90 seconds at 9 am: Libor rates move up

US services grow strongly; ECB disappoints; China imports rise; Aussies warn on Chinese media; Libor rates rise; UST 10yr yield at 1.59%; oil up, gold down; NZ$1 = 73.9 US¢, TWI-5 = 77

9th Sep 16, 7:32am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news bank funding costs are facing a tight spot.

But first, official data on the US services sector for Q2 is surprisingly positive. Total revenue at service firms rose +4.3% in the June quarter compared with a year earlier. That compares very well with the +3.5% growth in the first quarter and this year and the +2.2% growth in the final quarter of 2015. It was the strongest year-on-year revenue gain since the end of 2014.

In Europe, the ECB disappointed markets by keeping its interest rates unchanged and leaving the door ajar for more stimulus. But that was about all; it gave few hints about its next move. Markets had expected a more decisively dovish position.

In China, export growth rose in August but that was due to a weaker yuan. Imports however rose for the first time in nearly two years, and perhaps that suggests domestic demand may be picking up. In US dollar terms, their trade surplus narrowed somewhat. A faster pace of import growth will be welcomed by its trading partners.

And in Australia, a new report is warning of the effects of Chinese language online media and their drive to keep immigrant communities tied to news and views that reflect Beijing's world view. Official Chinese 'soft power' efforts are being directed to try and avert local assimilation. Fortunately the Report finds the efforts are likely to fail.

In New York the UST 10yr yield is back up, now to 1.59% today. Actually, there is action also in Libor markets as well. In less than a month, new rules for money market funds will come into force and these funds are shifting their focus to holding Government securities rather than corporate paper. That means that some aspects of bank funding will have fewer sources. Markets are reacting by driving up the interest rates in Libor. They have risen more +50 bps in the past year, and the cost of currency swaps has risen even more. Many analysts think we are only part way through these hikes. This shift could have a direct impact on NZ bank funding - if bank treasurers have left their capital raisings to the last minute.

The oil price has risen again today, this time by about US$2, with the US benchmark price now just under US$47.50 a barrel, while the Brent benchmark just under US$50 a barrel. Smaller than expected American inventory levels are behind today's move.

The gold price however is lower by about US$8, now just over US$1,336/oz.

The New Zealand dollar has slipped overnight on USD strengthening. It’s now at 73.9 US¢, 96.7 AU¢ and 65.7 euro cents. The TWI index is now at 77.

If you want to catch up with all the local 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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13 Comments

by Stephen Hulme | 9th Sep 16, 8:24am 1473366279

Re: rising Libor: This shift could have a direct impact on NZ bank funding - if bank treasurers have left their capital raisings to the last minute.

The Aussie parent banks are funding in the USD term market, according to Bloomberg.

Greenback bond issuance from Australia has increased to $43 billion this year, up 57 percent versus the same period in 2015, data compiled by Bloomberg showed. Commercial banks have led the way in doing ever-larger transactions, with Westpac Banking Corp. this month raising $5 billion in a single five-part offering, while National Australia Bank Ltd. did a $4 billion deal in July. Commonwealth Bank of Australia, the nation’s largest lender by market capitalization, this week priced $3.3 billion of U.S. currency securities. Read more

by David George | 9th Sep 16, 8:27am 1473366457

More on the house price saga, Bloomberg on NZ/Aussie parity. They are saying the booming house prices fueled by immigration is pushing up our dollar; not good for our dairy and other exporters.

"Housing booms in New Zealand and Australia could be putting the neighbors' currencies on course to reach parity for the first time ever.
Both nations have seen house prices surge in recent years, but the underlying causes are fundamentally different, according to Deutsche Bank analysis. Australia's boom is largely home-grown, whereas New Zealand's is being fueled by record immigration. That's affecting the countries' current accounts differently.
Aussies are feeling richer due to house-price gains, prompting them to spend more on imports and boosting their current account deficit, New Zealand is sucking more offshore capital into its housing market, narrowing its current account gap.
Currencies are sensitive to trends in the current account -- a country's balance with the rest of the world -- because they are a gauge of risk for investors.
``The nature of the real estate boom in Australia should have bearish currency implications because it leads to deterioration in the basic balance,'' Robin Winkler, a London-based strategist for Deutsche Bank, said in a research note. ``This is not the case in New Zealand and adds to our conviction that AUD/NZD should drop to parity.''
http://www.bloomberg.com/news/articles/2016-09-08/antipodean-housing-bo…

by Cowpat | 9th Sep 16, 10:13am 1473372794

NZD , is at interesting levels.Being at or about decade highs against multiple currencies, a push higher sees open air. A failure to push on thru these resistance levels , could see a correction , a view held by a number of fx dealers , but the reality is current fundamentals both internal/external support a stronger NZD. NZD is equally likely to reach parity against CAD, if there is not a global reset.The question should not be one of reaching parity, but how much beyond parity .

by OnwardsUpwards | 9th Sep 16, 10:40am 1473374438

The NZD/USD is going much higher. Not because of the reasons you have stated but because of what the FED is going to do and how Wheeler is going to react (The wrong way).

by Crow22Darkness | 9th Sep 16, 11:57am 1473379028

Except most of the Housing boom has already been going on a decline in most of Australia especially in the regional areas & Perth.

The only real estate boom in Australia is mostly in Sydney where house prices are beyond insane & Melbourne.

by Stephen Hulme | 9th Sep 16, 8:44am 1473367468

Re: China: The cost of borrowing yuan in Hong Kong surged to a seven-month high amid speculation China’s central bank is intervening to discourage bearish bets on the currency.

The overnight Hong Kong Interbank Offered Rate climbed 3.88 percentage points to 5.45 percent, the most expensive since February, according to Treasury Markets Association data. The one-week rate rose 2.09 percentage points to 4.06 percent. Read more

USD funding shortage?

On August 30, the overnight SHIBOR rate jumped above 2.05% for the first time in more than a year. As the acronym indicates, SHIBOR is to Chinese RMB interbank liquidity as LIBOR is to eurodollars in London. In the summer of 2015, SHIBOR began rising steadily and often precipitously despite monetary policy “stimulus.” On June 27, 2015, the PBOC cut the benchmark lending/deposit rate by 25 bps while also reducing the required reserve for Chinese banks. Despite the policy “double shot”, O/N SHIBOR was only temporarily diverted and soon resumed its troubling trajectory.

Since the Chinese economy is funded in externalities (especially “dollars”) as much as internal bank reserves and true money policies, the problem of SHIBOR was revealed as a function of increasing pressure placed on the Chinese system as a result of the then building “dollar” run. In response, dating back to that March, the PBOC had pegged CNY exchange as a workaround, increasingly stamping out any volatility in CNY (to the dollar). What that really meant was that the PBOC was attempting to fill the funding void left by Chinese banks unable to pay the required premium (in lower CNY exchange) to bid in eurodollar markets (repo, unsecured, FX, etc.). Read more

by Stephen Hulme | 9th Sep 16, 9:04am 1473368686

Are Japanese authorities finally waking up to the real costs of so called "stimulus" in respect of damaging 'reach for yield' buying stampedes evident across global sovereign bond markets, including New Zealand?

Japan’s central bank in coming weeks will probably modify its stimulus program to alleviate risks from ultra-low long-term yields, according to Evercore ISI.

The change would help to make the Bank of Japan’s easing more sustainable over the longer haul, given diminishing chances of hitting the 2 percent inflation target soon, according to the analysis by Krishna Guha and Ernie Tedeschi, Washington-based analysts at the research group.

Bank of Japan Governor Haruhiko Kuroda on Monday pointedly flagged concerns about negative potential effects from the slide in long-maturity bond yields. Earlier this year, rates as long as 20 years touched zero percent. The BOJ chief noted that the drop hurt returns on pension programs, and could affect confidence levels and the economy more broadly. Read more

by Chris-M | 9th Sep 16, 10:44am 1473374655

"- Official Chinese 'soft power' efforts are being directed to try and avert local assimilation. -"

What does this reveal about China's intentions?

by workingman | 9th Sep 16, 1:05pm 1473383157

Good question, Chris-M. Every Chinese national or ex-national who experiences and embraces Western democratic freedom is a threat to the Chinese state. Ideas always undermine power. And unchallenged power is an existential necessity for so-called communist dynasties.

Right now, we have political agenda in more profound competition with each other than we have had for many decades. Every existing ruling system - capitalist or communist, or anything else - maintains or has maintained its hegemony by using growth in material well-being to manage its population. This whole political-economic trade-off is now under an extreme of pressure - in the West as it happens as much as in China and other states.

As the Chinese rulers are discovering, when people get richer at home, when they travel the world, and when they live elsewhere, they tend to want or agitate for greater freedom. It's a way of thinking that cannot be tolerated, wherever it takes root. The Party will do everything possible to maintain its unchecked power. It's a world in which the New Zealand government wanders like toddlers. But that's another story.

by Chris-M | 10th Sep 16, 12:49pm 1473468592

It is interesting to follow that thought a bit and compare how a country with a strong national identity like the USA will assimilate immigrants pretty quickly they take on the american identity. In NZ as a nation I don't think that we put much effort into fostering patriotism and a strong national identity with the result that it seems to take at least one generation for people to integrate. Australia I am not so sure; they are very patriotic and work hard at that, but at the same time they are pretty xenophobic which you would expect to work against assimilation.

by Stephen Hulme | 9th Sep 16, 12:49pm 1473382192

Uh-oh, here come the downward revisions.

WASHINGTON — The U.S. economy likely created 150,000 fewer jobs in the 12 months through March than previously estimated, the Labor Department said on Wednesday. Read more

by OnwardsUpwards | 9th Sep 16, 5:28pm 1473398933

Of the last 11 jobs reports, 8 were revised up.

by Ergophobia | 9th Sep 16, 2:23pm 1473387808

If Trump wins and the Great Rearmament of the USA gets under way - watch there with awe the return of jobs, prosperity AND interest rates.