US producer prices rise; Wall Street fades; Shanghai surges; OECD sees leading indicators turn lower; China cuts rare-earth exports; UST 10yr yield at 2.15%; oil and gold stable; NZ$1 = 65.9 USc; TWI-5 = 70.5

US producer prices rise; Wall Street fades; Shanghai surges; OECD sees leading indicators turn lower; China cuts rare-earth exports; UST 10yr yield at 2.15%; oil and gold stable; NZ$1 = 65.9 USc; TWI-5 = 70.5

Here's our summary of key events overnight that affect New Zealand, with news American investor enthusiasm is fading, but Chinese investors are cock-a-hoop.

Firstly, in the US underlying producer prices increased solidly for a second straight month in May, boosted by a surge in the cost of services. Overall, final demand producer prices were up +1.8% in the year to May, but up +2.3% excluding food and oil. Eyes are turning to tomorrow's US CPI result for May. Markets are expecting a tad less than 2%.

Wall Street started positively today but as the session developed all those gains evaporated and it is about even now. More companies are reporting earnings trouble from the Trump tariffs. European markets ended much more positively, up about +0.7%.

Asian equity markets ended up very positively yesterday. Tokyo was up +0.3%, Hong Kong was up a strong +0.8% on top of the prior day's spectacular gain. And Shanghai topped all that, up an impressive +2.6%. Rumours swept markets there that Beijing is about to unveil expanded fiscal stimulus measures to lean against growing external trade weakness that has seen local consumers turn risk averse. Some analysts believe China could deliver 2 trillion yuan (NZ$440 bln) worth of cuts in taxes and fees, and allow local governments to issue another 2 trillion yuan in special bonds largely used to fund key projects. That's a level of new juice which excited their stock market.

The OECD is reporting that growth momentum has evaporated in some key countries, including the United States, Japan, Canada and the euro area as a whole, including Germany and Italy. The downturn in the leading indicators for the US is quite striking - but clearly this hasn't hit them yet.

And the US President renewed his Twitter attack on the US Fed overnight, bizarrely arguing that they should set policy to artificially manipulate the US dollar lower. His Treasury Secretary also recently argued that the Chinese should be manipulating their currency more to not fall against the US dollar. American complaints about currency manipulation by others have now been completely undermined.

China is starting to ration its exports of rare earth minerals. May exports fell -16% and it is likely that June's level will be much lower.

In Hong Kong, the popular pressure is rising against the rendition law changes. But the Hong Kong Government is pushing ahead anyway.

In Australia, mortgage brokers there are fighting to stay exempt from the obligation to act in their clients best interests.

And the widely-watched NAB business survey for May has come in with a very healthy improvement after the less-than-stellar dip in April. But it is not all it seems. Yes, sentiment improved but business conditions measured in the survey slipped yet again.

The UST 10yr yield is holding and now just on 2.15%. Their 2-10 curve is little-changed at +22 bps and their negative 1-5 curve is now at -14 bps. The Aussie Govt 10yr is at 1.46% and down -2 bps. The China Govt 10yr is up +2 bps to 3.29%, while the NZ Govt 10 yr is down -1 bp, now at 1.76%.

Gold is little-changed today, now just on US$1,327/oz.

US oil prices are also little-changed. They are still just under US$53.50/bbl. The Brent benchmark is still at US$62.50/bbl.

The Kiwi dollar has stepped back a little again this morning and is now at 65.9 USc. On the cross rates we are softer too at 94.6 AUc. Against the euro we are down to 58.1 euro cents. That eases the TWI-5 down to 70.5.

Bitcoin is down marginally, today at US$7,898. The bitcoin rate 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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18
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Economic conditions worsening. Only in Japan, EU, USA and China. So don't worry. Stock markets rise so it's fine. They get their "juice" as you put it. And asset values are artificially inflated a bit more and we kick reality can down road a bit further... closer to cliff edge. Meanwhile most of pop is oblivious and banks keep bleating that nasty RBNZ is not allowing them to take enough risk. So 2008.

16
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No sentence I have read sums up more why these criminals need to be regulated and forced to act in a responsible way.

"In Australia, mortgage brokers there are fighting to stay exempt from the obligation to act in their clients best interests."

They played a huge part in the housing bubble in the states leading up the GFC.

Like everyone else, they got away with it of course.

10
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Here Tim Morgans take on China

https://surplusenergyeconomics.wordpress.com/2019/06/06/151-the-great-br...

"Chinese authorities have been pouring eye-watering amounts of new liquidity into the system since the start of this year. This has helped Chinese capital markets recover, of course, but seems to have done nothing more than buy some time for the economy itself, with key volume indicators (such as vehicle sales) continuing to fall sharply.

These interventions are starting to get noticed, puncturing much long-standing overseas complacency about China as an ‘unstoppable growth engine’. Pointedly, Forbes magazine recently asked why, if the Chinese economy really is growing at over 6%, “is the People’s Bank of China (PBOC) pumping money into the market like a drunken sailor?”

It may not be at all fanciful to detect a sense of near-panic in Beijing.

Great article!

China's rationing of rare earth minerals (REM) to the US could really hurt the USA as REM are used in just about any tech device (computer, phones etc). This could benefit OZ as they are the 2nd biggest producers of REM

Those silly Australians with their obsession with obsolete industries like mining, eh. So last century.

Your are on fire this morning Roger...much like Australia in the future.

Sorry, there does seem to be a somewhat combative edge creeping in there. I don't actually object to the idea of global warming, we know climate is cyclical. I find the idea of man made effects plausible, but a good scientist should never believe his theories. Theories are just ways to conceptualise how things work. The brain is not clever enough to do more than come up with rules of thumb about how the world works.

Yup, that's all those armchair scientists at the IPCC have been doing, sitting on their asses dreaming up rules of thumb.

The physics of complex systems is a wonder, and deeply mysterious. Sometimes small changes have no effect, sometimes they cause a phase transition. Modeling them is fraught with traps for the unwary, you need to be a Mandelbrot just to figure out what you can know and what you cannot.

The three body problem is a simple example of a complex system:
Three-body problem, in astronomy, the problem of determining the motion of three celestial bodies moving under no influence other than that of their mutual gravitation. No general solution of this problem (or the more general problem involving more than three bodies) is possible.

https://www.britannica.com/science/three-body-problem

actually even IPCC scientist admit the modelling is wrong an alarmist.

The problem occurs when science get politicized

If you have the time and patience this is an eye opener https://www.youtube.com/watch?v=X2q9BT2LIUA

So increased CO2 in the atmosphere (check) may releate to the heat build up (theory)?

I came across a letter from a scientist working on ice cores a few weeks back. One thing they do know for certain is that the rising CO2 levels are caused by burning of oil and coal, they can tell from the carbon isotopes. Cause or not? Does look pretty convincing from that angle.

yes 100% the rise in CO2 levels from the last low point of 250ppm to its current is mostly attributed to humans

The Aussies have immense opportunities stemming from the ongoing trade war between China and the US.
Some forward-looking companies are looking to vertically integrate mineral processing and metal manufacturing into their mining operations. Unfortunately, most of these are wishful thinkers are startups facing a tough time cutting through bureaucracy and trying to convince governments and private investors to fund their ventures.

The world of junior miners is a curious one. Most are just story stocks, the management make a living by repeatedly gulling young investors and spending their money on their salary. As a group they waste huge sums of money. However, a very small minority are run by brilliant people who change the world.

China may control 90% of the global production of rare earth minerals, which involves processing and refining the raw ore into a usable material, but they don't control all the ore in the world.
Experts claim that although not as abundant as oxygen or silicon, these minerals are "moderately abundant" and significant deposits can be found scattered across Brazil, China, India, Australia, and the US. To be fair, the "rarity" status of these minerals was established decades ago when extraction methods were not as advanced.
https://www.theverge.com/2019/5/23/18637071/rare-earth-china-production-...

The problem seems to metallurgical. Meaning the metals are not rare, but they tend to mixed with radiactive ore, this makes the processing problematic. The rare earth metals are incredibly useful though, the magnets in wind turbines need them and so do society's current obsession, the smartphone.

Not sure where you get that they are usually mixed with radioactive ores.. they are usually just in very low concentration so not economic to mine. The radioactive bit seems to be the processing of the REE. https://www.businessinsider.com.au/rare-earth-metals-elements-what-they-..., although one potential source is indeed a uranium mine in Australia

Waste products (called tailings) from the process of refining rare-earth minerals are often dumped in dams and reservoirs near processing facilities. Sometimes, radioactive chemicals are used during the refining process, and those can enter waterways as well.

It's just another panic/hysteria/fake news. Scientific American is not fooled: rare earths are not rare in terms of raw resource, but rather in terms of downstream separation and treatment. Which is about to get refreshed in the US by 2020 as Mountain Pass (MP Materials) completes its mothballed plant. Plus the Circular Economy can assist here - just store the finished-but-unwanted goods which contain the RE's, and wait for the recycling momentum to build.

Take a Cerium pill and chill......feed that Thorium into a Nuke and harvest the Power.....

Entropy, Waymad.

Trump bashing is just so tiresome, please get over it:
the US President renewed his Twitter attack on the US Fed overnight, bizarrely arguing that they should set policy to artificially manipulate the US dollar lower.

Yes, I get it, the president is a fruit cake, so what's new? It is a defining feature of republics, isn't it?

The US does well when the USD is low, and the world falls apart when it is high. It is a bit chicken and egg, but when the dollar is high the world goes bust cos it borrows in dollars when they are cheap and can't pay them back when interest rates rise and world trade slows.

You prompted me to think about factors influencing NZD/USD currency pair values.

A while back interest.co.nz hosted this article:

Victoria University Economist Geoff Bertram has proposed the Reserve Bank force New Zealand's banks to reduce their foreign currency borrowings to reduce the pressure on New Zealand's dollar and its export sector.

Bertram delivered a paper detailing the recent history of New Zealand's monetary policy, foreign borrowing and the New Zealand dollar to a Fabians' Seminar "Fresh Ideas for a Productive Economy" in Wellington last week. A full version of the paper is here.

In it he argues that New Zealand's inflation-targeting regime, its free floating exchange rate, unregulated capital flows and a sharp increase in foreign currency borrowing by New Zealand's banks since 1993 have had the effect pushing up the currency.

This has helped the Reserve Bank use the currency to suppress tradeables inflation and offset relatively high non-tradeables inflation.

Link

The upward pressure on the NZD/USD pair is caused by foreign investor purchases of NZD to underwrite foreign NZD debt issuance (Kauri bonds) which constitutes one leg of the foreign borrowing hedging facility (cross currency basis swaps). Thus:

by Audaxes | 5th Jun 19, 6:29pm

For example, NZ banks borrow Eurodollars in London, World Bank borrows NZ dollars (Kauri). To hedge, both parties swap borrowed currencies at the current FX rate over three or five year terms. The basis currently ~21 bps for the 3yr tenor is paid by the NZ banks which affords the World Bank sub-Libor financing costs at the agreed reset dates. Large currency moves in either direction evoke collateral calls. I call this paying tribute to a foreign banking entity.

Link

The RBNZ recently confirmed hedged foreign borrowing is currently ~$100 billion:

Increased cross-border financial flows in recent decades have increased links between New Zealand’s financial system and those of the rest of the world. Currently, around a third of New Zealand banks’ debt and equity funding is issued abroad. This diversifies banks’ funding sources. However, the global financial crisis (GFC) illustrated that offshore funding markets can be susceptible to unexpected increases in funding costs or reduced access to funding. Banks have reduced their reliance on offshore funding since the GFC.

Banks’ offshore funding is typically issued in foreign currency. The banking system currently has around $100 billion of foreign-denominated debt liabilities, primarily in US dollars and euros. Banks use derivatives to hedge their foreign exchange (FX) risks. Around 95 percent of their offshore FX borrowing is hedged, with most of the remainder ‘naturally’hedged with foreign currency assets. FX risk is largely eliminated by these hedges, but risks can emerge in some circumstances (see box A).

Link - page 14 (20 of 48)

Your understanding is greater than mine, but it seems the rapid asset price inflation that NZ suffers from, courtesy of misguided economists who don't understand accounting, is due to excess capital inflows. These come in via new residents bringing money with them, borrowed or equity; offshore residents buying new zealand assets; and funding for mortgages. The exchange rate is modulated upwards by these inflows to the disavantage of the productive sector, there must be a chained reduction of export inflows to balance the excess capital inflow. Double entry rules. Price inflation of existing assets is the result of excess capital inflows, ie after viable new investment opportunities are filled (these being largely knee capped by high exchange rates). Result, silly house prices and marginal profitability in the productive sector.

Please also increase the word limit for comments, it is very annoying. The idea is good, long comments are difficult, as are long articles, but you have reduced the comment stream to a txt exchange.

I don't mind clicking to read more if it interests me, but it would be good if comment streams were hidden once they degenerate into bickering between two individuals.

The interest.co.nz comments/posts are by far the most interesting things I read about most days. Yes, the articles are good too & I'm learning much (with much more still to do). I also enjoy the links (when I can access them) so many thanks to those who supply them.