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US jobs and pay rise; US trade deficit falls; air travel jumps; Aussie AAA may be lost in December; big China bank fined NZ$300 mln for AML fraud; UST 10yr yield at 1.78%; oil and gold down; NZ$1 = 73.3 US¢, TWI-5 = 76.8

US jobs and pay rise; US trade deficit falls; air travel jumps; Aussie AAA may be lost in December; big China bank fined NZ$300 mln for AML fraud; UST 10yr yield at 1.78%; oil and gold down; NZ$1 = 73.3 US¢, TWI-5 = 76.8
7th Nov 16, 7:22am by David Chaston

Here's my summary of the key events over the weekend that affect New Zealand, with news of yet another large bank caught with another large penalty for corruption.

But first, the US non-farm payroll jobs growth came in slightly ahead of expectations on Saturday, but in the detail there were some impressive aspects. Firstly, the jobs growth for September was dramatically revised higher. And secondly, pay levels rose more than expected, now up +2.8% year-on-year. That's its fastest rate of growth since June 2009. This report shows an American economy in a healthy state, despite the political campaign screeching. And this data won't dissuade the Fed from a second hike in December.

Staying in the US, their trade deficit (for both goods and services) fell -10% in September as exports rose and imports fell. Within that, their goods deficit fell and their services surplus rose.

Global air passenger traffic grew strongly in September, up +7% compared to the same month in 2015. This was the strongest year-over-year increase in seven months. Capacity climbed +6.6% and load factor edged up +0.3 of a percentage point. This comes on top of strong air freight traffic growth.

In Australia, fund manager BlackRock says the Australia could lose its S&P AAA credit rating in December if their Federal government makes yet another push-back on when it expects to return to surplus. Australia is a 'serial under-achiever' on that score, they say. The Aussie Mid Year Economic & Fiscal Outlook will be released sometime in December.

India, which said a few months ago that it will bring in a GST, has announced the rates at which it will apply. It is choosing to apply four rates which range from 5% to 28%, with most items set at 12% or 18%. But by having multiple rates, it is just creating a huge incentive to manipulate and avoid. On the positive side, this scheme will eliminate all indirect state taxes.

And in New York, one of China's largest banks, the Agricultural Bank of China, has agreed to pay a NZ$300 mln penalty to settle an investigation by New York’s banking regulator that the lender violated anti-money-laundering laws. The regulator said bank management had silenced and severely curtailed the independence of a whistleblower who attempted to conduct an internal investigation of suspicious activities involving counterfeit documents with Chinese and Russian parties.

In New York, the UST 10yr yield will start the week lower 1.78%. Here however, wholesale swap rates will start higher.

The US benchmark oil price is down again today, and is now just on US$44 a barrel, while the Brent benchmark is above US$45.60 a barrel.

The gold price is lower too and now just under US$1,297/oz.

The New Zealand dollar will start the week pretty much where we were this time on Friday, at 73.3 US¢. On the cross rates it is now up at 95.5 AU¢, and against the euro at 65.8 euro cents. The NZ TWI-5 index is at 76.8.

If you want to catch up with all the local 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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7 Comments

by  scarfie  |  7th Nov 16, 8:52am 1478461926

Is this a case of running out of yield and having to sell your assets? AEP - http://m.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11743…

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by  Stephen Hulme  |  7th Nov 16, 9:14am 1478463265

An act of China bashing propaganda in light of the failed US Asian pivot?

Estimates of foreign reserve erosion in October vary enormously. The consensus figure is $26b. Anything near $80b to $100b would amount to a 'grey swan' event, and would probably be misinterpreted as an even bigger escalation of capital flight than is in fact happening.

Hmmmm...

China is on a shopping spree, buying up Japanese government bonds.

It bought close to a net 9 trillion yen ($86.6 billion) worth of JGBs in the January-August period, more than tripling the amount from the same period last year.

It is likely that the People's Bank of China, the central bank that manages the country's foreign reserves, has been reducing its holdings of U.S. Treasurys in anticipation of higher U.S. interest rates and shifting some of its money to JGBs. During the eight months, the bank cut its U.S. Treasury holdings by about $48 billion, according to data by the U.S. Treasury Department. Read more

Moreover,

China’s State Administration of Foreign Exchange, which manages the nation’s reserves, started liquidating some Treasuries and buying Japanese debt after the Federal Reserve raised rates in December, according to people with knowledge of the matter. SAFE boosted holdings further in the past three months as it sold some pound assets before and after the U.K.’s June vote to leave the European Union, said the people, who requested anonymity because the information isn’t public.

A dollar-based investor needs just a few steps to turn Japanese three-month bill returns positive.

To buy the bill, yielding negative 0.24 percent, a fund manager can borrow yen, lending dollars in return. As part of that agreement, they’d pay the three-month yen London Interbank Offered Rate -- now at about negative 0.02 percent -- and receive dollar Libor -- at 0.82 percent.

But the trade becomes especially lucrative because of the basis spread on the cross-currency swap, which determines the cost to convert payments from one currency to another. The swelling appetite for dollars has led that spread to roughly double in the past year, to 64 basis points, or 0.64 percentage point, close to a 2011 high. The dollar lender also receives that amount.

All in, the dollar-hedged yield on three-month Japanese bills is 1.24 percent, near the highest in at least five years, Bloomberg data show. Read more

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by  scarfie  |  7th Nov 16, 10:09am 1478466553

Forgive me if I am missing something. But if they are simply shifting money from US Bonds to Japanese Bonds why are they bleeding on the balance sheet?

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by  Stephen Hulme  |  7th Nov 16, 10:45am 1478468702

There is no doubt China is short USD, as is Japan, UK and Europe (negative currency swaps), but PBOC balance sheet reduction doesn't mean those dollars are extinguished. More than likely term swapped to domestic Chinese banks (temporary in bound foreign funding), hence the ongoing shortage as failures to rollover/return funding exacerbates the CNY versus USD position.

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by  scarfie  |  7th Nov 16, 5:37pm 1478493424

Good point. When debt destruction happens it is the end game. Or more accurately the link to consumption based on that asset ceases.

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by  Stephen Hulme  |  7th Nov 16, 8:51am 1478461871

But first, the US non-farm payroll jobs growth came in slightly ahead of expectations on Saturday, but in the detail there were some impressive aspects

This report shows an American economy in a healthy state, despite the political campaign screeching..

Hmmmm....

The 6-month average monthly change is +179k, and has been close to that for the past six months dating back to the shockingly weak report for May (without May, the average of the past five months is still only +210k). Between July 2014 and February 2015, the average was around +260k. The headline of the payroll report registers about one-third slower now than at the height of “full employment” euphoria. There is a very good chance that the US labor market has slowed considerably, leaving open debate exactly how much and from what condition to start with.

Despite the unemployment rate that has hovered near or just below 5% since last August, wage and income growth continue to stagnate at historically low rates. Weekly earnings (production & non-supervisory) actually contracted in August, but rebounded in both September and October. That was neither surprising nor actually different, volatility is typical. Average weekly earnings in the past during growth periods had averaged between 2.5% and 3.5%, and at “full employment” between 3.5% and 5.0% (more toward 5%). There is nothing even close to that over these past two years where the unemployment rate indicated to economists the same condition – the problem of interpretation. Read more

And the risks defined by Federal Reserve Vice Chairman Stanley Fischer are:

First, and most worrying, is the possibility that low long-term interest rates are a signal that the economy’s long-run growth prospects are dim. Later, I will go into more detail on the link between economic growth and interest rates. One theme that will emerge is that depressed long-term growth prospects put sustained downward pressure on interest rates. To the extent that low long-term interest rates tell us that the outlook for economic growth is poor, all of us should be very concerned, for–as we all know–economic growth lies at the heart of our nation’s, and the world’s, future prosperity Read more

UST10yr stalled below 1.80%

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by  Andrewj  |  7th Nov 16, 9:47am 1478465267
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