Wall Street rises; US-China trade talks positive; US consumer sentiment rises; US Fed pumps; Canada jobs jump; China capital flight rises; UST 10yr 1.77%; oil up and gold lower; NZ$1 = 63.4 USc; TWI-5 = 68.6

Wall Street rises; US-China trade talks positive; US consumer sentiment rises; US Fed pumps; Canada jobs jump; China capital flight rises; UST 10yr 1.77%; oil up and gold lower; NZ$1 = 63.4 USc; TWI-5 = 68.6

Here's our summary of key events overnight that affect New Zealand, with news of a sharp run-up in bond yields and equity prices.

Wall Street is up very strongly today, up +1.4% in afternoon trade. And that is enough to nearly erase the losses in October so far. No gain to be sure, but that is a much better position than three days ago.

The Europeans are even more bullish today, with the DAX up almost +3% on the day. The laggard is London with the smallest rise of the major European bourses, but it is still a healthy +0.8%.

Yesterday, Shanghai was up +0.9%, Tokyo was up +1.2% and Hong Kong starred up +2.3%. The ASX was up +0.9% and the NZX50 wasn't in the party, only up +0.3%.

No one big thing appears to have turned on the optimism tap. The trade talks between China and the US have concluded in Washington with no specific agreement, just "positive hopes". They are to resume at some time in Beijing. The 'hopes' are all around some sort of truce and minor actions rather than a resolution.

In the US, a closely watched consumer sentiment index rose strongly in in early October as consumers anticipated larger income gains and lower inflation during the year ahead.

The Federal Reserve said it would begin significant extra buying of Treasury bills to boost its balance sheet and avoid a recurrence of the unexpected strains experienced in money markets last month. It purchased +NZ$130 bln in overnight trade. They just don't want you to call it QE resumption or money printing. But the bald fact is, investors don't want the stuff in sufficient quantities and without the Fed demand the banking system wobbles of the past few weeks will get worse. The Fed 'put' in action, and markets are happy.

Canada has reported a strong labour market in September. Their unemployment rate fell unexpectedly to 5.5%. Employment rose by +54,000 in September, driven by strong gains in full-time work. Canada's participation rate is much higher than their southern neighbour.

In China, the pace of capital flight has apparently picked up to record levels. This hidden flight is of unrecorded transactions to evade tight capital controls. Analysing the “net errors & omissions” in China’s balance of payments, you can get a good indication of concealed capital flight and it rose to a record high of NZ$200 bln in the first six months of this year. The last time these pressures were high was in 2015 and 2016 and back then in the first six month of those years, this type of concealed flight was NZ$125 bln in the same half-year.

Market expectations of the trade truce is seeing the Chinese currency appreciate.

In Europe, there are signs the British are in more of a compromising mood and that some sort of transition deal can be done on Brexit.

We should also note that Jacina Ardern didn't win this years Nobel Peace Prize; the prime minister of Ethiopia did.

And in New Zealand, the early release by the REINZ of their September house price index shows year-on-year, the housing market value nationwide has lifted +3.7% ( up from +2.9% in August), in Auckland by just +0.7% (-1.5% in August) and up outside Auckland by +7.7% (+6.8% in August).

The UST 10yr yield is sharply higher again today, at 1.77% and up +12 bps from where we left it last night and up a whopping+26 bps from this time last week. Their 2-10 curve is positive at +14 bps. Their negative 1-5 curve is narrower at -8 bps. Their 3m-10yr curve has almost disappeared at -2 bps. The Aussie Govt 10yr is down at 1.09%, an overnight rise of +12 bps and a weekly rise of +20 bps. The China Govt 10yr is unchanged for the week at 3.16%. The NZ Govt 10 yr is now at 1.18%, up +11 bps overnight and +15 bps for the week.

Gold is down -US$12 overnight to US$1484/oz and that compounds a -US$21 drop in a week.

The VIX volatility index is just under 16, and lower than this time last week. Its average over the past year is 17. The Fear & Greed index we follow has moved back toward 'neutral' from the sharp move last week to the 'fear' side.

US oil prices are up sharply today and by more than +US$1, now just under US$55/bbl. The Brent benchmark is just under US$60.50. Mid-east tanker tensions have driven the overnight jump. An expected further reduction th the US rig count didn't happen this week and it in fact moved up a little.

The Kiwi dollar is firm against the greenback today, now at 63.4 USc and actually this is its highest level in more than three weeks. On the cross rates we are still at 93.2 AUc. Against the euro we are still at 57.4 euro cents. Both these are similar to this time last week. That puts the TWI-5 at just on 68.6.

Bitcoin is now at US$8,345 and while that is lower than this time yesterday it is up almost +2% for the week. 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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Hmm. Fed buying US-Ts, does their theory actually work in practise? It seems the world's bankers are in a very complex game. It is not clear that the rules stay constant, it is as if there are sudden phase changes with periods of calm between. Very Mandelbrot.

It seems the world's bankers are desperately buying US-Ts to use as collateral at the Fed Pawnshop. Presumably this is because it allows them to transform turds (ie "negative yielding sovereign debt" and "leveraged loans") into their version of gold (banks' ability to lend bigger and more hugely bigger sums to any bank anywhere). All very "end of cycle". Not sure that the Fed reducing the supply of US-Ts isn't in fact something of a bubble pricking exercise (if not in their theory) that makes the shortage worse. Phase transitions are characterised by instability. Could be an interesting few weeks ahead.

So if there is a trade deal, the vision of low rates could disappear as a bad dream?

Trump says the Fed should cut rates anyway even though US and China have agreed to trade deal

Make of that what you will.

The reality behind the "strong" Canadian job market:
While the gains were all full-time, they were entirely public-sector positions and self-employed. Private sector jobs dropped by 21,000

Thank God - Jacina Ardern didn't win this years Nobel Peace Prize - !

Why? Not even sure she was a contender, but why would you not want a NZer recognized in such a way?

There are quite a few sadistic people in this world. It's a pity kate

... the sadistic people of Orc Land ... or was it the masochistic voters , have re-elected Phil Goof as mayor .. and simianlarly in Christchurch , Lianne Dianzell has been given a second chance ..

Labour are organized in local body elections ... but what about the Gnats . . where the bloody hell are ya ???

In Auckland they are call themselves Citizens & Ratepayers

.. if there was a Kiwi who actually deserved the nomination , sure ... but what has Jacinda done to be worthy of this accolade ? ... sorry folks , but she is no Mother Theresa , she's no Mahatma Ghandi . ..

A huggable , friendly , lightweight pollie .... that's not noble enough ...

That was a good breakfast, poached eggs on toast, cheese, banana and good coffee accompanied by the chorus of right winger whinging..

That's right..why on earth should she even be mentioned.????

I dOnT lYk TaXcInDa

wHo doEs .. buTt , nO onE particularly Lyks siMon bRidges eiTher ...

... wotCha chOices theN , coMe 202o eleCtion ???

wiNston fiRst ! . . ahH hA dE haaaAaa .... n0ne oF theM is nOble ... igNoble moRe Lyk ...

Looks like we as country have to decide if we like Mr AirNZ... Bridges burnt, JacindaMania fans comatose (too much wacky backy from their mates in the Greens?), Will Winston stay upright, or will his liver finally give out? The suspense!

... I'm curious why we don't seem to have had any political polls out lately ...

It appears that as hopeless as the coalition government is , it is counterbalanced by a particularly useless and unelectable Gnats team ...

... only Winston is true to form ... playing each side artfully off against each other ... and not giving a toss what the PM wants of him... he's the boss !

POLLS ! . . The latest New Shrub political poll has Labour down 9.2 % to 41.6 % support ...

... Gnats up 6.5 % to 43.9 ... Greens steady on 6.3 % , and ACT on 1.4 ...

New Shrub report that support for Taxcinda as PM has dropped 10.6 % to 38.4 . .

... Simian Bridges is up 2.5 , to 6.7 % ...

Errrr, the HPI report says Auckland DOWN by 0.7%, not up.

But the bald fact is, investors don't want the stuff in sufficient quantities and without the Fed demand the banking system wobbles of the past few weeks will get worse.

Treasury Bills are in demand globally - seen a failed T bill auction recently?

A sale of €487.5 million of 13-week bills on Wednesday drew Greece's first-ever negative yield of minus 0.02% as investors now pay Athens for the privilege of lending it cash, as Bloomberg first reported.

The US 3 mth TBill trades down at 1.68 %, below Effective Fed Funds fixed at 1.82%. Furthermore, the cost of repo funding 3mth bill purchases is greater at 1.888%, as of today's close of business. Dealers are willing to incur negative carry costs to buy US Treasury Bills.

The real danger is in swapping T-bills for bank reserves. The latter has no place in repo, nor, really, as a replacement for repo. The former, however, are the best of the best, the most pristine of pristine repo collateral.

Treasury bills occupy the slot at the very top of the list. They are all on-the-run meaning they are all dependably liquid and since they are short maturity instruments they don’t exhibit much intraday volatility. They hit all the sweet spots the repo market is looking for as ideal collateral.

And now Jay Powell wants to remove perhaps a lot of them from circulation even though dealers don’t really want to sell what they’ve got. That’s the price speaking, not me. Right now, it costs you more to fund a bill in repo than it rewards you in equivalent yield. With that kind of negative carry, you get rid of it. If you don’t, then it’s because there is some other utility worth paying what is essentially a liquidity premium.

The fact, yes, fact, that they don’t sell them is an undeniable indication that they don’t want to sell them. They aren’t being forced by the law into doing something harmful at their and the system’s expense, they are choosing to absorb the growing cost in order to face up to some other factor within that system.Link

Negative interest rates.
German banks apply negative rates to retail deposits.


So much for the time preference of money!.

Exactly, I made the same reference on this thread:

by Audaxes | 12th Oct 19, 7:24pm
Commercial property heading for a sweet spot as interest rates tumble and investors chase income returns

Your assertion is in need of qualification.

Thus, the decline of interest rates to zero corresponds with a monetary imbalance in favor of deflation, if at least an abundance of deflationary pressures. This is something that Milton Friedman also talked about, particularly in 1998 with regard to Japan. He called it the interest rate fallacy, meaning that low nominal interest rates signify "tight" money conditions, or what would be consistent with significant deflationary pressure. It is and remains a fallacy because economists like those at every central bank around the world have decided instead that low rates are only "stimulus."

To correct this view, Friedman pointed out the basic, non-trivial distinction between a liquidity effect and an income effect. Low rates can be stimulative in the short run (the liquidity effect), but over the long run their persistence means something far different. A yield curve is supposed to be upward sloping given the core time value of money and investing. That arises from opportunity cost, meaning the more plentiful the opportunities the greater the time value and the steeper the curve (the income effect). Yield and/or money curves (the eurodollar curve and even the history of the OIS curve) that collapse and remain that way unambiguously demonstrate that "stimulus" deserves only the quotation marks.

Note the repo liquidity dilemma the FRBNY is enveloped by without obvious remedial success at modestly low interest rates, ours are decidedly lower. Only recently, the RBNZ 's overnight cash rate (OCR) was nearly matched by the New Zealand Government Stock 10 year note yield.



John Tamihere , not contrite after being absolutely spanked by Goofy Phil for the Orc Land mayoralty , now insists that a monster has been unleashed... that he'll be up to his goolies in the 2020 general election ...

One can ponder , is JT hinting at starting his own political party ?

I think he'd be a better fit taking over the reins at NZF than Shane Jones