US job concerns; services sector expansion slows; World Bank cuts China growth forecast; Canada housing variable; Aussie growth slows; UST 10yr yield at 2.12%; oil down and gold up; NZ$1 = 66.2 USc; TWI-5 = 71

US job concerns; services sector expansion slows; World Bank cuts China growth forecast; Canada housing variable; Aussie growth slows; UST 10yr yield at 2.12%; oil down and gold up; NZ$1 = 66.2 USc; TWI-5 = 71

Here's our summary of key events overnight that affect New Zealand, with news lower growth is coming for China - and everyone else.

But first, on Saturday (NZT), we get the next US non-farm payrolls report. Analyst surveys suggest that will deliver +180,000 new jobs in May, well down from the +263,000 recorded for April. But today, the precursor ADP report suggests analysts may be over-estimating. This ADP report came in at just +27,000 new jobs, its lowest since 2010. This alternative survey shows that SMEs and manufacturers are doing it tough and shedding jobs in a significant way. The ADP reports are very close mimic of the non-farm data, but occasionally deliver a quite different result.

Meanwhile there were two American services MPIs out overnight. One - the internationally benchmarked one - shows a sharp decline to a three year low. The other - the more closely watched local one - recorded a faster expansion. Take your pick.

The US Fed released its May Beige Book survey results this morning. They say economic activity expanded at a modest pace overall from April through mid-May, a slight improvement over the previous period. Almost all reporting Districts reported some growth, and a few saw moderate gains in activity. Manufacturing reports were generally positive, but there were some signs of slowing activity and a more uncertain outlook, they said.

And the Fed is now on record of 'acting' to weigh against the impacts of a trade-induced slowdown. The Powell put.

There was a global survey out for the services sector as well and that reports a slowing, with a contraction in the order backlogs of service companies.

In China, their Caixin services PMI slipped to a three month low but it is still expanding at a good rate. However overall business confidence is also slipping.

The World Bank has cut their forecast for China growth to +6.1% in the 2020 year (pg 9). This is down from their prior +6.2% estimate. Lower business confidence, higher debt, and decelerating investment commitments are all behind their lower overall global view, all in turn all driven by the trade wars. (They don't review either Australia or New Zealand separately.) The IMF has made a similar cut for China growth.

In China itself, they have suspended enforcing their smog controls and steelmakers are going for it. Output is up almost +20% and that is keeping iron ore prices very high. All this production is in sharp contrast to their contracting factory PMIs. It is not clear how this reconciles.

None of this is affecting the equity market mood today. After big bounce-back gains yesterday, they are rising again today at about a +0.6% clip.

In Canada, May home sales in Toronto surged +19% while in Vancouver they are still in the doldrums and hit a 19 year low for a May.

In Australia, Q1 2019 data out yesterday shows their economy grew at it slowest rate since 2009, up +1.7% from the same quarter last year, a drag on the annual rate of +2.4% in the year to March. This is way lower than its long term average of +3.5% pa.

The UST 10yr yield is little-changed overnight and is now at 2.12%. And their rate curves are easing with the 2-10 curve now at +28 bps and their negative 1-5 curve down to -19 bps. The Aussie Govt 10yr is at 1.49% and down -3 bps overnight. The China Govt 10yr is down -1 bp to 3.25%, while the NZ Govt 10 yr is unchanged at 1.72%.

Gold is up again but only by +US$3, now at US$1,329/oz.

US oil prices fell sharply again overnight, down more than -US$1 to just on US$52/bbl. The Brent benchmark is now on US$61/bbl. Inventories are building and demand is wavering. This market has now turned bearish with prices falling more than -20%in just eight weeks.

The Kiwi dollar is holding up well today. It is now at 66.2 USc. On the cross rates we are higher however at 95 AUc. Against the euro we are firmer at 58.9 euro cents. The TWI-5 is now at 71 and a new one month high.

Bitcoin has bounced back a little today, now up to US$7,803 and a +1.5% gain 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 ».

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21 Comments

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Highlight new comments in the last hr(s).

In regards to steel production in China and "It is not clear how this reconciles" - easy, China is not a free market. It is a mercantile and predatory economy that is "planned" by the CCP so we shouldn't be surprised when China acts in this way.

It's a cunning move by the Chinese authorities - mass production will put downward pressure on global steel prices. Couple that with a falling yuan and Chinese steel can water down the benefits of higher import tariffs, if any, for US steel producers.
US companies will need a lot more from their government than import tariffs to invest in building up industrial capacity. Their ageing infrastructure, particularly energy, is one of the biggest hindrance to any efforts on reducing their reliance on landed capital goods like steel and aluminium.
For context, US aluminium output in 2018 was barely more than Iceland's and well below Norway's.

Loads of overcapacity in the grain market PDK, if it came down to it they could eat all the grain going to Ethanol.

What have they done to the Mississippi?

https://www.theatlantic.com/technology/archive/2011/05/what-weve-done-to...

That is really interesting. Google maps shows the state line, which has lots of loops that I assume show the non linear river path.

Could make oil interesting if the ethanol supply dries up.

The article in reuters isn't there, but this will do. http://www.agriculture.gov.au/abares/research-topics/agricultural-commod...

I don't think energy from ethanol is that efficient, by the time you fuel the tractors, fert etc.
The problem today is the competition from the Eastern block, as a farmer from Kansas said

"William Tierney, chief economist for AgResource Company, pointed out how the wheat market has changed.

“Twenty-five years ago, I was at the center of the world wheat crop,” he said. “I was in Kansas. The Kansas wheat crop doesn’t matter any longer. The U.S. wheat crop almost doesn’t matter any longer. "

If you look at Dairy it's become highly efficient at increasing production if there is demand, and competition is coming from alternatives like Soy and Almond milk which now have nearly %20 the US market.

Nestle have just announced a vegetable burger.
https://www.businessinsider.com.au/beyond-meat-stock-price-nestle-announ...

You got the snap on me there. I was just wondering about the increase in demand for that ethanol energy, but yeah the EROI is probably so bad it doesn't matter that much.

Yes I have been reading about the Chernozem for a few years. That and Russia offering free land and citizenship in the East to westerners that move there and stay 5 years.

Food not so much the problem just yet. Credit capacity, energy, and water more so.

Richard Duncan this morning, dismissing that trade wars are the cause of slowing growth. China was slowing anyway.

Since the crisis of 2008, China has overtaken the United States as the most important driver of global economic growth. But China’s economic model of export-led and investment-driven growth is in crisis. China’s economy would have slowed significantly even had there been no trade war. Now, facing 25% tariffs in its most important market, China’s economy may soon begin to contract. Its imports already have. The rest of the world will suffer as Chinese demand recedes.

Yes I recall car sales already declining in China in 2018 before the tariffs really started to kick in.

"Capital Consumption" I have been trying to explain that to people for a couple of years now. They generally can't conceive it though.

At a guess at how the next year or so might shape up I can see a continuing shift of capital into bonds in the hunt for capital gains. When interest rates there plateau then PM's might be the only place left to speculate.

The UST 10yr yield is little-changed overnight and is now at 2.12%. And their rate curves are easing with the 2-10 curve now at +28 bps and their negative 1-5 curve down to -19 bps

Some colour is called for:

Normally, it’s a very good sign when the yield curve steepens. If longer-term rates are rising faster than those on the shorter end of the curve, it would say the bond market is forecasting a better probability of normal. Given where interest rates have been the last decade plus, this kind of steepening is what should’ve happened in 2017 if globally synchronized growth had been a real thing.

There’s another kind of steepening curve – the bad kind. This one is pretty much the best recession signal there is – not just the probability of it happening, but the high probability it has begun. Forget inversion, when you see the bad curve show up it’s all but game over.

In mainstream convention, they have these all backward. At least I think so. In Wall Street jargon, the bad curve is called a bull steepening. I don’t subscribe to the view there ever can be a bull market in bonds; that perspective seems pretty upside down given the accuracy of what is instead a liquidity indicator.

Therefore, to me what convention says is a bull steepening (for bonds) it’s actually a bear steepening. For everyone else outside of bonds, pretty much the rest of the world, when this happens it’s a really bad time. Link

In Australia, Q1 2019 data out yesterday shows their economy grew at it slowest rate since 2009, up +1.7% from the same quarter last year, a drag on the annual rate of +2.4% in the year to March. This is way lower than its long term average of +3.5% pa.

Hmmm... the Australian rate cut caught the eye of a foreign analyst:

Rate cuts, they aren’t stimulus but they do tell us when the most optimistic group of optimists is no longer optimistic. That very clique in Australia and New Zealand have just done their part along these lines. Who’s next?

Link

The more concerning figure that came out of Australia yesterday remains the 0.9% fall in Gross Value Added per hour worked.
Not surprising considering a significant portion of their economy runs on exporting dug-up dirt; the proceeds from which are pocketed by a few while the remaining of their economic activities majorly involve increased consumption through debt and migration.

In a cost-push to local inflation, RUC rates are going up 5.5% - from $68 to $72/1000Km for yer average diesel SUV - from 1 July. Then same again 1 July 2020, just before the election. Great Universal Pricing Signal for freight, postage, logistics etc....

Right, off to buy 15 or 20K.....

Will Barfoots sales continue to crater. ? Capital gains, Easter , OCR cut , miserable weather, school holidays, pent up demand, housing shortage

Meanwhile Elon has had a breakthough in insight

https://www.wsj.com/articles/tesla-careens-from-growth-story-to-demand-w...

"Tesla Chief Executive Elon Musk has described demand for the Model 3 as “insanely high.” “The inhibitor is affordability,’’ Mr. Musk told analysts earlier this year. ”It’s got nothing to do with desire.”

Apparently price matters.

UK construction and services giant Kier Group, with 20,000 employees, is on the ropes after issuing a profit warning, amid worries about its debt, that sent its shares spiraling down 40% on Monday and a further 2% on Tuesday, and another 4% so far today to 154 pence. The stock is down 56% over the past month and 85% over the past year and is now worth less than the price it opened at on its first day of trading back in December 1996.

https://wolfstreet.com/2019/06/05/another-outsourcing-giant-teeters-in-t...

MONETARY POLICY

Of Kiwis and Currencies: How a 2% Inflation Target Became Global Economic Gospel

https://www.nytimes.com/2014/12/21/upshot/of-kiwis-and-currencies-how-a-...

Hah, really? So much for black swans, we should be watching out for those kiwi birds!