China cuts car tariffs; US banks report bumper profits; US economic well-being up; shipping stress rises; China bond investors turn cautious; UST 10yr at 3.06%; oil and gold unchanged; NZ$1 = 69.3 USc; TWI-5 = 72.1

Here's our summary of key events overnight that affect New Zealand, with news investors in China's bond markets are getting nervous.

But first, China has announced about a 10% reduction on its import tariffs for cars and car parts. That reduces it down from between 16% and 35%, rates that had been in place for a decade. However, it is expected the main beneficiary will be European luxury cars rather than American ones. Ironically, GM is already one of the largest car exporters to China, even with the existing tariff rates.

In the US, banks are reporting record quarterly profits to in the first quarter of 2018, a result of the new tax laws favouring them, regulation rollbacks, rising interest rates, and a stable economy. Their net interest margin widened to 3.32%, the highest in five years. Community banks recorded a net interest margin +30 bps higher than that. (New Zealand bank net interest margins average 2.11%.)

The Federal Reserve latest Report on the Economic Well-Being of U.S. Households finds it has generally improved over the past five years. It found that almost three quarters of adults said they were doing "at least OK" financially in 2017 and that is up from 65% in the first survey in 2013. Even so, notable differences remain across race, ethnicity, education groups, and locations and many individuals still struggle to repay college loans, handle small emergency expenses, and manage retirement savings.

There was a factory report out from one regional Fed overnight and that came in very much more positive that analysts were expecting.

Wholesale trade data in Canada also surprised on the upside.

Going the other way is new data in Japan showing chain stores there are reporting slipping sales.

The recent rising and strong growth in world trade has brought an even stronger growth in investment in modern container ships. Capacity has now outstripped demand and even the largest are having earnings woes. Some have said that will result in a cutback on services where overcapacity is the worst. New, higher fuel costs are a new threat. The overall impact will most probably see much higher freight rates soon, especially for regions like New Zealand where competition is not so fierce.

In China, the rising level of corporate and SOE defaults in their bond market is eroding confidence for others in that market. Investors in the US$10 tln market are showing serious risk aversion, yields are rising for corporates and availability of funding is being restrained. The Chinese private commercial sector is very much debt-based, rather than equity-based, so this is serious.

In Australia, it is now clear that coal-fired facilities saved both Victoria and South Australia from blackouts this past summer. And that also needed some large key industry users to shut down so that households weren't affected. The strong push to shift to renewables there is up against a capacity reality and the public policy mood is swinging back to keeping the reliable coal-based backup systems in place and updated.

And Moody's is reporting that tougher regulation and higher self-imposed standards by banks is improving the quality of Aussie covered bonds - which were already among the safest in the world of covered bonds.

The UST 10yr yield is now at 3.06% and virtually unchanged from yesterday. The Chinese 10yr is at 3.71% (down -1 bp) while the New Zealand equivalent is at 2.85% (unchanged).

Gold is also unchanged and still at US$1,292/oz in New York.

Oil prices are stable today and are now just over US$72/bbl in the US although the Brent benchmark is pushing on higher and now just over US$79.50/bbl.

The Kiwi dollar is unchanged as well at 69.3 USc. On the cross rates we are still at 91.4 AUc and at 58.9 euro cents. That leaves the TWI-5 at 72.1.

Bitcoin is now at US$8,203 and that is -1.7% lower than this time yesterday.

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18 Comments

Energy as money, with a clearing house to boot. The most interesting news all year.

"container ships...Capacity has now outstripped demand...The overall impact will most probably see much higher freight rates soon"

that's not normally how supply & demand works...

If your ship is sitting empty at the dock, it's probably costing a lot. Where do you go? Out to sea? That costs in fuel, and because there's no cargo you can't cover those costs, so you have to rely on another ship to recover running costs. So prices go up. It's kinda counterintuitive.

A more likely outcome is that shipping companies compete harder and accept narrower margins, thus reducing shipping costs.

shipping freight rates have been increasing for NZ for the last six months, we are a tiny market tacked onto the Australian routes

https://ourfiniteworld.com/2018/05/11/how-the-economy-works-as-it-reache...

"The model in Slide 5 is the familiar Supply and Demand model used by economists. According to the model, if Demand increases from D1 to D2, then price will increase from P1 to P2. The rising price, in turn, will allow the quantity produced to rise from Q1 to Q2, based on the upward sloping supply curve S.
This model is true in some cases, but it is not always true.

Supply and Demand Are Both Affected by Reaching Limits

As the economy approaches energy limits, lack of sufficient growth in energy consumption affects both Supply and Demand...."

Real world economics - any and every change leads to an increase in price

explain how taxi prices work then, we have more supply than demand but prices rise.
i think you have to take into account input costs, you can only make a loss for so long and with distorted markets the weak dont fall by the wayside to let the strong survive, rather prices increase all around to even let the weak survive

If GM are a large exporter of cars to China, how is the reduction in tariffs not beneficial to it?

I see your point but reducing greatly tariff benefits those suppliers that don't already have a presence in a certain market. New entrants now no longer have a cost disadvantage over existing participants and can lower their prices to gain a bigger market share.
If the EU were to sign a trade deal with NZ and reduce tariffs on meat and dairy, our exporters may have a fairer shot at competing with their homegrown suppliers on EU soil.

Interesting that Chinese corporate debt rates are rising. This is the standard pattern as US interest rates rise. The USD is still very much No. 1.

The US hegemoney is based on USD bank lending worldwide at low interest rates. Then when conditions allow, putting interest rates up to extract their tribute. Those that can't pay go bust and their assets are bought up by US multinationals at bargain prices. I suspect that China is more vulnerable to this process than they realise.

So far Venezuala has gone bust, Argentina has 25% inflation, Turkey is about to join the club, shortly followed by South Africa.

Some sort of EU bust up over Italy is also in the works, although I think the EU will back down and change their accounting rules to make it look ok. The Italian plan is to debase the Euro so the Germans opt out, so there are fireworks going on behind the scenes, even if the EU like to appear all clever and in control.

This is an example of what happens when your government overspends on your behalf (which is why we have Aussie banks of course, not NZ ones);
https://www.zerohedge.com/news/2018-05-21/canadas-brookfield-buying-spre...

putting interest rates up to extract their tribute.

Someone has to pay for all those aircraft carriers. People mistakenly think it is the US taxpayer when it is really the interest on their mortgage that does it.

The world gets more interesting by the day.

These countries beleaguered by inflation and capital flight will be forced to approach IMF and World Bank for bailout packages. In return, they will have to throw open their gates to American and European companies in the name of economic liberalisation and reforms. Flush with funds and economies of scale, these companies will eventually capture large portions of their consumer and industrial markets in every sector.
This is the new art of economic warfare - capital invasion.

More doom and gloom from across the ditch stemming from what appears to be a merciless, rotten banking system. Australians and NZers have always been told that the Antipodean banking system is the best in the world, which is a kind of subliminal comfort that supports the confidence tricks necessary for the bubble.

http://www.afr.com/business/banking-and-finance/financial-services/banks...

https://www.zerohedge.com/news/2018-05-21/24-americans-will-drive-less-s...

Economies of shale...or is that scale. ..Did you buy a gas guzzler too?...or another for the better half...when yer put it on the House....peoples.