Here's our summary of key events overnight that affect New Zealand, with news the next US Fed rate decision just got more complicated.
Firstly, non-fram payrolls in the US rose much more than expected in June, up +224,000 and smoothing out the very low May result. But that May result was actually revised even lower. The average for the two months isn't flash. The average for the past three months is below par as well.
In the June result, factory payrolls only rose a modest +17,000 reinforcing the weak survey results that the regional Feds have been reporting. In its semi-annual report to Congress, the Fed said the trade war tariffs are having a material and negative impact on American manufacturing. (see p30.)
Most of the payroll gains in June were from hiring in healthcare (+50,200), company admin jobs (+51,000), local government (+29,000) and in transportation (+23,900). These four accounted for about 70% of the overall rise. The other 22 categories accounted for the rest.
Average hourly earnings are up +3.1% over the past year.
Wall Street is down on these results, figuring that the US Fed is now less likely to add monetary juice any time soon if current payroll growth is running at about its 2018 average. The S&P500 is down -0.2%, although that is less than the -0.5% falls recorded in Europe earlier. Asian markets ended flat on the day.
The US Fed next reviews its policy rate on August 1 (NZT). Given that US economic growth in Q2 seems to be running at only +1.3%, the chances of a rate cut, while they may have receded, are not zero. Still, with their mandate for both foster employment and a 2% price stability, with the US jobless rate now at 3.7% and inflation at 1.8%, it will be hard to make the case that some emergency policy shift is required.
In Canada, it might be even more complicated. Their inflation is running at 2.4%, but overnight their jobs data for June was particularly weak, with jobs falling -2,200 in June and their unemployment rate rising to 5.5%.
In Germany things are clearer, even if they are not good. Factory orders took an unexpectedly large dip in May, down -8.6% on June and that is more than the -5.3% fall in April. For a very large economy, shifts like this have a global implication.
Back in the US a key index of business spending and especially for investment has come in at its lowest in two years.
The impact of the trade war on the two main participants is becoming clearer. Chinese exports to the US of goods that were slapped with tariffs dropped -14% by a total of -US$18 bln. This was equivalent to 3% of China's total annual shipments to the US. America suffered a heavier blow, with tariff-hit exports to China falling -38%, or by -$23 bln. This drop was equivalent to about -15% of all annual exports to China. And this data is sourced from official US trade sources.
May data for international passenger air travel showed solid growth in May, increasing by +4.3% in year-on-year terms. However, the trend rate of growth has clearly slowed over recent months. In the Asia/Pacific region it was up less at +4.0%.
In China, investment in projects outside the country are drying up quickly. The Westland/Yili deal is an anomaly. Only $US$35 bln has been committed in the first half of 2019, the lowest since 2013. That represents a -75% drop from the peak of such M&A activity in the first half of 2016.
In Australia, the newly elected Morrison government has had its tax cut package pass into law, with opposition support. It lowers tax rate thresholds rather than tax rates. Therefore in the current year most people will get a refund. Below, AU$18,200 pa there is zero tax and that isn't changing. For 2018–19, 2019–20, 2020–21 and 2021–22, income years, the increase in the top threshold of the 34.5%* tax bracket will increase from AU$87,000 to AU$90,000. For 2022–23 and 2023–24, the top threshold of the 21%* tax bracket will increase from AU$37,000 to AU$41,000, and the 34.5%* bracket will increase from AU$90,000 to AU$120,000. For 2024–25 income year onward, the top threshold of the 34.5%* tax bracket will increase from AU$120,000 to AU$200,000. Those at the top end will get the biggest break. (*The tax rates listed here include the 2% Medicare levy).
The UST 10yr yield is now at 2.04%, a +9 bps overnight jump on the US payrolls result. Their 2-10 curve is now at +17 bps and their negative 1-5 curve is at -16 bps, both narrower. There have been strong recoveries in other sovereign bond yields as well. The Aussie Govt 10yr is at 1.36%, up +8 bps overnight and a +2 bps rise over the week. The China Govt 10yr is up much less overnight, only +1 bp, and down -9 bps over the week to 3.19%, while the NZ Govt 10 yr has mimicked the Chinese, up only +1 bp overnight and down -6 bps for the week and now at 1.54%.
Gold is down to US$1,399/oz and an overnight fall of -US$16.
The VIX volatility index is now at 13 and now below its average over the past year. The Fear & Greed index we follow has moved from neutral over to the greed side.
US oil prices are little-changed today. They are now just on US$57.50/bbl. The Brent benchmark is also little changed at US$64.50. The US rig count is unchanged this week.
The Kiwi dollar is down -100 bps in the past week against the US dollar, half of that coming overnight. It is now at 66.2 USc. On the cross rates we are also weaker over the week at 94.9 AUc. Against the euro we are unchanged at 59 euro cents. That all pushes the TWI-5 down to just on 71.1.
Bitcoin has had a very volatile week starting near its high of US$12,399 and along the way crashing at one point to US$9,770. It now at US$11,217 with total weekly volatility of +/- 13%. The bitcoin rate is charted in the exchange rate set below.
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10 Comments
Interesting income tax rate changes in Aussie. In general, I like tax cuts in that they give power to individuals to use the money as they think best. Having made clear my philosophical attitude, let's look at the details, which are unusual, even radical.
If they had skewed the tax threshold raises towards the lower paid this would have encouraged more spending in the economy. This would be the normal political and institutional choice based on standard economic reasoning. If growth is slowing, then stimulate spending in the private sector. Standard operating procedure is to reduce interest rates and relax credit restrictions on mortgage lending to encourage credit growth in the private sector. Cut tax rates on the lower paid to stimulate spending. Increase government spending, both in general and on capital projects, to mop up idle labour and inject money into the economy. This is the standard response to slowing growth.
The Aussies seem to be playing a more complex game. The problem with the standard response is it wins the current battle but sets you up to lose the war. It prioritises the short term over the long term. This is all well and good in a crisis, but makes for poor long term policy. The way the bureuacratic machinery works, however, crisis response just becomes long term policy. So you get asset bubbles where money flows into inflating the price of existing assets not into investment in productivity enhancement.
It looks like the Aussies have chosen the tax cuts to encourage saving, not spending. On the monetary side they have chosen a similar strategy, tightening credit regulation and modulating interest rates to contain the slide in house prices that results. All rather fascinating.
This makes sense as a viable strategy if you look at these issues from a balance sheet perspective. It also plays to Aussie's strength in producing and exporting the stuff that cannot be made in any factory anywhere. If they are really serious they will also restrict the inflow of people and the inflow of foreign capital to a more reasonable and sustainable level.
Except the Australian government is in deficit so a tax cut is effectively taking power away from the individual by borrowing on their behalf. Tax cuts are almost never paid for by cuts to government spending because the big ticket item cuts that are needed are never popular. Instead they pretend big tax cuts are affordable through efficiencies and tinkering which is never true.
Another aspect to the tax cuts is that their energy policy (Coal Bad, Wind/Solar Good and heavily subsidised) has (oh so predictably) raised power prices to the point that no energy-intensive business without rocks in its head will set up in SA or (increasingly) VIC. Because without the baseload demand (18Gw minimum give or take - see Anton Lang's daily update on what is producing what where) carried by King Coal in QLD and NSW, the grid collapses. And the Bad Old Coal Gensets have to keep running 24/7, because nothing else can supply the spinning inertia, and the frequency standard to which every non-dispatchable must synchronise. And that costs......because as well as keeping spinning, with zero or low RoCoF and dispatchable, these essential plants also supply the Subsidy Flow of Green Cash to the non-dispatchables - wind and solar.
Check the extent of interconnect flows at AEMO, and see Jo Nova on the general stupidity. So there's the double-whammy of less jobs, and higher living costs - both highly regressive effects.
The election result seemed to be a backlash against greenthink. QLD likes coal mines and the most excellent pay packets they provide. It seems that QLD and WA think the rest of Aussie are, er, well, shall we say, wet behind the ears (although their language might be a tad over ripe for our gentle tastes).
Yes, China's come to play alright. They're still printing money but the communism part says that whatever fails will be the CCP's responsibility, who will just keep printing money. Chinese money is both over-valued & under-valued. Under valued from the USA's perspective, who want them to keep the yuan up so that the global cards don't all fall over at the same time & over-valued by the Chinese themselves through their continuous QE & by keeping the yuan pegged to the dollar. In my book if it were to go one way... it would be to devalue their cuurency by half because I think that's all its worth. I know, the repercussions are enormous with their global buying power disintegrating effecting the whole global system but they overate themselves, hence my choice. Both powers have their pluses & minuses columns listed on a big board at their HO's & sooner or later... KaBoom!!! the currency war will overflow into the markets to such an extent that it will be unsolvable by currency manipulation or negotiation from either side. That's when you get your favourite media subscriptions updated & watch closely. It will be quick & it will be dangerous & the only good news here is that the sooner it's over, the sooner we can start again.
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