The Fed's balance sheet grows sharply on giant liquidity program; US data positive; China gives new push to RCEP; Aussie GDP hit by fires, coal threat; UST 10yr yield at 1.92%; oil down and gold up; NZ$1 = 66.1 USc; TWI-5 = 71.2

The Fed's balance sheet grows sharply on giant liquidity program; US data positive; China gives new push to RCEP; Aussie GDP hit by fires, coal threat; UST 10yr yield at 1.92%; oil down and gold up; NZ$1 = 66.1 USc; TWI-5 = 71.2

Here's our summary of key events over the weekend that affect New Zealand, with news of extremes wherever you look. Please note there is no video version today.

The Federal Reserve pumped in another +US$211 bln to Wall Street in repo funding last week. Recall the previous week they pumped in +$367 bln. That is more than +US$½ tln in just two weeks in their on-going operations to add liquidity to American financial markets. This is not insignificant and there has been a sharp upturn in the growth of the Fed's balance sheet as this cheap ~1.5% money is added to the system. (Recall, at its maximum, the Fed's GFC QE ran at a maximum of $80 bln per month.)

Maybe that is one reason Wall Street ended last week on a firmish note, up +1.3% on the week. For the year, it looks like the S&P500 will have risen a very impressive +28%, proving cheap money drives asset prices. The benchmark US Treasury 10 year yield has fallen from ~2.7% to about ~1.9% in the same period.

Friday's rise was bolstered by good consumer income and spending data for November. The same data set reveals that inflation as measured by the Fed's preferred metric, PCE, slipped to 1.6% pa.

American consumer sentiment is also holding in the latest survey although unchanged from the previous month. It is also very little changed from this time last year.

European markets were even more bullish on Friday than their American counterparts, with most up nearly +1%. The exception was London with finished with virtually no gain. Of the three main EU equity market indexes, London (FTSE100) is going to end the year up about +12%, The German DAX30 is on target for a +26% rise in 2019, and the winner is the French CAC40 which is headed for an annual gain of +28%.

In France, they are tackling the pollution problems of diesel SUVs with a NZ$34,000 tax on them in 2020, raising it from NZ$21,000 presently. This is on top of tough new European rules being phased in next year to lower car emissions. At the same time, the French are reducing cash incentives for the purchase of electric cars.

In China, the Shanghai equity market ended last week with a solid +1.1% gain and they are heading for an annual +22% gain in calendar 2019.

China is also making new efforts to get its TPPA-alternative RCEP multi-lateral trade deal done. This is the trade deal it prefers because it excludes most of the TPPA's labour and environmental standards. China's push includes an attempt to help reconcile fractious Japanese-Korean relationships.

China continues to be embarrassed by the lack of acceptance of its currency. New data shows that the yuan's share as an international payments currency is only up to +1.2%. That is a gain, but almost an insignificant one. It even trails the Aussie dollar. Even th e US dollar had a larger market share gain in 2019 while retaining and enhancing its dominant position. And don't forget, payments are the easy bit to change. It is the pricing basis where the greenback shines, and even those meager yuan transactions are probably priced originally in US dollars.

In Hong Kong, their Q3 current account data release revealed that capital flight from the City is underway. More than NZ$30 bln flowed out in Q3, more than four times the flow in the second quarter, and there was an inflow of capital in the first quarter of 2019.

In Australia, their tax authorities have won a huge case against gold miners involving rorting their GST refund scheme. More than AU$¼ bln is involved and it attracted crime networks.

In Sydney, fires, droughts and low water supplies are challenging everyone with extremes. As water supplies get very low, evaporation in existing supplies is becoming a critical issue. And these climate disasters are set to douse their economy with Q4 and future GDP now expected to be lower than it otherwise would have been. Further, China is reviewing its coal import quotas and the Aussie coal industry is waiting nervously on that outcome.

The UST 10yr yield is at 1.92% and, although unchanged from Friday, it is up +9 bps from this time last week. Their 2-10 curve is little-changed overnight at +29 bps. Their 1-5 curve is at +21 bps. Their 3m-10yr curve is at +35 bps. The Aussie Govt 10yr has risen over the past week to 1.31%. The China Govt 10yr is virtually unchanged at 3.24%. The NZ Govt 10 yr however is now at 1.64% and up +6 bps for the week.

Gold will start the week at US$1,478/oz and up +US$4 from this time last week.

US oil prices are down sharply but just to levels we had at the start of last week, of just on US$60/bbl and the Brent benchmark is now just under US$66/bbl.

The Kiwi dollar will open this short week at 66.1 USc and little-changed. On the cross rates we are also similar at 95.7 AUc. Against the euro we are marginally firmer at 59.6 euro cents. That puts our TWI-5 at just on 71.2 and a little stronger since this time last week.

Bitcoin is little-changed from this time Saturday, now at US$7,163. 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 ».

Daily exchange rates

Select chart tabs »

The 'US$' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'AU$' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'TWI' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '¥en' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '¥uan' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '€uro' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'GBP' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'Bitcoin' chart will be drawn here.
Loading...
USD 
NZD
End of day UTC
Source: CoinDesk

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

19 Comments

Comment Filter

Highlight new comments in the last hr(s).

Has anyone read a good analysis of why the repo market needs this extraordinary support that seems to be growing.

... $US 211 Billion one week .... $ 367 b. the next ..

Kicking the can down the road is getting expensive these days ... keeping the bubble inflated ....

.... 2020 is gonna be a good year for the real estate industry ...

Doesn’t it make money because they are effectively printing money for this purpose and purchasing an asset?

“If carry makes the world go ’round, and reserves make carry possible … the day we run out of reserves would be the day when the world would stop spinning. No, this is not an overstatement.”
https://www.cnbc.com/2019/12/10/fed-qe4-could-happen-before-years-end-cr...
https://www.bloomberg.com/news/articles/2019-12-20/repo-oracle-zoltan-po...

Good call bw, when will this be?

Good call bw, when will this be?

When markets lose trust in "the engine of growth". This partly explains why people are looking to assets such as gold and Bitcoin.

Thanks, that was a good read.

Still doesn’t really explain what is going on.

I’m not sure why hedge funds should get help beyond the fact they seem to participate in the same market. They should really be on their own.

No one can get access to the actual information. The Fed does not have to release the details of who they are lending to.

The following video has a summary of Zoltan Polzar's analysis. To an extent the Fed has already reacted to this. The video has a decent explanation of the FX swaps and bank liquidity issues. The possibility that the Fed is bailing out foreign banks and local hedge funds could also be in trouble.
https://www.youtube.com/watch?v=bBOMPE-ivRM

I've looked at more than this but it's hard to know what are real issues and what are not.

Credit Suisse: Zoltan Pozner

David : No comment box for the Bjorn Lomborg article ....

.... well , no need really ... I'm sure we all agree 110 % with his views ... I do ...

Yikes, that wasn't intentional. Open now. Thanks for the head's up. Merry Christmas.

(sigh! The wrong spot)

If get a liquidity crunch then RE market will dry up like did in late 2008

Creating money looks like a full time job for the Fed. There must be a point of no return, surely? Balance sheets can't keep getting heavier & heavier forever. It's beyond my 20th Century education. Can anyone shed any light?

"Nine other Eric Watson-linked companies have been moved into liquidation following the collapse of Cullen Group."

Great news...I hope Sir Owen gets every cent back and more from that smary crook. Karma...

I hope Sir Owen gets every cent back and more from that smary crook

I think Glenn had implicitly stated this aim was to cause grief for Watson. Looks like the collapse of the Cullen Group is possibly a result of this.

The Federal Reserve pumped in another +US$211 bln to Wall Street in repo funding last week. Recall the previous week they pumped in +$367 bln. That is more than +US$½ tln in just two weeks in their on-going operations to add liquidity to American financial markets. This is not insignificant and there has been a sharp upturn in the growth of the Fed's balance sheet as this cheap ~1.5% money is added to the system. (Recall, at its maximum, the Fed's GFC QE ran at a maximum of $80 bln per month.)

Let's get real: check out the Fed's balance sheet, section 2: for 18/09/19 and 18/12/19. Net out the changes for US Treasury securities and Mortgage-backed securities between the two dates to equate permanent additions to SOMA and therefore reserves on the other side of the balance sheet. Outstanding temporary liquidity injections can be noted at the line labelled Repurchase agreements. Furthermore, FOIs are borrowing Treasury collateral (real cash for Eurodollar funded banks) from the Fed via Reverse repurchase agreements.