90 seconds at 9 am: Trade pressures unresolved

US trade deficit widens; China CPI rises, China new loan growth slows; global food prices rise; two EU banks in trouble; key bond curve inverts; UST 10yr 2.46%; oil softer and gold up; NZ$1 = 66 USc; TWI-5 = 70.6

10th May 19, 7:43am by David Chaston

Here's our summary of key events overnight that affect New Zealand, with news largely about international trade which is indicating a risk-off mood.

The Americans released their March trade figures for goods and services and that showed a wider overall deficit on -US$50 bln for the month, but a narrower deficit with China, down to -US$20.7 bln as imports slowed and exports rose with them. But you may recall we reported China's data yesterday which was for April and that later data seems to show the reverse trends. However, the big point is that whatever the US deficit level, it is not overly significant in the American economy, being just -2.9% of US GDP and stable. The issues are political, not economic.

Canada's trade deficit narrowed as exports rose faster than imports, which also rose.

In China, consumer inflation hit a six-month high in April, driven mainly by a faster rise in food prices, especially pork prices. They were up +2.5%, a rise from +2.3% in March.

And China's new loans and overall borrower debt rose by less than analysts estimated last month, bolstering expectations that their central bank will have to loosen monetary policy again as economic growth slows and the risk that their trade dispute with the Americans will intensify.

Global food prices rose in April to their highest level in almost a year, led up by meat and dairy prices. The UN is noting that global meat production is falling, primarily because of African Swine Fever in pigs in China (equivalent to a foot & mouth disease outbreak, but in pigs). This will cause upward pressure on prices for other meats.

In Europe, two banks are in trouble. In the UK Metrobank is facing a capital crisis. And in Italy, Banca Carige is under existential pressure after a major potential funder withdrew its intended support. It is a bank that has been ailing for some time.

One curve many bond traders watch is the the yield on 10-year US Treasury notes which have now fallen below the 3-month bill yield. This is unusual, but is the second time this has happened in 2019. If it does correctly foreshadow a recession, one famous trader is warning that the resulting bond losses will be "massive".

In Australia, it is now only about a week until their Federal election. It will be close. Today, their opposition Labor Party released its campaign budget costings and that shows it plans more spending, bigger tax cuts, and the closing of many tax loopholes for "the rich" (or what they call, "the big end of town"). All this, costed by the Australian Treasury, is expected to result in larger surpluses than the current government is projecting.

Overnight European markets fell very sharply, with most down more than -2%. Wall Street is currently trading down -0.5% so far today after starting much lower on the EU signals. But a brief earlier attempt at a rally on some trade news fluff is petering out and the decline is setting in again. Yesterday, Shanghai closed down -1.5%.

The UST 10yr yield is now at 2.46%, and that is -3 bps lower in trading today so far. Their 2-10 curve is little-changed at +19 bps and their negative 1-5 curve is wider at -11 bps. The Aussie Govt 10yr is at 1.72% which is down -2 bps since this time yesterday, the China Govt 10yr is at 3.33% and -3 bps lower, while the NZ Govt 10 yr is at 1.86% and also -3 bps lower.

Gold is up +US$4 at US$1,284/oz.

US oil prices are slightly lower today, now just at US$61.50/bbl while the Brent benchmark is just on US$70/bbl.

The Kiwi dollar will start today at 66 USc. On the cross rates we are a touch higher at 94.3 AUc. Against the euro we are unchanged at 58.8 euro cents. That puts the TWI-5 up only marginally at 70.6.

Bitcoin is up +2.9 again today taking its price to US$6,057 and its highest since mid-November 2018. This run-up has added more than +17% in May alone. 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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21 Comments

by Fritz | 10th May 19, 8:19am 1557433184

Here you go, another big broken promise. This government are frauds:

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12…

by powerdownkiwi | 10th May 19, 8:29am 1557433790

Actually, they've just been braver than most of us.

https://www.radionz.co.nz/news/political/388820/27m-clean-energy-centre…

Now we need to dinosaurs to fit their accounting-system to fit within a bounded one. We may be some time waiting for that, and I doubt they've much of that commodity left. So maybe the rest of us have to concoct a sustainable/resilient one.

by nymad | 10th May 19, 9:30am 1557437449

How is this brave?
What will this achieve? To me, it's just a token gesture for the people of Taranaki, with the efficacy of some lethargic working group. The centre will just be a hive for leeching bureaucrats and the $20mil funding over 4 years (4 years?! that's barely a PhD) will be squandered. This isn't going to help the incumbent industry in Taranaki; it's not going to replace the loss of Methanex or Waitara Valley production. It's not going to keep anyone in bread except for the incredibly top heavy civil servants who will administer it for 4 years.
Clean energy and energy security is one of the more dominant research agendas throughout New Zealand universities. Send that money to them. Leverage their existing expertise first. Don't masquerade virtue signalling as some sort of brave new productive venture.

by powerdownkiwi | 10th May 19, 9:52am 1557438734

I am well aware of the research agendas of Universities.

But we are late and this is big. We have to perhaps double our grid (over 100 years in the incremental making) in perhaps 10 years. I've been attending lectures for longer than that, and I'll tell you the pace of change thus far: inadequate.

I think what we'll all find, is that time-constraints force us to go with proven technology. Your contribution - should you wish to make one - could be to construct a non-growth trading model, as a contribution to social coherence through and beyond the morph. You apply for the 'funding' - I'll write a supporting letter. :)

by nymad | 10th May 19, 10:43am 1557441787

A non growth trading model?
The reason we trade (in a neo classical sense) is because we realise some utility gain. You are proposing that we have some market structured to force agents to cooperate without some benefit (utility growth)? Seems like that would be a difficult thing to secure funding for. But hey, I guess BS funding is the theme of the day..
By what you are saying it sounds like the issue isn't with neo-classical models, but with individual preferences. The solution isn't to redefine ideas of economic (ir)rationality, but to redefine the utility agents derive from social coherence and social welfare. If you increase this, you get your desired outcome. Ironically, still in a 'growth' framework.

by murray86 | 10th May 19, 8:33am 1557434006

More likely that they are bound by existing laws and rules. Takes time to change those.

by theglc | 10th May 19, 8:36am 1557434161

Yes this is the most disappointing thing about this government.

I have however been impressed with the FBB and the changes being put into place around healthy rental properties and the ring fencing of losses.

This government probably gets 5/10 at the moment, which is still significantly better than the 2/10 I would rate the previous National Govt.

by lonewolfnz | 10th May 19, 10:09am 1557439740

How are renters surviving under Labour with land-lords exiting the market and rents spiking upwards as a result?

by Lapun | 10th May 19, 2:09pm 1557454148

Certainly too many immigrants doing trivial jobs at wages that threaten the honest Kiwi business and its workers. However at least this govt is doing something about the worst exploitation. ref https://www.tvnz.co.nz/one-news/new-zealand/auckland-sweet-shop-owners-…
In a comment posted a few days ago I claimed rogue employers were hit with trivial fines; punishment insufficient to stop the exploitation. Well at least these two employers will go to prison. Will they have their residency revoked?

Note how well INZ does it screening: ""The chefs had responded to advertisements placed in Bengali newspapers and borrowed money to travel to New Zealand, only to find their working conditions were much worse than expected. This morning the court heard the men worked 14 hours a day - seven days a week - for more than a year and were paid $6 or less an hour. Judge Brooke Gibson said Islam had confiscated their passports as soon as they arrived and they were taken and withheld to control the victims. One chef did not speak English and one was illiterate in his own language.""

by Roger Witherspoon | 10th May 19, 9:06am 1557435961

Interesting that the Aussie Labour Party see tax cuts as a perfectly acceptable way to stimulate the economy, whereas here it seems the left think tax cuts are heresy. To me it seems an excellent way to put money in the pockets of ordinary people when times are hard, so they can spend it, pay off debt, or save, as they think best. Here, it seems to be an article of faith among the fashionable left that the government knows best how their earnings should be spent. Is this the fatal flaw in their thinking? When not in power, the left are usually not too bad at seeing what is not working, but their solution is always more government, more control, more rules, more taxes. Why is that?

by Battinz | 10th May 19, 8:39am 1557434387

Hard times? Aren't we supposed to be rollicking along?

by murray86 | 10th May 19, 8:39am 1557434376

Agreed Roger. Our left wing attitude seems to be epitomised by Michael Cullen's comment of "Rich Pricks". Yet even MC doesn't seem to realise that for the majority of Kiwis, he's one of them! Just goes to prove that the reality is they are plastic socialists, whose true goal is to get people down and dependent, then keep them there. All the while with their snouts in the trough. Still, in the current Government there seems to be a few who are trying to break that mold. Alternatively they have taken the attempt at concealing their true colours to a higher level

by Withay | 10th May 19, 8:57am 1557435458

I feel like NZ is like the frog in cold water being heated up. Slowly but surely we have become less independent and individually competent with each new governmental measure added and now we look to government and politicians as the answer to our problems as opposed to ourselves. It’s as if we are slowly becoming addicted to receiving assistance which leads to a viscous cycle of creating more dependence on assistance. Most of our politicians look to me to be essentially unwitting drug dealers.

by powerdownkiwi | 10th May 19, 9:00am 1557435637

I don't think it's that black or white. There is a rising political awareness that the planet is stuffed if we carry on this trajectory. That awareness clashes with the need to be elected by a less-aware-on-average populace - National have the bigger problem with that, probably, although NZF wouldn't be far behind. And the debate has been skewed these last 3-4 decades by funded propaganda, on behalf of the 'winners' in the current system.

Many of the trends - wealth-disparity, resource-depletion, habitat (ours) stuffing, were entirely predictable. And if we don't deal with them, everything else is pointless - all the social gains (equities, knowledge, culture) will be lost.

I think the most impressive example of mature leadership, has been Neil Holdom - the Mayor of New Plymouth. Rather than baulking/hiding, he's learned, thought, and he's leading. Once we sort out how to carry ourselves long-term, then we can perhaps work out how we share. I suspect that involves talk about 'profit' and 'boardroom obligations' (the latter will have to be widened). We are about to head into interesting times indeed. Strap yourself in - it'll be a ride and a half.

by murray86 | 10th May 19, 10:35am 1557441302

A part of the problem, and something Withay refers to above, is that the required changes to redefine our economic structure require legislation. Putting money into people's hands is pointless if the only options they have for spending it productively actually perpetuate the status quo. Thus we do need more rules, but they need to change the way we do business. So we get trapped between the Government and big business lobbyists who don't want to surrender their profits, even in the name of survival. A historical perspective is that people become more vocal when they feel wealthier, and this may be one of the, albeit small, drivers behind the Government lefties being reluctant to give tax breaks, or even just addressing bracket creep. They might have more at their doorstep clamouring for better Government.

There is a lot to be done to fix the current mess, but the Government must remember who they serve, and keeping them poor will not help their cause, but only open the door for the opposition to beat them out at the next election.

by brisket | 10th May 19, 11:06am 1557443183

I like this:
{...the required changes to redefine our economic structure require legislation. Putting money into people's hands is pointless if the only options they have for spending it productively actually perpetuate the status quo. }
It gets to many of our current problems. Eg, people who want long-term financial security in a low-interest-rate environment are basically compelled to put their money in RE or shares, which causes bubbles and instability. This is the line of thinking that leads to socialism, which I know is a dirty word around here... we need ways for people to have engagement with and ownership of productive activity. That's the sharemarket in theory, but not in practice - in practice it's a casino that operates by opaque rules far removed from peoples' everyday productive activity, and unless you're wealthy enough to buy large tranches of shares in individual companies you have absolutely no control over their activities.

by RickStrauss | 10th May 19, 9:55am 1557438902

Problem is, they're bound too much by the self-interest of those making the most money currently - i.e. tax free income from land. Unfortunately, Kiwis involved in productive business and being paid in wages and salary have to bear too much of the load while that income gets a free ride.

As capitalists such as Milton Friedman highlight, raising land tax while lowering income tax would do the country well. But it's hard to get that past interested parties.

by Roger Witherspoon | 10th May 19, 10:28am 1557440907

Yes, everyone adjusts to how the rules are set, so any change is resisted. Plus, in this case, only National would be trusted to make the change, in the same way the trade unions only trust Labour to change workplace and employment rules. Governments always have lots of excuses to spend more.

Interestingly, Bill English did effectively increase land taxes by stealth, by getting rid of building depreciation, despite it defying all accounting sense, it went through without much resistance. It was equivalent to increasing income taxation on business. Similarly National created the Auckland Super City State, centralising power in the spendthrifts' hands, again equivalent to a land tax. National also brought in more people than Labour, resulting in significant shareholder dilution, ie, our enjoyment of our country is diluted by too many cars and too many people on the beach and too many rules because of the need for more rules with more people. Each of these arguably constituted a betrayal of trust from the point of view of National voters.

by J.C. | 10th May 19, 10:54am 1557442492

Personally, I distrust the National Party immensely. I think I distrust Labor slightly more than National.

by rastus1 | 10th May 19, 2:09pm 1557454165

...and the markets are so confident/ transparent/unmanipulated that they continue to move based on beautiful tweets from a pathological liar. Yeah right.

by rastus1 | 10th May 19, 2:09pm 1557454166

...and the markets are so confident/ transparent/unmanipulated that they continue to move based on beautiful tweets from a pathological liar. Yeah right.