US & China pull back from tariff war; US mortgage rates at seven year high; Canada inflation above BoC target; EU pushes back on US Iran sanctions; UST 10yr at 3.06%; oil soft, gold unchanged; NZ$1 = 69 USc; TWI-5 = 72

Here's our summary of key events over the weekend that affect New Zealand, with news on trade.

First, the trade tension between the US and China seems to be fading - at least until the next Presidential tweet. The Chinese appear to have agreed to some vague plan to "increase imports from the US", and a senior American official said they are putting 'on hold' their tariff penalty plan. However, it doesn't appear that China accepted the US specific demands. More 'consultations' are planned. When Wall Street opens tomorrow, it is likely to get a boost from this development.

These moves come after a tough turn in Congress on Saturday. The Republican measures to soften the impact on their farm sector couldn't get the votes in the House to pass, based on the enormous deficit-raising cost. Bit of an own-goal here as the party who started the current trade war has been unable to shield itself from its local impacts.

Then China abruptly ended an anti-dumping probe into imported American sorghum.

Domestically, US home mortgage rates have now hit a seven year high. The average 30 year fixed rate mortgage is now at 4.61%. A standard variable rate mortgage is now at 3.77%. These represent a +5 or +6 bps rise in just one week. Rising rates have traditionally held back their real estate markets, for both new builds and resales. Americans owe US$15 tln for housing loans, so a 1 bps rise adds US$1.5 bln to their payment load per year. In the past week that has risen by US$7.5 bln pa.

In Canada, their CPI inflation rose at the rate of +2.2% in the year to April. That is down from +2.3% in the year to March. Meanwhile Canadian retail sales rose much more strongly than expected, but that was only due to surging car sales. Otherwise they slipped unexpectedly. This is the third straight month Canadian inflation has been higher than the Bank of Canada target.

Meanwhile, the EU trade balance came in almost exactly where analysts had forecast, but that doesn't hide the surge in trade for both imports and exports which is really quite impressive. Their large surplus with the US swelled. Their deficit with China, which is even larger, grew as well. Overall, their surplus shrank a small amount.

And the EU is moving to try to protect its companies from fallout from the US's unilateral reimposition of sanctions on Iran.

The UST 10yr yield is now at 3.06% and -5 down from this time on Friday. The Chinese 10yr is up to 3.72% (-3 bps) while the New Zealand equivalent is at 2.89% (up +1 bp).

Gold markets are now closed, ending at US$1,292/oz in New York. That is basically unchanged.

Oil prices are down a little and are now just under US$71.50 and the Brent benchmark is now just on US$78.50/bbl. The US rig count was stable this past week after six straight weeks of gains.

The Kiwi dollar will start the week lower at 69 USc as early trading is seeing the greenback rise. On the cross rates we are down at 91.9 AUc and 58.7 euro cents. That puts the TWI-5 at just on 72.

Bitcoin is now at US$8,516 and little changed from where we left it on Saturday.

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10 Comments

Re the US-China trade developments, the outcome is exactly as it would be given Trump's character traits and his business and legal history. Trump loudly threatens a war of one sort or another (in this case, one completely irrelevant to economic or geopolitical realities), and then promptly runs away and hides. Far easier to deal to the EU or, even better, anyone unable to fight back. It hasn't taken China long to get the measure of their erstwhile opponent.

No comment as yet by FMA on banks' response to their 18 May deadline request.

Wonder what surveys in the USA are revealing about consumer confidence? From talking to our old neighbours, there is increasing concern from their adult children over their increasing mortgage interest cost. Starting to squeeze quite a bit. No panic, just more worry.

US mortgages are typically fixed at 15 and 30 year terms. The increase in interest rates only hits purchases and refinancing. Increased interest rates will have an effect one way or another. I think something else will blow up first though.

I know a lot of car loans in the US are underwater. The primary causes are either rolling debt from the previous car onto the new car loan, and long loan terms become common up to 7 years. The 7 year car loans are underwater until around the last 3 or 4 payments at the very end.

They are rolling over old loans because the loans are securitised and sold off immediately. It's the collateralised loan obligations (CLO instead of CDO) that will blow out. The CLOs have student loans, mortgages and credit card debt rolled in too. It's not unusual for people to bury themselves in credit card debt spread over 9-12 cards. I'm not sure what will happen with their student loans but a lot are in default and some will come up on the 10-20 expiry that applies.

When the CLOs blow up there will be a massive credit tightening in the US similar to the GFC. The reason I say this is the Dodd Frank Act is targeted for repeal.

https://en.wikipedia.org/wiki/Dodd%E2%80%93Frank_Wall_Street_Reform_and_...
http://money.cnn.com/2017/04/21/news/trump-executive-order-taxes/index.html

Dictator
All valid comments & student loans at over a trillion dollars will never be repaid
Rolling various grades of debt into one and claiming it’s a safer security because it’s comprised of various grades of debt and earns a great return was the same Con GWBush flew around the world promoting pre GFC
Now we have Trump wishing to dump Dodd Frank ! It’s not like it was great but better than nothing and majority of it was drafted by WallSt bank lobbyists anyway.
If there was any sanity here a Glass Steagall would be reimposed but there is only insanity in the Trumphouse.
Do you know Wilbur Ross own steel mills here hence he proposed to Trump tariffs on imported steel !?
So much more you won’t even hear about downunder.
Enjoy your winter

Thanks. We often have wondered why we came home. Little bit less unsure now.

I see a lot of what is going on due to the number of people I help with personal finance online are mostly in the US. What's happening on the ground right now is crazy, and partly fueled by everyday people thinking they'll get a larger tax refund (when it will be smaller in a lot of states). I'd 2019 will be a year that breaks a lot of people in the US. Car loan defaults are trending up and mostly over 5% default rate now.

Wilbur Ross is a massive tool but even he's acknowledged that Trump's actions will not bring back the jobs. The jobs have been lost due to technological change.

The debt fueled party will carry on. A some point the financial sector will break, and given the tax cuts for the rich combined with increased Government spending the Trump money printing spree will hurt at some point. I'm not sure if the money printing will just increase asset prices or will turn into a high inflation rate.

Wait what? Does that mean that Trump doesn't really know how to clean coal either?

Here's a "nice problem to have" story from across the ditch where apartment prices are down by up to 40% and likely to be less than a king's ransom for bushy tailed fist home buyers. What.s more, the population appears to be increasing, which will keep the state coffers ticking over and contributing to GDP.. Happy days for most I guess.

A recent real estate advertisement revealed what some might call the bargain of a lifetime — a northern Brisbane apartment selling for almost 40 per cent below its 2010 purchase price.

SQM Research managing director Louis Christopher said large price falls have become the new norm for Brisbane apartment owners looking to sell in a saturated market.

"We have seen some heavy discounting before, but this is probably one of the biggest ones I've ever actually seen," he said.

http://www.abc.net.au/news/2018-05-16/apartment-glut-offers-massive-disc...

There anecdotal evidence that there's still a lot of luxury cars being purchased in Canada. There's a lot of people that still have not experienced the credit tightening.