Dairy prices drop; Automakers feel the trade war; Trump promises UK a deal; US made goods fall; German Govt. bonds hit all time low; Chinese travel warning, RBA cuts; UST 10yr up to 2.13%; oil still down and gold up; NZ$1 = 66.1 USc; TWI-5 = 70.8

Here's our summary of key events overnight that affect New Zealand, with news today's dairy auction has brought a sharp reversal in fortunes. At the headline level, it is down -3.4% in US dollar terms and down -5.0% in New Zealand dollar terms. That puts prices back to where they were in February of this year. But things would not have been much worse if the dominant WMP product had not shown just a small -1.5% dip. Some other commodities took a thrashing. Cheddar cheese for example fell a whopping -19% from the last auction, falling by -US$256 per tonne. Butter was down -9$ or -US$141 per tonne. Not helping either was a rising NZD which is +2% higher than it was at the prior auction event.

While in the US President Donald Trump latest move to slap a 5% tariff on imports from Mexico doesn’t appear to be going down well with automakers. Toyota, which assembles vehicles in Mexico, has told US dealers the new duties could cost its major suppliers up to $1 billion. US automaker GM has also signalled it is concerned with the US Government’s latest move as it could affect its supply chain. Trump says the tariffs will apply from June 10 if Mexico does not halt the flow of illegal immigration, largely from Central America, across the U.S.-Mexican border.

While in the UK US President Donald Trump has promised the Britain a “phenomenal” trade deal after Brexit, despite the fact there were no details on what it would involve. During his tour he heaped praised on the UK which is expected to leave the European Union on October 31.

But despite Trump’s optimism a new US Commerce Department released on Tuesday shows new orders for US-made goods fell in April and shipments dropped by the most they have in the last two years. The new data shows the ongoing weakness in the country's manufacturing activity that could hurt the broader economy and comes on the back of moderate consumer spending and poor results for home sales, construction and equipment sales in April. US factory order levels slipped in April from March, but are +1.5% higher than in April 2018.

Some economists believe the slowing economy, coupled with the ongoing Sino-US trade war could force the Federal Reserve to cut interest rates later this year.

While in Europe the China-US trade war is weighing on minds there too with German 10-year government bond yields falling to an all-time low of -0.219% on Monday as investors scramble to buy the safe haven assets in the face of a worsening global economic outlook. Berenberg Bank chief economist Holger Schmieding says the main factors pulling down yields are persistently low inflation, global trade tensions and mounting expectations that the US Federal Reserve will cut rates in September.

In China the Government has issued a warning to its citizens travelling to the US, citing harassment of its citizens, as well as ongoing shootings and crime in the States. It is expected to threaten some US luxury goods manufacturers and shows the trade war is continuing to escalate by the day.

While closer to home the Reserve Bank of Australia announced on Tuesday that it was cutting its cash rate by 25 basis points to 1.25 per cent. The Board said it made the decision in a bid to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target. The unemployment rate had been steady at around 5 per cent for a number of months, but increased to 5.2 per cent in April. And recent inflation figures have been lower than expected and suggest subdued inflationary pressures across much of the economy. 

Two of the big four banks responded with a full -25 bps reduction in in their floating mortgage rate (CBA and NAB), but the other two withheld some of it (ANZ and Westpac).

The UST 10yr yield has recovered somewhat overnight and is now at 2.13%. However their rate curves are not tightening at this point with the 2-10 curve now at +25 bps and their negative 1-5 curve is at -24 bps. The Aussie Govt 10yr is at 1.52% and up +2 bps overnight. The China Govt 10yr is down -3 bps to 3.26%, while the NZ Govt 10 yr is down -2 bps at 1.72%.

Gold is up again but only by a minor amount, now at US$1,326/oz.

US oil prices are still down but have stopped falling so are still at just under US$53/bbl. The Brent benchmark is now under US$62/bbl.

The Kiwi dollar opens today firmer again. It is now at 66.1 USc. On the cross rates we are unchanged at 94.5 AUc. Against the euro we are firmer at 58.7 euro cents. The TWI-5 is now at 70.8 and a one month high.

Bitcoin has fallen sharply again, now down to US$7,685 and a -9.4% drop overnight. Bitcoin 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 ».