90 seconds at 9 am: China bond worries

Fed reveals why it held rates; US jobless benefit claims fall; China's new bond market concerns; US debt ceiling battle returns; UST yields rise; oil up, gold down; NZ$1 = 66.5 US¢, TWI-5 = 70.7

9th Oct 15, 7:36am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news of gathering worries about bond markets.

But first, today's release of US Fed meeting minutes for September 18 meeting shows they held off on raising short-term interest rates because they had nagging worries about when inflation would return to 2% after running below their official target for more than three years. Global risks also played their part in caution. If these are their decision drivers, rate increases may be some way off.

Last week's level of American new unemployment benefits claims came in very low. The raw data shows that the number of people on these benefits is now at their lowest level since April 2000.

Golden Week has ended in China and life there is returning to normal. Almost half the country - some 750 million people - was involved in some sort of travel in the past seven days.

New worries are being raised about the sustainability of China's bond markets. We recently saw their equity markets fall sharply in a painful realignment; the worry now is that their much bigger bond markets may do the same, and soon.

And worries are also rising over the sustainability of US Treasuries. Another 'debt ceiling' battle is looming in Congress. Money will run out in the first week of November and lawmakers are balking at yet another rise. Under President Obama, the debt ceiling has risen about US$7 tln and soon to be more. Under President GWBush it rose about US$4 tln. Under President Clinton it was up just US$2 tln. There is a real political reluctance about endless, increasing issuance. At some point Congress will hold the line and that will cause financial market stress. At this time credit spreads are not really expecting any issue, although things could turn quickly.

In Europe, VW has said that 430,000 diesel vehicles worldwide were fitted with their cheating software and the issue will take years to resolve. It involves models from 2009 to 2015.

In New York, the UST 10yr yield benchmark inched higher again today but not reflecting the debt ceiling issue yet, and is currently at 2.08%.

The US benchmark oil price continues higher, now just over US$49/barrel, Brent and just on US$53/barrel.

The gold price is slightly lower however, now at US$1,145/oz.

The New Zealand dollar has built on its gains overnight. It is currently at 66.5 US¢, at 91.9 AU¢, and 58.8 euro cents. The TWI-5 is at 70.7 and its highest since August.

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

The easiest place to stay up with event risk today is by following our Economic Calendar here »

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18 Comments

by dtcarter | 9th Oct 15, 9:13am 1444335209

Surely the R&D costs of developing the engine they promissed they were selling, and then the cost of manufacturing and retro-fitting a new engine to 430K vehicles, will send VW bankrupt?

by David Chaston | 9th Oct 15, 10:59am 1444341549

I think you could be right. The new VW chairman said something similar recently - it is a crisis for them that threatens their very existence. I reckon they will survive on a very much smaller scale. I also think they could use the crisis to recast themselves as essentially an electric vehicle manufacturer, if they survive.

The fines they face won't be insignificant. The writeoffs of their diesel technology will be huge. The brand damage may be the largest of all. An existential crisis.

by Alter Ego | 9th Oct 15, 10:10am 1444338623

Are we transferring someone Else's debt ceiling to our Friendly Shores?.

Fed a lie in fact.

Is this the norm these days. Do we have any Joyce.?. Are we heading for a bigger debt ceiling, ourselves?.

Is this money laundering on a Grand Scale?.

Is this why America can never increase interest rates, due to the flow on effect?.

Are our rates falling in line?. And raising the price of our Houses?.

Is this what TPP Eh...is all about.

http://www.nzherald.co.nz/politics/news/article.cfm?c_id=280&objectid=1…

My conspiracy theories are just that....until proved to me otherwise.

I think we should bring back the Friday Funny as this is getting all too serious for me.

Where is Gummy, Wolly ..etc...

by Stephen Hulme | 9th Oct 15, 10:20am 1444339251

But first, today's release of US Fed meeting minutes for September 18 meeting shows they held off on raising short-term interest rates because they had nagging worries about when inflation would return to 2% after running below their official target for more than three years. Global risks also played their part in caution.

Redefining inflation to exclude financial instances hardly adds to the solution.

by Kate | 9th Oct 15, 12:11pm 1444345901

If they really wanted goods/services inflation - they'd raise interest rates - surely equities are what they are actually protecting.

by Stephen Hulme | 9th Oct 15, 12:18pm 1444346318

Bernanke disingenuously claims otherwise.

BERNANKE SAYS BIGGEST IMPACT OF QE WAS TO 'CREATE JOBS'

by iconoclast | 9th Oct 15, 12:32pm 1444347131

nice throw away line .... slick with words isn't he

It's official - incomes of middle class America are now lower than they were prior to the GFC - so Bernanke's magic elixir has created jobs? how many? what jobs? where? who? what value?

Meanwhile Hillary Clinton has upped her manifesto for the upcoming presidential election by promising to go after Wall Street - the largest beneficiary of QE who are now very much better off than pre-GFC

Promises, promises, promises

by iconoclast | 9th Oct 15, 12:55pm 1444348549

absolutely - it is NY and equities protection - the cognoscenti who have enjoyed the 300% ride up on the back of QE and the FED's open window zero % (to the merchant banks) need some more time to unload the toxic soup onto the unwitting and unwary, go to cash to repay QE

by Stephen Hulme | 9th Oct 15, 12:58pm 1444348719

The misunderstanding of the issues are immense and no amount of dalliance in the vicinity of ZIRP/NIRP will bring back the required wholesale eurodollar credit creation function.

The problem is, as it has been since 2013, who is going to fill the money dealing gap? This is a persistent topic I have explored, and wondered not long before the events of July and August why it wasn’t appreciated as a huge systemic risk: Read more

by Mike B | 9th Oct 15, 1:24pm 1444350250

The rise in equities is not all down to low interest rates and QE - it is all down to global super funds.

Where do you think the billions of dollars being paid EVERY WEEK into super funds goes? it has to go somewhere

Remember it is not just NZers that hand over part of their wages every week to fund managers. It is NZ, Australia, Canada, America, Britain and on and on. - Where do you think it all goes?

by Kate | 9th Oct 15, 1:48pm 1444351712

To my mind, it goes largely into equities BECAUSE of the support from QE.

Where else could it go?

The biggest loser of this misallocation of surplus capital to my mind is infrastructure replacement. Aging schools, bridges, pipes, sewerage and water treatment plants etc. Bad here but worse I think in the US (check out the blue box in summary);

http://www.infrastructurereportcard.org/executive-summary/

And that's a 2 year old study.

by iconoclast | 9th Oct 15, 1:57pm 1444352265

There was pressure from the FED on Wall Street Merchant Banks to use the Discount Window rate 0% to put a floor under the NYSE which they did and hold, then unload to the pension funds, and the Merchanteers have been rinsing and repeating for 7 years - that's how QE was used and distributed

by Stephen Hulme | 9th Oct 15, 2:31pm 1444354282

Not from US citizens if this report is true.

The overall results from the survey show that 62 percent of Americans have less than $1,000 in their savings accounts, and a third of those under-savers have no savings account at all. The portion of savers with balances over $1,000 is 29.1 percent.

The most frequently selected amount that people say they have in savings is also the lowest $0; 28 percent of people selected this answer. Even worse, the next-most-common answer is “I don’t have a savings account,” selected by one in five people (20.7 percent). Read more

As noted in the link below - Institutional cash pools, not households, are the dominant sources of funding in the US money markets.

by Kate | 9th Oct 15, 1:36pm 1444350999

How nuts is it? So nuts they've taken to referring to "dollar" in double quotes - which I assume means "dollar" of the newfangled/notional variety????.

by Stephen Hulme | 9th Oct 15, 2:12pm 1444353133

He means dollar funding - credit creation via money dealing.

An "expert" explanation may be helpful or not, but the decribed actions were definitely a big part of my past life.

Before 2008, broker-dealer balance sheets had virtually unlimited elasticity and were the main source of short-term debt supply, with $4.5 trillion in repos outstanding at the peak. Broker-dealers “manufactured” these short-term assets by financing (predominantly) "safe," long-term assets such as US Treasuries and agency RMBS for leveraged bond portfolios. They reused these securities through their matched repo books for their own funding. Cash pools held dealer repos directly or indirectly through money funds. Read more

by Kate | 9th Oct 15, 2:27pm 1444354079

Let me try and see if I get it right.

So now (since 2008) this "dollar" credit creation function is being carried out by way of central bank balance sheet expansion, as opposed to via money dealing - and the powers that be appear to have no idea of how to reverse out of this dead end?

How'd I do? :-).

by Stephen Hulme | 9th Oct 15, 2:48pm 1444355321

Not bad - capital and new regs stop the transfer back to the banks - they are resisting by downsizing out of the previous elastic arrangement - note that the sovereign/agency asset pledged as collateral to source repo financing is economically retained by the cash borrower under repo accounting rules, hence the collateral can be repoed out for cash - thus the term repo chains and the associated failures to deliver the collateral in a timely manner. Read more

by Alter Ego | 9th Oct 15, 12:52pm 1444348346

SH..Shush ..Shush.

QE in all its woeful Glory, Truth be told?. The comments tell it like it is.

I swear that the comments that are contained therein, are not what the QE and Bernanke wanted published in print..for all the World to see.

Some people must think we are all daft but the writing has been on the wall for many a year.,

The ones with the most to lose, are the ones spinning the yarn and making the rules up as they go along.

One rule for you mugs, Champagne glasses for U.S rulers and others in on the scam..

Pulling the wool over peoples eyes and giving them a sop and a sock in the pocket, is what it is all about.

That has been obvious since GFC was instigated, many a long year ago...and even now.