Weekend Briefing: Trade retaliation grows

US jobs growth slows, jobless rate dips; Canada trade deficit narrows; China hits US goods with higher tariffs; US trade deficit widens; Italian bond yields jump; UST 10yr 2.95%; oil and gold down; NZ$1 = 67.5 USc; TWI-5 = 71.1

4th Aug 18, 8:45am by David Chaston

Here's our summary of key events overnight that affect New Zealand, with news China is retaliating against the lasted US tariff hike.

But first, American job growth slowed more than expected in July as employment in the transportation and utilities sectors fell, surprisingly for the transportation sector, but there was a drop in their unemployment rate to 3.9%. Their 'low' jobless rate is solely because they have a stubbornly low participation rate and that shows no signs of improving. Also stubborn is the rise in earnings, up +2.7% pa again. It has been at this level for more than two years now and if anything seems to be softer now than it was at the end of 2016. It is proving to be a long wait for tighter labour market conditions to show up in broader jobs gains or in pay increases.

Wall Street posted some modest gains on the jobs result. The UST 10yr benchmark fell however, and the US dollar was little changed.

Canada's goods trade deficit narrowed from C$2.7 bln in May to $626 mln in June, the smallest deficit since January 2017. Total exports increased +4.1%, mainly on higher exports of energy products and aircraft. Total imports edged down -0.2%. This was a much better result tan markets were expecting. The Canadian trade surplus with the US widened however and locals spurned imports from their southern neighbour.

Consumers in other countries are also changing their buying habits away from US products.

More directly in the trade war, China as announced new tariffs on US goods, ones that will especially hurt US hardwood exports. They also targeted food products, chemicals, steel, aluminum and consumer goods like furniture, bicycles, baseball gloves and beauty products. More than US$60 bln of trade in additional goods have been singled out for additional tariffs.

And China is working to undermine US sanctions on Iran, and work with the EU to preserve the nuclear deal.

The Shanghai stock exchange closed -1% lower yesterday.

The American trade deficit widened in June at the fastest rate since November 2016, pushed by a stronger dollar and front-running buying. The trade deficit in goods and services increased +7.3% in June from the previous month to a seasonally adjusted -US$46.4 bln. It was, however, about what analysts were expecting.

American trucking companies ordered a record 52,400 big rig trucks for regional and long-haul routes in July, what is usually the slowest order month of the year. That is nearly triple the orders from last year, when fleets ordered 18,726 trucks, and a +24% jump from June’s orders.

In Italy, bond investors are retreating and yields rising ahead of what will be contentious budget negotiations within the new and unstable Italian government.

The UST 10yr yield has retreated on the US payroll data outcome and at the market close is at 2.95% and about where it was at this time last week. Their 2-10 curve has remained just on +30 bps. The Chinese 10yr is at 3.49% (unchanged from yesterday) while the New Zealand equivalent is now at 2.83%, also unchanged.

Interestingly, the VIX has retreated a bit and now just under 12. The average index level over the past year is 12. The Fear & Greed index has is moved further over to the 'greed' side.

Gold is down -US$2 from yesterday and now a just on US$1,213/oz in New York and that is a another -US$9 retreat over the week.

US oil prices are a little lower today from yesterday and now just over US$68.50/bbl. The Brent benchmark is now just over US$73/bbl. The US rig count is marginally lower this week.

The Kiwi dollar is ending the week at 67.5 USc, and although slightly firmer from this time yesterday, it is down -½c from this time last week. On the cross rates we are little changed at 91.2 AUc, and at 58.3 euro cents. That puts the TWI-5 at 71.1.

Bitcoin is now at US$7,384 which is down -1.5% from yesterday, and down more than -10% over the past week.

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

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19 Comments

by NoFax | 4th Aug 18, 9:02am 1533330161

The US low participation rate is odd given that there are more job listings than there are jobless.

by Advisor | 4th Aug 18, 4:02pm 1533355349

The situation is unique in the rust belt of the United States where most once-retrenched blue collared workers still await the well-paying manufacturing jobs as promised by the Republicans.
The service sector doesn’t pay nearly enough to bring them back into the workforce.

by spinach1 | 4th Aug 18, 10:39am 1533335945

Not entirely sure what china is about with their retaliation apart from satisfying the indignant among themselves.
I would guess that much of what they import from the USA is raw materials to be sent back as processed or manufactured items by the cheap labour, which is the only reason anyone deals with them. If so it ups the cost to their own factories for the incoming product then it gets more tariff on the way back to the states. As for finished goods from the states, these would likely be premium, quality items bought by the high end of the market for prestige. I imagine tariffs are unlikely to deter these buyers who are simply showcasing their wealth......

by Yvil | 4th Aug 18, 11:22am 1533338550

"And China is working to undermine US sanctions on Iran, and work with the EU to preserve the nuclear deal"

Yet another example the US tariffs uniting the world… against the US (although I understand this is not directly linked to the tariffs)

by Roger Witherspoon | 4th Aug 18, 11:54am 1533340458

Are the Trump tariffs good for us? I mean, presumably we can get a bit more for our exports of milk and beef. Should be good for Aussie, Vietnam, Taiwan, Japan and Phillipines too, or am I missing something?

by HeavyG | 4th Aug 18, 12:07pm 1533341275

We will fill the food gaps as China places tariffs on US meat and dairy. Aussie will be loving it to as the fill wheat and soya gaps. Trump is giving $12b in aid to farmers to prop them up. se https://www.cnbc.com/2018/07/24/trumps-12-billion-aid-for-farmers-risks…

by Andrewj | 4th Aug 18, 12:43pm 1533343396

depends how the Chinese see our position on the South China Sea.

by Andrewj | 4th Aug 18, 12:41pm 1533343271

With China open and everywhere else closed, someone began heavily selling UST futures so that by the time Europe opened yields were uniformly rising. The final bigger leap came in the final 30 minutes before US markets started up. By 9:30 am, the 10s were at 3.011%.

Trump reflation? Technical selling?
http://www.alhambrapartners.com/2018/08/03/what-was-that-tuesday-night-w...

Risk reduction before the weekend is prudent and remains standard operating procedure. Especially when news such as the PBOC raising reserve requirements on FX forwards well after the close of their official trading day could be sprung out of the blue when no one was paying attention.

Who would have thought that at 9 a.m. London time, when the on-shore yuan found a bank suddenly willing to aggressively buy the currency, that it was something everyone needed to think about? At the time it felt like that was the time-marker signaling the de facto end of the trading day rather than a recast of how things might go.

https://www.zerohedge.com/news/2018-08-03/and-just-pboc-changed-your-day

1. China owns just 6.8% of US Treasuries. Absorbed in days by market.
2. China’s entire gold holdings are less than 0.2% & would be less than 1% of money supply.
3. Yuan is used in less than 4% of global transactions. Impossible with capital controls
4. https://www.dlacalle.com/en/nuclear-option-china-has-already-lost-a-poss... …

by Andrewj | 4th Aug 18, 1:16pm 1533345411

By far, more Americans have gone “missing” from the labor numbers during the “recovery” than during the “recession.” In other words, there have been all along fewer jobs gained than people. In just the “recovery” portion, there hasn’t been enough growth to keep up with bare minimum population. It’s not as if we are undergoing a second baby boom, either, even population expansion is itself at a low. Low standards all around.
http://www.alhambrapartners.com/2018/08/03/payrolls-deadly-low/

by NoFax | 4th Aug 18, 1:20pm 1533345656

I think you missed something. There are more jobs in the US than people looking for jobs - that has never happened before. https://www.cnbc.com/2018/06/05/there-are-more-jobs-than-people-out-of-…

by David Chaston | 4th Aug 18, 3:22pm 1533352948

I don't think the data they are talking about is the same Andrewj is referring.

The BLS data itself probably reconciles it:

The US working age population (that is not "institutionalised") is 257.8 mln as at July.

95.6 mln of them are not in the workforce. Of these 33.2 mln are men aged 20 and over. This is the group that some people call "missing". They are sometimes described as having "given up".

Those in the workforce and wanting work are 162.2 mln. Of these ~6.3 mln are unemployed.

And as you point out, there are ~6.4 mln job openings.

The problem behind all of this is their generally very 'average" (and that is being kind) public education systems (it's state by state), one that is getting ravaged by the current Administration even more. It has produced tens of millions who are not qualified for any sort of real work and no employer really wants them. At core, this group can't critically think, and are very susceptible to chemical stimulation. Tens of millions of these people however can vote, and we can see where that got them. Years of partisan denigration of public education systems (seeing phantom lefties everywhere, thinking science is a great left-wing plot, etc etc.) has an eventual social cost. Heck, even Presidents can get elected with wacky appeals. Understanding how the Americans got into their present social fix starts with understanding how public education has been hollowed out ever since the early 1980s. (There were times of improvement within that period, too.) The consequences are revealing themselves now. It is a core reason their society bifurcated along income lines and their GINI score is now well over 0.4 (high, and high is bad. NZ is 0.33 and actually pretty good - more than that, ours has been stable at that level for yonks - despite what some local partisans claim).

by Yankiwi | 4th Aug 18, 3:09pm 1533352172

David Chaston, very good comments about the employment data.

As to US politics, they have the best .gov that money can buy. After the primaries of the most recent presidential election, I was a bit shaken. Over a third of a billion people, and those two were the best choices to lead the country???

dI was also rather dismayed at the lack of democracy in the democratic primaries. The party apparatus pretty much defined their candidate beforehand and their caucus method of selection in the primaries didn't align well with the popular vote. If the party had gotten behind Sanders, it would be a very different world today.

Finally, not sure as to whether the primary problem is in the education system. I consider more of the problem there to be cultural in nature.

by Andrewj | 4th Aug 18, 3:30pm 1533353444

David, my youngest two daughters went through the USA high school system, okay they were both AP students ( advanced placement). They ere enthralled with the school system, they were encouraged in sport, the parental input was huge, many wealthy families gifted to poorer families and the teachers gave %100. All the teachers had lunch in the school room, so they could be there for children who wanted help with work or just to talk.
We went to the UK for Christmas and the cousins were all at Eton. They told me when they did homework together they were doing the same literature and working at the same level.

So the failure is one of families and society not the education system.

by David Chaston | 4th Aug 18, 11:12pm 1533381179

Both my kids were also in the US public school system (Redmond in the Seattle area) and it too was excellent. But I fear that was the exception. As you well know, public schools are funded locally by local taxes (city by city) with locally elected school boards who set the tax rate. And as you will also well know, most voters don't have school kids and there is incipient resentment about all kinds of taxes. It is not a system run by parents; rather by general politicians and increasing numbers of them have an anti-tax bias. As some neighborhoods age, the mood twists to cheaper non-edication goals.

For five years or so I worked for a textbook publishing company in the US, a large one. A core frustration then was the partisan nature of what the curicculum "should be", and the key decisions on this were essentially political in many cities, counties even states. There are many places pushing social agenda's that reject science or even best-practice teaching (think "creationism", or revisionist "history" and the like).

The combination is very corrosive. The US is a very big place. (NZ is hardly a few suburbs in a large US urban area - again, as you know.) You can always find plenty of outstanding 'good' examples. But sadly, there are too many not-so-good ones and they are growing like a disease. The worst part is, when the partisanship and budget aspects bite, it drives away good teachers, and gets reinforced with 'teachers' who parrot the community bias. It can not be good for far too many.

When these student enter the workplace, or go out into the world, the only reference they have is their very dodgy education. Employers can spot it easily. I know, I hired scores of people across the US in my time there. It can be very sad.

I too had my kids in UK public schools (but not Eton - regular schools). These were ok, but a substantial discount to NZ schools. The worrying aspect there was the social strata segmentation built into their public system. A big problem for them.

I felt the best system is the NZ one - even though that Seattle school may have been individually the best.

by Andrewj | 5th Aug 18, 9:10am 1533417052

interesting David, it's so hard to judge people, the USA is a diverse and varied country. The UK school my daughter went to she thought was the worst. Good people come out of all of them. The poorest children in our school got the best sports gear, all donated but always the best. Most of my daughters class went to church on Sunday, probably %80 would put their hands up if you asked who was christian, but they were polite, all hard workers, now at uni and studying across the spectrum.
I noticed State workers children got discount uni fees, it's really pays to work for the State if you can.

My friends in the USA give time and money to the community, much more so than we do here. We all know that the poor areas south of us have many disadvantaged children struggling at school, those families should move and probably would if the jobs were available.

Like I have said if the USA is in recovery it's not being seen as a general trend but more an isolated one. Lots of young men used to enter the work force as apprentices and leaned very good and valuable skills, not just work skills but life skills.

One of my most successful friends left school early in NZ, got a mechanics apprenticeship with the local garage and never looked back, today he probably employs over 100 people. He was from a low income background.
My friend in San Jose, works for Apple, a Plastic engineer phd, highly qualified from a poor background, large Catholic family, scholarship got her through uni. Is teaching a bit at Santa Clara university, a Jesuit university, when I go and see her there, it is an amazing school, hate to know what it costs.

by NoFax | 4th Aug 18, 7:50pm 1533369006

I agree that there are issues in the US public education system but to say the blame lays with the Republicans is simplistic and actually plainly false. It was late 1979 the Federal Department of Education was established by Jimmy Carter - I am sure a good man but a truly awful president - which has not been a success. The US spends a lot on public education but does not get value for its money; https://www.politifact.com/ohio/statements/2016/sep/21/donald-trump/tru…

The overly bureaucratic education system produces poor results and that is true in the US or in Europe or here in NZ. Also, the denigration of skilled labour has been apparent in culture for years and it has resulted in millions of skilled jobs not been filled and individuals spending a lot of money getting useless degrees. Mike Rowe has become a leader in promoting skilled labour: http://mikerowe.com/ and I think his interview with Ben Shapiro is very good.

However, lets be very honest here; the popular culture, the media, and the schools are "Left" and it is these institutions that have created the society the US lives in; politics is downstream from culture. To even lay the blame on Trump's door is I think indeed unfair - there is much to criticise Trump but I don't think this is one of them.

Interventionist governments and activists - media, culture, and academia - have created the current situation. The only way out of the current situation is grow the economy which Trump is doing. NZ has a vested interest in the US doing well and I hope they do and I think right now they are doing very well indeed.

Finally, I am unsure if the GINI index really means much than that some people earn more than others. Jeff Bezos must be a million times wealthier than me but so what? He earned his money fair and square. I am more concerned by the rent seekers and corruption. If we live in a society that rewards merit then we will have people earning different amounts. As long as we have equality of opportunity then I am not concerned. I think the point I was making about the more jobs than jobless is that the US is still the land of opportunity despite what many would have us believe.

by Advisor | 4th Aug 18, 4:22pm 1533356524

The Canadian 2-10 yield spread is at the scariest level among major economies of the world at 25bps, something nobody is talking about. Anyone?

by Bobster | 4th Aug 18, 5:07pm 1533359227

Some nice juicy mortgage fraud, again. Looking forward to the liar loan stories, they’ll be next no doubt

http://www.stuff.co.nz/business/106013217/Real-estate-agent-guilty-for-…

by puketepapa | 5th Aug 18, 12:42pm 1533429750

Need to know - Has the tax-man come calling yet?
Tracy Taylor, Narayanaraja, Rahul and Happy Yadav and $900,000 profit flipping 3 properties in 1 day