Weaker US inflation; US-China trade outcome in doubt; EU digital tax shelved; Aussie credit demand drops; UST 10yr 2.60%; oil and gold up; NZ$1 = 68.7 USc; TWI-5 = 73.4

Weaker US inflation; US-China trade outcome in doubt; EU digital tax shelved; Aussie credit demand drops; UST 10yr 2.60%; oil and gold up; NZ$1 = 68.7 USc; TWI-5 = 73.4

Here's our summary of key events overnight that affect New Zealand, with news US inflation has come in lower than estimates suggested.

Wall Street is up (+0.5%) on the back of low inflation figures which suggest the Fed will be dovish about future interest rate hikes. Overnight the EU markets were flat and they followed Asian markets which were up by more than +1% yesterday.

The US CPI rose 1.5% in the 12 months to February, the smallest gain since September 2016, largely driven by lower petrol prices. This is a major miss as markets were expected a rise of 2.2%.

Meanwhile the US-China trade talks are getting more uncertain with US saying they want to be able to retain the right to impose punitive tarriffs and a deal is not certain.

The US-China rivalry has also taken a new turn with the American's challenging the use of Huawei gear in undersea cable networks.

While the number of people leaving Hong Kong looks set to rise as China tightens its grip, with more than half of the people under 30 saying they are thinking about leaving the territory.

In Europe at a meeting of EU ministers they have shelved plans to introduce a digital tax on global giants like Google and Facebook, but they have said they may try again in 2020.

And staying in Europe, Volkswagen has announced plans to cut jobs as it speeds up the production of less labour-intensive electric cars. The German car maker says it will also review the different brands it owns including Audi, Skoda and Porsche.

While in the UK Teresa May's Brexit dramas continue - yesterday she thought she had a new deal with the EU, but today even her own Attorney General is refusing to back it.

In Australia, more evidence of a lending slowdown. Lending commitments to households for owner-occupied buying and alteration projects are down -3.3% in the year to January. But much worse, this data is down more than -15% for January 2019 alone compared with the same month in 2018, indicating the falloff is growing.

The Australian federal government has ditched a key recommendation from the banking royal commission to scrap trail commissions for new loans arranged by mortgage brokers after pressure from the industry and smaller lenders.

The UST 10yr yield is softer today by -4 bps and is now at 2.60%. Their 2-10 curve remains at +16 bps while their negative 1-5 curve is at -10 bps. The Aussie Govt 10yr is down -1 bp to 2.01%, the China Govt 10yr is also down by -1 bp to 3.16%, while the NZ Govt 10 yr is up +1 bp to 2.12%.

Gold is firmer, up to US$1,297 and a +US$5 rise since this time yesterday.

US oil prices are now just under US$57/bbl while the Brent benchmark is just over US$66.50/bbl. That's a small rise overnight.

The Kiwi dollar is at 68.7 USc and almost +½c firmer. On the cross rates we have firmed against the Aussie and now at 96.9 AUc and a new two and a half year high. Against the euro we are holding at 60.8 euro cents. That puts the TWI-5 at 73.4.

Bitcoin is little-changed at US$3,862. This rate is charted in the exchange rate set below.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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18 Comments

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are low interest rates not supposed to encourage borrowing and growth? If we are not getting growth/inflation someone should be able to tell us why, or are central banks no longer relevant in this information age?
After an asset bubble the forces of deflation appear strong in the economy.

Confused Central bankers look for answers

https://www.bloomberg.com/news/articles/2019-03-11/wall-street-s-got-it-...

Muted inflation is taking Fed out of the picture for bond buyers

https://www.marketwatch.com/story/muted-inflation-is-taking-fed-out-of-t...

Kevin: In a way we’re asking, what happens when the bus with all the tourists leaves? What actually happens to the market at that point.

David: Yes, because first there is the issue of artificial demand. So what we have seen is elevated prices because of the economic footprint of the European Central Bank, the Bank of Japan, the Federal Reserve, and their balance sheets have become a dumping ground for credit. So you have central bank buying that is artificial. That’s the first issue, an excess amount of demand that doesn’t really belong there and may not remain. Then there is the consequence of an ever-expanding debt market. You have the private, you have the corporate, you have the governmental markets, and the scale is now considerably larger than it was ten years ago. So supplies are greater – far greater – but that is not apparent in the pricing of debt today because you have had this artificial buyer.

Kevin: And that is what has kept interest rates so artificially low. We continue to harp on this. If these bonds and this credit were actually going out and chasing a market, they would have to pay higher interest rates.

David: That’s right. So if the central bankers decide to liquidate or reduce their holdings – this is the normalization we were talking about – in the fixed income assets that they own today, that swells the available product in the market, in a timeframe where the market-makers have either gone dormant – maybe they come back – or they have disappeared. So who assists in the orderly buying and selling of an excess amount of bonds in that environment?

Kevin: This brings me to the question, can the central bankers actually normalize?

David: It is going to become apparent, and I think very soon, that having killed off the market-maker function the central bank community now must remain squarely in the middle of the bond market. There has almost been a devolution of the marketplace. It used to be a competitive market environment where many people were making the market, and by creating inefficiencies, by creating a misallocation of capital, essentially what they have done is they have harmed the structure of the market, and the normal functioning with market-makers.

Now all of a sudden, as that role has deteriorated, it has left a gap that only the central banks can fill. They have basically written a script in which they have to play a dominant role moving forward. So the Federal Reserve moves in. What are they trying to do? What are they claiming that they are going to do by the end of this year? Put 600 billion dollars’ worth of bonds back onto the market.

Kevin: You need a buyer to buy those, though.

David: Yes, probabilities are high that they will have to reverse course and restore order to the bond market

https://mcalvanyweeklycommentary.com/the-bond-market-is-losing-its-bigge...

Without Central Bank intervention, commodity prices would tank. Thats the issue.
Which ultimately means áll jobs/income are now dependent on further credit.
Capitalism is now Socialism.

Not sure I agree with that analysis Andrew. Yes, the Japanese and EuroSSR have completely destroyed their bond markets, but the result is US bonds are well bid. The US is dumping vast amount of US Treasuries on the market, both from the Fed ($0.5 trillion pa?) and from the government overspend/political bribery culture ($1 trillion pa?), but the Europeans can't get enough of them. I mean they yield 2.6% against 0.1% or less on German bunds, ie 2600% more. Interesting times indeed, but it is the EuroSSR which is collapsing, not the US, as yet, anyway.

This all has echoes of the late 1980s to me, the USSR fell apart, just like Euroland is doing now; and Japan fell into eternal stagnation, just like China is doing now.

11
up

Short memories are the blight of many people. The scrap about the use of Huawei's technology on infrastructure around the world is heating up again, but people are forgetting the report that identified that in June 2017 China diverted all internet traffic between the US and Australia through China for a period. Something that was not supposed to be able to happen, especially remotely. Such a capability can have multiple purposes, most of them not good. And then there was the Canadian discovery of an unexplained chip on boards manufactured in China (not Huawei if I remember right). It is clear that there are agendas coming out of China that the majority, if not all of the western world would find at least questionable.

Chips planted by Chinese military unit into China sourced hardware manufactured for Super Micro Computer and used in servers of major US corporates and government agencies:

https://www.theguardian.com/technology/2018/oct/04/china-planted-chips-o...

Thanks Andrewj. An interesting article.

China Scrambles To Defuse $6 Trillion "Hidden Debt Bomb" With "Titanic Credit Risk"
https://www.zerohedge.com/news/2019-03-12/china-scrambles-defuse-6-trill...

Since being founded in the depths of the financial crisis, Zero Hedge has built a dedicated following by serving up a mix of hardcore financial analysis and populist political commentary. Both the ‘Tyler Durden’ name and the site’s tagline -- "On a long enough timeline the survival rate for everyone drops to zero” -- are borrowed from the anarchic cult classic ’Fight Club.’

'In 2016, Bloomberg revealed the identities of Zero Hedge’s three main writers. They were Colin Lokey, who quit the blog, Tim Backshall, a credit derivatives strategist, and Daniel Ivandjiiski, a Bulgarian-born former analyst long-rumored to be behind the site.'
https://www.bloomberg.com/news/articles/2019-03-12/zero-hedge-says-faceb...

Global debt levels have become "higher and riskier" than that of a decade ago, meaning that "another credit downturn may be inevitable", S&P Global Ratings has warned.

'In a report entitled Next Debt Crisis: Will Liquidity Hold?, published on Tuesday (12 March), S&P found global debt has surged by around 50% since the 2008 Global Financial Crisis, led by major-economy governments and Chinese non-financial corporates, while global debt-to-GDP ratios have risen to more than 231%, compared with 208% in June 2008.'

https://www.investmenteurope.net/research/4001300/-global-credit-downtur...

https://www.zerohedge.com/news/2019-03-11/facebook-bans-

and

http://kunstler.com/clusterfuck-nation/ides-and-tides/

"Here’s what’s actually going on in that beast known as The Economy: Globalism is winding down as a decade of Central Bank machinations reach their limits of deception, leaving the major trading nations with little more than comparative disadvantages".

https://www.youtube.com/watch?v=7n8PgM0c3ic

The table at the 10 minute mark is interesting to say the least

Can NZ be headed the same way.......

While the number of people leaving Hong Kong looks set to rise as China tightens its grip, with more than half of the people under 30 saying they are thinking about leaving the territory.

Taiwan's advance notice: The CCP's entreaties toward them of 'one country, two systems' will result in the same situation should Taiwan's leaders fall for it.

And Theresa May defeated for a second time - No deal Brexit being voted on tomorrow. Current options are "No Deal", extension of Article 50, another referendum, cancellation of Brexit. Interesting times....

Very slim chance that MP's will vote for a "no deal". Very small minority support that outcome.

They will probably vote for an extension.

Then who the f$%k knows what will happen?

Labour just mailed all their UK members asking about a snap general election and asking for £8.

There is very little public appetite for another general election in the UK right now but Corbyn just can't seem to stop gnawing on that bone and thinking about his own power plays rather than the nations interests. I can't think of an opposition party who have been more inept. It's hard for me to fathom that any opposition party could have failed to capitalise on the mess that the Tories are in right now, and yet somehow, Labour are inexplicably in just as much of a quagmire.
In fact, there seems to be a great poverty of politicians with any power or clout in the UK who are not just flexing their own egos and personal agenda's/beliefs.

Absolutely, this is the thing about all of this, it's a destructive power grab from all sides - Tories wanted the initial referendum to quell the right wing of the party and stem the desertion to UKIP, Labour have been absolutely disastrous and are only interested in winning an election. This is the biggest decision of a generation or more and all the major parties are bothered about is a pissing contest, horrendously bad leadership from both sides.

This is great advice on the CGT:

http://www.stuff.co.nz/business/industries/111204349/surprise-card-could...

I’ve always said the tax cuts should be greater than the revenue gain. That way the impact on some people will be softened and the majority of the public will see a big net change in their favour.

I was told by a mate who lives in Taiwan that a lot of people have been quietly leaving Hong Kong. So the survey confirms what has been going on for some time. Although people are not making a big fuss about it so as not to attract attention.