The IMF supports a weaker yuan; Chinese data does too; Indonesia tariffs EU dairy products; US & Canada data weakens; Japan gets better growth; UST 10yr yield at 1.73%; oil up and gold down; NZ$1 = 64.7 USc; TWI-5 = 69.9

The IMF supports a weaker yuan; Chinese data does too; Indonesia tariffs EU dairy products; US & Canada data weakens; Japan gets better growth; UST 10yr yield at 1.73%; oil up and gold down; NZ$1 = 64.7 USc; TWI-5 = 69.9

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Here's our summary of key events over the weekend that affect New Zealand, with news the US is not getting any international support for its recent anti-China currency moves.

In what is a pointed rebuke for the US's China policy, the IMF is standing by its assessment that the value of China's yuan was largely in line with economic fundamentals. But the director of the IMF’s China department said they were encouraging China to pursue a more flexible exchange rate with less intervention. If China agrees, that could undermine the US drive to get China to hold or artificially strengthen its exchange rate with the US dollar.

And data in China largely supports a weaker yuan. Their consumer inflation rose in July to +2.8%, the highest in eighteen months. The rise is largely due to higher food prices with both pork and fruit prices shooting up sharply.

Their producer price inflation was lame however falling -0.3% in July from the same month a year ago. That is the first sign of factory deflation in more than three years.

We have extensively covered the US-China trade war, and mentioned the new Japan-Korea trade tensions and the developing India-China tussle. But there are others worth adding to the list. Indonesia and the EU are at loggerheads over Indonesia's support of palm oil and deforestation to grow that industry. Among other retaliations, Indonesia says it will add between +8% and +18% tariffs to EU dairy products. And the EU is likely to do battle with Brazil soon too over Brazil's Amazon deforestation policies.

In the US, producer prices rose lamely in July, the weakest rise in over three years. Clearly, demand is not putting pressures on prices yet.

And mortgage rates in the US have tumbled to their lowest level in nearly three years. But analysts say they are unlikely to be low enough to provide much of a lift to their sluggish home-sales market.

In Canada, employment was little changed for the third consecutive month in July. The unemployment rate rose however to 5.7% as more people searched for work. Compared to the same month a year ago, employment was up by +353,000 (+1.9%), driven by gains in full-time work (+326,000 or +2.2%). Over the same period, hours worked increased by 0.7%. But compared to June 2019 most of these metrics recorded a "disappointing" slip-back.

And staying in Canada, the value of building permits issued declined by almost -4% in June, largely due to a decrease in the value of multi-family and multi-unit permits.

In Japan, their June quarter GDP growth came in much better than expected even if it was lower than in the first quarter. They grew at a rate of +2.8% in the first quarter and +1.8% in the second quarter, whereas most analysts thought they would be lucky to get any growth in the second quarter. The yen rose on the data. Growth came from a stronger export sector and a consumption boost ahead of a sales tax increase.

In the UK, their economy shrank for the first time in more than six years and the drop was significantly different to almost all forecasts including the official ones.

One industry being hit particularly hard by the global economic slowdown and trade wars is vehicle manufacturing. Even though sales were stable to June, the July results are unsettling the industry and production declines are being reported everywhere. It's a trend that will have a huge impact everywhere in global factories.

The drop in the iron ore price, which exceeded -20% in the past four weeks, is accelerating. It fell another -4% at the end of last week. China's steel industry is turning sharply lower. And China is having real problems delivering on the infrastructure stimulus already approved which is inhibiting its ability to weigh against the trade downturn.

And China’s banking and insurance regulator has launched a nationwide inspection into commercial banks' loans to fund property investment, to scrutinise real estate developer financing and crack down on speculation in their housing market.

The UST 10yr yield is now at 1.75%, a decline from this time last week of almost -10 bps on top of the -23 bps fall the previous week. Their 2-10 curve is much flatter for the week, now at just under +10 bps and their negative 1-5 curve is wider at -22 bps. The Aussie Govt 10yr is at 0.99%, down another -10 bps for the week on top of the previous week's -13 bps fall and the prior week's -14 bps fall. The China Govt 10yr is down -10 bps for the week to 3.04%, while the NZ Govt 10 yr is now at 1.11%, a -28 bps decline on top of last week's -15 bps retreat. These are all huge moves.

Gold is slightly lower today than yesterday, down -US$10 to US$1,496/oz, but is up +US$53 for the week, or a gain of +3.7%.

US oil prices are up +US$2 from Friday but are still lower than this time last week. They are now just on US$54.50/bbl. The Brent benchmark is also lower for the week at US$58.50. Meanwhile, the IEA has cut its forecast for oil demand, saying the world economy outlook looks 'fragile' amid economic slowdowns and US-China trade war risks.

The Kiwi dollar is a little softer to start the week, now down to 64.7 USc. That is a -½c fall for the week and that is probably less than what you might have expected given we have had a -50 bps OCR cut in that time. On the cross rates we are down a whole -1c for the week at 95.3 AUc. Against the euro we are down to 57.8 euro cents. That sets the TWI-5 back to just on 69.9 and a third week in a row where we have dropped nearly -100 bps in the week. Just three weeks ago the TWI-5 was at 72.5, so that is now a -3.7% overall depreciation.

Bitcoin is now at US$11,349 and while that is little changed from where we left it last, it is up almost +15% for the week. The bitcoin rate is charted in the exchange rate set below.

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9 Comments

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Is Pimco Right That Negative Yields Make Sense?

The $1.84 trillion money manager sees longer lifespans changing consumption behavior. Link

Or is it a case of paying up for liquidity hedges today given a very uncertain economic future - US H-8 graphic evidence

You can't look at interest rates alone, in a credit based system you have to look at all parts of the money equation. M.V=P.Q . Although I reworked that for interest to (M.V)+i=P.Q. That permitted certain predictions that are playing out. Negative interest rates are going to have an impact that may, in theory, reverse the trends in place. One of those being the money is surplus to the requirements of the economy finding its way into assets. Assets thus become money like if they command a yield. It can follow that negative interest rates reverse the credit fueled asset bubble. Those spending savings might be okay, but those trying to cash up assets do so into a sellers market.

The quantity of money should contract. Paying to keep your money in the bank contracts the money supply further.

It means borrowing dries up, personally I don't see that the system will handle that very well. It doesn't go in reverse.

Ask yourself what the value of money is in comparision to asset values?

Just thoughts for discussion, if anyone is brave enough to put their thinking caps on.

Next: Trump devalues the US dollar.
For those who think even he would not dare... watch this space, it won't be long.
Nixon did it.
The world economic system is currently in disintegration cycle.
We all get used to it changing slowly or slow boil. When it is boiling, we cannot predict what is coming, except that it will be v different to what we are used to.

Interesting to see Japan beating expectations. I think Japan is possibly much better prepared for this new economic age. Last week an interest.co.nz reader was suggesting that Japan is a basketcase compared to the Anglosphere. The reader seemed to essentially believe that the Anglosphere will be able to enact economic policies that the Japanese have used (QE, NIRs, etc). The difference is that the Anglosphere will do it far more effectively and debt / asset deflation will not be a concern. Even in these seemingly dark times, it appears that people cannot accept that the economic environment will be worse going forward.

Household spending and final sales continue to be subdued however you want to characterize them in relative terms. But because they aren’t falling off a cliff, Japan’s economy is being characterized as resilient and therefore that is the strong part – it isn’t worse…at the moment. It is facing serious external headwinds (demonstrated by the export numbers) and managing to stay somewhat afloat.

Or is it?

It may be that Japan’s economy is simply weakening just not all at once, at least not yet. This year has seen something of a weird new phenomenon, a sort of recession impatience. Either get on with it, or it can’t be happening. Link

Thanks for posting. The sentiment expressed there makes much sense, but I guess my point is that Japan has much more experience with deflation and NIRP, QE. I would think that the Japanese policymakers and public don't hold false hope nor do I expect that they buy into the "she'll be right" attitudes in Aust / NZ. Their economy has transtioned into"lower cost" structures and that's a good thing, particularly for basic human needs like shelter, food, water, power, and transport. Comparatively, we're light years behind them.

Competitive devaluation. Trump will devalue US dollar.
Because US dollar will only otherwise appreciate from herein. As a safe haven.
China has more problems with its finance system than anyone official in NZ, or in media, wants to contemplate.
This can of worms looks just fine til bankruptcies are allowed and defaults. Then counter-party risk starts to assert itself. The system of debt is unravelling. Iron ore collapse in price is signal that market thinks China will use a lot less. Bad news for Aus and in turn for NZ

More fiat will flow into crypto and gold I ssuepct. Won't matter what Roubini or Buffet say or think.

Doesn't look like the Aussies are in a hurry to diversify their economy away from bulk commodity extraction and export.

There's now a multi-billion plan to frack rocks for oil in Western Australia.