US imposes even more tariffs on China; Fed 'put' may no longer work; yuan falls; Moody's cuts growth forecasts; commodity prices fall; UST 10yr yield at 1.53%; oil down and gold up; NZ$1 = 64 USc; TWI-5 = 69.2

US imposes even more tariffs on China; Fed 'put' may no longer work; yuan falls; Moody's cuts growth forecasts; commodity prices fall; UST 10yr yield at 1.53%; oil down and gold up; NZ$1 = 64 USc; TWI-5 = 69.2

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Here's our summary of key events over the weekend that affect New Zealand, with news the growing instability of US trade and economic policy is really roiling markets now.

China announced its retaliation to the additional August 1 American tariffs. This has infuriated the US President who doesn't think China should respond. Why is not clear, because Beijing always said all US tariffs would be responded to. Trump has announced even higher and broader tariffs since, and still doesn't expect a retaliation. He has 'ordered' US companies to shift operations out of China. (It's a call being rejected by business. But there might be a basis.) And he is now threatening the EU as well with new tariffs.

It's bewildering policy made on the hoof and with little thought for the implications. It's also the new normal for US policy formulation. There are many odd aspects to these trade policies, not the least is that the US President seems to know full well that it is US companies and US consumers who pay them.

At the first set of presidential trade volleys, Wall Street dropped -2.5% in its Friday session. Will the extended weekend announcements cause an even sharper drop when markets open today? Well find out soon enough.

The US Fed boss says they have no playbook for the Trump trade war; they are struggling to figure out the right policy settings when Government policy is so fickle. He stopped short of committing to more rate cuts. The Fed 'put' is now in doubt. Then, the US President reacted with more fury at the Fed chief, asking if he is a bigger threat to him than China. It is now getting very silly indeed, and quite sad.

One reason markets are gloomy is that no matter what happens, analysts see the negative effects of the trade war lasting much, much longer than any positive sugar-hit a Fed rate cut can deliver.

The Chinese currency weakened again, taking its depreciation against the US dollar since the beginning of July to -2.7% and the Chinese authorities are struggling to keep it from sinking faster. (Since the start of 2019, the cumulative devaluation is -4.5%.)

Separately, the EU is tightening its import rules for food products related to "pest control and chemical use". Canada is the first to report an impact on its cherry exports to the EU. But other products in the gun with the EU include apples, pears, blueberries, peppers, potatoes and tomatoes. New Zealand should feel vulnerable.

In an updated review to all these vulnerabilities, Moody's has cut the growth forecasts for sixteen Asia/Pacific economies, including Australia and New Zealand.

In Australia, their new car sales are in trouble with uncertainty twisting buyers to focus on used cars instead. Dealers are suffering sharp sales drops.

And the iron ore price is back down to levels we last saw in April, now a -25% fall since the peak in early July. Soybean and corn prices have dropped sharply too.

How does all this affect New Zealand? We seem to be well prepared for a downturn. Our imports may well get cheaper, oil especially. The Government has wisely retained plenty of fiscal ammunition. The RBNZ has plenty too but used some of it recently to keep our exchange rate from overheating. We sell food which should be more resilient to trade issues that other types of trade, even if not immune. We run big trade surpluses with both China ($2.7 bln) and Australia ($1.5 bln) and the much smaller deficit we run with the US ($0.8 bln) is for goods we can easily do without especially in the short-term - and as the US dollar rises, this will diminish on its own. Yes, we are vulnerable because we rely on trade, but the trade we do is not in the cross-hairs of the big trade bullies. Our problem is one we already have; insufficient investment because domestic confidence is waning.

The UST 10yr yield has slumped back to be now at 1.53% and just below where it was this time last week. (In between, it got as high as 1.66%.) Their 2-10 curve has turned negative, but only just. Still this is the first time this curve has gone negative since June 2007. Their negative 1-5 curve is wider at -32 bps. Their 3m-10yr curve has blown out to a negative -57 bps and down to where it last was prior to the GFC. The Aussie Govt 10yr is at 0.89%, down overnight by -2 bps. The China Govt 10yr is unchanged at 3.07%, while the NZ Govt 10 yr is also unchanged at 1.16%.

Gold has leaped to US$1,527 and up +US$27 on Saturday and up +US$15 for the week, or a gain of +1%.

US oil prices are suddenly weaker at now just under US$54/bbl. The Brent benchmark is unchanged for the week at US$59.

The Kiwi dollar is a little firmer on a tallest-dwarf basis, now at 64 USc. On the cross rates we are up at 95.6 AUc. Against the euro we are quite a bit softer at 57.1 euro cents. That sets the TWI-5 up to just on 69.2.

Bitcoin is now at US$10,066 and that is down 3.3% from where we left it on Saturday. The bitcoin rate is charted in the exchange rate set below.

 

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52 Comments

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25
up

"Our problem is one we already have; insufficient investment"
I disagree. We have heaps of investment - but it's in the wrong place!
Imagine if even just half of all that investment capital (debt) was applied across our nation's industries instead of being locked up in 30-year residential mortgages!
We'd still be leading the World, as we were 60 years ago....
Releasing and redeploying that capital has to be our goal. Failing that, and continuing to add more of the same to it,....well that's economic suicide.

22
up

Exactly. The fashionable idea of our time is that globalisation is good. It is only good for global banking. For the West it has meant de-industrialisation and more and more debt. We have suffered a massive economic decline. It now takes two incomes to merely pay the rent on the interest to "buy" a house. This is just a cheap plastic imitation of home ownership. We have been sold a lie. We do not need foreign capital, we are perfectly capable of generating our own. We have a good business model that should allow us all to prosper, yet the very brainy but stupids in charge have been seduced by intellectually convincing ideas that do not work.
https://carnegieendowment.org/2019/08/01/5-smart-reasons-to-tax-foreign-...

Apologies for being morbid, but demographics are surely going to grant your wish (and globally).

Boomers will sell investment properties for retirement and die from now and over the next few decades. Yes, their children will inherit but the reality is most of their kids will be heavily indebted and will use that inheritance to pay off huge mortgages and/or put into their own retirement funds.

Without an inheritance tax, it's hard to trace the impact of death estates in the NZ economy, but in the UK for instance, who have a whopping big inheritance tax, HMRC have enjoyed a huge increase in tax revenue over the last few years. And that's after they have recently increased the inheritance tax threshold to a massive £850k for the family home. I strongly suspect this is the demographics of the boomer generation having very high capital wealth compared to other prior and existing generations.

We don't know what the future of banking and investing behaviour will look like obviously, but if the psychological effect of the 87 stock market crash in NZ is anything to go by, then major economic shocks can and do massively effect how Kiwi's invest. If the coming recession is not too painful, it's unlikely anything will change, but if anything dramatic happens (huge housing market crash for instance) then the investment culture could change.

The potential boomer property sell off could have a deflationary effect on global housing markets and the release of all that capital back to the economy will be interesting.

Hmm... who will be buying the boomers property?

If/when there is a massive deflationary event, will there be any capital to release when it's all tied to property prices and bank credit?

That capital doesn't exist in a falling market.
https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=122...

You misread my point entirely. People will always buy property. I didn't say that they would be buying property at inflated prices, but equally, they are not going to be giving away houses for free. Even after a major crash, we would still be talking about NZ's biggest asset class, disproportionately held by the boomer generation and worth $100's of thousands each. Or are you suggesting that people we stop needing houses to live in? And/or houses will decrease so much in value as to leave the boomer generation no capital at all? Even if such an apocalypse did occur, as per my comment, the release of these houses back to the market would still have a deflationary effect on NZ's major asset class (property) and could therefore trigger a major change in investment behaviour away from property, in the way the 87 stocket market crash poisoned stocks for an entire investing generation.

> use that inheritance to pay off huge mortgages

Sounds ok to me.

For many, it will only partly pay off the mortgage.
Remembering of course that inheritances are usually divided among two or more people.

Keep in mind too that the majority of baby boomers do not own investment properties, and despite the stereotype there are a lot of low-moderate wealth baby boomers.

This won't make the baby boomer demographic effect (retirement and death) any less deflationary. Boomers own far more houses than any other generation, even the low-moderate wealth boomers have a high percentage of home ownership, so that will still be one house released from the statistically biggest generation (millennial generation might end up a bigger numerical generation but that was not a baby boom just exponential growth and the millennial generation own significantly less of the property asset class so no particular deflationary event can be predicted as yet anyway) . When these houses are released back to the market, that capitol is released and this will have a deflationary effect on the housing market. Depending on what else is happening in the global economy, and the NZ economy, this could have a profound effect on investment behaviour. The issue here is whether anything could happen to change NZ's investing behaviour away from real estate and into something more productive and I am speculating that the boomer generation retirement/death could have a much bigger negative effect on the housing market than is ever mentioned. Especially if immigration trend and retraction from globalism continues (as seems to very much be the political trend).

And what does massively reducing debt in a system do?

Dunno. I will say that deflation is not necessarily bad. I don't buy into the theory that the world is somehow going to end.

Me neither. We don't really understand how the current global economic environment will play out or what deflation might add to that.

However, the received wisdom is that house prices double every 10 years, but the boomer effect in addition to the two recent bubbles, the high debt levels and the effect of double income losing momentum might mean a decade or more of much slower house price inflation.

Maybe in the U.S., but we get all this foreign capital in NZ precisely because there is no place for it in the rest of the world. NZ by comparison is seen as a good buy with a good return, good investor protection with low corruption. DC has stated the problem with exceptional acuity, and we should be putting more of our own capital back into the business of NZ Inc. as it were.

Globalisation has had a bad rap because it gets stuffed up by loser strongmen leaders and snivelling bureaucrats who impose ridiculous trade protection measures, market access restrictions, corruption messing up the rule of law, failures to protect intellectual property, and mucking up the playing field by flouting trade rules. We have exceptionally poor market access even in the places you would least expect it, such as the EU.

Trade protectionism is not for us down here.

bw, NZ was "leading the World 60 years ago" ? I think most people around the world didn't know what New Zealand was, 60 years ago

The RBNZ has plenty too but used some of it recently to keep our exchange rate from overheating.

Do the citizens extend the RBNZ a mandate to engage in such frivolous activity which would have happened regardless, given recent USD strength against other countries? And will we incur the wrath of Trump and be labelled as China is for undertaking devaluation tactics?

Actually, I think the RBNZ and RBA are beginning to see part of the problem. Modulating interest rates probably does help soften a downturn, although it therefore weakens the cathartic effect. The real battleground is the destructive effect of excessive foreign capital inflows, and the credit controls on the banking system should help. Institutions are slow to adapt, favouring stability of ideas, ie strategic considerations, over tactics. I don't think they have diagnosed the cause of our decline just yet, but they are making progress, painfully slowly, but progress.

Then, the US President reacted with more fury at the Fed chief, asking if he is a bigger threat to him than China. It is now getting very silly indeed, and quite sad.

Lets be clear, the US commander-in-chief declared - "...My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?"

One person has taken Trump's tweet as a declaration of war - Dilbert creator Scott Adams (vid).

For goodness sake, Donald. Grow up.

History repeats, but this time there is some recourse.

13
up

Trump's policies aren't "made on the hoof". I could have told you this would have been the response more than a year ago. I suggest stop relying on Trump's critics for analysis and read what his advisors are saying.
You may not believe it, but Trump believes China and the US (and the West in general) are in a cold war. One that China has been fighting one sided for years. It's only now that the US is fighting back.
We are seeing the new normal.

It's only now that the US is fighting back

How many military bases does the US have in foreign sovereign states, which devalues their status to US vassals? ~800? It's a global policy of "Might is Right". Unfortunately, that type of "exceptionalism" has been rudely interrupted by the same might, recently on display in a more united Russia and China.

There is no moral equivalence between the US and the CCP. No argument.

This encounter has nothing to do with morals.

The hell it doesn't. The west has operated a policy of tolerant trade and openness with China for the last 30 years, hoping they would liberalise and gradually move towards become a more open and good global citizen as they got richer. Through to perhaps 5-10 years back that seemed to be working slowly. Back Xi's tenure has seen them become belligerently hegemonic - grabbing vast areas of south china sea, militarily threatening their neighbours, propping up the disgusting north korean, and doubling down on their evil ways with the recent genocide against the Uighers. Enough is enough. Enabling and assisting the continued growth of a malignant state possessed of a strong will to dominance into an even greater global threat is clearly nuts. Unless or until China liberalises it should be walled off.

Good points. I think the 'China Challenge' is a lot more complex than many would suggest.
Turn a blind eye, and you keep the economy humming along and get geo-political stability - but at what costs.

Take a more punitive approach - and we see the economic downsides, and geo-political instability.

So the obvious alternative is diplomacy. But diplomacy isn't easy. Obama promoted that, it arguably failed in many respects.

We need to keep in mind the lessons from history though. The USA and the west limited trade with Japan in the mid 1930s, given its transgressions in China etc. That only fired up Japan further, and increased their need to access resources throughout Asia that they no longer had access to through trade.

The hell it doesn't. The west has operated a policy of tolerant trade and openness with China for the last 30 years, hoping they would liberalise and gradually move towards become a more open and good global citizen as they got richer.

US elites/oligarchs lobbied to get China into the WTO to replace exported jobs with bank debt - which suited the US 1% and elsewhere at many levels.

Yep, it's all 7D backgammon. No way that a plainly petulant and impetuous person is behaving petulantly and impetuously.

Yes, Obama's presentation was much more "statesmanlike"and well dressed in verbal finery, as it was aimed at the intellectual elite:
https://obamawhitehouse.archives.gov/the-press-office/2011/11/17/remarks...

Trump, on the other hand, is rude and uncouth, as he is addressing his red neck supporters; the people who elected him precisely because both the Democrats and the traditional Republicans had betrayed them. Democracy, even when corrupted, is curiously adapative, at least sometimes. A Trump is just what you get when the system of representative democracy fails. Pure Hayek.

Nonetheless, the message and subsequent actions were no less devastating for the victims - Trump has exposed the hypocrisy of the US extending global democracy by force for what it really has always been - seeking resources at other's expense.

What, US management philosophy based on the plantation overseer? US global banking seeking to enslave us all in debt serfdom? Surely not?

Yep, that's what global "free trade" was about, until it backfired.

If it is predictable then it's not "impetuously". Maybe read wider than the WP & NYT.

And which websites are those - 8chan?

Confusing two issues. The need to address the China issue...and the way the to do it. Sure address the issues. But no need to be a racist, offensive, morally bankrupt, raging baffoon in the process. You can't tell me there was not a better way to do this....

Status quo presidents have shown no inclination to draw a line in the stand and chinese hegemonic ambition needs to be resisted - because their leadership is evil. Trump for all that he is an icky person and a buffoon and making a lot of mistakes is at least taking a stand on some issues like this that really matter in the long term.

There are no doubt plenty of candidates with the same ethos, and a legislative background. They just didn't have the reality TV credos to truly unite the downright moron part of the electorate.

US companies have beaten down China's for for rope to hang themselves with, but rolling back free trade policies seems like it won't be popular with the Republican party sponsors (though the redhat voters might like it).

I suppose that wars are always going to be expensive, at least this one doesn't seem to involve open violence.

Looks likely, in that the China policy and especially its detail is not particularly driven by Trump himself but by those behind him. Other areas of policy he clearly makes up more on the hoof. E.g. Mexico is going to pay for the wall.

I do suspect Trump is just a puppet.....

...or useful idiot - take your pick.

Nonetheless, he is articulating the need to bring Russia back into the western sphere of influence to isolate China.

G7: Trump's demands for Russia's readmission cause row in Biarritz

I think Russia has always feared the West in one way or another (being invaded twice doens't help). I would argue that Russia and China have more in common than Russia and the West. What Trump demands doesn't away's mean Trump gets.......

Running the USA is different from running his business - the power dynamic's are completely different for one.

Greenland … lol

BTW, question to all:
Why is Greenland, which is covered in ice called Greenland
and Iceland which is covered in grass & tussock called Iceland?

12
up

When you start from a false assumption (the world has an infinite supply of resource, say) then you end up making comments like 'Trump is to blame'.

Trump is a symptom, not a cause. So is the Brazilian fellow, as is Boris, as are the fires in Brazil, Siberia and SE Asia, as are the refugee streams. America re-valued it's aging housing stock, used it as an ATM, and offshored all its production capability to low-wage, low regulation countries. Essentially indulging in slavery, paid by IOU.

That had to end - the US debt has been unrepayable for 20 years and perhaps longer, and the resource-base is on its knees. Don't blame Trump - flawed human example though he is.

Agree. Noam Chomsky points out that Trump is a distraction;

https://www.youtube.com/watch?v=uQvig0KvUaE

You say that oil is going to get cheaper for us to import, but then you say the US Dollar is on the rise. Surely these nullify each other?

Not necessarily. The drop in commodity prices is likely to be a lot more than the fall in our dollar. The reason is that the price of oil also has a large 'demand' component and that can easily beat the currency component.

Have look at this interview from Real Vision Finance's interview with Steve Bannon. It answers lots of questions about Trumps moves on China.
https://www.youtube.com/watch?v=qH5QzuzD01A

NZX Monday am - Fonterra share price takes another big hit

No matter how many times the RBNZ cuts the OCR in half, banks will not be prompted to lend enough to rescue this outfit from the knackers yard, irrespective of RWA capital impositions.

Agree Audaxes.... came across this article the other day

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=112...

Too much debt in the system, frightening derivatives exposure and all time low interest rates mean that NZ and many of it’s citizens will not do well in the next GFC.

There will be some incredible opportunities for those who have cash in the next GFC but if you’ve got high debt and/or highly leveraged the shock could be quite devastating.

Don't know what you had for breakfast David but keep having that, I love the more opinionated David (in respect of D Trump) and love the vocab such as "tallest dwarf" as well. ; )