Fed's Powell signals a US rate cut; Canada holds; trade war jockeying; China PPI drops; Australian consumer confidence falls; UST 10yr yield at 2.06%; oil and gold rise; NZ$1 = 66.5 USc; TWI-5 = 71.4

Fed's Powell signals a US rate cut; Canada holds; trade war jockeying; China PPI drops; Australian consumer confidence falls; UST 10yr yield at 2.06%; oil and gold rise; NZ$1 = 66.5 USc; TWI-5 = 71.4

Here's our summary of key events overnight that affect New Zealand, with news an American rate cut soon suddenly looks more likely.

In Washington, US Fed chairman Powell is testifying before Congress. His remarks are being taken that the Fed will do whatever necessary to push back against the economic slowdown underway and that means markets see a rate cut soon, probably at the August 1 meeting (NZT). Equities are rising on Wall Street. The US dollar is falling. Powell also said Facebook's crypto project "raises concerns" and can't be allowed to proceed without changes. And he said he will not quit if the US President tries to force him to - he fully intends to serve out his four year term.

At the same time, the Fed released the minutes of its June meeting. That shows there is disagreement that a rate cut is necessary at this time.

The Bank of Canada reviewed its policy rate overnight and left it unchanged at 1.75%. This was the expected result. But it did bump up its growth forecast for the next three years which wasn't expected. They see inflation at about 2% there.

In the trade war negotiation, the new word is that China has instructed its tech firms not to buy from US suppliers when the US changes its rules to allow such purchases again. There are stress signs in big China tech firms. And it turns out that the US President told President Xi that he would look the other way in Hong Kong. Now the US commitment to 'freedom' is just a bargaining chip.

In staying in China, their inflation rate held unchanged at +2.7% as expected as food prices, especially fruit and pork, keep it elevated. Fruit prices are at a decade high. But the surprise was that producer prices slipped to be unchanged from a year ago. We haven't seen this in almost three years and signals their industry is struggling with soft demand.

In our back yard, concerns are growing that Tonga is deep in hock to China, and that the Chinese are buying off their elite decision-makers.

On Tuesday we noted that in Australia the NAB business confidence index fell sharply giving up its post-election gain. Now the Westpac-MI consumer sentiment index is also sharply down. The drop has been called "troubling" because it comes despite two RBA interest rate cuts and the re-elected Government's AU$158 bln tax-cut package. Consumer confidence is now at a two-year low.

The UST 10yr yield is now unchanged at 2.06% after being a little higher earlier. Their 2-10 curve is now at +23 bps (wider) and their negative 1-5 curve at -12 bps (narrower). The Aussie Govt 10yr is up +3 bps at 1.36%. The China Govt 10yr is unchanged at 3.19%, while the NZ Govt 10 yr is up +1 bp and now at 1.57%.

Gold is up +US$17 overnight to US$1,415/oz.

US oil prices are sharply higher today, up about US$2.50/bbl. They are now just over US$60/bbl. The Brent benchmark is up too, now at US$66.50. US producers are shutting down in the Gulf of Mexico ahead of a storm. And US inventories came in lower than expected last week.

The Kiwi dollar is +½c firmer now at just above 66.5 USc. On the cross rates we are marginally firmer again, now at 95.5 AUc. Against the euro we are up as well at 59.1 euro cents. That puts the TWI-5 up to just on 71.4.

Bitcoin is little-changed today, now at US$12,285. 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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Debt trap diplomacy?
China?
Noooooo. Couldn't be.

A global phenomenon:

Global debt has grown by over 12% (or $27 trillion) since 2016, reaching $244 trillion (318% of GDP) in Q3 2018.
• The corporate sector accounted for over a third of the rise, putting debt/GDP at a record high of 92% of GDP.
• Household debt in emerging markets topped $12 trillion in Q3, up from $9.3 trillion in 2016.
• Big shift towards bond markets over the past decade: globally, a persistent rise in reliance on non-bank credit.
• Growing reliance on FX-denominated debt—at multi-year highs for non-bank borrowers.
• Risk of dollar funding shortages: USD-denominated liabilities of non-U.S. banks stand at $13.3 trillion (21% of GDP)
• Rollover risk is high: $3.9 trillion of EM bonds/syndicated loans come due through end-2020.

Borrowing from the future to spend today on an industrial scale - Link-PDF

Another good doco by SerpentZA on the influence of China, in Africa this time

Is China DESTROYING Africa?
https://www.youtube.com/watch?v=rlAb-Gfeoyk

His remarks are being taken that the Fed will do whatever necessary to push back against the economic slowdown underway and that means markets see a rate cut soon, probably at the August 1 meeting (NZT).

Didn't ECB's Draghi claim he would do 'whatever it takes' for Europe? Notably, Germany is burning regardless, after relentless rate cuts and so called QE interventions.

German factory orders slumped in May in the latest sign that global trade uncertainty is turning Europe’s temporary slowdown into a more serious downturn…

ING said the report “wraps up a week to forget,” and JPMorgan now predicts that Germany may have contracted in the second quarter. If that happens, it would be the third time in a year that Europe’s largest economy posted no growth at all.

Link

It’s a clever bit of misdirection. In one of the last interviews he gave before passing away, Milton Friedman talked about the true strength of central banks. It wasn’t money and monetary policy, instead he admitted that what they’re really good at is PR. Maybe that’s why you really can’t tell the difference Greenspan to Bernanke to Yellen to Powell no matter what happens.

Testifying before Congress today, in prepared remarks the Federal Reserve Chairman threw cold water on what was supposed to be the second half rebound. It still might happen, according to the FOMC’s models, but it is more and more “uncertain.”

Link

Germany's woes are compounded by its Energiewende, which has seen reliance on that Greenest of energy sources - Lignite - remain unchanged (while chewing through historic landscapes and villages), has seen the expenditure of hundreds of billions on Unreliable Wind, and has caused neighbouring interconnected countries to protect their own electricity grids from being dragged under by Green Windy Electrons..

German policy makers have been successful in deploying new technologies, but have so far failed to achieve CO2 emission reductions. Producer rents were significantly cut, while the subsidisation of renewables has led to a sharp increase in end-user prices.

There is a difference between cause and causal.

Nobody can run an économy' without fossil energy
https://www.youtube.com/watch?v=PZrPDKTo-50

but fossil fuels are a temporary state of affairs, and the best time to morph is the earliest. A distinction must be made between things which have to happen - real things like morphing to long-term sustainable energy-sources - and the desire of individuals and nations to 'make money'. The latter is a blind, wishful hope that the future will deliver, via belief in the magic powers of a proxy.

And it turns out that the US President told President Xi that he would look the other way in Hong Kong. Now the US commitment to 'freedom' is just a bargaining chip.

Well...