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China and US agree phase one deal; world trade slipping; US retail sales weak; China FDI grows; Japan sees improved growth; IMF warns Australia on debt; UST 10yr yield at 1.82%; oil and gold up; NZ$1 = 66 USc; TWI-5 = 71

China and US agree phase one deal; world trade slipping; US retail sales weak; China FDI grows; Japan sees improved growth; IMF warns Australia on debt; UST 10yr yield at 1.82%; oil and gold up; NZ$1 = 66 USc; TWI-5 = 71

Here's our summary of key events over the weekend that affect New Zealand, with news the world trade landscape is changing with imports falling worldwide.

Firstly, it does look like the "end of the beginning" in the US-China trade war has arrived. The so-called 'phase one' deal has been agreed and the US won't impose the next set of tariffs. Neither will China. And unlike other claims, this one has been confirmed by Beijing. Market reactions are mixed. American equity and bond markets weren't enthusiastic. But the Shanghai equity market rose an impressive +1.8%. Tokyo rose even more, up +2.6% and Hong Kong was also up +2.6%. It will be interesting to watch Wall Street when it opens tomorrow.

The deal sees the US halve tariffs on about $120 bln of trade while the Chinese don't have to reduce any tariffs but they said they will. China will buy some ag products, but actually how much is in doubt. It sets up a 'dispute resolution' process but that is one where each side becomes judge-jury-executioner for any claim and is in fact just a kangaroo-court basis, pretty amateur. The key element is that the ambition is very low with enforcement a joke. So this deal is more theatrics than ground-breaking and the international community won't be following this model.

This is a time however when we can assess the impact so far of the trade war, not only on the US and China, but other large economies as well. Import volume data compiled by interest.co.nz (from OECD data) shows that imports fell the least in the US, and only recently. From its peak in June 2019, American imports have fallen just -0.5% of GDP since. That compares with a -0.8% of GDP fall in Japan, a -0.9% fall in the EU and a -1.4% fall in China. So it has been China and not the US who has used this time to wean itself off of imports and most of those are from the US. Basically the Americans have kept on buying Chinese goods, and the American public or businesses have paid the higher tariffed prices. So perhaps it is no surprise that Washington has wanted a deal, one that seems to have damaged their trade, but superpower rival very little.

The 'phase one' trade deal won't move either China's or the US's trade, even 0.1% of GDP either way.

Maybe there is another reason for the muted Wall Street response; weak November retail sales. They rose at only a very modest pace in November, virtually flat from October and only up +2.9% above the same month a year ago and a slower-than-expected start to the holiday shopping season. And given that American inflation is up +2.1% in the year, the gains look very mediocre. Business inventories were up +3.1% in the year.

In China, foreign direct investment levels are rising. They are up +6% in 2019 so far, a gain of US$124 bln. Almost 30% of that is in high-tech sectors and that portion grew a remarkable +28% in the year.

Data for Japanese industrial production for the year to October looks very discouraging, down -7.7% and that is a faster rate of decline than for the year to September. But that was in the shadow of their GST increase, and when the typhoon hit. Looking forward, they are more optimistic with 2020 growth of +1.4% partly as a result of an infrastructure stimulus boost.

In India, the presumption is that their export prowess is all about services - call centers, IT services and the like. But it turns out these service exports are growing slower than their overall economy and declining. They were up just +5.25% in the year to October.

The latest UN climate negotiations in Madrid look like they have gone nowhere.

The IMF is warning Australian regulators to be ready to act should rapid housing debt growth continue on current trends, saying "looser financial conditions could re-accelerate asset price inflation, boosting private consumption but also adding to medium-term vulnerabilities given high household debt levels".

The UST 10yr yield is at 1.82% and very little different from this time last week. Bond markets seem sceptical of the trade-war deal. Their 2-10 curve is unchanged at +22 bps. Their 1-5 curve is at +12 bps. Their 3m-10yr curve is less positive +26 bps. The Aussie Govt 10yr is down -9 bps from Friday at 1.16%. The China Govt 10yr is virtually unchanged at 3.22%. The NZ Govt 10 yr is now at 1.58% and unchanged from Friday although it is up +9 bps in a week.

Gold is at US$1,476/oz and up +US$16 for the week.

US oil prices are up further to just on US$60/bbl and the Brent benchmark is now just at US$65/bbl.

The Kiwi dollar will start the week firm at 66 USc. On the cross rates we are holding at 95.9 AUc. Against the euro we are little-changed at 59.3 euro cents. That puts our TWI-5 at just on 71 and marginally firmer for the week.

Bitcoin is now at US$7,086 and down -2.5% from where we left it on Saturday. The bitcoin rate is charted in the exchange rate set below.

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42 Comments

I think China is playing a very interesting game regards Agriculture. I see they have a goal of being back to full pork production by 2021 that's not much more than a year away.

'Chinese officials plan to restore normal pork production by 2021 via a crash farm-building campaign and other measures that include ordering local officials to ensure local pork self-sufficiency, reconfiguring the slaughter industry, and setting up rigid pork supply pipelines. At the same time, officials plan to address chronic problems by shoring up disease prevention and dotting the countryside with tanks to collect millions of tons of manure and diseased carcasses.'

They have also invested a lot in South America

'During the election campaign, President Bolsonaro
alerted that the “Chinese are not buying in Brazil. They are
buying Brazil”
. The concentration of Chinese investment
in some “strategic sectors” has raised concerns among
the new government supporters. President Bolsonaro
mentioned particularly that the permission to foreigners
to buy land or to control industries in strategic areas
should be reviewed. '
https://www.policycenter.ma/sites/default/files/PCNS-PB1921.pdf

Soon we're all going to be fighting to get product into China, it could look like the wool industry.

It seems optimistic that theyll be at full production 2021. Disease in agriculture is very hard to control, especially in factory style farming typical of pork. It will be interesting to see if the Chinese consumer will develop a sustainable demand for other animal proteins such as sheep and beef. Maybe the swine fever has paved the way for substantial opportunity in these markets

I think Chinese Mandarins would rather just focus on what's cheapest to feed the masses.

Great briefing on US-China trade situation.

Indeed. But perhaps it takes 'Mercins a bit longer to get the message?! " the Americans have kept on buying Chinese goods" + "weak November retail sales." = The Message is getting through.

In the "post-truth era" what does it mean for a message to get through?

In entirely speculative alternative news:
The "trade war" drama continues to work, distracting the easily led from what's really going on. Capital continues to flee a broken Euro-Land, putting upward pressure on the USD, causing a shrinking of trade worldwide and pushing down government bond yields in the USA, Canada, Australia and New Zealand

The banking system of Euro-Land continues to implode, with large scale emergency repo measures carried out in force by the US Federal Reserve. Major US banks refuse to lend overnight to banks based in Euro countries as they have no central bank backstop. The lie that underlies the European Central Bank is that, since it cannot bail out banks, it really is not a central bank. The most basic reason for a central bank is to function as a lender of last resort in a liquidity crisis, traditionally extending credit against good collateral at a premium (Bagehot).

Interestingly, the French and German politicians seem to be finally beginning to recognise the collossal stupidity of their actions over recent decades, long after the break-up of the EU can be averted. They have no central bank. Their currency is an illusion. They have lost their second biggest source of funding - Britain. The French have suddenly realised that if they weaken Britain it will not be able to afford its military, and they will be alone in a Europe "of vegetarians", as they put it. The Germans have suddenly realised that a weakened Britain won't be able to afford German cars. The rise of the movements to defend national culture across Europe gather force, with imminent potential for civil war according to the French Interior Minister. France is paralysed by a general strike.

Major US banks refuse to lend overnight to banks based in Euro countries as they have no central bank backstop.
Last I heard the Bundesbank is fully operational and loaded with Europe's IOUs.

That can never be repaid. The German people have been betrayed by their leaders, as they are beginning to work out. The German business model is based on lending money to people who can't afford to pay it back, so they can buy German cars. In a sense, it is the exact opposite of our business model, taken to extreme.

Who are you quoting here Roger?

I think he has confused the Euro currency with Eurodollars (USDs held outside the USA).

... freshly back from climate change conference in Paris is our own James Shaw ( did he sail there & back ? ) exhorting us of the need to decarbonise our economy ... on Newstalk ZB this morning he stated that although China is constructing 700 coal fired power plants over the next 10 years , theyll be shut down soon , as China is also building wind turbine towers at the rate of one per second ...

... wow ... that is exciting .. a power source which has been theorized for so many years , about to become a reality . ..

... there are 31 million seconds in a year ... breathe a sigh of relief that the Greens aren't in charge of our finances !

Correct me if I'm way off here, but a back of the envelope calculation would put that at only 31 million wind turbines per year.
That sounds a bit low for the land of hopes, dreams, and hyperbole...

Better get PDK here to confirm the numbers.

Fascinating article, by a dyed in the wool Labour voter who voted Conservative for the first time:

I was proud to be one of them. Brought up in a Communist household by a trades union organiser father who would shout “Tory!” at the television with such uncharacteristic rage that I believed it to be a swear word as a tot, I was one of the millions of people who rejected a party with which we no longer recognise, colonised by malign cuckoos with crocodile smiles. So I decided to follow my head rather than my heart – and thoroughly enjoyed losing my religion.

There was something so moving about the Red Wall coming down, as millions broke free from the bonds set on us by the self-styled Great And The Good who, from the Fabians onwards, saw the working class as something to be contained and counted but never actually seen or most importantly heard.

https://www.telegraph.co.uk/politics/2019/12/15/boris-johnson-turned-com...

I understand Blair is an avid Fabian. Ardern worked for UK PM Tony Blair's Cabinet Office. Does that make her a likely candidate for Fabian membership?

I think it may have been the anti-Jewish rhetoric that put people off Labour as much as anything. That was certainly particularly shocking to me.

I tend to believe the press slandered/smeared Corbyn as an anti Zionist /Semite because he supported Palestine and the two state solution.
Note this comment - https://twitter.com/Louis_Allday/status/1205446455684730880

There have also been a steady stream of articles about Jewish families moving to Israel as they no longer feel safe in Britain, that appeared genuine.

The Corbynite rhetoric is to say that it is smear campaigning (even though the left have smeared the right EVERY bit as disgustingly as the right were smearing the left this election). There is massive hypocrisy going on. Corbyn fans are horrified by the social media "hate speak" that Labour politicians experience and yet they see no problem in using the same hate speech against Cameron, Osbourne and Boris et al. I have actually had friends post to facebook "everyone come to David Cameron's twitter, we are having awesome fun abusing the pig "f&%ker". And then, on the same day posting to complain about people insulting Corbyn.

I have many British and Israeli Jewish friends and family. All are left leaning. Many are fully convinced that Corbyn has displayed anti-Semitic views, or at the very least, he has behaved in ways that are to minimise Muslim terrorism against Jews and refer to them as "brothers" and "comrades" (even the convicted murderer of 7 Jews) and that Corbyn has not been balanced in support offered to Jews. In addition to that, there is undoubtedly the long standing notion within the left political narrative that Jews are part of the elites. British Jews are in general a savvy bunch, they don't generally allow themselves to be used as political cannon fodder. When all my Jewish friends say that they are convinced by the evidence about the antisemitism, i'm not going to just dismiss that because Corbyn appears to be anti-racist in other arena's. It's perfectly possible for someone to dislike or favour one particular race or religion, to appear anti-racist in supporting those people and not others.

In other words, what’s really driving asset growth for the entire banking system in the US in 2019 are holdings of those risk-free assets, especially those of US Treasuries. Link

How long before NZ banks migrate away from residential real estate lending to focus on zero risk weighted, risk-free assets?

Not really. The high pressure for capital flight from Euro-Land and China means a steady stream of new residents. The money they bring with them must either force up unemployment or debt. It's a double entry based argument best explained by Michael Pettis. So unless the NZ business model changes, their lucrative core business is secure.

It is possible that the NZ business model does change. There have been a number of small changes that could eventually cause this. The first was the core funding ratio, which is a form of capital control on foreign borrowing. Then the loan to value ratios, again, a form of capital control. Then the "foreign buyer ban", probably completely ineffective window dressing, but it does say "You are Not welcome here". The rumblings in the comment stream about the excessive immigration rate suggest there could be more actions that further restrain foreign capital inflows.

The devaluation of the USD begun by the Fed (ie lowering interest rates, repo funding of Eurodollar system) should continue to accelerate commodity price rises. We could very easily find ourselves following the Aussies and running a record current account surplus despite the best efforts of those nominally in charge to bugger things up. Change happens slowly, then all at once.

The high pressure for capital flight from Euro-Land and China means a steady stream of new residents. The money they bring with them must either force up unemployment or debt.

Immigrants have to sell their foreign savings to purchase NZD deposits which already have a debt in the form of a bank asset lodged against them. Since we run a significant current account deficit there is room for foreign NZD heavy correspondent banks to lighten their local hoard.

Yes, NZD move from offshore to onshore. They are then used to push up the price of existing assets or lent on deposit to the banks who can then re-lend them 25-30 times over (or whatever the figure really is after going through the smoke and mirrors of risk adjusted/gamed capital rules) into the mortgage pool. Result, rising house prices, falling real yields and the illusion of prosperity for some.

NZDs never leave New Zealand as USDs never leave the US. Foreign banks use NZ correspondent banks to hold foreign ownership of NZD as NZ banks hold NZ ownership of USD in New York correspondent banks.

Your understanding of the financial plumbing is far greater than mine. Does the process I describe not happen? Are my speculations just a fantasy constructed from hot air and based on nothing more than my fevered imaginings? Seriously, if it is all rubbish I'd like to know. While I try to write in a strongly worded form, it really is about putting out a theory to see if anyone more knowledgeable than I can shoot it down in flames.

“So it has been China and not the US who has used this time to wean itself off of imports”

Or is this “weaning” simply a by-product of a slowdown in the Chinese economy?

Exactly, imports falling faster than exports is not a good look, it is a sign of internal collapse. Quite different from exports rising faster than rising imports, which is a good sign.

The family of an under-the-table migrant worker died on the job is seeking compensation from ACC
Why stop at privatising profits from low-value migration and socialising all associated costs of population increase? The taxpayers now also have to compensate the family of workers didn't contribute a cent in PAYE or ACC levies.

My condolences to the family of the victim but should we be picking up the tab on behalf of awful employers working vulnerable migrants to death?

10
up

Politely tell them no. Go after the employer.

Absolutely we should. The govt should put compensating this family as the highest priority for my tax. Seriously. It is a matter of morality - that thing govt's forget Right and Wrong and knowing which is which.
However it would please me greatly if the money was then repaid from the pensions of the current and the previous ministers of Immigration who have greviously and knowlingly under recruited labour inspectors. This problem has been well reported by the media for the last 4 years at least. Scandal.

What about if it came from the pensions of the entire bureaucrat and politician class? Outrageous, of course, but there is a massively destructive moral hazard here and no restraining feedback process.

I absolutely agree that we should provide some sort of financial relief to the ailing family.
However, I am afraid that if we were to open this 'can of worms' with taxpayer-funded compensations for immigration screw-ups, both sides of our political spectrum shall resort to writing cheques to poor migrant families instead of reforming the system.

Team Bridges has a clear vested interest in not keeping deviant employers accountable for their actions and Ardern's lot would rather target migrant family votes by positioning themselves as rescuers with hugs and taxpayer money than do anything meaningful so as to prevent exploitation altogether.

So this guy gets paid under the table in cash and pays no tax and you want us tax payers to compensate the family. Get real!!!

We set up the situation and did nothing when it was reported many times. It only takes a single database query to list current holders of work-visa's with no IRD taxes paid for a given period. That would list the suspects and labout inspectors do the rest. Only reason it doesn't happen is nobody wants a computer system that lists their mistakes.

Lame!

They need to take responsibility for their own actions, no one put a gun to his head to KNOWINGLY work illegally

The family should have no grounds for a claim on ACC

Do we have anything similar for proven Chinese spies who visit the beehive? Even if they are MPs and shadow ministers?

Days to the General Election: 16
See Party Policies here. Party Lists here.