90 seconds at 9 am: 'Goldilocks' US jobs report

Non-farm payrolls better than expected; McClay receives assurance NZ is on track with EU FTA, Key congratulates Turnbull, inflation weakens in China; UST 10yr yield at 1.36%; oil and gold stable; NZ$1 = 72.9 US¢, TWI-5 = 76.5

11th Jul 16, 7:52am by Jenée Tibshraeny

Here's my summary of the key events over the weekend that affect New Zealand, with news the US's labour market performed much better than expected last month.

The Bureau of Labor Statistics' non-farm payrolls report shows 287,000 new jobs were added over the month, a powerful rebound from only 11,000 in May, and the largest increase in eight months. However the unemployment rate crept up to 4.9%, retracting most of its sharp decline from April. Average hourly earnings rose less than expected at 2.6% over the year. A BNZ strategist says June's non-farm payrolls is a "goldilocks report", strong enough to suggest that the economy isn't falling into a hole but weak enough to suggest that the Fed won't be tightening anytime soon.

Trade Minister Todd McClay has received strong assurances our trade interests won't take too much of a hit from the Brexit. Having met the European Union's trade commissioner and other trade ministers at a G20 summit in Shanghai over the weekend, McClay is adamant our trade relationships with the EU and UK will continue and we'll keep being kept in the loop with any discussions between the EU and UK that affect us. He's also been reassured New Zealand remains on track to negotiate a free trade agreement with the EU.

Prime Minister John Key has congratulated Malcolm Turnbull on forming an Australian government. Turnbull last night declared victory, eight days after cliffhanger elections, leaving his conservatives with a fragile grip on power. Key says he's been in regular contact with Turnbull and believes New Zealand and Australia "should work even more closely together".

New data shows consumer inflation in China decelerated in June as food prices increased at a slower pace. China’s Consumer Price Index (CPI) rose 1.9% in June from a year earlier, down from May's 2.0% increase. China’s Producer Price Index (PPI) declined 2.6% year-on-year - once again a little weaker than expected. The index has lingered in deflationary territory for more than four years, although it's decelerated less rapidly in recent months. Soft inflation, stemming from weak demand, gives China's central bank scope to keep easing monetary policy.

The UST 10yr yield has slumped back down to 1.36%.

The US oil price has remained stable since Friday morning, at US$45/barrel. The Brent benchmark is just below US$47/barrel.

The gold price has remained at US$1,357/oz.

The NZ dollar starts the day strong at 72.9 US¢, 96.4 AU¢ and 66.0 euro cents. The TWI-5 index has lept ahead even further since Friday to 76.5.

If you want to catch up with all the local changes from Friday, we have an update here.

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

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10 Comments

by Stephen Hulme | 11th Jul 16, 8:24am 1468182268

A BNZ strategist says June's non-farm payrolls is a "goldilocks report", strong enough to suggest that the economy isn't falling into a hole but weak enough to suggest that the Fed won't be tightening anytime soon.

Witness the obvious outcome and gains to Wall Street funded by Main Street.:

A peculiarly destructive twist is the way many banks take advantage of low rates of interest and regulatory forbearance to “play the yield curve” in bonds instead of making business loans. The swift revival of the dollar “carry trade” in 2009 is the international version of this. Fundamentally, it represents a gift from taxpayers (and their central banks) that has made even mediocre bankers look like financial geniuses again, while refilling depleted war chests for additional dizzying rounds of political contributions, lobbying, and bonuses. Read more

Evidence:

The strongest U.S. labor report in eight months was no match for investors waiting in the wings for a chance to buy long-maturity Treasuries. Read more

And it's consequential, complimentary outcome:

That U.S. stocks were able to erase their Brexit trauma and pull within inches of a record Friday was impressive enough. That they did it on a day bond yields were flirting with all-time lows is unprecedented. Read more

by Henry_Tull | 11th Jul 16, 8:33am 1468182790

So is this our secret sause too.

Simon Swanson, managing director of financial services company ClearView Wealth, said the economy was doing reasonably well but it was "migration that's holding up the economy".
"I don't believe real incomes are growing anywhere as strongly as we'd like. The GDP of the country, the gross domestic product, is increasing because we've got an increasing population."
A migration ban "would have an impact - ask Japan," he said. "We would not have population growth if we had no migration. That's just a fact, it's not a political statement. That has consequences."
http://m.smh.com.au/federal-politics/federal-election-2016/business-say…

With the Oz corporates running the joint, we see them operating Akld as a state capital. And press for more new numbers to mark em down as home owners and lease car drivers.
Increased productivity, the bit we thought we were bending our back for hasn't happened for us for years. In fact we've been chucking some of the new tools - can't afford em.

by workingman | 11th Jul 16, 10:12am 1468188722

You're right, Henry. The government isn't willing to turn the immigration tap down, because flow of people is what passes for economic growth. Productivity is going nowhere, but many tens (hundreds?) of thousands of jobs now depend on the continuing inflow. So it's an economy somewhat as Florida is or was, dependent on more and more arrivals keeping the ever-growing numbers of residents in business. It's an ever-enlarging spiral, feeding on itself, and fast chewing through the country's future economic options.

by PocketAces | 11th Jul 16, 10:25am 1468189554

Isn't it incredible how any new area with small businesses, either franchised or not are run by immigrants, I would hazard a guess and say, just about 100%. Why?

by KH | 11th Jul 16, 10:33am 1468190037

Immigrants come into to run small businesses. Can't be happening. Mr Joyce and Mr Key tell us firmly immigrants are only coming in to provide essential skills our employers need. That must be true, they tell us so.

by Kakapo | 11th Jul 16, 10:44am 1468190645

How can anyone be expected to run an ongoing work visa scam without a small business to offer fictitious jobs in?

by Stephen Hulme | 11th Jul 16, 8:56am 1468184180

Wellington International Airport, which is 66 per cent owned by investment group Infratil, posted a 29 per cent gain in full-year profit as growth in international passenger volumes drove revenue.

The airport paid a dividend of about $13 million to the city council and a subvention payment of $39.5 million on Infratil. Read more

Another blemish to detract from Wellington Airport's claim, ratepayers/taxpayers should fund a loss leading runway extension since it's they who will be the prime beneficiaries. I think not.

So why does Infratil appear to get a disproportionate share of the profits each year?

It comes down to tax - Wellington International Airport doesn't pay any. Chalkie has gone through several years of cashflow statements and found not a cent paid out since at least 2007.

The reason it doesn't pay tax relates to the subvention payment to Infratil. A subvention payment is a legitimate method of balancing the tax liabilities in a group of commonly owned companies - the threshold for common ownership is 66 per cent.

If company A owns companies B and C, where B makes a profit of $100 and C makes a loss of $100, A has made a balance of zero. To avoid the unfairness of B having to pay tax even though the group has made no money, B can make a subvention payment of $100 to C, so both make zero and no tax is payable.

Infratil does this with Wellington Airport, using a subvention payment to reduce the airport's profitability to negligible levels and offset losses elsewhere in its New Zealand portfolio. Since 2007 the payments have averaged $23.7m.

According to IRD tax rules, a subvention payment cannot exceed the amount of the loss-company's loss, so the $30.1m payment last year means another New Zealand company within Infratil had a loss of at least $30.1m.

Leaving aside the oddity of an Infratil subsidiary apparently losing tens of millions year after year, Chalkie reckons there's something odd about how the subvention payment is calculated.

According to Brown "the airport calculates what the net profit after tax would have been, and then the city council gets 34 per cent of that, and then the remaining share of net profit after tax, and the amount of tax would have been paid, is taken by Infratil as a subvention payment". But if the loss-making Infratil subsidiary pays no tax, and the airport pays no tax, why does Infratil get paid extra to cover tax?

Not only that, but the Commerce Commission calculates the airport's allowable returns as net of tax, even though no tax is being paid.

Admittedly, Chalkie is no sophisticate in tax matters, but he reckons Infratil is. If the airport's prices take a hit, perhaps tax benefits will be a consolation. Read more

by Caleb | 11th Jul 16, 9:15am 1468185337

Damn.

by Caleb | 11th Jul 16, 2:59pm 1468205999

I bet they don't share financial liability in the case of insolvency.

by Ahuhyeah | 11th Jul 16, 7:20pm 1468221615

I know nothing about company tax. Since I have just been enlightened about subvention payments and tax... can anyone advise whether liability is also taken between these companies... or is it cake and eat it too?. E.g. Company be A owns company b, company a makes loss but company b profit. Company b not taxed... because of subvention payment but company a goes broke owing millions so company b has to pay the debts? I am guessing this has tui billboard moment coming.