US jobs growth modest, prior months revised down; equity markets tumble; China to retaliate over US tariffs; Japan & Korea dispute escalates; regulator defects; UST 10yr 1.84%; oil down and gold up; NZ$1 = 65.3 USc; TWI-5 = 70.7

US jobs growth modest, prior months revised down; equity markets tumble; China to retaliate over US tariffs; Japan & Korea dispute escalates; regulator defects; UST 10yr 1.84%; oil down and gold up; NZ$1 = 65.3 USc; TWI-5 = 70.7

Here's our summary of key events overnight that affect New Zealand, with news markets are in full retreat as the US compounds its policy missteps.

But firstly today, US jobs growth came in at a modest +164,000, almost exactly as expected. But there was a sharp sting in this data; June's +224,000 gain was revised down to +193,000, and May's data was revised lower too. The July result is the fifth lowest increase over the past two years.

Wall Street isn't impressed. Essentially it has ignored this result, building on yesterday's tariff disapproval. It is down another -0.7% so far today and looks to be heading for for a weekly drop of -3.3%. Bond yields keep on dropping too and risk aversion builds quickly over the policy misstep.

European markets fell even worse. Not only are they facing an unreliable US economy, they have their own slowdown to worry about and the fear of Brexit as well. Most markets were down more than -3% overnight. Yields fell sharply there too.

In Asia yesterday, Shanghai ended down -1.4%, Hong Kong ended down -2.4% and Tokyo was down -2.1% on the day. Those results dragged the weekly levels down -2.5%. For trillion dollar markets, these are a huge loss in 'value'.

China is raising the stakes, and the risks, by announcing it will retaliate again against the new US tariffs. And it said China now "won't give an inch" after what they see is the latest insult from the US negotiation style.

One of the great ironies of this trade war is that since the US started it, the trade deficit the US runs with China has gotten progressivel worse. In new June data out overnight, it is recording a record deficit with China. US exports are falling much faster than US imports. Clearly US policy makers willfully don't understand what is going on. It is American's continued buying that is fueling this deficit. The Chinese have shown much more discipline by pulling back sharply on their buying of US goods. American buying of Chinese goods just shows Washington's aim at Beijing for this is quite misplaced. An Economics 101 course would help the US cause, but economic literacy isn't the US President's strong suit. From all this we should all assume the policy mistakes will keep coming.

While all this is going on, Japan and South Korea are in their own trade tussle, rooted in deep cultural enmity. Now each has removed MFN status ("most favoured nation") and that will roil trade between the two neighbours. It is a trade dispute that could get ugly fast.

In Vancouver, Canada, July housing sales have surged as prices there fell. Sales are up +24% year-on-year and prices are down -9% on the same basis.

In Australia, just how close the regulators are to their industry has been highlighted by a very recent more at ASIC. Their senior executive leader who led an industry probe into the fast growing 'buy-now pay-later' sector and oversaw potential changes to responsible lending laws has left the government watchdog to head up "regulatory affairs" at Afterpay. Afterpay's ability to decapitate ASIC's regulator management like this will be worrying many.

The UST 10yr yield is now at 1.84%, an eye-watering decline from this time last week of -23 bps. (It is the largest drop since May 2018 when global markets took fright over Brexit.) Their 2-10 curve is much flatter for the week, now at just +12 bps and their negative 1-5 curve is wider at -20 bps. The Aussie Govt 10yr is at 1.09%, down another -13 bps for the week on top of last week's -14 bps fall. The China Govt 10yr is down -4 bps for the week to 3.14%, while the NZ Govt 10 yr is now at 1.39%, a -15 bps decline on top of last week's -6 bps retreat.

Gold is unchanged today from this time yesterday at US$1,443 but is up +US$25 for the week.

The VIX volatility index is risen to over 18 in a sharp turn up from last week and now above its average over the past year of 16. The Fear & Greed index we follow has turned back to the 'fear' side.

US oil prices recovered some of yesterday's sharp drop but are still lower than this time last week. They are now just on US$55.50/bbl. The Brent benchmark is also lower for the week at US$61.50. However, the US rig count is lower yet again this week and is now at its lowest level since late 2017.

The Kiwi dollar is little changed overnight but is a whole -1c lower than this time last week. It is now at 65.3 USc. On the cross rates we are firmer for the week at over 96.1 AUc. Against the euro we are down to 58.8 euro cents. That sets the TWI-5 back to just on 70.7 and nearly -100 bps lower than this time last week, for the second week in a row. Just two weeks ago the TWI-5 was at 72.5, so that is a -2.5% overall depreciation.

Bitcoin is now at US$10,468 and up +0.8% overnight and up +6.3% for the week. 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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43 Comments

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Our former leader and head gloomsteriser Bernard Hickey gave an interesting view on Radio Live last evening : that with government borrowing available at just 1.5 % , a ridiculously low level , our leaders could borrow $ 100 billion at a cost of a mere $ 1.5 billion per year , and throw that hundred B into much needed infrastructure ...

.. a truly transformational shot in the arm for our economy... projects only need to raise our productivity or efficiency by 1.5 % to cover the cost of the debt ....

what about the workforce?

.. they have work to do ... lots of it ... bear in mind , this was just a Hickeysterical wild theory ... his thinking being , why tax and spend ( i.e. why keep raising the tax on petrol ) , when simply borrowing at such low rates immediately gives us the money needed for key projects ... many of which have been canned by Taxcinda ...

More interesting question is who is going to lend us $100 billion (and I think they will want more than 1.5%).

Hollywood and the Movies industry remember we have Weta! :)

They are all IT specialists, professional gamers and Instagram influencers. And I am not exactly joking.

Pity that there's not much support for Games companies in NZ. Did you know that the Games Industry makes more money than Film, TV and Music industries put together.
https://metro.co.uk/2019/01/03/video-games-now-popular-music-movies-comb...

GBH (who reminds me of Wally who went to Welly...)

Hickey had enough put in front of him, over a long period, to know better. So have others.

https://www.resilience.org/stories/2019-02-26/the-future-is-rural-the-un...

Bother to download it (it's free) and read it all. Yes, I realise there are some big words and that it's longer than a twit.

.. great reading for insomniacs ... these guys you reference do waffle on a lot . . Not much practical advice to use in the real world. ...

Here's the go : the world is not short of fossil fuels, far from it . . and that's a good thing ...

... and population growth is slowing , sadly : we'll probably top out around a mere 9 to 11 billion people...

Borrowing sure worked for Greece. Not.

Auckland and Vancouver are racing to the bottom

... so long as this government fails to staunch the massive flow of immigrants into our fair land ( another election promise broken ) the demand for housing remains stronger than the construction industry's capacity to provide new builds ...

GBH, is there really a shortage? Construction industry confidence is very low and so is intention to hire. Prices are declining in Auckland and sales rates are slow, with a lot of building going on. Doesn’t look like a shortage.

... agreed ... it's hard to tell ... with stories of investors buying houses and then leaving them empty ...

But I reckon if we're so slack on immigration , new arrivals must be outstripping new house supply ... just my theory , for what it's worth.

One completely unknown is what quantity of spare bedrooms in larger house that are being rented out. Old people may not be too keen to do this but once the house is inherited or sold, many become like flats or airbnb. Look at how many cars line the roads these days. Its a step change.
The census in theory should be able to provide some intelligence on this but because those who ran that process had very little of it, we may not have any good data for years.

Let’s look at who is coming to nz. Students and low skilled workers. There are places where two students share one room. The newer builds are rented for premium prices which are hard to let out. Who would want to pay 700 a week ?? Therefore rents have not risen in Auckland.

Vancouver, Sydney, Melbourne, Auckland. I’m sure many of us are seeing the pattern. All kicked the can down the road during the GFC, only to form bubbles and became some of the most unaffordable markets in the world, but starting to correct now with declining markets.

An Economics 101 course would help the US cause, but economic literacy isn't the US President's strong suit.

I would suggest that it is not really an economics issue rather a societal issue. I guess the two things should be related. China has a much stronger "hive mind" than the US. The people of China will noticeably pull back on purchasing US goods to collectively punish the US for their perceived insults. The people of the US will do no such thing.

That's exactly the mentality of many that have put China in such a strong position...

Time for them to cave

Not sure it's the hive mind. More like Command and Control in the Stalinist State. John Garnaut's view that Xi sees himself as the successor to Mao and Stalin seems increasingly to be the case.

I disagree with David's view that the US is making policy missteps. They appear to be making a stand against China and the EU on the economic front before it becomes on the military front, as they did with the USSR and Japan in the late 1980s. Their tactical choices may not make sense to us (sudden tactical changes are a standard US military technique to disorient the enemy, look up John Boyd) but there is a certain amount of strategic integrity. David seems distracted by the personalities, as are many. If the US wants to hurt China and the EU, it needs a high dollar and trade tariffs aimed at them. In contrast, a low dollar (ie Fed rate cuts) helps them, by flooding the world with liquidity.

The point is that China and the EU are far more vulnerable to societal disintegration if growth continues to slow. Would the Hong Kong riots have happened if the HKD was free floating? Is the primary cause of their discontent that growth is slowing, due their hard peg to the USD?

I agree with you Roger and also disagree with David. China has massively taken the p$%s over many years regarding trade and IP, although I don't like Trump I like his stand on this. The west has been far too accommodating to China on both economic matters as well as human rights transgressions.

All part of the game: BBC article; US accuses Chinese billionaire of evading $1.8bn in tariffs. https://www.bbc.com/news/business-49187965

"Chinese billionaire Liu Zhongtian has been indicted in the US over allegations he evaded $1.8bn (£1.5bn) in tariffs on aluminium imports.
Prosecutors accuse Mr Liu of using the aluminium company he founded to smuggle huge amounts of the metal into the US".

China is not really a "Stalinist State". I would wager people like the students at Auckland Uni were driven by passion rather than naked "Command and Control". Hong Kong riots have been driven by a fair degree of foreign agitation. The US is constantly interfering in the affairs of other countries, it's their modus operandi.

Hive mind is more a reflection of historical/ethnic background than anything else and China has certain advantages there. This is something we have actively sought to stamp out in our own societies. Time will tell whether or not that was a good idea.

Hong Kong needs to become an independent state, Chinese should have no control over them

Well, there are no legal or logical grounds for this. Hong Kong was seized by the British at the end of the First Opium War in 1842. After that it was used as a sort of large criminal enterprise to push narcotics on the Chinese people. The natives of Hong Kong were treated as second class citizens. The new territories were later leased for 99 years and that has expired. It's hard to make a case that it should be an independent country.

Are you a member of the CCP?

I guess Zachary missed this article: BBC Hong Kong protests: 'I'm in Australia but I feel censored by Chinese students'.
https://www.bbc.com/news/world-australia-49159820
Quote: " As the situation grows yet more tense, the impact is also being felt overseas, particularly among the hundreds of thousands of mainland Chinese and Hong Kong students studying in Australia. At the University of Queensland, the tensions spilled over into violent clashes last week, when a group staging a support rally for the Hong Kong demonstrators were confronted by pro-Beijing protesters.
Hundreds of protesters faced off against each other, yelling insults and abuse as the Chinese national anthem was blasted from a speaker".

No, but it is futile agitating for something that is simply impossible and kind of dangerous for us. For the Chinese it is existential, similar to how Crimea is for the Russians.

I also think there is no place for this activity in our universities. In the past guest speakers have been cancelled because of the potential for violence and I cannot see how this is any different in principle. It's not our fight, lease ran out, got to give it back.

Hand themselves over to China?

Funny I thought that New Zealand and Oz had the right to free speech that's what makes us an attractive country to emigrate too. Careful Zachary if we lack those basic freedoms then they may decide to sell up and go back or move else where, and whoops there goes the housing market.

Exactly, hence my question if ZS is part of the CCP.. typical signs

You may be right, but ZS is usually babbling on about the virtues of living in a Western democracy and how it attracts the overseas wealthy to want to live here. I would have assumed that living in a 'free country' with freedom of expression and speech is an essential part of that. Certainly the immigration figures seem to reflect that.

I should probably clarify my statement, "there is no place for this activity in our universities" as meaning no place under their current rules which absolutely prohibits free speech that could potentially lead to violence.

There is actually no such thing as "freedom of expression and speech". I imagine it would be an absolute madhouse if it did exist.

Wow ZS, I'm seeing another side of you

To quote you ZS: There is actually no such thing as "freedom of expression and speech". Actually there is freedom of expression and speech! You're actually exercising that freedom right now or have you forgotten?

Yes he has. Dr Smith has a rather authoritarian streak - I suspect he doesn't understand shades of grey exist in many (if not all) arguments.

Just because you can write some things doesn't mean you can write all things. Numerous people have been banned from this site.

The thing is all China has to do is outlive the Trump Administration - there is no guarantee that the next administration will adopt the same approach.

This is an extremely shallow view. I think that whoever is inpower in 2020 would not want to completely throw away the push back on China's IP theft. Industry may be squealing a bit right now because they have to adjust their supply chains and actually invest some money in the USA or to shift production to other cheap labour countries. But once people get that into their thick skulls, they will actually start to see the benefit of it because the Chinese will no longer be able to just steal their technology and set up their own firms and sell it back to the US and other western countries.

I'm a bit confused as to whom you are saying is being thick - the Americans or the rest of the world. The interesting thing about IP is that once a product is in the market place it's value drops to zero. It's out there in the public domain. The real value is IP is the next big thing - what is being developed but even then you have disruptive technologies that displace or overtake existing technology and what was valuable IP now becomes "quaint" and old tech. Japan has a population that is rather conformist - they always had a problem that they could copy but found it difficult to innovate - that is why they stole IP. The more interesting question is does China have the same problem. In other words China will always be behind the eight ball and not be able to develop it's own IP.

Unfortunately China does not have a rule of law - it has a rule by the CCP. So long as the rule of the CCP exists there is little point in trying to enforce any IP provisions of any treaty - it simply won't happen in any meaningful way . The Chinese leadership doesn't have to pander to an electorate like the American leadership does. Indeed yesterday Stuff ran an article which noted that the Democrats presidential hopefuls during their debate hardly mentioned foreign policy - they focused on domestic policy. While it could be argued that this means a change in the focus by the Democrats - adopting a more isolationist stance - alternatively they have learnt that they should focus on what the majority of the American public wants to hear ( and I suspect foreign policy isn't one of them). That doesn't mean it is not important - just not important to most Americans.

I reiterate my comment that all China has to do is to wait out the Trump Administration.

For those of you worried about rising sea levels and global temperatures check this out:-
BBC How much warmer is your city?
https://www.bbc.co.uk/news/resources/idt-985b9374-596e-4ae6-aa04-7fbcae4...

Now lets see, the forecast here is for 0 overnight and 5 degrees max tomorrow....