90 seconds at 9 am: The global economy faces challenges

US manufacturing slows; China meat imports jump; China urbanisation grows; India faces severe regional water crisis; Turkey faces reckoning; UST 10yr yield at 2.02%; oil unchanged and gold up; NZ$1 = 66.2 USc; TWI-5 = 70.7

25th Jun 19, 7:19am by David Chaston

Here's our summary of key events overnight that affect New Zealand, with news global equity markets are on hold ahead of the G20 meeting in Japan and the all-important signals that will come from the Trump-Xi meetings.

Meanwhile in the US, a third Federal Reserve regional factory survey weakened in June, First it was New York, then Pennsylvania, and now it is Texas adding to signs of waning momentum in manufacturing amid heightened trade tension. The Dallas Fed’s gauge of manufacturing in slumped to a three-year low as more firms saw conditions worsen. Their six month outlook also deteriorated.

The Chicago Fed's national activity index wasn't quite so downbeat however.

In China, meat imports are soaring. Pork imports surged the most, increasing +63% in May from a year earlier. Lamb shipments climbed +53% to 42,036 tonnes, while beef imports rose +41% to 123,720 tons. (China is also becoming a large importer of bananas, a trend that is sure to raise the worldwide price.)

And China's urbanisation rate will reach 70% in 15 years. That is up from about 55%. The shift will involve world-shaking investment and help explains why the iron ore price just keeps on rising and rising.

Parts of India are facing a severe water crisis. Not only has rainfall been low, but preparation and investment has been absent, and demand is rising. In Chennai, ten million people now face a real immediate crisis. But other major centres are about to as well. India faces an impossible challenge.

In Turkey, following a stunning rebuke of their strongman president in the Istanbul local elections, creditors are worried. Turkey tried to borrow-and-spend its way to prosperity, but the debt is now due in enormous amounts. It is a clear example of an MMT failure. Already their currency is in the pits and inflation is running high. All that internal debt resulted in a foreign liability as it flowed through and out of their economy as fear rose. Turkey's choices now are tough.

The UST 10yr yield is starting today under 2.02% and weaker by -4 bps. Their 2-10 curve is now at +29 bps an their negative 1-5 curve is wider at -17 bps. The Aussie Govt 10yr is at 1.30% and a +2 bps rise from yesterday. The China Govt 10yr is also up +2 bps to 3.27%, while the NZ Govt 10 yr is up +2 bps as well, now at 1.56%.

Gold is up strongly again and is now at US$1,415. That is a gain of +US$16 and a new six year high.

US oil prices are little-changed today. Prices are now just over US$58/bbl. The Brent benchmark is now at US$65.

The Kiwi dollar is rising and now at 66.2 USc. On the cross rates we are also firm at 95 AUc. Against the euro we are up at 58.1 euro cents. That all pushes the TWI-5 up to just under 70.7.

Bitcoin is up as well, now at US$11,023 and a +2.6% gain in the past 24 hours. 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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Source: CoinDesk

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18 Comments

by Withay | 25th Jun 19, 7:35am 1561404932

“Turkey tried to borrow-and-spend its way to prosperity, but the debt is now due in enormous amounts. It is a clear example of an MMT failure.”
I don’t agree with the premise of MMT for starters but this is another big issue. It gives too much power and is accordingly easily corrupted and corruptible. We need to have systems in place that inhibit the damage a malicious or incompetent person can do in power. Imagine if both MMT and UBI came to pass, the polliticians would have a bidding war for who would give away the most and bye bye country.

by Audaxes | 25th Jun 19, 9:13am 1561410834

More a collateral transformaton chain failure due to an unexpected downturn in global economic fortunes:

The year 2017 was a Eurobond binge, one that was as much Chinese as Argentinian or Turkish. Some dealers, including some specific dealers, really bought into globally synchronized growth and what better way than in securities lending.

These would include those which extend in and out of China (maybe by way of Hong Kong, too, but that’s a different if related story). A Chinese bank which still needs dollars (each and every day of the year) could in 2017 (in theory) pledge lower quality China corporates to a eurodollar bank for UST’s in return so that the Chinese bank could then obtain dollar funding (either FX or direct in eurodollar repo).

We might even imagine the Chinese bank pledging lower quality RMB-denominated assets (for a little higher fee) in exchange for US$ denominated pristine collateral – with the eurodollar dealer taking on the exchange risk because in 2017 everything looked awesome!

Link

by steven | 25th Jun 19, 10:40am 1561416005

UBI actually seems vaguely workable, its just a different way of having a social safety net which you pay for anyway.

by Roger Witherspoon | 25th Jun 19, 11:05am 1561417542

The problem seems to be the divergence of theory and practise. In theory it should be possible to make it work well. In practise the money seems to flow to the politically most powerful special interest group. So it ends up making things worse. A similar policy led to the guillotine being used against shopkeepers after the French Revolution.

The fate of the venerable Viscount Takahashi Korekiyo was sealed when he tried to withdraw the stimulus. The militarists sent a young officer to chop off his head in his sleep. Yet Ben Bernanke's ideas are copied from Korekiyo san.
https://en.wikipedia.org/wiki/Takahashi_Korekiyo

This seems to be the general problem of central planning. It sounds wonderful but often just impoverishes many and enriches a few.

by Withay | 25th Jun 19, 2:22pm 1561429363

That’s what I’m getting at. It only takes 51% (or less in NZ’s case) to realise that they can vote themselves a pay rise under UBI and power will shift dramatically. It’s too powerful a tool and we require a perfectly benevolent person to wield it which of course we won’t get.

by gypsymanz | 26th Jun 19, 9:13am 1561497185

One might say that has already happened with the pension system in New Zealand.

by Uninterested | 25th Jun 19, 8:16am 1561407363

From your tone it sounds like you go looking for bad news out of the US. Haha.

by dictator | 25th Jun 19, 10:17am 1561414671

I think everyone is looking to see how bad the next lot of data is going to be.

by profile | 25th Jun 19, 8:26am 1561407980

Iron ore price cranking and China logs dropping. NZ needs to be more savvy in it's log marketing.

by profile | 25th Jun 19, 8:44am 1561409090

Amazing what an effect lack of preparation and investment can have on a city water supply. For Chennai:
"The decadewise departure of annual rainfall indicates that the driest decades were 1931–1940 and1951–1960; 1911–1920 was the wettest period. ...The 1961–2015 period witnessed more wet years compared to the earlier years. Two out of the four extremely wet years occurred after the year 2000."
https://ascelibrary.org/doi/full/10.1061/%28ASCE%29HE.1943-5584.0001630

by Andrewj | 25th Jun 19, 8:56am 1561409811

WSJ on China repo after Baoshang: "It said some institutions in the debt markets had placed certain trading counterparties on a 'blacklist' and demanded they post higher-quality collateral against their borrowings."

by dictator | 25th Jun 19, 10:20am 1561414800

This is a good way to test what shape counterparties are in. If they can't post collateral then there are going to be issues.

by steven | 25th Jun 19, 10:44am 1561416243

Not sure its MMT, I thought with MMT a Country didnt need to borrow it just printed. Then carefully over-watched by those who know what they are doing.... (hahahahaha).

If I recall correctly Turkey's problem is lost of cheap money from specualtors rushed in to try and make a killing and when that didnt happen it all wanted to exit. This is as much a failure of neo-liberalism's "let the market decide" as anything else, if not more so.

MMT failure? it cant! my admittedly limited understanding of the crok of poo is there can be no problem with MMT as the Govn can just print more, bound to end well.

by avatar99 | 25th Jun 19, 11:30am 1561419034

Didn't read your comment before posting mine, sorry. You are exactly right - no borrowing involved in MMT and your laughter after "carefully over-watched by those who know what they are doing" is the correct degree of cynicism IMHO. The person I trust most on how we should manage our money supply is Ann Pettifor and she is not an MMT proponent even though she does want to break the power of the banks.

by avatar99 | 25th Jun 19, 11:26am 1561418766

I am no MMT proponent but you can't equate "borrow and spend" with MMT. As I understand it, the whole point of MMT is that government should create the money WITHOUT borrowing. Which is why I am not a proponent - far too much power in the hands of government.

by CSE4 | 25th Jun 19, 1:07pm 1561424824

The federal govt (Trump & co) do borrow the money, they borrow it from the Federal Bank (Jerome Powell & co). And it goes on the books as debt to be repaid to the Fed and interest payment must be made at whatever rate the Fed is setting. So it's debt, that taxpayers do have to service and pay back. In MMT the basic idea is just keep borrowing more and more and use borrowed money to pay those interest bills, and one day you'll just have interest bills consuming all tax dollars, and debt that can't as a result have any principal paid off, and then presumably you default, and all will be well.
So for those that believe you can consistently spend more than you earn, and a day of reckoning will never come, it's a great idea.

by avatar99 | 25th Jun 19, 3:06pm 1561431962

Borrowing is not part of MMT (again, I am not a proponent but let's be accurate in our discussion). Suggest you start with wikipedia:
https://en.wikipedia.org/wiki/Modern_Monetary_Theory

by Wrong John | 25th Jun 19, 12:11pm 1561421472

We like the borrow & spend part, it's just the paying back that's annoying.