The Fed adds liquidity freely

Kia ora,

and welcome to Monday's Economy Watch where we follow the economic events and trends that affect New Zealand.

I'm David Chaston and this is the International edition from Interest.co.nz.

Today we lead news of extremes wherever you look.

The Federal Reserve pumped in another +US$211 bln to Wall Street in repo funding last week. Recall the previous week they pumped in +$367 bln. That is more than +US$ ½ tln in just two weeks in their on-going operations to add liquidity to American financial markets. This is not insignificant and there has been a sharp upturn in the growth of the Fed's balance sheet as this cheap ~1.5% money is added to the system.

Maybe that is one reason Wall Street ended last week on a firmish note, up +1.3% on the week. For the year, it looks like the S&P500 will have risen a very impressive +28%, proving cheap money drives asset prices. The benchmark US Treasury 10 year yield has fallen from ~2.7% to about ~1.9% in the same period.

Friday's rise was bolstered by good consumer income and spending data for November. The same data set reveals that inflation as measured by the Fed's preferred metric, PCE, slipped to 1.6% pa.

American consumer sentiment is also holding in the latest survey although unchanged from the previous month. It is also very little changed from this time last year.

European markets were even more bullish on Friday than their American counterparts, with most up nearly +1%. The exception was London with finished with virtually no gain. Of the three main EU equity market indexes, London (FTSE100) is going to end the year up about +12%, The German DAX30 is on target for a +26% rise in 2019, and the winner is the French CAC40 which is headed for an annual gain of +28%.

In France, they are tackling the pollution problems of diesel SUVs with a NZ$34,000 tax on them in 2020, raising it from NZ$21,000 presently. This is on top of tough new European rules being phased in next year to lower car emissions. At the same time, the French are reducing cash incentives for the purchase of electric cars.

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In China, the Shanghai equity market ended last week with a solid +1.1% gain and they are heading for an annual +22% gain in calendar 2019.

China is also making new efforts to get its TPPA-alternative RCEP multi-lateral trade deal done. This is the trade deal it prefers because it excludes most of the TPPA's labour and environmental standards. China's push includes an attempt to help reconcile fractious Japanese-Korean relationships.

China continues to be embarrassed by the lack of acceptance of its currency. New data shows that the yuan's share as an international payments currency is only up to +1.2%. That is a gain, but almost an insignificant one. It even trails the Aussie dollar. Even th e US dollar had a larger market share gain in 2019 while retaining and enhancing its dominant position. And don't forget, payments are the easy bit to change. It is the pricing basis where the greenback shines, and even those meagre yuan transactions are probably priced originally in US dollars.

In Hong Kong, their Q3 current account data release revealed that capital flight from the City is underway. More than NZ$30 bln flowed out in Q3, more than four times the flow in the second quarter, and there was an inflow of capital in the first quarter of 2019.

In Australia, their tax authorities have won a huge case against gold miners involving rorting their GST refund scheme. More than AU$¼ bln is involved and it attracted crime networks.

In Sydney, fires, droughts and low water supplies are challenging everyone with extremes. As water supplies get very low, evaporation in existing supplies is becoming a critical issue. And these climate disasters are set to douse their economy with Q4 and future GDP now expected to be lower than it otherwise would have been. Further, China is reviewing its coal import quotas and the Aussie coal industry is waiting nervously on that outcome.

The UST 10yr yield is at 1.92% and, although unchanged from Friday, it is up +9 bps from this time last week. 

Gold will start the week at US$1,478/oz and up +US$4 from this time last week.

US oil prices are down sharply but just to levels we had at the start of last week, of just on US$60/bbl and the Brent benchmark is now just under US$66/bbl.

The Kiwi dollar will open this short week at 66.1 USc and little-changed. On the cross rates we are also similar at 95.7 AUc. Against the euro we are marginally firmer at 59.6 euro cents. That puts our TWI-5 at just on 71.2 and a little stronger since this time last week.

Bitcoin is little-changed from this time Saturday, now at US$7,163.