US jobs growth strong; Fed bond strategy to hit mortgages; China cancels deals at record rate, capital flight 'dangerous'; Aussie ombudsman criticises banks; UST 10yr yield at 2.42%; oil down, gold up; NZ$1 = 73 US¢, TWI-5 = 78.3

US jobs growth strong; Fed bond strategy to hit mortgages; China cancels deals at record rate, capital flight 'dangerous'; Aussie ombudsman criticises banks; UST 10yr yield at 2.42%; oil down, gold up; NZ$1 = 73 US¢, TWI-5 = 78.3

Here's my summary of the key events over the weekend that affect New Zealand, with news of 'dangerous' shifts in China as they return from their Lunar New Year break.

But first, the latest US non-farm payrolls report confirmed solid employment growth. But despite the brisk hiring, their jobless actually rate rose in January to 4.8%. However wages only grew at a modest +2.5%, evidence for both Congress and the US Fed that their economy has room to grow before it risks overheating. That space will allow the Fed to raise rates cautiously and also allow the new American administration to push ahead with its big infrastructure renewal plans.

Part of the US Fed's vast reservoir of bond holdings it has built up are mortgage-backed securities. In the past year alone, the Fed bought US$387 bln of mortgage bonds just to maintain its holdings. Getting out of the bond-buying business as the economy strengthens could help lift their key 30-year mortgage rates past 6% within three years. Unwinding QE “will be a massive and long-lasting hit” for the mortgage market. The impact will be felt worldwide

China is back after its Spring Festival holiday. The January non-official readings for their service sector shows that new business continued to grow strongly, though at a marginally slower rate than in the previous month; while input prices and output charges increased at faster rates.

Meanwhile, Chinese overseas deals worth almost U$75 bln were cancelled last year as a regulatory clampdown and restrictions on foreign exchange caused 30 acquisitions with European and US groups to fall through. The figures, which reveal a sevenfold rise in the value of cancelled deals from about US$10 bln in 2015, highlight a waning appetite for global deal making by Chinese firms. And the feeling seems to be mutual; foreign firms are investing less in the country, apparently worried about the currency trap. "There's no return lower than not getting your money back," said one.

And capital flight continues to drain out of the Middle Kingdom. All of this is getting people focused on the trap the Chinese central bank may soon find itself in; some bankers are calling the level of capital flight 'dangerous' even now.

And in Australia, the government there is forcing overseas investors out if they bought land illegally.

And also in Australia, a critical report into lending practices by the big banks to small business has added fuel to calls for a royal commission into the financial services sector.

A look at our soil moisture map shows clearly that it is dry in the North. A medium level drought emergency has already been declared for the rural sector. Now the focus will shift to Auckland's water supply with at least two to three months to go in summer. At the moment, Auckland's largest water reservoirs in the Hunua Ranges are about 80% full, but overall storage is falling at about 2% per week.

In New York, the UST 10yr yield started today at 2.46% and is now at 2.42%, a drift lower as the 'Trump trade' unwinds.

Oil prices are lower today, now just over US$53 for the US benchmark, while the Brent benchmark is just over US$56 a barrel.

The gold price however is sharply higher, up another US$13 and now at US$1,230/oz.

The New Zealand dollar is pretty much unchanged against the greenback and now still at 73 US¢. On the cross rates we are at 95.5 AU¢, and against the euro at 68 euro cents. The NZ TWI-5 index is up slightly to 78.3.

If you want to catch up with all the 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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Prophetic

"Unwinding QE “will be a massive and long-lasting hit” for the mortgage market. The impact will be felt worldwide"

Possibly, but thereafter $1.5 trillion of the remaining US Treasury hoard will have to be retained to balance the currency in circulation liability. View Fed balance sheet.

But first, the latest US non-farm payrolls report confirmed solid employment growth. But despite the brisk hiring, their jobless actually rate rose in January to 4.8%. However wages only grew at a modest +2.5%,

There are certainly a lot of negative conditions attached to such a solid outcome. And let's not forget.

Even the headline payroll estimate is not at all what it seems. For January 2017, the Establishment Survey increased by 227k. That, however, is not the same as claiming the US economy added a relatively sold 227k jobs last month, as will be widely and repeatedly stated, rather the BLS is suggesting that of their survey data if they ran it 100 times in only 90 of them would they expect to find job gains of between 113k and 341k. About the only thing the BLS data says in monthly form is that the interpretation of some level of job gains is statistically significant (because the 90% confidence interval doesn’t cross zero). Read more

Donald Trump and Your China Business: Double Down, Ditch It or Die

http://www.chinalawblog.com/

The most basic link in finance is that between risk and reward. Just like alchemists who once sought a path to gold from lead, a great deal of modern finance was built around finding a shortcut between them. Discovering the great asymmetry where risks would be low but rewards sky high was the Holy Grail of later 20th century mathematics. If you studied advanced math or economics (same thing, unfortunately) at an Ivy League school at that time chances were that at the end of your college career was one on Wall Street.

It was almost like a series of Nigerian princes had descended upon the financial districts of each of the world’s great money centers, promising each and every bank (really “banks”) as much wealth as they could possibly want should they only take a small risk. The most famous of them was Robert Merton and Myron Scholes, who got involved with LTCM, and though they nearly brought down the financial world in 1997 and 1998, that was merely the re-imposition of risk/reward that had never really been altered.

That was one of the great ironies about LTCM. It introduced math in a way that actually preyed upon biases. The allure of math is its scientific senses, the way in which it is pitched under objectivity, as if great formulas and complex equations can see the future because there they have no emotion or individuality. In truth, this financial math is sleight of hand, a magic trick performed by the best of illusionists.

Despite that spectacular failure, everyone on Wall Street and Lombard Street set out to be them anyway, until 2007 Read more

Another ten years on, and...

So what do you do if you're a European banking regulator faced with the task of maintaining a safe, sustainable financial system amid a concerning growth in bank leverage. Well, if you said sell down risk assets then you're just being silly or completely ignoring your implicit obligation to engineer higher banking profitability at all costs.

If we can get serious for a moment, like in the early 2000's, when all else fails you turn to synthetic CDO's which, courtesy of some magical, if completely incomprehensible, math, slashes the risk of bank balance sheets while having a negligible impact on profitability. It's called the Synthetic Collateralized Loan Obligation and it's all the rage in Europe. Read more

So...

What's a bank to do when regulators want it to offload risk to prevent a repeat of the last financial crisis? Why turn to a complicated derivative transaction commonly associated with that same crisis, of course.

Deutsche Bank, which has lost almost half its equity value so far this year, is planning a synthetic collateralized loan obligation to lower the capital requirements tied to a pool of billions of dollars of corporate loans. Read more

And to top it off takes out a one page advertisement apologising for past indiscretions.

Deutsche Bank took out full-page ads in Germany's Frankfurter Allgemeine Zeitung and Sueddeutsche Zeitung on Saturday, in which the country's biggest lender apologized for (getting caught) engaging in market manipulation and misconduct that has cost the company billions. In the ad, signed by CEO John Cryan on behalf of the bank's top management,the bank said its past conduct "not only cost us money, but also our reputation and trust."

The ad said "we in the management committee and bank leadership as a whole will do everything in our power to keep such cases from happening again." Read more

Deutsche bank is technically bankrupt anyway
They ( & the UK banks ) have been "used" by WallSt to make deals WallSt could not legally make under US regulatory laws.
You can guarantee WallSt will come out of GFC2
ahead of the European banks
The manipulation starts at WallSt and the rest of the world are its puppets.
The master will do just fine.
What is of greatest concern is that a bunch of 20 somethings on a Florida business vacation were ever
taken seriously by their superiors in WallSt and worse that their stupid financial manipulations were sold to the rest of the world as legitimate financial securities

Deutsche Bank were on 0.1% equity last year. They were in serious trouble then and claimed to be changing some of their positions to increase equity. I doubt that they could change anything without using up equity so it was all smoke and mirrors. Then later in the year the fine came from from the GFC and they shat themselves. There is also another lesser fine that came through as well.

Now given the state of the central banks in the EU the whole banking system is already past the point of failure. The deal with Greece stuck them with loan payments that they cannot possibly pay, the ECB told them to sign the deal knowing this. If the payments from Greece or Italy stop there would be a cascade failure. Instead of letting things fail then recover they have dug a deeper hole.

I don't think anyone within the management of those banks understands the OTC options or the leveraged risk from those options. I think you're right in that they have created another LTCM problem except the problem is threaded through a larger portion of the financial system than LTCM ever achieved. How many times are the massive banks going to try to take down the global financial system before they succeed?

Nike will make a killing now that US jogging is growing!

Only if they repatriate their manufacturing under the new administration?

In New York, the UST 10yr yield started today at 2.46% and is now at 2.42%, a drift lower as the 'Trump trade' unwinds.

More so in basis point value terms (DV01) over at the real yield sector. Read more