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US services sector growth slows; China targets new stimulus projects; huge AU mortgage fraud; oil falls further; swap rates now very flat; NZ$1 = 77.9 USc, TWI = 79.7

US services sector growth slows; China targets new stimulus projects; huge AU mortgage fraud; oil falls further; swap rates now very flat; NZ$1 = 77.9 USc, TWI = 79.7

Here's my summary of the key news overnight to keep you up-to-date over these holidays.

Firstly, we should note that the NZD has taken quite a jump overnight, up about 1c across the board. Especially, we are at a new post-float high against the Aussie at 96.1 AUc. The strength was driven by the better than expected Fonterra auction results.

And secondly we should note that long term swap rates continue to fall with the New Zealand 1-5 swap curve at a new five year low of just 20 bps and the 2-10 at just 22 bps. They are likely to go even lower given that UST 10yr yields fell below 2% overnight. More on that below.

In the US their pace of expansion is slowing, which should not be unexpected. Growth in their giant services sector slowed in December and new orders for factory goods fell for a fourth straight month in November, signs their economy lost some of its growth momentum in the fourth quarter of 2014.

China is pushing ahead with more than 300 infrastructure projects valued at over NZ$1 tln as policymakers seek to shore up growth that's in danger losing momentum.

Also, keep an eye on another unpronounceable Icelandic volcano; apparently it is about to blow, possibly spectacularly. Nor not. No-one really knows but it could also be a major Black Swan event.

Also spectacular - and closer to home - two Melbourne men have been charged with a massive mortgage fraud scheme involving more than AU$100 mln - and possibly much more. Both worked for Cigna. ASIC alleges the two were the architects of a complex scheme that used faked documents to take out home loans from the Commonwealth Bank, ANZ, NAB, Westpac and a host of other lenders.

The selloff in global oil markets continued overnight with the he benchmark US price is now just on US$48/barrel and the Brent benchmark is just on US$51/barrel. The number of rigs operating in the US is now in steady decline, with almost 100 idled in the last three months of 2014 and twice that many planned to shut down in 2015. Still, that will leave more than 2,000 pumping in North America, and another 1,300 elsewhere.

Cheering the moves lower in the oil price is the Japanese corporate sector who now see a way back to competitiveness.

Going the other way, gold prices rose again overnight and are now up to US$1,220/oz.

UST benchmark 10yr bond yields sank again in overnight trading on Wall Street and are now at 1.99% which is a new four year low. As we noted above, New Zealand interest rate swaps saw more yield falls. Now the 1-5 curve is now just 20 bps and the 2-10 is just 22 bps, both fresh 5 year lows.

The NZ dollar has taken quite a jump in the past 12 hours, up about 1c. It starts today at 77.9 USc. We are also at 96.1 AUc and the TWI is now at 79.7.

And in the virtual currency world, Bitstamp, one of the largest exchanges for trading the digital bitcoin currency, said it has suspended its service after a security breach yesterday resulting in loss of around 19,000 bitcoins.

The easiest place to stay up with event risk over the holiday period is by following our Economic Calendar here »  Have a fun, safe New Year celebration.

 

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26 Comments

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Re: rigs operating, except that because of the horrendous decline rates of shale oil wells there is a huge need to have more and more rigs just to keep production flat.  Ergo if there are less, and with oil workers being laid off that's pretty certain shale output could decline a lot earlier.  Break even cost per rig is >$80 per barrel, who in their right mind keeps drilling at <$50?  except if its to keep a fraudulant ponzi schene going?  "Investments" could turn rather oopsie.

 

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Thousands of jobs already being lost in US oil patch and related industry:
http://money.cnn.com/2014/12/30/news/economy/oil-job-cuts-civeo-stock/index.html?iid=SF_INV_River

I notice in the past few weeks US economic data has been weaker than expected (today both the non manufacturing ISM data/industrial production data was considerably weaker than predicted) and the unemployment claims data seems to have turned. Co-incidence? I think not….

More on the bust:

http://wolfstreet.com/2014/12/30/oil-bust-contagion-hits-hedge-funds-su…

''What Civeo is doing, other companies in the oil patch have already started to do, or will do soon: cutting capital expenditures not with a scalpel but with an axe while slashing headcount and other operating expenses. These companies gorged on debt during the greatest credit bubble in US history. The Fed encouraged them to. Investors closed their eyes and held their noses and handed them the money. Wall Street made sure they did. And now that debt sits on their shoulders and will have to be dealt with, even as the price of oil has plunged by half. It’s going to be very, very tough.''

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Yes as they say, the cure for lower prices is lower prices - can't see sub $60 prices for more than a couple of quarters, the signs are already there

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That rather depends on how long the on-going demand collapse goes on for. Get a deep enough global depression and oil could go to $20.

In principle though you are correct - if (miraculously) demand was somehow to recover in 2016/17 oil prices would soar as supply will have been curtailed through the swathe of cancelled projects announced already (which would have been needed to merely compensate for the ever present 5-6% depletion of existing conventional fields). Such is life at the crest of the peak oil curve.

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I'd add to that King, such is life, and future volatility, in a world of money printing. Its the reason why 2015 forecasting is a wasted exercise, and why anyone on here with really entrenched views is really missing the big picture, when in fact they are often the ones thinking that they are the only ones that are seeing it. Debate is really useful, but that's about all.

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and of course your entrenched big picture money printing view is the one.

Well we'll get to see.

 

 

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In a few months summer will return to the northen hemisphere and heating oil demand will

dramatically fall away.

What price oil then?

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Heating oil isnt a biggee in the scheme of things.  As a foil for instance there will be a summer driving season when motorists tend to drive more and hence consume more.

By then oil needs to be or should be climbing back up to $80ish.  If it isnt I think the economic and political disruptions /effects will be something we dont want to behold.

 

 

 

 

 

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NZD jumps against AUD, Aust is slowly slipping into recession, China is slowing down. A perfect storm is brewing.  The only silver lining is the oil price.

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and of course Wheeler will have to slash the OCR in 2015 and we should see fixed mortgage interest rates sub 5% as swap rates collapse, which will be great for all the SME's that use equity in their house to fund their businesses.

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Given that it is highly likely that the plunging oil price will skewer a) the Russian economy (with a huge negative impact on Europe, and significant potential collateral damage to the sovreign debt markets), b) the US shale industry (whos debt fuelled growth has contributed massively to the US 'recovery'), and sets off a conflagration in the high yield debt markets c) smacks the Canadian economy (oh so dependent on Tar sands investment) etc etc I think the fact that the average motorist might save $20 a week in return is rather more of a nickel rather than a silver lining.......

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In Sydney, the fuel price is now $1.00, a drop from the peak of $1.60 (August 2014).  That is oughly 37% drop.  In NZ, it's averaging $1.98, a drop from $2.21, that is about 10% drop. Someone is making good money from the poor motorists !! 

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How many weeks till we achieve parity with the Aus$ and perhaps 0.70 against the Euro?

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the we you refer is the/a currency, it is not a qualitative reflection on any of us - in an individual sense.

 

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Wheeler is soon going to have to swallow one great big spoonfull of humble pie.

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Much prattle in the lead up to the end of 2014 as to how the US shale oil industry could still make money when a barrel of oil was $70, or $60 or even just $50. It is not quite that simple - the price that the producers get at the wellhead is considerably lower than the published WTI price. And guess what - most US shale oil producers are having to now sell at prices in the mid/high-$30s.

http://www.fhr.com/%28X%281%29S%2843dmxy55bhwjko55so0hu045%29%29/refini…

Given that most of them were not cash flow positive when the price of oil was in the $80 plus range, imagine how much they are losing now?

 

Boom.

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The knock on effects are metastasizing rapidly through the US economy - thus a US steel plant has just sacked 750 workers citing the collapse in the oil price and contraction in demand for pipeline steel:

http://www.foxbusiness.com/industries/2015/01/06/us-steel-lays-off-756-…

"The company has suddenly lost a great deal of business because of the recent downturn in the oil industry," Tom McDermott, president of United Steelworkers local 1104 in Lorain wrote to workers, in a letter reviewed by The Wall Street Journal. "What appeared just a few short weeks ago as being a productive year, [with new hires in December and extra turns going on], has most abruptly turned sour."

 

 

The tip of the iceberg.

 

It won't be too long before the Fed is rushing to try and bail out the shale oil industry before the US economy goes totally t+ts up. After all the US is the home of the free market..........

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and then there is the junk bond aspect, i wonder how many "investors" and pension funds apart from their own money, borrowed off the fed and near zero and went into the junk bond market looking for a margin....oopsie.

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The answer is none. The lowest rate loans available there is the 30 year fixed interest rate which is available only to people with good equity and very high credit scores. The QE funds are placed into the reserve accounts of the banks from which the FED purchased the MBS's. They remain at the FED.

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hmmm, Ok, so its all private money in the junk bond market then.  

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I wonder where Profile is... cash flow negative is a good thing right?

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Most of the independant oil-geology engineers ie those with the technical know how and independance to be honest say $80 to $95 for shale.  Lets say its $80, even if its $70 who in their right mind is going to be investing with oil breaking below $50 and looking at $40?  ppl thinking of the future? gimme a break....

 

 

 

 

 

 

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The RBNZ Governor continues the long tradition of his predecessors of too little too late and too much too soon rather like using a steamroller to navigate a mountain bike course and being surprised when you come last.

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There is currently about $90 billion of junk bonds in shale plays and 21 issuers of these bonds. Ownership will be spread across thousands of funds and 10's of thousands individual investors. Most were issued at betweem 8-12%. Only high growth speculative funds would participate in this market, all fully aware  of the potential for total loss.

Even if the value of all of them fell to zero, the loss would equate to a 1 point fall in the S&P. However, the increase in profits by companies that benefit from low oil prices will far exceed the loss of profit from companies that suffer from it. 

As usual steven, your statements are merely just you whipping to death your favourite hobby horse, and lack any meaningful analysis.

 

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US energy companies have taken on an extra $550 billion of debt since 2010, and this article highlights the risks:

http://www.bloomberg.com/news/2014-12-11/fed-bubble-bursts-in-550-billi…

 

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