Here's my summary of the key events over the weekend that affect New Zealand, with news the next stage of winding back QE is about to start.
The Federal Reserve could begin shrinking its US$4.5 tln balance sheet as soon as this year, earlier than most economists expect. New York Fed President William Dudley gave the signal over the weekend in the central bank's most definitive comments on the question that looms over financial markets. They are zeroing in on a strategy to begin winding down their portfolio of mortgage and Treasury securities, as part of their broader effort to drain reservoirs of stimulus out of the US and world financial system. The tap may have been turned off in October 2014 but all that QE is out there still. The job of withdrawing it will not come without its own pressures.
Inflation in the US is now back over +2% pa. The latest release of the "personal consumption index" (or PCE) preferred by the Fed pegs it at +2.1%. Also revealed in the release was a personal savings rate of 5.6%.
Consumer sentiment about their. economy remained high in March, mainly because of higher incomes and favorable job prospects, but it was also held up by a view that lower economic growth is the new normal.
China's official PMI indexes were released over the weekend and both rose in March. The factory one is at its highest in over a year, and the services one is on a similar trend, but even higher.
And Chinese companies are struggling to get money out of the country for their acquisition spree. So they are turning to raising it offshore. Chinese firms have issued more than $50 bln worth of US dollar bonds in the last 90 days, up sharply from last year.
In Europe, Brexit is about to get very messy. The EU has restated its formal position that divorce must be completed with Britain before any negotiations of new trading arrangements with the block can be started. They said Britain must agree to pay its bills and to protect millions of Europeans living in Britain before reaching a new trading relationship. They warned that the negotiations could be “confrontational.”
And Credit Suisse, the second-largest Swiss wealth manager, faces a sweeping tax evasion and money laundering investigation spanning five countries and potentially involving thousands of account holders. Investigators in the Netherlands arrested two people - seizing a gold bar, paintings and jewelery - and are probing dozens more suspected of concealing millions of euros in Swiss accounts. Criminal investigations are also underway in Australia, Germany, the UK and France and the roles of bank employees are part of the inquiries. Australia's Serious Financial Crime Taskforce said it had identified 346 of its citizens "with links to Swiss banking relationship managers alleged to have actively promoted and facilitated tax evasion schemes". No word yet of any Kiwis being caught up in this.
In New York, the UST 10yr yield will open lower at 2.39%.
Oil prices are up slightly today to just over US$50.50 for the US benchmark, while the Brent benchmark is just over US$53.50 a barrel.
The gold price is higher too, up +US$3 to US$1,247/oz.
And the New Zealand dollar starts today just a little lower at 70 USc. On the cross rates the Kiwi dollar is at 91.8 AU¢, and against the euro is at 65.8 euro cents. The NZ TWI-5 index is at 75.2.
If you want to catch up with all the changes on Friday, we have an update here.
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Transparency International has released a new report, entitled Doors Wide Open: Corruption and Real Estate in Four Key Markets, which has identified Australia, Canada, the UK and the USA as the top four spots targeted by corrupt officials or criminals for real estate crime.
Australia is the worst, failing to address 10-out-of-10 loopholes. Read more
Inflation in the US is now back over +2% pa. The latest release of the "personal consumption index" (or PCE) preferred by the Fed pegs it at +2.1%.
Hmmm...
If it took a nearly 80% rise in WTI just to generate calculated inflation barely above the target mark, then nothing really has changed. As the base effects of oil pass into history, so will the Fed’s chance to claim success in the one place where “money printing” should make all the difference. Instead, it was the “dollar” working through oil prices that moved inflation and will keep doing so, leaving WTI the only thing that matters and monetary policy as it has been for a very long time – irrelevant.
Unless something has radically changed during March that hasn’t yet been published or caught any attention, the PCE Deflator’s “success” in February will be the only month for that condition. For an exact preview of what to expect four weeks from now, we need only turn to Europe whose inflation data is one month ahead.
Like the PCE Deflator, Europe’s HICP (Harmonized Index of Consumer Prices) rate registered the 2% target level in February for the first time in a very long time (48 months). And like the Fed, the ECB had undertaken a considerable amount of “stimulus” and even QE (and then expanded QE) which was expected to change the inflation trajectory. Instead, it was only oil prices that delivered the ECB its brief 2%, and then promptly took it away in figures released also today.
The calculated HICP was just 1.5% for March 2017, considerably less than expected because in the mainstream economists still actually believe QE is working and will continue to over time. The major surveys of economists had expected inflation to decelerate only to 1.8% this month, and steady itself from there on for the rest of the year. Thankfully, from the point of view of beleaguered consumers, QE isn’t working and plays no role in setting consumer prices. Read more
They (Fed) are zeroing in on a strategy to begin winding down their portfolio of mortgage and Treasury securities, as part of their broader effort to drain reservoirs of stimulus out of the US and world financial system. The tap may have been turned off in October 2014 but all that QE is out there still. The job of withdrawing it will not come without its own pressures.
Hmmm...
The Organization for Economic Co-operation and Development (OECD) estimated that global trade hit a new record high last year. By their figures, total trade added up to just more than $22.8 trillion, $4.6 trillion above than the “cyclical” peak recorded for 2008. But that raw comparison is highly misleading, as are any number of other related and unrelated economic statistics. “Record high” tells us absolutely nothing, just as briefly hitting a 2% inflation target is an empty result.
Total world trade since 2013, meaning the three years of 2014, 2015, and 2016, was up just 8.5% (total, not per year) though at that record high level. In 2007 alone, despite that year falling under the initial conditions for what would become a globally synchronized Great “Recession”, trade grew by almost 8%. Had that event actually been a recession, global trade growing in full recovery at its uninterrupted baseline rate would have been around $32 trillion in 2016, not less than $23 trillion. It’s an enormous difference, and begins to explain why oil prices and not central bank balance sheet expansion is setting inflation rates.
By some counts, the economic retrenchment was worse than a broken growth trajectory. The WTO estimates that merchandise exports contracted by more than 10% between 2011 and 2015, with a good deal of that decline due to commodity prices – again the “dollar” and its textbook deflationary condition. As the Wall Street Journal reported yesterday:
“Annual movement of capital across borders -- in the form of stock and bond purchases, foreign direct investment and lending -- fell more than two-thirds, to $3.3 trillion in 2015 from $11.9 trillion in 2007, according to McKinsey & Co. Overseas bank lending, particularly from Europe, has been hard hit. The stock of cross-border loans held at banks around the world contracted 21%, from $35.5 trillion in 2008 to $28.2 trillion in the third quarter of 2016, according to the Bank for International Settlements.”
The global economic “miracles” of the late 1990’s and middle 2000’s were all built on cross-border lending and monetary flow. Their absence is the dominant economic setting, before 2007 nowhere but up and now no other direction than down. The eurodollar system is poorly understood if so often ignored, but it is essential as a completely parallel global banking system where at root is the monetary capacity provided by offshore virtual currency. There are no dollars there, no physical Federal Reserve Notes or certificates of any other kind, and there surely isn’t any gold or hard money equivalent. Read more
Crikey, sounds like sanity returning. Next thing New Zealand will be running a current account surplus (ok, just kidding, and yet...):
"The stock of cross-border loans held at banks around the world contracted 21%, from $35.5 trillion in 2008 to $28.2 trillion in the third quarter of 2016, according to the Bank for International Settlements.”
Crikey, sounds like sanity returning. Next thing New Zealand will be running a current account surplus..
China may have other plans.
China’s ambassador to Canada, Lu Shaye, told the Globe and Mail that Beijing is seeking full access to Canada’s economy ahead of free trade talks, a move that could result in Chinese state-owned companies bringing their own employees to work on projects in Canada. Charles Burton, an associate political science professor at Brock University, said bringing their own workers abroad is “normal practice” for Chinese companies. “It’s not as if [the Chinese] would be asking something of Canada that they don’t expect from other countries,” he said. Read more
Possibly a dumb question.
What are likely to be the consequences for the ordinary New Zealander homeowner/mortgage-holder/investor over the next two to three years with the Federal Reserve winding back QE?
For ordinary New Zealanders, QE led to low interest rates (mortgages and investments) fuelling a property boom and a buoyant share market due to surplus cash.
Is it likely that winding back QE going to see higher mortgage and investment interest rates, and less buoyant housing market and share market?
Would even appreciate some comment from you David.
The property boom is the result of a surplus of money finding its way into asset prices, and asset price bubble. A drop in interest rates is a part of the same equation, a surplus of money lowers the cost of that money. Trouble is you can't stop the process without popping the bubble.
Have you listened to Charles Murray before?
"Money printing" happens when a central bank buys securities in the market. The exchange is that the seller (a private entity) gets the money, the central bank the bond. To fund it, they 'just' create the funds by journal entry. (The central bank does get to keep the coupon payments.)
But the reverse happens when they sell those securities back into the market. The buyer gives up cash (to the central bank) to own the security and its coupon payments. That removes money from the economy. A journal entry is then made to cancel the money that was 'printed'.
That's the concept, anyway.
I agree with Scarfie on this. Not certain of a 'pop' but it is a possibility. The Fed is probably encouraged that the various market tantrums over the prospect of tapering, then stopping new QE, then raising interest rates all never materialised. Their toughest act will be withdrawing the financial reservoir. If they do it slowly enough and with enough transparency there may not actually be a 'pop'. But I reckon the days of rising asset prices are over. But I could be wrong about that; don't forget the Europeans, Japanese and Chinese still all have the tap on 'full'.
However, the US is still the major infuence. It would not surprise me if we see a shift to higher yields for non-sovereign bonds. And that would flow through to housing loans.
Could be a slow gradual process though - or not. Black Swans are probably out there somewhere. (And one mught be the new US President who could score an own-goal while thinking he is protecting his billionaire mates.)
But heck, in reality my view is no better a guess than yours. (Beware the people who say they know for certain what will happen ... )
Probabilities and uncertainties - not looking positive at the moment
3 Apr 2017
The talk today is the increasing uncertainty in the US about the programs being touted by the White House. The main one from a market perspective is the Tax Code Review and the reduction of the corporate tax rate to 15% from 35%. This is now unlikely and will be slanted towards a 25% rate, down from its current rate of 35%. Seeing as NY has risen 5% in the 1st Quarter of the year and DJ has risen 2000 points since the election on the expectation of 15% tax rate, it "should" theoretically (potentially) give back half those gains of 1000 points. That's the risk as of today.
I know for certain what will happen.
The world economy MUST grow. Anything else is collapse.
Central banks MUST prop up all markets.stocks/bonds/pension funds to prevent collapse. There is no free market now. Debt must be doubled down, permissible debt ratios MUST increase ... the faith must be kept at all costs. The underlying energy burn MUST increase.
BUT the problem is not monetary in nature. So ultimately it can not be fixed by monetary means.
" don't forget the Europeans, Japanese and Chinese still all have the tap on 'full'."
There's a graph at the bottom of this article which illustrates this point.
http://www.oftwominds.com/blogmar17/agree-Geithner3-17.html
Printer8 - Bloomberg recent take on the 1.75 T mortgage whale- "In the past year alone, the Fed bought $387 billion of mortgage bonds just to maintain its holdings. Getting out of the bond-buying business as the economy strengthens could help lift 30-year mortgage rates past 6 percent within three years, according to Moody’s Analytics Inc.
Unwinding QE “will be a massive and long-lasting hit” for the mortgage market, said Michael Cloherty, the head of U.S. interest-rate strategy at RBC Capital Markets. ".
Something else to blame Trump for I spose.
https://www.google.co.nz/amp/s/www.bloomberg.com/amp/news/articles/2017…
With usual derring-do - usual speed - late to the party - we are looking into it
FMA casts regulatory net out to short-term derivatives
The Financial Markets Authority WANTS to license all short-term derivatives firms before the year is out, with the sector accounting for about 40 per cent of complaints to the regulator over the past 18 months
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=118…
AU - done early last year - 2016
The Australian Securities and Investments Commission (ASIC) is responsible for the supervisory oversight of Australian financial services (AFS) licensees that issue retail over-the-counter (OTC) derivatives. AFS licensees in this sector provide a range of financial services, including for trading in margin foreign exchange (FX) contracts, contracts for difference (CFDs) and binary options.
http://download.asic.gov.au/media/3899926/rep482-published-20-june-2016…
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