Fed cuts as expected, ends bond sales early; US jobs expand modestly; Chicago PMI slumps; trade talks fizzle; China stresses grow, RCEP struggling, TPP stars; UST 10yr yield at 2.01%; oil unchanged, gold down; NZ$1 = 65.6 USc; TWI-5 = 71.2

Fed cuts as expected, ends bond sales early; US jobs expand modestly; Chicago PMI slumps; trade talks fizzle; China stresses grow, RCEP struggling, TPP stars; UST 10yr yield at 2.01%; oil unchanged, gold down; NZ$1 = 65.6 USc; TWI-5 = 71.2

Subscribe to our daily podcast here.

Here's our summary of key events overnight that affect New Zealand, with news reality checks are appearing globally.

Firstly, and as expected, the US Federal Reserve made its first rate cut since 2008, taking its upper bound benchmark rate from 2.50% to 2.25%. Powell says more cuts "may come". It also ended its program of selling down the bonds it had built up during its quantitative easing program. It was due to pause that program in September anyway.

On the news, the US dollar rose marginally. Benchmark bond yields fell. And Wall Street equities fell sharply, down -1.2% so far which reflects a growing understanding of the underlying economic risks ahead.

Inflation and employment are the two Fed mandates. They are struggling to get inflation up to 2%, but employment metrics seem to be where they want them. We get the July non-farm payrolls report this Saturday and today the precursor ADP Employment Report is out indicating +156,000 jobs growth, better than the last two months but a modest level compared with the last few years. The factory sector was weak again, with all the gains in the service sector. Markets expect a similar modest growth from the non-farm payrolls report.

Overnight there has been more evidence the US factory sector is struggling. The widely-watched Chicago PMI has come in with a deeper contraction. In fact it is at its weakest level since December 2015.

In Shanghai, the trade talks haven't resolved anything, but at least the two parties are trying. The next round is scheduled for September.

And elsewhere in China, another large private company, this time a carmaker, has defaulted on a bond.

To contain risks like these, officials are now saying China will accelerate the debt-for-equity swaps of qualified companies to reduce high corporate leverage.

China’s factory activity shrank for the third straight month in July, underlining the headwinds facing them. But China's official PMI's show that the contraction eased somewhat. However their services sector, which is still expanding at a healthy rate, slowed slightly in July.

The latest negotiations for China's favoured trade deal, the RCEP are wrapping up with "good progress" claimed in this 27th round of talks. But fault lines are developing. New Zealand and Australia have been keen promoters of the 16 country deal deal, but reservations are growing about investor protections. And India is showing increasing reluctance at China's pushing. There is now talk that the Chinese will elbow India out of the group, and possibly New Zealand and Australia too unless they get their way. But many other smaller countries too are growing uncomfortable with how things are going.

Meanwhile, the TPP is developing nicely as a multilateral trade deal. Japan is buying more pork, beef and wine from such countries such as New Zealand, Canada and France after lowering tariffs. The US is out in the cold in these areas.

In Japan, the latest data on vehicle production, housing starts and construction orders all beat the modest estimates of analysts. But Japanese consumer confidence is still in the pits, and getting worse.

Data out in Europe shows that the eurozone GDP rose +1.1% in the second quarter of 2019. This was marginally better than expected, and partly because Italy didn't contract as expected. Also low and uninspiring was eurozone inflation which has come in at +1.1% in July. Food prices are rising however, up +2.0%.

The UST 10yr yield is now at 2.01% and down -6 bps on the US Fed rate cut. Their 2-10 curve is now back narrower at +14 bps and their negative 1-5 curve is wider at -17 bps. The Aussie Govt 10yr is at 1.19% and down -2 bps since yesterday. The China Govt 10yr is down -2 bps to 3.18%, while the NZ Govt 10 yr is now at 1.47%, a further -3 bps fall on the same basis.

Gold is now at US$1,417/oz which is a -US$13 fall overnight.

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

The Kiwi dollar starts today -½c lower after the Fed cut, now at just on 65.6 USc. On the cross rates we are softer at just on 95.9 AUc. Against the euro we are a little lower at 59.2 euro cents. That pushes the TWI-5 down to 71.2.

Bitcoin has firmed to over US$10,000 for the first time in a week and now at US$10,027 and up +4.1% since this time yesterday. 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 ».

Daily exchange rates

Select chart tabs »

The 'US$' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'AU$' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'TWI' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '¥en' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '¥uan' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '€uro' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'GBP' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'Bitcoin' chart will be drawn here.
Loading...
USD 
NZD
End of day UTC
Source: CoinDesk

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

44 Comments

Comment Filter

Highlight new comments in the last hr(s).

Requiem for the American Dream

https://www.youtube.com/watch?v=wp6Rbgv1MLg

Well worth a watch.

That's a great article Andrew, thanks for sharing. My thought process was heading along these lines but I hadn't reached the conclusion yet - something of an aha moment, at least for me.

Cutting interest rates stimulates borrowing, it doesn't stimulate spending - there is a difference.

The simple fact is, at this point, borrowing simply doesn't need to be stimulated more - it's well beyond the level of diminishing returns at this point.

Central banks are simply in a race to the bottom to attempt to keep their currencies not too hot and not too cold. One cuts rates, others then undercut them, then others undercut them - it's crazy.

It's a bizarre economic world we live in. It used to be you did some work, you got paid, you spent that on goods and services and tried to live within your means - if you couldn't afford something you didn't buy it. These days, often regardless of whether people even have any income - they want something, they get a loan, they buy it, then pay back the debt forever...

This spiral of debt has to end sometime - and I fear for the world when it does. It'll be armageddon economically - which may well lead to actual wars for resources, land, food, water etc. If economies can no longer trade for the things they need, countries will go to war to aquire them - and in a world with nuclear weapons, it's only a matter of time before they're used again.

Dark times.

Interesting stuff:

The clear beneficiaries of these central-bank policies are the borrowers. These borrowers are being subsidized by current and future retirees, by savers, by fixed-income investors, and ultimately by federal and state taxpayers when they’re called upon to bail out the pension funds.

Green heads will explode. A net carbon zero gas power plant. "The cost of electricity generated by Net Power is even more interesting. The plant doesn’t just sell power like most plants, it also sells the CO2 and other cycle by-products including nitrogen and argon.
These sales bring the cost of electricity from NET Power's plant down to 1.9¢ per kilowatt hour, Goff said, compared to 4.2¢ for a traditional combined cycle natural gas plant, making this the cheapest source of electricity, and with no carbon emissions."
"The plant can switch to air cooling for a small (2.5 percent) efficiency penalty and thus become a net water producer."
https://www.forbes.com/sites/jamesconca/2019/07/31/net-zero-natural-gas-...

Nah man. Technology will never save us. No evidence for that, whatsoever.
Best to stick with the limits to growth and Malthusian fallacies.

Sad thing is, people who believe in such things will do just that. I think doom believe must be largely genetic.

Let's just ask what the EROEI is, eh?

Physics - nothing like it. We don't do sequestration because it takes too much of the net energy. Yet this one wants to use oxygen - which takes energy to collate... Note too, that it's not 'more efficient', it's çheaper'. Says a lot, that does.

I just don't see how EROEI matters.
What matters is absolute energy surplus from energy invested.

And the type/medium of energy you receive. Using a surplus of solar/wind energy to refine aviation gas for example beneficial regardless of the energy returned on energy invested.

French electricity (75% nuclear) produces one-tenth the emissions of German electricity at little over half the cost.

The great nuclear vs renewables experiment is over. Nuclear won.
- Coal is ~ half problem
- China emits 30% global CO2
- Utility power from coal: China 60%, India 65%, Germany 36%, USA 27%
- Nuclear = 0% emissions

75% French utilities nuclear

Andrew, you cannot seriously believe any figures about nuclear. France followed Britain in choosing nuclear power for strategic reasons, so they had an ample supply of bomb fuel. From a certain point of view it is an entirely rational choice for them, living next door to Germany and a short drive from Russia. That North European plain has no natural defendable barriers, just the odd river, between them.

It is hard for kiwis to understand how deep the constant looming threat of invasion and annihilation without warning warps the thinking of the Europeans. It only took the Germans 10 years to re-arm last time around. Same for the Russians. These are short time scales.

Google how many nuclear plants Russia and China are building at present. The belief that cheap energy creates wealth is strong

3 mile Island, Chernobyl, and Fukushima would all suggest nuclear lost.

You can move back home after a Volcano, Tsunami, Earthquake, Flood, drought, fire, hurricane, tornado, even a War. But try moving back home after the local Nuke plant melts down.

Nuclear = 0% CO2 emissions. Correct, but what about the leftover fuel, water, and other radioactive waste? Where is all that going right now?

By that logic Banqiao Dam says that hydro is a gonner too, but it seems to be doing just fine.
https://en.wikipedia.org/wiki/Banqiao_Dam

Not at all. Completely different logic. There will always be accidents. That is a given.

The difference is, after that disaster - you can still go there, yes maybe you house is underwater. But the area itself isn't going to make you sick (potentially fatally) just by visiting.

My son's photos from Chernobyl on his sightseeing trip would give lie to that. The whole area is packed full of new native forests and wildlife all over the place, as soon as the humans moved out.

Yes, I have seen numerous documentaries on it, and agree that the biggest issue facing the planet is humans.

However although it appears wildlife flourishes. There are numerous mutations and increased fatalities from various cancerous growths.

Much of the Flora is also highly radioactive, and trees, crops, and flowers from the area are still not allowed to be removed from the area, or used by humans.

If they haven't done it in that bastion of green thinking, Australia, what makes you think it would be economical here?

why would you want to burn fossil fuel to create electricity?
we arent short of electricity
If its growth you want, we are short of a cheap energy source which powers our existing infrastructure

It doesn't solve much at all, it tries to sweep its CO2 production under the rug..

So it will have to be injected underground, and so far that hasn’t been successful in any big way without some side effects, like earthquakes.

Earthquakes to go with the floods and famines...just need to add some pestilence and we can go biblical!

Try and be more pragmatic? Google CO2 feedstock for starters. It's actually beautiful - the CO2 can be used for EOR making green heads double explode. "This CO2 can be sequestered or used in industrial processes, such as enhanced oil recovery. EOR is a decades-old process that uses CO2 to extract significantly more oil from old oilfields while permanently storing CO2 underground. In the United States alone, 85 billion barrels of oil are recoverable using EOR. Most industrial CO2 capture technologies cannot produce cost-effective, EOR-ready CO2, despite the fact that the industry is tremendously CO2-starved."
Carbon Dioxide as a Feedstock might be a good place to start.
https://www.nap.edu/read/10153/chapter/7#86

10
up

Central banks now only player in ensuring indebted share buy back market firms can continue boosting share values as profits tank. What a farce. Private debt good public borrowing bad. Central banks do not believe banks can withstand a recession so that previously normal feature of business cycle is to be fought like plague. So much for creative destruction. The financiers will reap as they sow I trust, rather than the newest fools saps getting crushed like last time

An intellectual interest in property prices brings me to this site. Thanks for the link. It feels different when mortgage debt is shown as people with faces and stories.

Another big Aussie developer calls in the receivers.

https://www.google.co.nz/amp/s/amp.heraldsun.com.au/news/national/ralan-...

I wonder how long it will be before starvation becomes an election issue in New Zealand?
My guess is, mid 2030's.

i think youre at least 10 years too optimistic

True, if we count coke on cornflakes (malnutrition) as form of starvation.

Makes it very important that we continue to sell off as much of our productive land and assets into foreign public-private ownership, quicksmart for short-term gains before it becomes obvious to the young'uns that it's going to be a major issue.

That combined with incremental year-on-year rising cost of food will make for severe problems as you allude.

Locally, "more firms are expecting to cut staff".

Well, raising minimum wage levels relentlessly by central fiat has, according to those who have actually thought these things through, at least four possible consequences:

  1. Staff numbers are cut
  2. Staff numbers remain as is but overall hours decrease
  3. Automation is purchased to replace staff
  4. The opportunity is taken to downsize, liquidate or otherwise exit the business

And the central planners gape in wonderment at these outcomes....

In my industry as the minimum wage has lifted whats happening is a narrowing of salary range between boy and boss. The financial incentive to "move up" is shrinking. You are right Waymad - our overall wage budget wont lift, we are just pushing labour efficiency and buying more machinery and trying to do things smarter.
Talk about unintended consequences - when some staff left recently I was very tempted to plant trees and live off carbon credits. Utopia - all my problems solved - no staff, no local council, no activists. But sadly I have to admit, its in my blood, I have carried on livestock farming. More mug me.

The question would be why we cannot pay higher wages?
We should be able to, something is wrong.

I have always - naively - believed two things, that what we are producing is needed/wanted by the rest of the world and that there is a huge margin between my farm gate and an overseas table. Having just spent a few weeks in Europe my very unscientific research ( one man can only eat so much ) shows the fallacy of both. The ONLY thing NZ produces that they want is our Sauvignon Blanc.
All the meat dishes tried were similar in price to NZ but either locally grown or from a neighbouring country and even worse of similar to better eating quality to here. So Andrew while I agree with your sentiments I haven't worked out how we achieve it.

you know something is wrong when people are paying one million dollars a hectare for Kiwifruit orchards but cannot pay an extra $2 an hour for seasonal labour, which is only for 6 weeks.

In Hawkes Bay orchards are calling out for more imported labour, at the same time the council has allowed them to erect temporary housing on orchards, which is hard not to see becoming slum housing in a few years.
They are telling government they cannot pay a 'living wage' if that is the case why the huge investment in orchards at some unbelievable cost?

Yet if you want to earn money you can plant pines for the carbon credit guys. The rate is high and good fit guys are making lots of money, they are all Fijian.

The cost plus model can't handle paying higher wages at the bottom unless someone at the top "misses out". The egos can't handle that as it distorts the scorecard of success and who's "winning". The perception of "value" provided by the worker can't be measured or quantified accurately by $$. Paying someone enough so they can do more than survive would mean that others who have more than enough might have to have less, that messes up the scorecard too.

The real question might be why have we made the cost of living so expensive and how do we fix that? Why have we turned homes into investment vehicles? The supply and demand of/for "wealth" is an obvious starting point but then requires a deeper understanding of the human condition and the influence of emotions and egos.

Yep there is something wrong and it's in the too hard basket. Easier to follow the current thinking that got us here rather than question the prevailing ideology and dogma.

No, neo-liberals/Libertarians dont think, these so called outcomes dont actually happen in the real world.

a)By getting those on the minimum rate paid more they participate more in the economy so the economy improves ie they buy things so actually when you buy things staff numbers can be increased as demand increases.

b) see a)

c) NZ doesnt have great swathes of manufacturing to automate and automation is cripplingly expensive in NZ as we as a organisation keep finding. PS you cannot automate McDonald like jobs etc.

d) If the business cannot survive but on the fact that NZers subsidise it with WINZ, family support etc losing it is no biggee.

Um, this.....and it's McDonalds....

And this for orchards

And some history from Chiefio....

Right now we have ever increasing automation of farm work. In the USA there is a holiday dedicated to Caesar Chavez as the founder of the United Farm Workers union as a P.C. Holiday for Hispanics. Never mentioned is the millions he had put out of work via demanding wages in excess of the value provided by that labor. Where there used to be millions of farm workers, there are now machines, or crops that do not need those workers. (Much of it just moved to Mexico where the former migrant farm workers now get about $9 / day instead of the US $9 / hour… but at least they don’t have to drive up to California. Grapes moved to mechanical harvesters. Some orchards changed to mechanical harvesting, while others became pastures. Tomatoes got a very effective mechanical harvester. You can argue that those are better ways anyway, and I’m all for eliminating that ‘stoop labor’, but then again, it was not MY job that ‘went away’…)

In reality, just how low can the mortgage rate go?

Not all lending rates are dropping. Banks are loading increasing margins onto falling bond rates. Their justification is preparing for RBNZ new capital adequacy ratios. And overdraft rates like credit card rates aren't moving.
But good luck to the residential mortgage borrowers. It seems the bottom is still ahead.