissions of the six common pollutants (PM2.5 and PM10, SO2, NOx, VOCs, CO and Pb) dropped by 74 percent. This progress occurred while the U.S. economy continued to grow, Americans drove more miles and population and energy use increased."
https://gispub.epa.gov/air/trendsreport/2019/#introduction

US factories are polluting way less — but it's not because of offshoring
https://www.vox.com/2015/2/8/7999417/US-factory-pollution-offshoring

by Pragmatist | 23rd Sep 19, 8:01am 1569182517

Yes, the EPA in the US, and the constantly increasing emissions standards on cars combined with yearly testing worked. We should work toward annual emissions testing of cars in NZ, a good way to force some of the old junk into the hands of the recyclers, and speed up the replacement with hybrids and eventually EVs.

I notice of course that the greenhouse gases CO2 and methane aren't mentioned.

by Kezza R | 23rd Sep 19, 8:28am 1569184095

That would involve Labour and the Greens to be able to implement changes. All hot air no delivery.

by Pragmatist | 23rd Sep 19, 8:34am 1569184471

Why would it have to be Labour and the greens, is it impossible for the Nats to do anything to improve the planet?

by Kezza R | 23rd Sep 19, 8:51am 1569185469

Yeah they could but it's going to take a term for them to clean up the current Govt's rubbish.
TOP could do it as well but they would be too busy on cat destruction and bombing the country with 1080.

by Pragmatist | 23rd Sep 19, 9:17am 1569187062

Well, yeah, going by how much the Nats achieved in their last term in govt they won't achieve SFA next time either...

by redcows1 | 23rd Sep 19, 8:52am 1569185570

Yes impossible, no one would buy it.

by Kezza R | 23rd Sep 19, 9:07am 1569186474

An incentive like that would sink the Greens for a couple of decades though.
Simple politics, Labour has already sunk itself and now take the Greens out by doing their job... no competition.

by steven | 23rd Sep 19, 10:39am 1569191947

They are doing some thing, despite NZF and taking flak off National. So the Q is why cant all the parties work together to achieve things?

by Foyle | 23rd Sep 19, 9:43am 1569188638

I used to develop car engines professionally. Higher emissions standards (other than diesel particulates) are useless in a country so sparsely populated as NZ. Ever more stringent emissions regulations have been used as a barrier for large automotive companies that can afford the billions in R&D to reduce competition from smaller players even though they deliver no real world benefits above and beyond those already achieved 15-20 years back. But they do cost a whole lot more, adding $1000's in complex systems to cars and using $100's of dollars more of precious metals in catalysts that are not recovered. They also prevent the operation of cars in far more fuel efficient ways (lean burning) that would save 10-20% of fuel use in cars - so net they are actually worse for the environment.

by Pragmatist | 23rd Sep 19, 11:18am 1569194300

"Higher emissions standards (other than diesel particulates) are useless in a country so sparsely populated as NZ."

What has population density got to do with not pumping pollutants into the air we (the entire planet) breath? In particular the four mentioned in profiles initial comment: SO2, NOx, VOCs, CO.

" using $100's of dollars more of precious metals in catalysts that are not recovered."
I assure you there is quite a good price paid by recyclers and wreckers for used catalytic convertors, I'm sure not all get recovered, there will still be those with farms or other remote land that just push the old wreck into the nearest gully and forget about it, but the vast majority do get recovered. When it takes 20seconds with a cutoff disc on a grinder to remove each cat and get $50 or so for it means that they do indeed get removed.

"They also prevent the operation of cars in far more fuel efficient ways (lean burning) that would save 10-20% of fuel use in cars - so net they are actually worse for the environment."

Which is why we have SCR systems in larger diesels and increasing in smaller diesels, it cleans up their exhausts rather well. And NOx storage cats for are not a new thing.. https://www.sciencedaily.com/releases/2007/07/070712134929.htm

by youngdumbandbroke | 23rd Sep 19, 3:48pm 1569210535

"What has population density got to do with not pumping pollutants into the air we (the entire planet) breath? In particular the four mentioned in profiles initial comment: SO2, NOx, VOCs, CO."

Means that no amount of reduction in NZ emissions will mean diddly squat in the global context.

Especially when one of the most populous countries cut a nice deal on coal
https://www.reuters.com/article/us-australia-coal-adani-ent/indias-adan…

by Gummy Bear Hero | 23rd Sep 19, 8:04am 1569182652

The sky didn't fall , even though the bright sparks running our RWC coverage cocked it up . . Now all they're streaming is tears ...

.. how pathetic ! . . Our national game , there's no greater sporting fixture than our ABs fronting up to the Boks ... and now , it's a commodity to be bidded and bungled over ....

by Kezza R | 23rd Sep 19, 8:29am 1569184173

Plain to see that Spark is still the same old arrogant Telecom.

by rastus1 | 23rd Sep 19, 8:36am 1569184568

winge and grizzle. And forget that new tech has issues and that Spark has broken the SKY monopoly on sport. Good work Spark I say.

by redcows1 | 23rd Sep 19, 8:51am 1569185495

Worked fine for me out here in the woopwoops.might cost me about in data though.
TBF Spark are really lucky to even get a chance to try, I was reminded this morning that MaoriTV got the rights to free to air summarily removed just because some didn't want to shift from the other channel

by Mountie | 23rd Sep 19, 10:11am 1569190317

Well said Rastus.

by frazz | 23rd Sep 19, 8:44am 1569185058

Was there something on in the weekend?

by BadRobot | 23rd Sep 19, 8:47am 1569185230

Nothing important.

by Audaxes | 23rd Sep 19, 9:24am 1569187484

In New York, the Fed pumped yet another US$75 bln into its money markets on Friday, taking the total to US$275 bln in four days.[my emphasis]

FRBNY did no such thing:.

The “repo operations” the New York Fed has been conducting since Tuesday were overnight repurchase agreements (ultra-short-term loans), where in the morning, the New York Fed offers up to $75 billion in cash at an interest rate that is within the Fed’s target range. These loans are secured by collateral. The allowed collateral are Treasury securities, Agency securities, and mortgage-backed securities guaranteed by the Government Sponsored Enterprises (GSEs).

These overnight interest-bearing loans unwind the next morning, with the Fed getting its $75 billion in cash back, and the dealers getting their collateral back. As these operations were undertaken every day for the past four days, it’s essentially the same $75 billion that gets recycled every day. The daily amounts are not additive. Link

by Kezza R | 23rd Sep 19, 9:47am 1569188859

Unless a bank goes bankrupt and starts the ball rolling.

by Audaxes | 23rd Sep 19, 10:51am 1569192669

Then FRBNY would have to buy the failed bank's toxic assets or extend direct funding to stabilise the situation if said bank was eligible for such assistance, much like the AIG rescue. Extending reserve funds, in exchange for collateral, to the 24 primary dealer registered banks does not ensure money transmission to ailing institutions beyond this inner circle.

At this point, FRBNY is acting to contain the dislocation in the repo market in order to help maintain the federal funds rate within the target range of 1-3/4 to 2 percent. Perversely, a second order ceiling IOER set at 1.8% and RRR floor set at 1.70% are also referenced to bring extra "stability" to the situation.

by Roger Witherspoon | 23rd Sep 19, 11:07am 1569193638

I've been trying to understand this repo market thingy. Isn't handing over your treasured possessions with the right to buy them back tomorrow, called Pawnbroking?

Am I right in thinking that the Fed front office acts as transparent banker to the banks. The repo market is the anonymous back door down a hidden alleyway, out of the back of a secondhand bookshop, where the Fed acts as Pawnbroker? If a bank borrows from the front office, everyone knows it and that bank's credibility is shot; but if they borrow around the back, then no one knows who is in dire straits and the pretense of respectability is maintained.

by Audaxes | 23rd Sep 19, 12:04pm 1569197063

The transparent Fed front office is:

The Discount Window, or what’s now called Primary Credit, still exists and like those repo operations it requires eligible collateral. Just like in 2007. And nobody will ever use it no matter how bad things get.

The same day the Committee voted to reduce the Primary Credit rate [August 17, 2007], the old Discount Rate, officials at the central bank held a teleconference with several large supposedly rock-solid institutions proposing that they kick things off by voluntarily accessing the window. It would show the world, they actually believed, how there was nothing unusual about borrowing here…

No one cared. Despite the big show made of it, the Discount Window remained a suicidal option in the perception of the marketplace. You went there because you had to and when you did everyone would immediately know who and for how much. Transparency was supposed to be a positive, an aspect of shame as a control lever, but it had turned the emergency policy into a virtual no-go zone. Link

by Roger Witherspoon | 23rd Sep 19, 12:55pm 1569200129

Ha, so the front office is a Pawnbroker's shop too. Hence the stigma when you go in bearing your most treasured possessions to hock, because you are desperate for an overnight loan. You cannot go in that way, because everyone will see that your ability to actually manage money is actually, well, rubbish.

That would not do at all, as people might then start to wonder which of the other bankers might also be over promoted, incompetent bunglers.

by Hardly | 23rd Sep 19, 10:58am 1569193100

This is worth a read on the Fed and the repo market.

https://www.bloomberg.com/opinion/articles/2019-09-20/how-the-fed-can-h…

A couple of takeaways for me which seem quite significant:

(1) people don’t seem to know why the issues are occurring, they can see the symptom but not the cause

(2) one long term solution might be the fed to buy more assets - more QE - which would have some pretty far reaching implications as a policy.

And the point remains - how did we get a problem at a point of such economic strength. What is going to happen in a liquidity crisis or recession?

by Andrewj | 23rd Sep 19, 12:48pm 1569199680

Holy cupcakes
https://www.zerohedge.com/economics/south-korean-exports-collapse-21-bi…

by Kezza R | 23rd Sep 19, 2:56pm 1569207377

Is this the start.... The cracks are growing day by day.