Federal Reserve keeps interest rates on hold but remains 'accommodative' to increases; US hiring slows; Eurozone GDP growth looks good; air freight demand hits 6-year high; UST 10yr yield at 2.30%; oil and gold down; NZ$1 = 68.7 US¢, TWI-5 = 73.7

Federal Reserve keeps interest rates on hold but remains 'accommodative' to increases; US hiring slows; Eurozone GDP growth looks good; air freight demand hits 6-year high; UST 10yr yield at 2.30%; oil and gold down; NZ$1 = 68.7 US¢, TWI-5 = 73.7

Here's my summary of the key events overnight that affect New Zealand, with news the Federal Reserve has kept interest rates on hold.

The US central bank has maintained the target range for the federal funds rate at 0.75% to 1%, in line with expectations.

It’s dismissed slowing growth in the first quarter as “transitionary”. The Federal Open Market Committee expects economic activity to expand at a “moderate pace”, labour market conditions to “strengthen somewhat further” and inflation to stabilise at around 2% in the medium term.  

The seemingly confident Committee has kept the door open to a rate rise when it next meets in June. It sees economic conditions prompting “gradual” increases and says its policy remains “accommodative”.

US companies hired workers at a slower but still-solid pace in April, while the services sector grew more than expected.

According to US payrolls processor, ADP, private employers added 177,000 jobs last month. It was the smallest gain since the 62,000 increase last October, but slightly above the expectations of economists polled by Reuters.

Growth in the Eurozone in the first quarter has outstripped that of the US, according to a preliminary estimate by the European Union’s stats department.

Eurostat says gross domestic product (GDP) grew by 0.5% in the quarter, which translates to an annualised growth rate of 1.8%. The US’s figure for the same period sits at 0.7%.

The level of growth in the region dampens euro-skeptics’ claims that being part of the EU is hampering their national economies.

In other news, global air freight demand in March was the strongest it’s been in over six years. Rising by 14% year-on-year, the International Air Transport Association says demand is consistent with an uptick in world trade and a six-year high in new export orders.

It notes an increase in the shipment of silicon materials used for electronics, has also contributed to the result.

In New York, the UST 10yr yield has increased to 2.30%.

Oil prices remain lower. The US crude benchmark is at US$47.50 a barrel, while the Brent benchmark is up a bit to US$50.77.

The gold price has continued to slip to US$1,243/oz.

The New Zealand dollar has fallen against the US further to the Fed’s statement, to 68.7USc. It’s up to 92.5 AU¢ and down to 63.1 euro cents. The NZ TWI-5 index has dropped to 73.7.

If you want to catch up with all the 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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Does anyone know why our petrol prices are over $2 per litre??

The Brentwood oil price is approx half what it was at one stage and yet our price per litre is still not a helluva lot less than what it was then!

Someone is making plenty!

behind the scenes Id guess there several reasons
- the brentwood price reflects a slack demand for (unrefined) Oil - everyone is sitting on high stocks and avoiding refining until needed... which adds cost
- the brentwood price is not a sustainable price for Oil cos
- refineries are probably taking a bigger cut where they can ...
- a big chunk of the retail price is tax - which doesnt really change

- Taxes, levies and excise (excluding GST) make up around 70c per litre
- GST makes up another 27c
Nearly a dollar goes into government coffers.

- Landed cost of imported fuel is around 64c
- Remaining 40c or so is the importer's and retailer's profit

The calculations are slightly different for crude imports but the tax component essentially remains the same.

Governments in net oil importing nations tend to intervene for the purpose of stabilising market price to a certain range by raising or cutting the tax components accordingly. This is to avoid inflation / deflation run-off and drastic changes in the economic cycle as a result of sudden rise and fall in fuel price.

It's Brent crude. There is no 'wood'.

Isn't it interesting how you can instantly tell when someone (two commentators, in this case) doesn't know what they are talking about by one small linguistic tell..

hang in there Nymad, youll get it one day.
Or perhaps you can enlighten me with your knowledge where I'm off the mark?

..I've never heard it called "Brentwood" crude before. Is that a place close to Sullom Voe?

Ya see, TM2 made an obvious linguistic mistake - one which you followed up by repeating. A definite tell that you aren't very familiar with the subject.

i was kinda hoping for more of your insight into Oil, not my sloppy linguistics (ya see - i assumed it must be a historical name but i probably had bretton woods in the back of my head).

It's named after the Brent oilfield in the North Sea. It's a good benchmark for 'light' crude.

Because you don't have a gull. Amazing the difference in NP prices since it's arrival.

But in saying that, they should still be lower than what they are.

The Fed "dismissed slowing growth in the first quarter as “transitionary”..."

Sounds a bit hopeful. Theres some ugly indicators round cars and planes...

IMF and Fed expect growth in the second quarter to rise to more than 3.5%. This, as they say, are delayed results of the full employment figures achieved in 2016. The PMI data from last night reflects a positive growth cycle as well.

Nearly 10 years of transitory slow growth, one day people will finally realise their investments are sinking.


How can it be “transitory” then, when if year after year of what should be balanced risks there are only those to the downside? Even the statement on inflation, and the evolution of the official position on inflation, betrays these definitions. The FOMC says that “transitory” energy price differences will give way and that in the “medium term” inflation will stabilize around 2%. Given the history of the PCE Deflator as well as that wording we can only conclude that “medium term” no longer applies to something like a five-year period. Read more

When I reworked the quantity theory of money I realised at that point that there is a great disparity between what is expected and what is happening. What is expected is an exponential curve, what is happening is a bell curve near its peak. You can use simple mathematics to plot what is happening and project the continuing problem. The disparity between the two is also exponential in nature. It will keep growing as excess credit until it blows up. Which is why the housing bubble may not be finished yet. But you won't want to be holding onto to any asset inflated by the bubble when it does blow.

Did no one remember back in the day, when Auto Sales had collapsed into a heap and Ford and General Motors and yes, Holden and plenty of others were doomed for closure.

They were Bailed Out, by various means, including scrapping a few million Oldies in repurchase trades..(That ironically may be now classics)....

Similarly this happened with Boeing bouncing...around like a led balloon..but was reflated....and this today means no closures really happened, but history appears to be repeating itself.

Putting the pressure on one side of the equation and bailing out the World, is heart warming, but stupid as people go crazy as they think it will never happen again.

History repeats itself endlessly and the printing Presses, never stop, even when Car Sales drop...and Airplane orders diminish..

People have short memories. "the Fed" is going for broke and is now doing an accounting shuffle and may have to repeat the process again...and again...and agaiiiiiiiiiiiiiiin.

Perhaps they could call it "Trumped up Charges"...today.

Stephen H shared this link the other day https://fred.stlouisfed.org/series/IOER

Interest rate on reserve deposits has become a transmission mechanism in regards to the potential inflationary pressures of , what is called, high powered money, .... (extreme excess reserves..)
( probably more of a transmission mechanism than the Fed funds rate...in this current environment..?? )

It kind of sickens me that Banks are getting 1% on excess reserves ..
These reserves were the result of the FED purchasing "troubled " assets from the Banks at "FULL" value..
ie... a bailout..

1% of $4 trillion is $40 billion a yr.... of risk free return on money received for the sale of financial assets which, probably, might have ended up as toilet paper...!!!

I'm sure the Banks feel thankful and humbled, and beholden to "you and I ".... by this amazing generosity..!!!

This gift of Money ( % on reserves) is the price the FED is paying for allowing excess reserves to expand so much , in the first place...
No surprise that the result of that, is a windfall to the Banks , and not you and I...!!

So how does the FED pay the interest? Print more money that ends up as excess reserves? A trap they can't get out of? What happens if the ever do release the excess reserves?

With QE the FED bought bonds in exchange for cash reserves that banks hold as deposits with the FED. The FED pays interest to the banks for their cash reserves from the income from those purchased bonds, no problem. The FED is likely to be making a good margin.

Fed Remits Only $92 Billion To Treasury In 2016, Lowest Since 2013 Read more

My understanding is that the FED either allows its financial assets to mature OR it slowly sells them..
( either way , it will be a removal of liquidity from the wider economy).
That way reserves decline..

The FED has,kinda, painted itself into a corner ... If strong inflationary pressure arise the FED will probably have to pay a higher interest on those reserves , in order to influence Banks in limiting credit creation.. while interest rates are in the sub- normal low level... zone ( which they have to be , because most of the western world is now a "zombie economy "... just like Japan )

Financial economy continues to be the main beneficiary..!!

just my view..

Fed reserves are not money - they cannot be withdrawn and utilised elsewhere. At best they can be retained against loans that create deposits that demand the 10 % reserve requirement - which as we know is too much for our banks, they set aside ~ 27% of 8% tier one capital for each dollar of mortgage debt created.

More importantly, banks in the US virtually avoid the anachronistic 10% fractional reserve impediment since the Fed introduced the Account Sweep Programs. Hence, US banks create credit in much the same manner as New Zealand banks do.

Basically, Fed reserves are inert.

I disagree with that Stephen,
Fed reserves ARE Money... far more so than credit money.
On the "moneyness" scale reserves are up there with cash and coins..??

Even thou, in a technical sense, you are kinda correct... about reserves not being "withdrawn"
( In terms of balance sheets.... inside money and outside money can never mix )

In terms of commonsense ... and underlying principles/realities... they can be used:
Why would anyone allow money to be put into an acct they could not use...???

Technically, a Bank could withdraw those funds in the form of cash or coin...
ALSO.... A Bank is easily able to "write a chq" against those reserves , in the same way you might write a chq against the money in your chq acct,
OR... it can make a loan.. ( as u mention...not lending the actual reserves, but an IOU against those reserves.. ie. credit money )


To say say Reserves are inert, kinda implies that they are meaningless because they cant be spent...??
These reserves are , very much, an asset of any Bank that has them.

I spent alot of time understanding this , because some high level economists have asserted that excess reserves can never be spent.... which to me defied, commonsense.

This my understanding.... not 100% sure ...but but pretty sure.

If a bank could withdraw it's reserves balances held at the Federal Reserve a commensurate reduction in Fed assets would have to take place, otherwise the balance sheet would in fact be unbalanced.

An official piecemeal reduction in bank reserves held at the Federal Reserve involves publicly selling UST bonds into the market place and crediting the cash proceeds to the reserve holders on a pro-rata basis. This collapses/extinguishes both sides of the balance sheet simultaneously.

Only the FED can increase or decrease Reserves , in regards to its' balance sheet... I get that.
likewise, only the FED can increase the quantity of paper money
Inside money vs outside money are two different systems.. that relate thru the payment system.

Reserves truly are "high powered money", and if there are ample credit worthy borrowers out there , Banks can easily transform those reserves into credit money... ( even thou those reserves are always "outside money" , and transform might not be the proper word to describe the process).

With a Bank writing a chq... the reserves are transferred to another reserve acct..
Withdrawing cash ...FED exchanges one form of liability with another.. ( balance sheet )


Point I'm trying to make is that reserves are not "inert"... and are considered to be high power money for a reason. They can be exchanged/ transformed.... kinda withdrawn...
To me, they are the digital equivalent of Cash.. ( outside money )

Point I'm trying to make is that reserves are not "inert"... and are considered to be high power money for a reason. They can be exchanged/ transformed.... kinda withdrawn...
To me, they are the digital equivalent of Cash.. ( outside money )

Not in reality. They are tied up and have to remain fully unencumbered from Jan. 2017.

On Wednesday, US regulators finalised details of the liquidity coverage ratio, which will require banks to hold a certain amount of assets that can be quickly turned into cash – to provide protection in the event of a future credit crunch.

If the ratio were applied now, banks subject to the new measures would have to hold a total of about $2.5tn in high-quality liquid assets over a 30-day stress period, Fed officials said – which is $100bn more than they currently have. Assets considered to be of requisite quality include Fed reserves and Treasury securities. Read more

Ha... I was wondering how The FEd was going to unwind its balance sheet, in the future...
Yes.... Maybe inert is the correct word... but now in a regulatory context... ( thou they have a choice between a mix of treasury securities and reserves )

Thks for sharing...

Treasuries require funding, which is offset with stock lending and repo related activities. Nonetheless, large US banks have well established positions. View graphic detail.

"Why would anyone allow money to be put into an acct they could not use...???" Isn't that the whole intent of Fed Reserves, to give a return for sitting idle that the bank would not otherwise get, thus providing insulation from the temptation to loan against the reserve? In the instance Stephen outlines it seems money is still getting loaned against the reserves, just leveraged at a lower rate.

Roelof, the Fed pays IOER on excess reserve balances (~$2,201 billion) as noted in the H3 release.

The Fed had around $900 billion of US government debt on it's balance sheet to offset the circulating currency liability, prior to the commencement of "Quantitative Easing". Since then it has risen to ~$1,500 billion. This amount along with other liability factors are deducted from the ~$4,500 billion asset balance to leave ~$2,201 billion Fed reserve balances, most of which are eligible for IOER. View Fed balance sheet.

My mistake... got it..! Banks make $20 biilion a yr ...risk free..

I will contend that nothing is risk free. When a yield is being paid there is always risk. The only question is who is exposed to it?

Unless the FED ceases to exist ... the payment of % on reserves is risk free..
It is technically impossible for the FED to go broke....

They have a licence to print/counterfeit money .... :)

Somebody at sometime has to pay the interest. No such thing as a free lunch. That means the exponential consumption of resources somewhere.

I would add that one opinion of have read is that the FED can clear the reserves as interest rates rise. But what happens if as I believe they don't rise in a meaningful way? Or in fact keep dropping?

And here is the next "Electrifying Tell". about cars....cheap at half the price, no profits yet, a safe bet, ...until the batteries run out and the grid fails and the shock hits us all....(Maybe).


I do not think I want to go on an electric plane...However.

Interesting bit of news, particularly the rural people. New Zealand farming supported by unethical minerals. http://www.wsrw.org/a105x3844