US faces another shutdown; Canada jobs rise; EU data weak; China returns, faces higher iron ore prices; OECD reports leap in US debt load; UST 10yr 2.63%; oil and gold firm; NZ$1 = 67.4 Sc; TWI-5 = 71.9

Here's our summary of key events overnight that affect New Zealand, with news China is back after a long holiday only to find the cost of a core commodity it needs is very much higher.

But first, it is groundhog day in Washington with negotiations to fund the US Federal Government stalled just days before funds run out on their three-weeks-old previous agreement. The same sticking point; funds for extending the border wall.

Wall Street ended last week back where it started, unable to hold earlier gains. Earlier, European markets were lower. The week closed even lower in Tokyo which was down -2.0%. Shanghai will be back later today after their national holiday week, but if Hong Kong is a guide, they will return with not much net change.

In Canada, employers added +66,800 jobs in January, far better than the gain of +8,000 that analysts expected. The Canadian jobless rate ticked up however to 5.8% as more people sought work. The Canadian currency rose on the news. It was also bolstered by better-than-expected housing starts data.

And there was data out in Europe. The German trade data actually came in a bit stronger than expected with both exports and imports rising while their trade surplus eased back a bit. But French industrial production data was weak as expected in December but not as weak as the prior month. Italian industrial production data was similar.

China is returning to normal today after their Spring Festival week-long holiday. The mood will be interesting to assess. Many indicators are weak, but not all. The pace of official stimulus will get special attention. And China loves public-private partnerships (PPPs). They are reporting that in 2018, a total of 8,654 PPP projects had been registered, worth NZ$2.9 tln. The projects for which construction has started totaled 2,237, with these adding up to NZ$700 bln in investment.

The price of iron ore, especially in the key Chinese market, is rocketing higher. This is despite the China slowdown. The dam disaster in Brazil has triggered a sudden supply shortage, extended by Brazilian outrage at the miner which may further reduce shipments from more mines there while remediation work is undertaken. Brazil is Australia's largest supply rival to China.

But on the flip side, this now means there is a sudden drought in demand for iron ore carrying ships. The Baltic Dry index, which measures ship charter pricing, has plunged, now down to 2016 lows. This is a sudden -56% drop since the beginning of 2019.

In India, a general election will be held in the next 60 days or so and the reelection of prime minister Modi is not a certainty. With India rising as an economic power, more international attention will be focused on this likely-to-be fractious campaign. One aspect to watch is the extent that relationships with rival China play out. Another is growing unease over the pace of job creation.

The OECD is reporting that gross borrowings of member governments from the financial markets are set to reach a new record level in 2019 by exceeding US$11 tln. But the increase is confined to a few countries, particularly the United States. As QE is wound back, governments are switching to market funding sources. New Zealand is among a small group of members (including Denmark, Iceland, and Sweden) where the debt load is considered at "very low levels". If it wasn't for the US's voracious debt-funding appetite, the OECD would be reporting good overall progress in reducing this budget load.

The UST 10yr yield is lower at 2.63% and back to where it was at the end of January. Their 2-10 curve is just on +17 bps. The Australian Govt. 10yr yield is at 2.10% and holding at its new lower levels. The China Govt. 10yr yield will open this week at 3.15%, while the New Zealand Govt. 10yr yield is at 2.11% and a new all-time record low.

In fact, local wholesale swap rates fell sharply again on Friday and every duration out to seven years is also at new all-time record lows. We are being infected by an assumption that our OCR is more likely to follow the RBA down.

Gold is up +US$4 at US$1,314/oz.

US oil prices are unchanged at just under US$53/bbl while the Brent benchmark is just over US$62/bbl.

The Kiwi dollar is starting the week little changed in offshore markets at 67.4 USc. On the cross rates we are at 95.1 AUc, and at 59.6 euro cents. That leaves the TWI-5 at 71.9, about where it has been for a few days.

Bitcoin is up +7.5% to US$3,611 and taking it back over NZ$5,000 for the first time in two weeks. This rate is charted in the exchange rate set below.

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

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3 Comments

At some stage, the yield curve could steepen dramatically. Not because 'we are saved' from a recession, but because it's now seen as inevitable. The segment of the yield curve to collapse first could be the short end ie: curve steepens.
Back in the day, interest rated management was handled by two distinct set of dealers - the short end, out to ~3 years and the long end, out to +30. The short end was often the young, flexible lot and the far end the bowler hat wearing traditionalist. Now I'm sure that's history, but if whoever is managing the short end moves first, fiercest and fastest, the curve could steepen before it flattens/inverts.

The Current Prime Minister of India - Narendra Modi is winning the 2019 general elections hands down.
Which will put a further pressure on China's steel exports.

India has just outpaced Japan & it's expected to leapover EU soon, with Modi or without Modi.

https://en.wikipedia.org/wiki/List_of_countries_by_steel_production

If the 'crats propsoed New Green Deal comes to pass there will be a monumental demand for steel. "As it happens, a team of Stanford engineers led by Mark Jacobson outlined just such a plan back in 2015. Jacobson's repowering plan would involve installing 335,000 onshore wind turbines; 154,000 offshore wind turbines; 75 million residential photovoltaic systems; 2.75 million commercial photovoltaic systems; 46,000 utility-scale photovoltaic facilities; 3,600 concentrated solar power facilities with onsite heat storage; and an extensive array of underground thermal storage facilities.

Assuming steep declines in the costs of each form of renewable electric power generation, just running the electrical grid using only renewable power would still cost roughly $7 trillion by 2030. The Information Technology and Innovation Foundation calculated that the total cost of an earlier version of Jacobson's scheme would amount to $13 trillion. And based on how fast it has taken to install energy generation infrastructure in the past, Jacobson's repowering plan would require a sustained installation rate that is more than 14 times the U.S. average over the last 55 years and more than six times the peak rate."
https://reason.com/blog/2019/02/07/green-new-deal-democratic-socialism-by-o

"Keep in mind that the total asset value of the entire U.S. electrical system, including generation, distribution, and transmission, amounts to less than $1 trillion."
https://reason.com/blog/2017/06/21/powering-us-using-100-percent-renewable