Japan-US trade deal second-rate; China-US talks resume; US rail cargo traffic slumps; China retail sales up, but quality shifts; German data weak; UST 10yr yield at 1.55%; oil firm and gold down; NZ$1 = 62.9 USc; TWI-5 = 68.5

Japan-US trade deal second-rate; China-US talks resume; US rail cargo traffic slumps; China retail sales up, but quality shifts; German data weak; UST 10yr yield at 1.55%; oil firm and gold down; NZ$1 = 62.9 USc; TWI-5 = 68.5

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Here's our summary of key events overnight that affect New Zealand, with news of how to make a second-rate trade deal.

Japan and the US have today signed a bilateral trade deal, apparently a "phenomenal victory" for American farmers according to the US. But the facts show it is a deal that is worse than the one the US would have had if it had signed the TPP deal. The US gets nothing on dairy products, nothing on rice, nothing on cars, and only gets the same deal TPP members get on beef. It does get tax-free access for its tech giants but the irony is that it won't get any benefit from it. Japan keeps its car access to the US and gets tariff-free access for its machine tools.

This comes as the Chinese and Americans are about to resume their trade-war talks and expectations of a real deal seem slim.

Meanwhile in the real economy, American rail cargo stats continue to make unsettling reading. September traffic levels were down -7% year-on-year and a bigger fall than the -4.6% in August and July. That industry is calling it a 'recession'.

This data comes after trucking companies cut payrolls for the third straight month in September.

Still, Wall Street was posting minor gains today with the S&P500 up +0.2% in early afternoon trade although it has fallen back into negative territory near the close and is now down -0.5%. Overnight European markets were up about +0.7% and today will see the resumption of trading in Shanghai and Hong Kong after holidays. Yesterday the ASX200 also managed a +0.7% gain even though much of the East Coast was on holiday, while the NZX50 was up +0.8%.

In China, retail sales over the holiday period were up +8.5% year on year, but that rise was less than the +9.5% rise in 2018. And there is debate about the nature of the spending with some seeing it twisting to cheaper products. For example, instant noodles are up very strongly and at the other end of the scale sales of cars have taken a heavy hit downward.

German factory orders fell again in August, for the 15th month running. And the Sentix investor sentiment index dived again as well.

The UST 10yr yield is up +2 bps at 1.55%. Their 2-10 curve is positive at +9 bps. Their negative 1-5 curve is wider at -27 bps. Their 3m-10yr curve is unchanged at -22 bps. The Aussie Govt 10yr is down -2 bps at 0.88%. The China Govt 10yr is unchanged at 3.16% but will resume trading later this morning after their week-long holiday. The NZ Govt 10 yr is now at 1.02%, and a -1 bp dip this morning.

Gold is down -US$4 to just under US$1,500/oz.

US oil prices are firmer today at now just over US$53/bbl. The Brent benchmark is just under US$59.

The Kiwi dollar is lower this morning, now at 62.9 USc. On the cross rates however we are still at 93.4 AUc. Against the euro we are at 57.3 euro cents. That puts the TWI-5 at just on 68.5.

Bitcoin is now at US$8,263 and that is up +3.4% from 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 ».

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18 Comments

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What better way to celebrate 70 years of communism than with a pack of noodles?

Though extinction rebellion prefers Mc Donalds.
https://twitter.com/JuliaHB1/status/1181204702782001154

McDonald’s Officially Testing Plant-Based Beyond Burger In Canada
https://sodelicious.recipes/food-culture/mcdonalds-officially-testing-pl...

Highly recommend "The China Hustle" on Netflix - great scam still going on today but repurcussions catching up with some of the dodgey Chinese CEO's
https://www.bloomberg.com/news/articles/2019-10-07/secretive-chinese-tyc...

Quick question: why didn't Fonterra get a put option on the Beingmate shares, back to the original owner?.

Who gave the legal advice (was there any) and law firm sign off.
Every one else does this, when you buy a huge wad of script off "the one guy".

The US gets nothing on dairy products, nothing on rice, nothing on cars

The TPP ratification wasn't particularly a win for dairy producers in NZ either. Fonterra reported shortly after the release that cracking open the Japanese and Canadian dairy markets even after the deal would still be a tough fight.
Japan already buys half its WTO-mandated rice import from the US (around 340k tons a year).
American automakers don't make much of an impact in the Japanese market as they fail to live up to the environment and safety standards that their Japanese competitors have to offer.

The USTR reported that in the later stages of the deal more than 90% of U.S. food and agricultural exports to Japan will either be duty free or receive preferential treatment once it’s implemented
That sounds like a better deal than what TPP had in it for the overall agricultural market.

US employment data sounds pretty good. Getting people working is a pretty big deal.

True, with the reported jobless rate at a 50 year low. But it is less impressive that it seems with their participation rate so low.

The US has one of the lower participation rates of developed countries. Every 1% rise in the participation rate for the US involves 2 mln working-aged people. If they had a healthier participation rate in the same economy (say 65% - and don't forget NZ is at 70% so 65% isn't a high standard), they would need to find extra jobs for 4.7 mln people and right now that would raise their real jobless rate to 6.2%.

Forcing people out of the workforce to achieve a very low jobless rate isn't very smart public policy.

In fact, if they had a participation rate like NZ, they would have to report a jobless rate of 12.9%, all else being equal.

Several economists are worried that the high-paced job creation in the US over the last couple of years resulted, to a large extent, from a spending spree due to income tax cuts.
As the temporary surge in economic activity from this sugar rush starts to die down due to tepid wage growth, we could witness a massive slowdown, potentially a reversal in US job growth.

Regarding the upcoming trade talks, the treatment of the Uighers by the Chinese will remain an issue.
Previously ,https://www.reuters.com/article/us-hikvision-usa-uighur/u-s-might-blackl...

https://www.rnz.co.nz/news/national/400316/auckland-fuel-sales-both-fall...

Headline looks good, second para sounds like consumers are changing their behaviour, but read on, diesel sales down the same amount due to trucks filling up before they enter Auckland, not to mention the switch to electric cars.

For something as price inelastic as fuel, petrol, would have to go up a lot more than 12 cents, to create a 7 % drop in consumption

Does it take into account migration, and the possibility that some of the increase in use of public transport was not due to substitution.

That old rascal Spengler has another crack at international relations advice....by consulting the shade of Cardinal Richelieu...

Fifteen years ago America could have anything it wanted within the realm of possibility, but it chose something outside the realm of possibility, namely to remake the world in its own image. As a result you have squandered your substance and dissipated your morale. Now you must choose carefully what you want. You cannot incite the enmity of China and Russia, for example, and at the same time constrain Iran. Do whatever you like. Except as a source of amusement it is of no concern to me

That shift is rippling through major debt markets as investors express concern for the economic outlook. Benchmark two-year Treasury yields sank to 1.37% Thursday, the lowest since 2017. It was little changed Friday at 1.39%.

Two year UST yields have backed up to 1.46% today and the bull steepener fell to 10bps.

Nevertheless,

With inflation expectations tumbling to record lows, Mario Draghi has a real problem on his hands – and the market, the bond market, anyway, knows he doesn’t know what to do about it. I wrote on Saturday:

"What that says is pretty simple – no matter what the ECB has done, or likely will do, the bond market in Europe believes that there is a much greater risk of Japanification than any other potential scenario. The very idea of inflation is absurd no matter how many bonds are bought, how negative the non-floor floor, or what other popular comics and actors authorities will add to their unending puppet show."

Authorities, and not just those in Europe, are going to keep feeding us their theater. The global economy demands a monetary response and central banks have none to give. They don’t understand the monetary system, which is why they don’t really understand what’s happening in the real economy. [my bold]

Part of the reason bond markets haven’t reacted to the ECB is that the ECB only recently acknowledged there might, maybe, perhaps be a problem. It’s hardly encouraging when before you ever begin you put your denial on full display. Before around July, like Powell’s Fed Draghi’s ECB was sticking to the idea of “transitory” factors. Link

Once people think things they need will be cheaper in the future, they will put off buying and the spiral will begin.

Exactly - the NZ government 2.0%, 20/09/25 inflation index linked note is priced at a negative yield of -0.035% while trading at 121.45 on a clean basis. Investors must expect future cash flows associated with this bond will be paid into a lower inflation environment to offset the upfront loss in today's dollars.

'ANZ to announce customer remediation, local shares in trading halt'...
Too much too soon, aye ?
Key lost the key or what ?

Nah, too many XR kiddies glued to the front door - takes a lot of Remediating....