90 seconds at 9 am: NZ sovereign bond risk tumbles

US jobs growth solid; China signals rate cuts; India to adopt a GST; airfreight volumes rise strongly; UST 10yr yield at 1.56%; NZ sovereign CDS spreads sink; oil up +3%, gold lower; NZ$1 = 71.4 US¢, TWI-5 = 74.6

4th Aug 16, 7:31am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news risk premiums for NZ sovereign debt are sinking fast, and placing us among countries with the safest reputations.

But first, this weekend we will get the latest and important US jobs report. Today, the precursor ADP employment report was out and that revealed a stable gain of 179,000 private sector jobs, right on market expectations. Markets are expecting a non-farm payroll gain of a very similar level. Any surprise above that level will raise expectations of a US rate hike at their next meeting in the third week of September.

In China, nested deep on a key State website, is a call for Chinese interest rates to be cut soon. The Party website is influential and this call may well signal something significant is coming.

In India overnight, they have changed their laws to allow a Goods & Services Tax to be adopted. The new tax will do away with "a bewildering thicket of overlapping state and federal tax rules". However, there is still some way to go before it is finally in place, a rate set, and a final definition of the items covered.

Global air freight demand recovered strongly in June with freight tonne kilometers (FTK) up +4.3% year-on-year. This was the fastest pace of growth in 14 months. Airfreight volumes are the biggest in the Asia-pacific region, but these under performed growth-wise compared to North America and Europe where the pickup was stronger.

Back in New York, UST 10yr yields are higher today at 1.56%. And we should also note that the risk premium the market requires for NZ sovereign debt has sunk to a new post-GFC low, lower than for Australia, and down to the levels commanded by Norway and Sweden, at just 26 bps. And it amounts to a -30% fall in risk in just one month. NZ Government debt is highly prized by international bond investors.

The US benchmark oil price has bucked its downward trend of the past week with some sharp rises. Crude is up more than +$1 today, or +3%, to just under US$41/barrel and the Brent benchmark is over US$43/barrel. Heavy petrol demand in the US for summer driving is the cause.

The gold price is going the other way, down -US$10 to US$1,355/oz.

The NZ dollar is also lower, down nearly -1c overnight, starting today at 71.4 US¢, at 94.2 AU¢, and at 64.1 euro cents. The TWI-5 index is still at 74.6. A stronger US dollar, and concerns over yesterday's local labour market data were the drivers of the slip.

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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7 Comments

by scarfie | 4th Aug 16, 9:02am 1470258126

So does our risk premium state that we are a robust high tech economy, or a small fish that can be held in servitude?

by Stephen Hulme | 4th Aug 16, 11:34am 1470267289

Taxpayer servitude plays a significant part, given 10 year New Zealand government bond yields have more than halved since 2014 to ~2.20%, leaving significantly higher outstanding annual coupons in the 4.5% category to be paid for over many years to come.

Which brings me to my recent comment.:

Another wealth transfer mechanism funded by the taxpayer for our wealthy foreign benefactors, since the investment in productive economic outcomes are hardly reflected by the perpetual need for the RBNZ to cut the overnight cash rate, which further embellishes the capitalisation today of interest coupon debt flows yet to be paid.

by Stephen Hulme | 4th Aug 16, 9:01am 1470258112

Caveat from Bill Gross:

Almost all assets are a bet on growth and inflation (hopefully real growth) but in its absence at least nominal growth with some inflation. The reason nominal growth is critical is that it allows a country, company or individual to service their debts with increasing income, allocating a portion to interest expense and another portion to theoretical or practical principal repayment via a sinking fund. Without the latter, a credit-based economy ultimately devolves into Ponzi finance, and at some point implodes. Watch nominal GDP growth. In the U.S. 4-% is necessary, in Euroland 3-4%, in Japan 2-3%.

Where does New Zealand fit and does the NZGS 10Y note at ~2.20% reflect enough forecast growth to maintain financial stability? I doubt it.

by Stephen Hulme | 4th Aug 16, 9:50am 1470261029

In China, nested deep on a key State website, is a call for Chinese interest rates to be cut soon. The Party website is influential and this call may well signal something significant is coming.

Shibor has recently fallen just below 2.0%. Some speculate PBOC USD (Reserves) sales exchanged for RMB, to support CNY, have recently been unsterlised by injecting offsetting reserve balances into the banking system.

by Henry_Tull | 4th Aug 16, 10:59am 1470265165

Trailing numbers showing the resistance now suffered

http://www.telegraph.co.uk/business/2016/08/03/hsbc-reports-29-slump-in…

Concern over the sustainable level of economic growth in China was the most significant feature of the first quarter

Mind you. Nothing a good dose of buyback couldn't mount.
Talking about self medicating......
These bankers.

Sartre, the French existential philosopher, believed that by not taking action, we are complicit, if not directly responsible, for man’s inhumanity toward man. He lamented, “Anything, anything would be better than this agony of mind, this creeping pain that gnaws and fumbles and caresses one and never hurts quite enough.”

https://www.psychologytoday.com/blog/campus-confidential-coping-college…

by Stephen Hulme | 4th Aug 16, 10:39am 1470263985

Today, the precursor ADP employment report was out and that revealed a stable gain of 179,000 private sector jobs, right on market expectations. Markets are expecting a non-farm payroll gain of a very similar level. Any surprise above that level will raise expectations of a US rate hike at their next meeting in the third week of September.

It will take more than that in an election year.

Going back to December 2014, the new revised data set shows only one month (January 2016, ironically) out of the past nineteen with more than 1% inflation. The record of total futility now stretches an unthinkable 50 months; the last time the PCE Deflator showed price changes equal or “better” than the official monetary policy target of 2% was April 2012. Not only is calculated inflation stretching more than four years of defiance, it is again moving in the opposite direction of official monetary goals. Read more

by Learn to Socia… | 4th Aug 16, 11:17am 1470266222

Come on Auckland Brainiacs, Get on Board!

https://techcrunch.com/2016/08/02/china-has-actually-built-that-elevate…

"Today China Xinhua News said that the Transit Elevated Bus (TEB) is not only a real thing, but had its first road test today. It happened in Qinhuangdao City, and consisted of a brake and power consumption test.

The whole thing is powered by electricity, is about 72 feet long and 25 feet wide (so it can span multiple lanes of traffic) and can carry 300 passengers (but future versions could probably be coupled together to carry even more). And, when it’s actually launched and operating, it should hit max speeds of around 40 miles per hour, making it a pretty speedy mode of public transportation."