90 seconds at 9 am: Services shine

US jobs grow as service sector expands; eurozone retail keeps expanding; India cuts rates again; Murray worries; UST 10yr yields 2.10%; NZ$1 = 75.8 USc, TWI = 79.8

5th Mar 15, 7:17am by David Chaston

Here's my summary of the key issues from overnight that affect New Zealand, with news of widespread service sector growth underpinning the world's economy.

American employers added +212,000 jobs at about the expected rate last month according to the ADP Employment Survey but the gains seem to be slowing. That was despite growth in the giant US services sector picking up modestly in February, lifted by healthy improvements in new business.

Service sector growth is also improving and expanding in Germany, in France, in China, and even in Australia where it showed its first expansion in a year. Things look pretty tough in Russia however.

The data for the eurozone is quite encouraging and is providing more positive surprises than negative ones. In fact today it was revealed that eurozone retail sales rose for a fourth consecutive month in January, adding to the sentiment.

Eyes are now on the ECB who will be making some big announcements on their latest QE program tomorrow.

India’s central bank surprised markets overnight with a cut to its key lending rate for the second time this year, as it tries to join the world-wide trend of monetary easing. But the cut was from 7.75% to 7.5% leaving policy rates very high by any standard.

In Australia, David Murray has said Australia needs to consider introducing caps on borrowing to rein in house price growth and prevent further risk to the financial system.

The UST 10yr yields held on to yesterday's gains in New York earlier today and are now up +1 bp to 2.10%. New Zealand swap have rates responded putting on +5 to +9 bps in a steepening bias. It is time for bond investors - especially those exposed in the 'conservative' funds in KiwiSaver - to be on their guard. Rising interest rates could expose them to heavy losses.

The crude oil price is falling today and is now just on US$50/barrel and the Brent crude price is just under US$60/barrel. US crude stocks just keep growing.

The gold price is treading water and is still at US$1,201oz.

The New Zealand dollar starts today noticeably higher at 75.8 USc, 97 AUc which if it holds is a new post-float high and the TWI is back up to 79.8. That got an added boost with the kiwi trading at 68.5 euro cents which is also a post-float high.

If you want to catch up with all the changes yesterday, we have an update here.

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20 Comments

by @tony | 5th Mar 15, 8:22am 1425496967

>> In Australia, David Murray has said Australia needs to consider introducing caps on borrowing to rein in house price growth and prevent further risk to the financial system.

Its said here so often... over time limit borrowing to 3.5xMax salery earners salary.

A parent then can afford to stay at home and bring the kids up (if she chooses to).

Cap on House prices.

Lower mortgage stress.

Money to invest in REAL businesses.

by notaneconomist | 5th Mar 15, 8:32am 1425497520

I agree bond holders should be on high alert. There's around US$38Trillion in bonds municipals etc (often called the income market) and some US commentators say it could well be heading for a wipeout!!!

by steven | 5th Mar 15, 9:16am 1425500160

There are several types of bonds,

corporate type bonds

council/municipal

banks ~ CDS

Govn

lets say for argument the scenerio of,

The difference for me is only the timing of the default. The first 2 I personally think are toast. The debt is huge and relies on BAU or ever expanding growth and asset value increases. "junk" with a vengence. The "gearing" of these means that when we turn to a sustained recession with significant deflation they will fold like the ponzi scheme they are. The banks I think with their leverage will simply follow, keeling over as a result. The Q is then does a Govn allow that or step in and then also collaspe under the debt mountian.

Given the way Pollies think, I think they will step in to buy themselves time and shift the staggering private losses onto us the tax payer. We as tax payers if we have any sense should then vote in a Govn who will default aka Greece and throw the losses back at the private investor. Which ever doesnt really matter though in the end, it will be ugly.

So the Q is is it going to happen.

place your bets.

by notaneconomist | 5th Mar 15, 10:03am 1425503019

The Feds are in control here......they set the interest rate. How many 401K's are invested in the various bonds available???? What exposure do NZ'ers have??

Would you buy a 10 year bond fetching e.g.2% when you could buy one returning 4% or higher.......there is a load of dosh on the line here!!!

by steven | 5th Mar 15, 11:03am 1425506580

we are talking Trillions.

I am not so sure the Fed is really in Control myself, I think they are hanging in there by the fingernails (ditto teh EU). I think we have lots of private investment messing things up, the Fed is just trying to hold it together.

401s & NZ in terms of pensions around the world, these often have a US component (one of my ones does, it lost hugely in 2008/9)

Yes, 2% v 4% depends on whether they are both Govn or one is govn (2%) and one is corporate (4%). The Govn one has some long term backing ie the tax payer, the corporate bond only has the company, so as Harry said "do you feel lucky punk?"

For myself if I didnt have a mortgage and has some significant savings I would put it in short term NZ govn bonds for safety reasons, even if it was paying zilch. Then of course I am risk adverse.

by cowboy | 5th Mar 15, 10:17am 1425503832

Do you really think Bonds will be defaulted before Dividends are retained?

I see the Bonds market as a much superior way (for the company) of raising capital than a share release

by Stephen Hulme | 5th Mar 15, 10:32am 1425504729

I see the Bonds market as a much superior way (for the company) of raising capital than a share release

Not if the purpose is to buyback company equity to favour management capitalising their personal stock options. Rising corporate interest rates will extinguish this exposed practice, leaving innocent equity investors (including the NZ Super Fund, Kiwi Saver investors etc) fighting to rescue the remnants of their savings.

The biggest source of fresh cash in American equities isn't speculators or exchange-traded funds: It's companies buying their own stock, by a 6-to-1 margin.

Chief executive officers, who just announced the biggest round of monthly repurchases ever, executed about $550 billion of buybacks last year, according to data compiled by S&P Dow Jones Indices. That compares with a net $85 billion of deposits by customers of mutual and exchange-traded funds, the biggest gap since 2012, data compiled by Bloomberg and Investment Company Institute show.

If you sell a share of stock in the U.S. market, there's a fair chance the buyer is the company that issued it -- and it's buyers who've been on the right side of the trade since 2009. Buybacks are helping prop up a bull market that is entering its seventh year just as investors bail out and head back to bonds. Read more and more about Apple's buyback debt.

by cowboy | 5th Mar 15, 11:11am 1425507081

Does it really matter for the company who owns the stock?

If it's management wouldn't that align them even closer to doing a good job (unless it's their intention to pump & dump, preferrably after a fire sale).

If the buyback is at full market value, are ex-shareholders actually losing out?

And I wouldn't really consider major fund operators as "innocent" for example what happen to the daycare chain (whose name slips my mind) after NZ Super went after their shares. Pumped them full of equity, their thought they werre successful, when the massive expansion went all "Georgie Pie" on them, NZ Super dumped the daycare chain destroying what was left of their capitalisation ...but not their debts.

by steven | 5th Mar 15, 11:03am 1425506634

For the company, yes, for the investor?

by cowboy | 5th Mar 15, 11:16am 1425507388

If the Bond doesn't default then the investor gets their contracted rate.

A Shareholder has higher risk on getting a good dividend (fonterra should be interesting this year, since fonterra corporate had tough year, but unlike last year milk cost is way down for added-value subsidaries. the consolidated sheet should show some interesting "hidings".)

But no investor is entitled to be or have access to shareholding; it is something offered by the company for it's capitalisation process so buying shares gives control rights (if not reserved) and the investor isn't entitled to share in profit as many top performing companies prefer to keep the money working for them. ... at least investing bond holders are contractually entitled to a yield

by notaneconomist | 5th Mar 15, 12:21pm 1425511289

If the rate of inflation is higher than the return rate on the bond then the bond is losing money even though there is interest being paid........

by King of the whiners | 5th Mar 15, 8:46am 1425498380

US shale drillers starting to fall like flies – here are the next 3 on the cab rank – American Eagle Energy, BPZ Resources and Quicksilver Resources

”American Eagle Energy Corp. didn’t make a $9.8 million payment to bondholders due Monday, as the oil-and-gas company considers its current liquidity situation.In addition, the company has hired two financial advisers to help it assess options during the 30-day grace period it has now entered with bondholders, American Eagle announced Monday.

American Eagle is the third oil-and-gas company to recently enter a grace period with bondholders after skipping payments as persistent low oil-and-gas prices have hurt a number of companies that produce these commodities.

BPZ Resources Inc. didn’t repay $62 million in bonds at maturity on Monday, and Quicksilver Resources Inc. missed a $13.6 million payment on its bonds less than two weeks ago. Each said it might need to file for chapter 11 bankruptcy.”

http://www.wsj.com/articles/american-eagle-energy-skips-interest-payment-1425409042

Lets see what the contraction in the US shale industry is going to do to US Capex (and thus GDP) in the next few quarters.....

by steven | 5th Mar 15, 9:43am 1425501780

Oh well they must be operating grossly inefficiently. According to Profile's sources the shale players should be ok to $35.

All adds up, ie I wonder if we'll see a second round of investors jumping into the shale junk market when the oil price recovers. if not, of course its a great let out for the likes of the EIA and IEA all they have to say is these companies didnt invest so that is why our wacky production promises are/were not met.

Of course ppl have been commenting since 2009 that such organisations were effectively lying and knowingly so.

http://www.alternet.org/story/144017/modern_life_is_probably_screwed_by…

"Last week two whistleblowers from the International Energy Agency alleged that it has deliberately upgraded its estimate of the world's oil supplies in order not to frighten the markets. Three days later, a paper published by researchers at Uppsala University in Sweden showed that the IEA's forecasts must be wrong, because it assumes a rate of extraction that appears to be impossible."

by profile | 5th Mar 15, 2:38pm 1425519485

You are a class act Steven. $35? Your position is so weak you have to make stuff up and accuse the iea of lying. Take a look at yourself and try reading links before spamming.

What I quoted yesterday:
"EOG said this month that, thanks to improved technology and cost reductions, it can make more money with oil at $65 a barrel than it did three years ago when oil was $95.“I don’t think anybody is thinking it’s going to go back to $95, but $65 would be great for EOG,” Thomas said at the Feb. 25 conference."

And yes if you want to split hairs, and I'm sure you do, some plays break even at $35 or lower.

http://www.bloomberg.com/news/articles/2015-03-03/l-shaped-oil-recovery…

by steven | 5th Mar 15, 3:09pm 1425521340

You dont get it do you. Some maybe Ok to $35, but the losses incurred by all the others that cannot do that (even if its true btw) will break the industry and the faith in its junk bond market, as we are seeing with companies defaulting. Simple, of the three mentioned above are Ok at $35 why are the going chapter 11 at $55?

Also its some part of the plays, usually very specific areas that are approaching saturation of drilling. ie the $35 oil will simply have been drilled out.

Not just me accusing the IEA of lying btw they have a history going back some years of questionable projections,

http://www.alternet.org/story/144017/modern_life_is_probably_screwed_by…

On top of that more recently IEA assumes OPEC will not only make up the loss of production from non-OPEC but also produce what else the world demands. OPEC on the other hand says no, not us. So where is this IEA fantasy oil going to come from?

When you look deeper into OPECs producing countries the only 2 that might be capable of significantly increasing output is Saudi and Iraq. The latter is in considerable internal strife. The former, Saudi pretty much says maybe 2mbpd more but not really.

by profile | 5th Mar 15, 4:22pm 1425525764

Steven you are the one rabbiting on about $35 not me. You have a habit of attributing things to people that they didn't say. Tedious but says a lot about your strength of argument.

Some shale drillers went broke when the oil price went from $115 to $45. What did you expect? Just like a few dairy farms go broke when the milk price falls. I know it's difficult but think of the positives - a few firms go broke but the world economy saves $1.7 trillion oil cost. Creative destructiom. As also pointed out yesterday the shale gas industry has already been through this price collapse and survived leaner and meaner with everybody benefiting with lower gas prices.

As for 2009 predictions they have been steamrolled by reality. Look at this chart - in 2009 extraction rates of today would have appeared impossible. Wrong by under estimation not over.

http://www.aei.org/wp-content/uploads/2015/02/usoil3.jpg

Where is oil growth coming from? You don't even have the right continent. Where is the innovation coming from - not big government fields.

"Alex Lawler LONDON (Reuters) - The United States will remain the world's top source of oil supply growth up to 2020, even after the recent collapse in prices, the International Energy Agency said, defying expectations of a more dramatic slowdown in shale growth.
".

by Boatman | 5th Mar 15, 9:08am 1425499687

With the Kiwi $ getting stronger against the Aussie $ with every trading hour , why are we still paying $2 a litre for petrol when Aussies are at $1,16 cents per litre and up to $1,45 in the outback where they get extra for long distance transport .

Our premium petrol is over $2 , and Aussies are at $1,45

Our oil entry point is just up the road from Auckland so transport is not the big issue it is in Aussie

Its time someone started a campaign and forced the big multinalional oil giants to play ball here .

We are getting shafted by Big Oil

by JB | 5th Mar 15, 10:20am 1425504024

Answer is very simple - just two words:

GST and excise duty differences Little to do with the oil companies in what is a very competitive market.

by Boatman | 5th Mar 15, 10:31am 1425504716

The Heralds lead story orchestrated by Nicky Hager is just disgraceful reporting by our only credible daily newspaper .

The article is utter garbage , suggesting every e-mail is being read .

They have even re-run Snowdens incredible story of a spy facility right here in Auckland ( supposedly at Whenuapai , an airstrip that did not even have a fence around it three years ago )

Do me a favour Herald , how many people would be needed to be employed to read every e-mail , every social media comment sent every minute every day 24/7. Is the GCSB reading Boatman's comments on this site , for example ?

Firstly , who cares if we are spying on the pacific Islands , most of which are corrupt and dysfunctional and which are very dependant on remittances from NZ to keep them afloat ?

Secondly NZ DEFENCE forces are often called on to keep the peace on these islands when the locals start murdering each other , so it might be agood idea to know whats going on there , anyway .

Thirdly , its physically impossible to monitor each and every e-mail sent and received in the whole Pacific region .

Laslty , Hager is again trying to throw mud and hope it sticks , and most New Zealanders could not care less about these ill-conceived schemes .

Its not even a story .

Hager is lucky he does not live in Russia , because a real good story would be if Nicky Hager disappeared and his body was never found , a-la Russia .

If he were Russian , the TASS news agency would not bother to report it , but it would make a brilliant NZ Herald front page story , replete with all sorts of conspiracy theories.

It would run for weeks , if not years

I might even read it with interest

It will however never happen in our tiny open democracy located at the back end of nowhere .

by waymad | 5th Mar 15, 1:16pm 1425514563

One to watch always is perma-bear AEP @ Torygraph.

China's nearing a fiscal cliff, if one believes this article....

Now take the next obvious step, a thought experiment (the safest kind): assume AEP is right and China slows right down. And (important caveat) assume that Chinese data is actually "data" - very wide error bars. Now:

- forecast what that's gonna do to WMP (OK, perhaps little, ya gots ta have food..)

- forecast what that may do to the capital leakage out of China into - well, everywhere, really.

- forecast what that liquidity crunch might do to the NZ Awkland housing bubble...

Fasten yer seat belts....t'will be a bumpy coupla years.

Now, RTWT and tell me different.