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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.
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.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».