Here's our summary of key events over the weekend that affect New Zealand, with news of a surprisingly healthy rise in US payrolls.
But first, a key index of American business spending, and especially for investment, has come in at its lowest in two years.
And 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. in the year to June. 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 -US$23 bln. This drop was equivalent to about -15% of all American annual exports to China. And this data is sourced from official US trade sources.
And China is getting clearer - it's goodwill gesture to buy more US farm products is conditional on being treated as an equal. A Beijing insider's social media account has said these purchases won't happen if the US continues to "flip-flop" in its positions.
In its own turnabout, China's 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.
China is increasingly worried about the rise and rise of the iron ore price. And their peak steel trade group has now called for authorities to step in to control the market price, calling for "relevant government departments” to crack down on "monopolistic and intentionally unreasonable” pricing, The call saw iron ore prices fall nearly -4% on Friday. Miners BHP and Rio Tinto's share prices also fell.
In Japan, officials are turning optimistic about their economic prospects after industrial production data turned higher. Now their business conditions index is reflecting that. The prospect of a recession is fading in Japan and economic growth becomes the new reality again.
Globally, May data for international passenger air travel showed solid growth, 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 the US, non-farm payrolls 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. April was too. The average for the two months isn't flash. The average for the past three months is below par as well.
In this 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 was 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 was down -0.2% on Friday, 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 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. It's complicated.
In Canada, it might be even more complicated. Their inflation is running at 2.4%, but their jobs data for June was particularly weak, with jobs shrinking and their unemployment rate rising.
In Germany things are clearer, even if they are not good. Factory orders took an unexpectedly large dip in May, down almost -9%, and that is much more than the -5% fall in the previous month. For a very large economy, shifts as large as these these have global implications.
In Turkey, its strongman president has sacked the head of their central bank. The governor of the bank had tried to keep their currency from falling to try and limit inflation. But inflation is now running at 19% there. The official benchmark interest rate is 24%, but the high interest rate policy hasn't stopped their currency plunging, in part because investors feared this sacking would happen anyway. Even sharper falls in the Turkish currency are now expected, and that means even higher inflation can be expected. Turkey can't really afford anything these days.
The UST 10yr yield is now at 2.04%, a +9 bps 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$1,398/oz and a fall of -US$16 in the Friday session. India has raised its import tax on gold.
US oil prices are little-changed. They are now just on US$57.50/bbl. The Brent benchmark is also little-changed at US$64.50.
The Kiwi dollar is down -100 bps in the past week against the US dollar, half of that coming Friday night as the US dollar strengthened. It is now at 66.2 USc. On the cross rates we are also lower 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 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 is now at US$11,457 with total weekly volatility of +/- 13%. The bitcoin rate is charted in the exchange rate set below.
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