Tepid US data, but trade deficit shrinks; China's growth holds up; EU lists relatiatory tariffs; China woos Europe; Monash goes all in; UST 10yr 2.59%; oil and gold dip; NZ$1 = 67.2 USc; TWI-5 = 71.7

Tepid US data, but trade deficit shrinks; China's growth holds up; EU lists relatiatory tariffs; China woos Europe; Monash goes all in; UST 10yr 2.59%; oil and gold dip; NZ$1 = 67.2 USc; TWI-5 = 71.7

Here's our summary of key events overnight that affect New Zealand, with news ahead of the long holiday weekend that suggests there may be 'green shoots' developing in the Chinese economy.

But first, the closely-watched Federal Reserve Beige Book brought little new information this month. It reported that US economic activity continued to grow slowly, but some sectors expected growth to pick up in the coming months. It reported a “slight-to-moderate pace” of growth in recent weeks, while their labour markets remain 'tight'.

US mortgage applications fell for a second consecutive month while American mortgage interest rates climbed, ending a long string of rate declines that started in November 2018.

Also falling was the February American trade balance which came in just over -US$49 bln for the month for both goods and services. The goods deficit with China fell to just over -US$30 bln.

Going the other way however, US wholesale inventories as a proportion of sales rose again, now at 135% of current sales and the highest level since mid 2016. Stocks of unsold goods are particularly high in the furniture, hardware and machinery sectors, all these at over twice the current sales rate.

China’s economy grew +6.4% in the first quarter of 2019 from a year earlier, beating analysts' expectations and steady from the previous quarter, helped by sharply higher factory production. Retail sales also rose more than expected. These all come on top of a booming Chinese equities market and rising house prices.

In Europe, Switzerland will become the latest country to sign up to China's Belt & Road trade initiative. China has been very successful recently in driving a wedge between Europe and the US.

And the EU has come up with an eleven page list of items it will raise tariffs on if the US goes ahead with its threat to impose tariffs on EU goods.

In Indonesia, the incumbent Preident is set to win a second term as the country's leader, with unofficial preliminary results from yesterday's election projecting a victory over his conservative rival. That rival looks like he will contest the result however.

In Australia, high-ranked Monash University has signed a deal worth AU$100 mln over 10 years for Chinese investors and Chinese local governments to commercialise research and development coming out of the university's Melbourne campus.

And expectations about economic growth in Australia have improved although they are still negative. The latest Westpac Melbourne Institute report says to expect below trend growth in the 'lucky country' over the next six months.

The UST 10yr yield is unchanged at 2.59%. Their 2-10 curve is little-changed however at +19 bps and their negative 1-5 curve is still at -6 bps. The Aussie Govt 10yr is up +2 bps at 1.97%, the China Govt 10yr is still rising, up +3 bps at 3.43% (and an impressive +35 bps rise since the start of the month), while the NZ Govt 10 yr is at 2.01% and down -4 bps.

Gold is still down today at US$1,274/oz, down -US$1. It is now at its lowest price in 2019.

US oil prices are a little softer today at just on US$63.50/bbl while the Brent benchmark is still at US$71.50/bbl.

The Kiwi dollar will start today -½c lower after yesterday's CPI undershoot at 67.2 USc. On the cross rates we are down as well at 93.7 AUc. Against the euro we are lower at 59.5 euro cents. That puts the TWI-5 at 71.7.

Bitcoin is at US$5,221 and little-changed overnight. 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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23 Comments

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Highlight new comments in the last hr(s).

Chines Data -
"Energy consumption shows a marked downturn. Energy lite industries decreased the most for the latest numbers available, while energy intensive industries decreased only a handful of percentage points. However, it is still a decrease with total energy consumption falling 1%. For GDP growth of 6.4%, this is amazing energy efficiency growth".

https://newsletter.baldingsworld.com/2019/04/17/first-quarter-gdp-numbers/

Fascinating that an Aussie university is selling the fruits of it's R&D to the Chinese for $10 mil a year. I wonder if its for any research that comes out of the Uni or only specific parts of it (the article nominates three specific areas)? How does Aussie legislation impact on this, as some could be sensitive in a number of ways? Another question is if they are buying exclusive rights to the results? Is anyone else concerned about this? This could also be a swipe at the Aussie government, but the long term consequences could be significant.

Will be interesting to see how it plays out, yes.

The last news we saw coming up about academia and China's approach to IP was the suicide of scientist Zhang Shoucheng:
https://www.forbes.com/sites/arthurherman/2018/12/13/a-death-in-silicon-...

Maybe THIS will help some economists stop championing growth https://www.forbes.com/sites/jeffmcmahon/2019/04/05/the-world-economy-is...

I went to a Chu lecture, a few years ago. He was showing photos of shiny new Teslas and graphs of solar pricing going down. Nothing about population and draw-down. I went home shaking my head - this is a Nobel intellect? I thought.

Then I realised - even talking at a University, he has to tailor his message to not lose his audience. I think it was then that I realised we're stuffed. And realised that he had probably arrived at that conclusion before me.....

And it renders the vast majority of the current narrative - particularly the emphasis on 'money' - irrelevant, in terms of weighting. Yet the purveyors of that narrative are still choosing not to publish portions of the (admittedly unwelcome) picture.

Good link - thanks

I have asked the question before, but have never been satisfied with any of the answers i got. WHY IS INFLATION NECESSARY? I have always beleived that stable prices are a perferrable state. When I first asked the question, I hadn't understood the perpetual growth assumption that underlies our fundamental economic models and policies. But surely a state of equilibrium is a better target for our species and environment? this would mean we live in harmony with our environment while still have a good standard of living. The current models embed tension/stress, perpetuating competition with the net effect being extremely damaging for both the environment and our species.

Government, individual and world goals should be to identify and reach a state of equilibrium in all aspects of our activities so that every part flourishes. This ultimately would require some pretty unplatable regulation. For example what is the ideal total population the planet can sustain? Some would argue we are already past that point, so how do we get it back to where it needs to be for our survival? Also some human activities will need to be stopped or at least severely curtailed, but who decides and so on? Very big questions. Perhaps PDK could add to the discussion?

In a debt-based monetary system (like we have now), inflation is required in order to pay back the interest on the debt, otherwise the monetary system eventually collapses.

I am not sure I am convinced fully by that answer.

Fundamentally debt enables people to acquire funds to make an investment which will provide a return. In its simplest form a borrower is asking the lender to invest in something for a piece of the action. The level of return expected should be sufficient to pay this to the lender. But in itself this does not require inflation to exist across the monetary system. Inflation is essentially about a perpetual increase in prices. It seems to be underpinned by an assumption of perpetual growth, and market forces forcing prices to rise as resources are depleted. This inflation seems to be assumed to be what will fund the search for replacement resources, but too often only lines the pockets af a few as the cycle embeds the shortage of resources to a point of unaffordability (this is a gross over simplification). Debt can still exist in a stable system, but the fundamental structure of that system would have to change. People tend to borrow against future income today to pay for todays necessities (housing, transport etc), and a stable market would put less stress on all aspects. (again requiring a stable population) Some aspects are effectively compulsory saving, which is not a bad thing, but inflation means follow-on generations struggle to afford what earlier generations could. Business would also be much simpler too, but again a fundamental change to assumptions and structure would be required.

It is not just economic policy that would need to change, banking and peoples attitudes as well.

I'm probably not articulating it well, but when a commercial bank provides a new loan, they've essentially created new money out of thin air (refer to https://www.bankofengland.co.uk/knowledgebank/how-is-money-created ). Repaying the interest on the loan also requires an increase in the money supply, hence the need for inflation?

Mathmatically Gold Kiwi is correct. As 97% to 98% of money in circulation is credit, we can't pay it back so inflation is the only option.
"Fundamentally debt enables people to acquire funds to make an investment which will provide a return." - Kind of, our returns are coming mostly from inflation and money creation on unproductive assets. And for those who actually invest into something productive, they are most likely selling to someone or another country whose system is based off the same thing. Investing into productivity has been undermined and overtaken by speculation on unproductive assets.

i'm going to try to respond to both GK's and your comments here Withay. So fundamentally the issue is 'money creation' as you both have identified. Perhaps then the regulatory system needs to curtail this in a big way? This links to an earlier conversation on this site as well. while a loan is just credit, it needs to be paid back with real money. Essentially what you are saying is that the current system is what the bible describes as usery (?)

So if the system is restructured ti achieve a stable system, interest is still paid, but is a hireage fee for the use of the money, as I said, a piece of the action. Private debts are borrowed against future income, and again in a stable system this should not be a problem.

From what you two have put in then it seems that if banks are rigorously curtailed in creating money, perhaps taking that responsibility to central banks, then what would also likely be required is some form of structure/control on what can be borrowed for? This would be to ensure commercial borrowing is driven to productive activities?

Good targets for Governments to discuss and get into?

Murray86. In theory only is a stable system possible. But it has never been done by any society in history.
And you would have to factor in diminishing returns on resources/resource extraction and use of one off resources into any idea of stable...
Tinkering with the energy claim system (ie money) is beyond pointless now - the easy resources are burnt and gone and the humans demanding more is exponentially increasing by 220,000 + a day.

Human population is massively over any idea of carrying capacity now (courtesy of burnt fossil fuels).
Short of nuclear war, only resource collapse can correct it.

In practice we seek growth (and chased growth) to lift living standards - its basic human/animal nature to take advantage of all resources available to make existence easier/more prosperous. If you dont annex the land on the hill for your tribe, someone/thing else will.

try his (long link)
https://read.amazon.com.au/kp/embed?linkCode=kpd&ref_=k4w_oembed_KornN9S...

"In theory only is a stable system possible. But it has never been done by any society in history."
What do you mean by a stable system? Most societal collapses in history seem to coinside with the devaluation of the money of the time as opposed to sound money if that's what you are meaning?

i should say a steady state system (stable was the term Murray used) - basically one without the need for growth. The history of all societies is expansion and collapse.

"most societal collapses in history seem to coincide with the devaluation of the money "

I would differ in interpretation - most collapses are primarily because of resource issues (the money is quickly devalued as the resource shortage or limit on further growth becomes apparent)

murray86 - My simple farmer view on why some inflation is good has nothing to do with credit or credit repayment. It is about human behaviour. If the price of an item is likely to go up in the future there is created a sense of urgency to make the purchase. When the expectation of rising prices is removed people delay making purchasing decisions. The urgency is removed. When enough people stop buying - producers stop producing and a cycle of retrenchment and resultant reduction in employment takes place. If it continues for long enough it becomes a depression and everyone in society becomes poorer. Inflation encourages consumption and consumption is the major driver of our economy and while not everyone benefits equally - the confidence begets confidence.

Wilco. Wouldn't you agree that we purchase items all the time that will be cheaper in the future? Technology especially but practically everything else as well (assets aside). I fill up my car because it's empty, I eat because I'm hungry etc. Most of our consumption decisions are based on immediacy not whether something will be cheaper or more expensive. The assumption that purchasing would stop if something was to become cheaper is a bit sweeping.
What I agree with however is it is an attempt to control behaviour through the devaluation of any savings you might have. Inflation essentially taxes you until you are forced to purchase something that will hold it's value - ironically an idea reinforced by inflation itself.

"This links to an earlier conversation on this site as well. while a loan is just credit, it needs to be paid back with real money."
- Yes a loan is just credit but we have gotten to a point where credit gets repayed with credit. Someone's debt is someone else's income so to speak and through the creation mechanism we use, nearly every dollar in circulation has a credit claim on it.

"So if the system is restructured ti achieve a stable system, interest is still paid, but is a hireage fee for the use of the money, as I said, a piece of the action. Private debts are borrowed against future income, and again in a stable system this should not be a problem."
- I'm not against lending and interest (although some definately are). They can still work in a sound money system with no real issues. However, those borrowing would definately be borrowing for productive purposes to pay the loan back as inflation won't pay it back for them so whatever the are borrowing it for will have to produce genuine income.

"From what you two have put in then it seems that if banks are rigorously curtailed in creating money"
- Unfortunately we can't do that under the current system (without a major major correction/restructuring). As a loan gets paid off, that money disappears from circulation. If there wasn't a perpetually increasing amount of loans being made to keep increasing the money supply we would quickly fall into a depression. As per our current incentives as well, we have invested in unproductive assets which rely on inflation for the value of the loan to be eaten away so without inflation it would be a double whammy.

"perhaps taking that responsibility to central banks, then what would also likely be required is some form of structure/control on what can be borrowed for?"
- Currently commercial banks choose what created money/credit is used to loan on, more and more it's housing over the years at it is "safer" and becomes a self reinforcing cycle. Personally I would prefer money not to be created by the central banks either but to be borrowed from savers. This will get into idealogical territory but the free market would soon allocate money to the most effective areas in a sound money system (key is sound money system as in a fiat system money goes more towards speculation as we see now).

Hope this helps answer a few questions :)

Withay, and those above, thanks to a great discussion. Some questions are being answered, and some are raising more. what is essentially stated is that it is either inflation or deflation (depression). I am asking why not a stable system? By this in mean neither inflation or deflation, stable population, defined and regulated resource consumptions at sustainable levels. To some points above, yes there will be some removal of pressure of buying, and this is desirable. Don't forget we live in a finite system, and perpetual growth is literally killing us. Most that we buy will depreciate, but wear and tear will at some point require its replacement hence demand will also remain stable. Population growth cannot be perpetual. this is one of the unpalatable points of my first comment. For our survival we must acknowledge the need for a stable population, and this may lie at a point less than the current now. Additionally our political systems will struggle to accept this, as more population means more power. How do we achieve this as a planet let alone as nations on that planet?

I agree with pretty much most things you've said there. Our current system is beholden to perpetual growth hence why we have so much immigration and credit creation which is obviously not congruent with our finite planet.
One point though on "what is essentially stated is that it is either inflation or deflation (depression)." - I would say that because we have blown up our money supply so far, any attempt to correct it would be deflationary not that you have to choose one or another, more that we have backed ourselves into a corner. If the RBNZ wanted to, they could more or less achieve a stable (niether inflation or deflation) system. They along with the government have chosen a target of 1 - 3% inflation for ill advised reasons.

What a fantastic thread of comments. Congratulations to all.

..yep. Dopey NZ adopting the stupid policy here. Population policy should be the top of the list as an economic and environmental priority.

We desperately need one of those. The gap between marginal cost of new infrastructure per person and net tax take from new arrivers is worrisome.