China wins in mini deal with the US; US sentiment rises; Fed buys more USTs; Canada jobs market improves; China capital flight high; AU pressures banks; UST 10yr yield at 1.73%; oil and gold up; NZ$1 = 63.4 USc; TWI-5 = 68.7

China wins in mini deal with the US; US sentiment rises; Fed buys more USTs; Canada jobs market improves; China capital flight high; AU pressures banks; UST 10yr yield at 1.73%; oil and gold up; NZ$1 = 63.4 USc; TWI-5 = 68.7

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Here's our summary of key events over the weekend that affect New Zealand, with news of a sharp run-up in bond yields.

But first, China and the US seem to have agreed a mini trade deal, one where the US suspends its next tariffs and China buys some rural products from farmers in Trump's heartland electoral states. Some US analysts say "China emerges with wins" from the deal.

As best anyone can tell at this stage, it looks like China will buy about US$50 bln of farm goods and keep on 'opening up' its finance sector, both things China either offered two years ago or is doing anyway. Given that the US merchandise trade deficit with China hit more than US$440 bln in the year to August, the ag purchases represent about an 11% of the US's perceived problem.

Meanwhile, three American financial regulators have issued a warning to firms with digital currency assets, that they have an obligation to follow securities laws on AML/CFT, including 'know-your-customer', and requiring disclosure of suspicious activity.

Markets were higher on Friday. No one big thing appears to have turned on the optimism tap but markets closed before the mini-trade deal became apparent and they may have gotten wind of that.

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 end-of-week 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.

Car sales in China are still slumping and the September data wasn't positive, being the 15th decline in the past 16 months. Electric cars are the slowest sellers.

In Australia, political pressure is rising to force their banks to pass on the RBA's policy rate cuts in full to mortgage borrowers. Banks have held back about a third of those cuts in recent times to protect their term deposit savers and their margins because wholesale money rates haven't fallen as fully as the official policy rate. If the political pressure wins, bank savers will likely be nearly wiped out (Aussie TDs currently pay less than 1.5%) and bank funding could shift to a wholesale-only model. The short-term political points-scoring seems to be more important to Canberra than the long-term structure of their banking industry.

The UST 10yr yield has slipped back after a strong run up over the weekend. It is now at 1.73% after touching 1.77% earlier. Their 2-10 curve is positive at +14 bps. Their negative 1-5 curve is narrower at -10 bps. Their 3m-10yr curve has almost disappeared at -2 bps. The Aussie Govt 10yr is up at 1.08%,  a weekly rise of +20 bps. The China Govt 10yr is unchanged for the week at 3.17%. The NZ Govt 10 yr is now at 1.18%, up +15 bps for the week.

Gold is up +US$5 overnight to US$1,489/oz from where we left it on Saturday but that is a -US$16 drop in a week.

US oil prices are up sharply and by more than +US$1, now just under US$55/bbl. The Brent benchmark is just on US$60.50. Mid-east tanker tensions have driven the jump.

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 68.7.

Bitcoin is now at US$8,432 and up almost +2% for the week. The bitcoin rate is charted in the exchange rate set below.

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52 Comments

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Highlight new comments in the last hr(s).
11
up

If we went back to an economy investing in production and saving as opposed to debt and speculation, would we have a chance?

14
up

ECB and RBA have followed BoJ down the rabbit hole of punishing households that choose to be prudent with their finances.
It seems like these unelected overlords have now waged war on conventional wisdom of saving for a "rainy day" and treating debt as "last resort".
All to prop up an imaginary number at the expense of development and prosperity in its true sense.

We have excess food, power, water and building materials so we would survive. More people would need push bikes to get to work because we lack oil, and thank god for that. If anyone with a recently significantly upgraded navy/military (that one that can be mentioned or it calls off NBA games) decided to expand here our military is unable to put up much more than a token resistance.

Aj - no.

We are on track to have used less energy globally in 2019, than in 2018. (That's all-in, peak Light Sweet Crude was way back in 2005/6).

So even if the resource-stocks were there, we couldn't procure, process and proffer them. And the resource stocks (and sink capacities) increasingly aren't there. So we have seen the last of inflation, and the last of real growth - and thus the end of increasing underwrite for debt repayment.

Looks like the great re-set might be coming to a place near you, soon.

Having long-term exposure to gold, it's still something I rarely bring up at the BBQs without getting the feeling that others think owning it is in the domain of oddballs. Mind you, holding gold since 2012 until quite recently has not been something that would excite anyone. I still think gold is not really on the radar of most people. I like this quote from the article:

"DNB is no stranger to playing along with the Keynesian, inflationary games of the global monetary system. A system which, according to some, is now more a Ponzi scheme based on force and blind faith than sound economic principle. That notwithstanding, the centralized financial powers of the world know the real score, and that’s why hard assets like gold are hoarded and locked down while everyday, individual residents of these geopolitical jurisdictions are encouraged to spend and spend, going further into debt to prop up ultimately unsound national economies."

when you talk about exposure to gold,are you into listed gold or physical assets?the ghost of goldcorp probably puts kiwis off but i had a nice surprise when I sold some scrap gold a few weeks ago.takes a leap of faith to send it off in a prepaid courier bag but the agreed amount was in my bank acct at the end of the next day.

Gold still doesnt get around the Overshoot issue ... too many people with a deteriorating/diminishing resource base
All that fiat debt has greased supply chains, elevated commodity prices and provided purchasing power (albeit fake leveraged purchasing power)
Take away the fiat debt and incomes are decimated
Its wishful thinking that any financial system based on growth (on the back of some sort of reset) is coming back - There just aint the resources

Horrifying Andrew. 3D printing of food. If you know anything about the food technology you will realise that the priority has to be ingredients that will last indefinitely in tubes without congealing and a host of other printer requrements.Nothing much to do with nutrition.
Meanwhile what I actually see in New Zealand is a growing trend towards real foods and an interest n the souce. For example look at the exponential rise in real milk suppliers in response o that demand. Fonterra style so callIed milk is facing a challenge.

"Fonterra style so called milk is facing a challenge." If only because Fonterra and their farmer shareholders have utterly failed to support the local market. All dairy products in the local stores are way too expensive, and when challenged on the prices the answer has been alternatively "that's the international price paid" or "it's not us, it's the super markets".

The problem is calories per sunlit acre - you don't produce nutrition without real inputs.

Considering how frequently the commenariat here like to engage in council bashing, how come no mention of council election results?

In AKL the people have voted back in the fuel tax, environ tax, and 3.5.% general rise with a greater margin than last time

17
up

They voted in the least useless mayor from a poor selection. Local body politics are the pits.

I think councils have run the course and need to go. Living in a rural town that once had a MOW and local Govt with own roading team, I always saw it as wasteful and thought we should contract out and go private. 30 years later, I just want to go back.

Ex Wellington mayor Justin Lester may have Julie-Anne Genter to blame for his loss to Andy Foster ...

... sorry Greens .. but the voters of Wellington like their cars ... and do want upgrades to the roading system ...

Bollocks - do you live here Gummy? They voted for something to happen - like new ferrys, tunnels (pedestrian access). new library, better buses. More roads in Wellington - funneling more cars were exactly?

... and bollocks to you ... the letter from Genter was instructing Mayor Lester to cancel his proposal for a second tunnel , to ease car congestion ... he caved in to her demands ...

DP

Thats your opinion and not my or lots of people who voted the reason for voting Justin out - put the tar brush back in the pot and roll the modelt T back into the garage.

No, Shelley Bay. And cycleways, broken public transport and a general feeling that we have gone off the boil.

Reading the candidate policy statements was a strange experience. Made me think that perhaps a candidate could win a spot by saying "I only promise to act like a reasonable person and not claim anything too ridiculous. Read some of the other candidate statements on here then come back and read mine again, and you'll know exactly what I mean."

The very low voter turnout casts grave suspicion on the legitimacy of those "Elected"

... one Mel Content did comment on local body election results , in the Friday arvo briefing . .

He theorised that JT's stunning loss to Goofy hadn't diminshed his self belief one iota ... and that JT may be thinking of setting up his own party ...

"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". Well they're very likely to keep clamping down on capital flight for year to come and you can watch our immigration numbers rapidly increase, especially after the latest announcement from China's President Xi Jinping; A stern warning against dissent as protests continue in Hong Kong, saying any attempt to divide China will end in "crushed bodies and shattered bones".
BBC article: https://www.bbc.com/news/world-asia-china-50035229

Chilling language. 70 years to reach this level of dialogue.

That's truly chilling language, and once again shows China's true colors.

It makes me wonder what is really going on in China.....

Is the CCP worried they are not as in control as much as they like to think they are....

China's patience is coming to an end fast, now they have make a mini deal with the USA, those protesters better hide to avoid the Chinese army,they NO HOPE OF WINNING, they are not like Taiwan, the situation is hopeless, the rest of the world knows this.

Hong Kong is very lucky, they have these concessions, the rest of China does not. They could lose them if Beijing invades.

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 end-of-week 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.[my bold]

The 3-month bill is less than the current RRP rate. How in the world can any T-bill, let alone the benchmark 3-month maturity, trade less than the reverse repo alternative? There is as yet no one in the official world who will address what is a clear and glaring problem with the intended money market corridor.

Yes, in fact the banks are absolutely desperate for the stuff, the exact opposite of not wanting the stuff. Methinks weekend risk is high. Something may break, a currency peg, a major bank, a bomb. The 1987 crash was triggered by a severe storm....

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.

The most plausible explanation can be found in the BIS study of missing debt related to off-balance sheet FX swaps and forwards. When these contracts expire there is outward movement of capital recorded. Conversely, new USD FX swap debt obligations are recorded as inward capital flow.

The outstanding amounts of FX swaps/forwards and currency swaps stood at $58 trillion at end-December 2016 (Graph 1, left-hand panel). For perspective, this figure approaches that of world GDP ($75 trillion), exceeds that of global portfolio stocks ($44 trillion) or international bank claims ($32 trillion), and is almost triple the value of global trade ($21 trillion).

"Australian government orders probe on big four banks. Banks will have to reveal their pricing practices after none of them passed on the most recent (OCR) cut to customers in full **but slashed interest rates for deposit holders**." https://www.skynews.com.au/details/_6094530840001

China will prevail in the end and in the future trade wars. America needs the money from selling more than China does. They can control how their population feels in adverse conditions, whereas America cannot.
So, China can bear more pain and persevere till they win..Not so, the USA.

How long can Joe average Chinese person go without extra pork in their bowl v how long Joe average Americian can go without strawberries in winter.
China is always going to win.

If the concealed capital flight hinted at about is correct - I'm not so sure the CCP has the backing of it's people you think they have. While All China has to do is "outlive" Trump, and Trump has an electorate to consider (whereas the CCP does not), the consequences are far greater for the CCP than Trump.

China will win, they are a dictatorship, public opinion does not worry them

Authoritarian regimes always appear stronger than they really are. They are actually quite brittle. The CIA did not see the collapse of the USSR coming, only William Rees-Mogg saw it coming.

Yes, America is a mess. However, the rising USD is still able to create economic chaos worldwide (perhaps that should read, economic chaos worldwide causes capital to flee to the USD). Historically the US has been able to reinvent itself, it is part of its national myth about itself. Whether it can do so remains to be seen.

China's history is quite separate. It has usually fallen apart internally whenever it has tried to exert power outside its boundaries. The current power structure is that of a mandarin state, which suggests history may repeat. All China's neighbours hate it. Chinese people in China distrust the government, hence capital flight.

Just as the direction of refugee flows in a warzone tells a lot about the ethics of the two sides, capital flows also say a lot about the structure of the society they flow out from.

Trump continues to damage his own voter base - The Trump Administration targeted the most vulnerable among us by proposing a new round of spending cuts for the Food Stamp program.
MSNBC Memo to Trump: You’re the deadbeat
https://www.msnbc.com/politicsnation/watch/memo-to-trump-you-re-the-dead...

Funny thing about Capital flight ............. wherever there are exchange controls the problem is seemingly worse .

I am left dumbfounded how investors from China can afford to buy multi-million Dollar homes in my suburb and leave them vacant ............ more so given that its vitrually impossible, due to foreign exchange controls in China , to legally exchange the Yuan in anything like large amounts

Which suggests:
a) they have offical approval so the rules don't apply or they are acting as agents of the CCP
b) they are adept at finding ways around the rules (the mountains are high and the emperor is far away)
c) they are criminals acting with or without CCP approval. (Setting up CIA style drug ratlines comes to mind.)

Speaking of folk who were finding ways around rules, some now being penalised under Anti Money Laundering act. From the Granny Herald:

An Auckland-based money remitter has been penalised $4 million for failure to comply with recently introduced anti-money laundering laws.

Justice Mark Woolford decided Jin Yuan Finance should pay $4 million following a lawsuit from the Department of Internal Affairs. The penalty compares with $5.29 million awarded against Ping An Finance and $356,000 against Qian DuoDuo, which were both also accused of not complying with the AML regime.

Finance is sourced in NZ, against a credit line offered by a local Chinese bank branch secured against China domiciled assets?

If the political pressure wins, bank savers will likely be nearly wiped out (Aussie TDs currently pay less than 1.5%) and bank funding could shift to a wholesale-only model.

Unlikely, given the banking system as a whole operates on the basis credit and deposits are created simultaneously. Thus 'sticky' deposits are the main element underpinning the Core Funding Ratio.

I get the feeling the banks are in trouble, especially the European ones. That also puts The City (London) in the spotlight with all this Brexit Halloween stuff ongoing. This is fascinating to watch. Go Boris. The USA big banks have pretty much totally restructured over the past decade - they had to & they have. The European ones are like a possum in the car lights. They don't seem to know what to do other than don't spend it (Germany) or can't spend it (the rest). Some of the the Asian banks are also struggling with the smaller ones starting to merge with other smaller ones to get through in both Japan & China. The irony seems to be with all the QE we've had over the past decade, the banks are still running out of overnight money. Something's not right is it?

Boris reminds me of a fat possum sitting in the middle of the road wondering what the bright lights are all about?

two moons

Do not be hard on Boris, he has a mission impossible situation, any leader on this Earth would find this next to impossible, with the EU saying NO at every turn. the only way would be if the UK agreed to allow Northern Ireland only, to have a customs union with the EU only and still remain in the UK. whether the UK parliament would agree to this, who knows

Indeed - this article sheds some light on the problem.

As I wrote at the outset, the key part and therefore maybe the first step toward getting past 2008 finally is to fully appreciate and recognize that this isn’t some separate, firewalled system which incidentally happens to reach into everyplace around the world. The US banking system wasn’t the problem in 2008, the global dollar system was.

It is truly a global matter whether that comports with anyone’s laws and commonly accepted official practices.

If that means rewriting statutes and gaining international cooperation, then rewrite the statutes and gain international cooperation (for the record, I’m not advocating the Fed take over the eurodollar system, far from it; just that someone politically needs to step up and take some responsibility so that it can be reconstructed). Continuing to view the eurodollar system as some externality will only lead to more of the same.

As we were reminded a little less than a month ago. What was that repo rumble? Jay Powell wouldn’t know. Especially if, as I suspect, it had some origins (collateral) offshore in the “euro” part of the “dollar.”