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US service sector slow, Fed notices; more liquidity coming in China; record Aussie trade deficit; UST 10yr yield 1.86%, sharp fall in NZ swap rates; oil and gold up; NZ$1 = 66.5 US¢, TWI-5 = 71.5

US service sector slow, Fed notices; more liquidity coming in China; record Aussie trade deficit; UST 10yr yield 1.86%, sharp fall in NZ swap rates; oil and gold up; NZ$1 = 66.5 US¢, TWI-5 = 71.5
4th Feb 16, 7:16am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news our swap rates have fallen sharply opening up the chance of lower local interest rates.

But first, in the US activity in their vast services sector slowed to a near two-year low in January, suggesting that American economic growth weakened somewhat at the start of the first quarter even as their labour market remains resilient. We will get their non-farm payrolls report on Saturday and analysts are expecting growth under +200,000 in January, way below the almost +300,000 in December.

US Fed officials are noticing a tightening of conditions in the US.

China is further down the track and expected to loosen its reserve ratio requirements for banks soon.

At least their services sector is growing to pick up some considerable slack.

But as China switches gears away from heavy investment and toward consumption, the reverberations are being felt especially in Australia. Their trade position has steadily deteriorated, culminating in a record A$32.7 bln deficit in 2015, according to data dating back to 1971.

And international airfreight growth slowed to +2.2% in 2015 from +4.5% the previous year.

In New York, the benchmark UST 10yr yield has slipped slightly today from this time yesterday and is now at 1.86%. Yesterday in New Zealand we saw a dramatic fall in swap rates and flattening of the rate curve. In fact, it is now the flattest it has been in six months and rates for 4, 5 and 7 years are either at or near record all-time lows. The two year swap rate is back to levels we last saw in November 2012.

And that has come as credit spreads jumped today in all main markets.

The gap between US WTI oil price and the Brent benchmark has widened slightly although both are US$1.80/barrel higher today. The US price is now at US$31.50 while Brent is at US$34.5/barrel.

The gold price has jumped US$12, and is now up to US$1,139/oz.

The Kiwi dollar starts today noticeably higher as well at 66.5 US¢ a four-week high, at 93.3 AU¢, and at 60.2 euro cents. The TWI-5 starts today at 71.5. Yesterday's strong jobs numbers are impressing investors.

If you want to catch up with all the local changes on Friday, 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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15 Comments

by  MortgageBelt  |  4th Feb 16, 7:40am 1454524827

Perhaps every country's economy needs a Jubilee year.

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by  skudiv  |  4th Feb 16, 8:23am 1454527432

Nah, savings represent deffered consumption, and debt represents deffered savings. What every country's economy has done is consume far more than it can afford, and the days of deffered consumption are comming due. The plan is to avoid that with ZIRP or jubilee, which in my view is childish, and does nothing to address the issue of oversunsumption in the present.
"I'll gladly pay you tuesday, for a hamburger today." Has been the rallying cry up to this point.

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by  Andrewj  |  4th Feb 16, 8:20am 1454527210
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by  Stephen Hulme  |  4th Feb 16, 9:34am 1454531663

I mentioned the US Dollar Index yesterday in Chaston's what you need to know comment. The full import of potential negative US interest rates was at crescendo strength - reflected in traders moving out the curve with industrial size zeal to lock in what's left of US Treasury yields.

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by  Afewknowthetruth  |  4th Feb 16, 9:04am 1454529884

From the linked ADP report:' 'Private-sector employment increased by 205,000 from December to January, on a seasonally adjusted basis' That level of 'employment increase' does not even keep pace with population growth. The labour force participation rate continues to fall. Therefore there is no resilience in the US economy and it is actually circling the drain, just like most other economies these days, but with a much higher level of indebtedness than many others. . The situation in Australia gets worse by the month and will get much worse, of course, as the Chinese bubble economy continues to slowly burst. All Ordinaries no longer holding the 5000 level and down 2.24% yesterday. https://in.finance.yahoo.com/q/bc?s=%5EAORD .

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by  David Chaston  |  4th Feb 16, 8:56am 1454529365

For the US, you are plain wrong.
The data is here.

Summarising, their population 15-65 grew by +2,909,000 in 2015. Their labour force grew by +1,691,000, while the number of people employed grew by +2,490,000.

There are now (Dec-15) 149.9 mln people employed in the US, up from 147.4 mln the previous year.

Which is why 85.6% of their population growth ended up with jobs in 2015. Only 14.4% of that growth decided not to 'participate' and that is way lower than for the non-participation rate they started out with.

(It is also useful to note how unusually high the NZ participation rate is, even if it did slip marginally yesterday.)

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by  Country boy  |  4th Feb 16, 8:24am 1454527476

IT would appear with the strengthening NZD and the attitude of the Governor that NZ is heading for deflation. Deflation is destabilising as it raises the debt exposures of all, increasing the risk of financial crisis and at worst perhaps systemic financial problems. Is it time for another Governor

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by  David Chaston  |  4th Feb 16, 9:01am 1454529713

Disagree. Deflation with rising pay (which is what NZ has) is very good for workers and consumers. Income up, costs down. What's not to like? 

If you are a borrower (who has borrowed too much) then I can see how you will always want lower interest rates to ease your stress. But it is not the RBNZ Governor's role to make it easier for borrowers who over-extended themselves. You need to fix that problem yourself.

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by  Country boy  |  4th Feb 16, 9:14am 1454530486

sorry mate - from a system perspective deflation is very dangerous thus the responses of overseas central banks. If you want some historical perspective consider the impact of the Great Depression's deflation of 1929. What happens is there is a serious of failures of more indebted which destabilises other firms and financial institutions. Playing with fire is what it is. Be careful what you wish for.

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by  Roger Witherspoon  |  4th Feb 16, 9:27am 1454531231

That's what we are told isn't it. It is an article of faith that the US government saved the day, that's what they have been telling us ever since. It is probably just propaganda that serves a particular group of vested interests and not independent at all.

There is a line of thought that it was US government response to the Wall St crash of 1929 that turned a much needed wipe out of debt into a lasting depression.

The problem is growth comes from growth of debt (called "credit" by those who benefit from the interest payments) that ultimately causes a collapse once debt levels become unsustainable. The problem is someone must take the loss and it is usually the weaker members of society who do so. The better resourced sectors are able to field better intellectual champions to fight their cause.

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by  David Chaston  |  4th Feb 16, 9:38am 1454531932

In the "Great Depression" pay fell faster than prices. Joblessness became endemic. Quite different to now. Today's risks are from the "second machine age". Today's risks are real (and rising). And different. There are few realistic lessons from an event that happened 87 years ago for today. Look forward, not back ...

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by  Country boy  |  4th Feb 16, 2:03pm 1454547827

Its generally accepted (ie keynes and Friedman) that the depression was exacerbated by the monetary impact of government and central bank actions which led to employers failing and knock on effects that u identify. pays to go behind the figures a little.

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by  bigblue  |  4th Feb 16, 9:57am 1454533035

5 year swap rate collapses to the lowest ever seen - surely this means low interest rates for years to come. Collapse in swaps over all timeframes mirrors collapse in oil, dairy and most other commodities - we are heading to deflation and negative government cash rates - just a matter of time.

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by  Halfway To Paradise  |  4th Feb 16, 10:54am 1454536440

Maybe we are not going to need RBNZ to cut rates to get cheaper borrowing.

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by  Stephen Hulme  |  4th Feb 16, 9:54am 1454532887

US Fed officials are noticing a tightening of conditions in the US.

Debatable.

Yesterday, FOMC Voting Member Esther George issued a vote of confidence for the economy, despite financial turmoil returning across asset markets again today. Read more

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