China holds off reacting to the US; US CPI at target; US Federal deficit leaps; Canada and Germany report good data; AU election promise for FHBs; UST 10yr 2.47%; oil unchanged and gold up; NZ$1 = 66 USc; TWI-5 = 70.6

China holds off reacting to the US; US CPI at target; US Federal deficit leaps; Canada and Germany report good data; AU election promise for FHBs; UST 10yr 2.47%; oil unchanged and gold up; NZ$1 = 66 USc; TWI-5 = 70.6

Here's our summary of key events over the weekend that affect New Zealand, with news the trade stand-off between the US and China just got interesting to everyone - except the financial markets.

It is Monday, and the key bit of news is what hasn't happened; China hasn't retaliated yet to the sharp rise in US tariffs imposed on Friday which went on to US$200 bln of goods, taking a 10% rate up to to 25%. This imposition hasn't actually seemed to derail the talks themselves. They have wrapped up now, but both parties have agreed to meet this week in Beijing. Equity, bond, and currency markets have all also reacted as though nothing significant has happened and things will be resolved soon. China's "necessary countermeasures" haven't been imposed, not yet at least.

The US itself has pushed out the timeline, saying China must agree to what it wants within a month or face tariffs of all its exports to the US. In the meantime, the higher tariffs apply on the US$200 bln - and of course it is the American importer who has to pay them and pass on the costs to the American consumer and that is a +US$50 bln extra cost. China exports about US$½ tln per year to the US or about 20% of all its exports. The US exports about US$120 bln per year to China, or about 10% of all its exports.

It seems the Chinese don't see the current state of these negotiations as a breakdown, just an expected bump. And so far the financial markets seem to agree.

Interestingly, iron ore prices are back up near their recent highs. And coking coal prices have also been rising recently. These are not signs of fear in China, even if you can discount the Shanghai equity price rise as the result of instructed SOE buying by 'the National team'.

Consumer inflation in the US has come in slightly less than expected but right on the Fed's 2% target - and slightly above on a 'core' (without food or petrol) basis.

The April update to the US Federal monthly budget shows expanding deficits. For the twelve months to April, this deficit is -US$924 bln. It is conceivable that this will rise to -US$1 tln in the current fiscal year, way earlier than expected, and compared with -$779 bln last year and -$529 bln in the last year of the Obama Administration when it was apparently political evidence of fiscal mismanagement. The Trump Administration looks like it will about double their deficit in just one term, and in that period the deficit has gone from -2.7% of GDP to -4.8% of GDP. (And by the way, that +$50 bln in extra tariff income will hardly touch the sides of this deficit.)

The trade spat is one reason the US deficit could get worse quickly; their Agriculture Secretary said bigger, longer subsidies for farmers are on the way to prop up the sector. US grain stocks are surging as exports fall, according to USDA reports (p32). Other large production countries don't have that problem, according to the USDA.

In Canada over the weekend they reported strong jobs growth with more than +106,000 new jobs gained and by far the most of them full-time jobs. Their participation rate improved as well. It was a result that was much better than expected. In fact, it is their best jobs gain in more than 40 years.

In Europe, German exports rose to over +€118 bln in March, catching analysts by surprise at the gain and cementing a strong gain for the quarter. German imports rose even more strongly. This is data that doesn't fit the narrative of global trade in trouble.

Indonesia says it is wants to import more beef from Argentina to reduce what it says is an unreasonable reliance on shipments from Australia (and New Zealand).

In Australia, HSBC's economist Paul Bloxham has declared that the Australian housing market is now at its bottom and prices and demand will start rising later this year.

And a new election promise has been launched by the Coalition Government promising to guarantee the deposits of first home buyers who have at least 5%, but less than 20% to help them qualify to borrow-to-buy. It would only be available for couples with an annual income of AU$200,000 or less. It is expected to cost the taxpayer AU$500 mln. It is also likely to sharply raise the risk of going under-water quicker.

The S&P500 ended last week with a -1% loss. Although they were unusually volatile, both the European and Shanghai markets also lost -1% on the week.

The UST 10yr yield is now at 2.47%, and that is -6 bps lower in the week. Their 2-10 curve is now at +21 bps but their negative 1-5 curve is wider at -11 bps. We will be keeping an eye on UST bond yields because it is being suggested that China may be able to retaliate effectively by decreasing its exposure to this market, effectively pushing up US benchmark interest rates. The Aussie Govt 10yr is at 1.73% and also down -8 bps over the week. The China Govt 10yr had an -11 bps fall in a week to 3.31%, while the NZ Govt 10 yr is also down -7 bps this week, now at 1.85%.

Gold is at US$1,286/oz.

US oil prices are little-changed today, now just on US$61.50/bbl while the Brent benchmark is at US$70.50/bbl. In fact, these are levels similar to those at the start of last week.

The Kiwi dollar is little-changed at 66 USc. On the cross rates we unchanged at 94.2 AUc. Against the euro we are similar at 58.8 euro cents. That all makes the TWI-5 little-changed at 70.6.

Bitcoin burst into life over the weekend, up almost +US$1,200 and at one point reached US$7,578. It has since settled back and is now at US$7,103 which is +13% higher than where we left it on Friday and a full +36% higher than at the start of the month. Market capitalisation also surged over US$100 bln. This rate is charted in the exchange rate set below.

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23 Comments

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Why do you never mention that in order to avoid the tariffs, US importers can just buy stuff from other countries. Or in the long term, make these things in the US. Is there something stopping you saying this?

Yes, both things are possible. But unlikely in the shortish term (a year or so). One example is instructive. The US Administration gave an exemption to Apple for iphones. The reason was there was only one (Texas-based) alternative supplier for a set of tiny screw fasteners they needed and that alternative supplier made them for a Pentagon project at a price many multiples higher than the Chinese, and apparently had no idea how to make the volumes needed by Apple.

Yes, an American manufacturer could establish factories to make many of the products sourced from China. But what if in a new deal, the tariffs were reversed as fast as they came? That is a clear risk. What would happen to your investment then? Would you invest now on the basis that 25% tariffs are likely to stay forever?

And sourcing from other countries just poses similar problems. Why would a producer in Vietnam, or India, or wherever invest now to substitute for China production knowing full well that the China manufacturer will have excess capacity to compete everywhere else except in the US? A Vietnam-or-India producer is unlikely to invest solely on the basis of US trade, especially with the possibility that the tariffs could suddenly change, on a Presidential whim.

And China has the majority of the rare earth minerals needed for production of many of these electrical components. The supply chain they have there is also well established and not easy in the short term to replicate. Also (and it bares repeating) it's not the Chinese paying these tariffs. It's the American consumer and this will a) take a while to work through the existing stockpiles before price increases bite b) American made products will still be more expensive. So from the Chinese perspective there's no hurry and with the prospect of Trump being out of office in two years, they have a stronger hand than many people think.

Forgive me DC but I'll put on my idealistic glasses here. The problem the US faces as Roger points out below is that of jobs exportation and the loss of technological know-how. What the Trump administration could do is reapply some of those tariffs to funding the re-development of that technological know-how and capability. Yes they would be funding private industry to a limited extent to establish a production capability, but they must make a decision. Are they going to operate on an international trade basis or do they want to be self-sufficient? Every country needs to understand this problem fully.

For NZ the sale of Fisher and Paykel to Huawei means not just the loss of jobs, but the loss of manufacturing capability, production know-how, quality systems and so on. This leads to a significant impact on our total capability to have a manufacturing industry, not just one part of it. The retention of the F&P R&D (I have been told) doesn't matter as that is just mining our talent to someone else's benefit.

The US's problem like ours is real, and recovering from it is going to be painful. What they did, as we did, was allow their technology to be sold, out of greed, to a country that is ideologically at the opposite end of the spectrum, and a strategic opponent in world affairs. There is no way there can be a good outcome to that without it getting very messy!

I was wondering why the stand off discussion was about the wrong things. The Chinese don't care, they want to wean themselves off relying on America for jobs. Trump don't care. The Democrats and Republicans all want to stir up trouble, it's what they do best. The trade issues will dissipate rapidly if left to themselves. The Chinese will export through their Vietnamese subsidiaries a bit more. Vietnam and Bangladesh will benefit. The US soy bean corporations will just tranship in Brazil.

The issues are strategic ones. The US has exported their manufacturing jobs over the decades and has fallen into a state of decline. That is why Trump was elected. The populace can see that the Ever War policy and Cheaper Money policy has weakened their country and are desperately trying to reverse the decline.

The slow death of the US manufacturing economy can not only be blamed on cheap imports from China but also on a systemic collapse in their education and training quality. Notice how American tech and finance companies have to rely on H1B visas to keep their businesses running.

The churn out rate of engineers, mathematicians, data scientists etc. in the US is much lower than the industry demand for top-notch skills; add to that a broken vocational training system for mid-skilled manufacturing labour.
RPA may bring hi-tech manufacturing back to the West but poor skill availability may keep some countries completely out of the race (NZ and Aus, at their current pace of tech adoption, will surely sit this one out).

In a lot of cases H1B visas are nothing more than a scam for big corporations to save money. I work in the tech sector myself and have read so many horror stories of Americans having to train their foreign replacements before they're booted out the door. Often the skill level of these H1B workers is much lower, but it's all about the bottom line. Google the Disney H1B case for some insight.

Similar has happened in IT positions in some companies New Zealand where some IT departments are almost entirely staffed by foreigners with work visas (who are paid, oftentimes, around half what a Kiwi would be paid / was previously paid for the very same job).

That is sad. At a guess a good brick layer produces twice as much as an avarage one. From my own experience a good computer programmer is worth a dozen average programmers and on occassion will produce something beyond the capability of that average programmer.

The slow death of the US manufacturing economy can not only be blamed on cheap imports from China but also on a systemic collapse in their education and training quality.

You'd think partly because of the drive by administrators to turn education into a business on the back of practically unlimited student debt and a faulty ratings system (US News) that fails to take into account the cost of education. Too great a focus on exploiting younger people for profit and too little on actual research and education that is an asset to the country.

I do not understand the reason why guaranteeing first buyer deposits is also likely to sharply raise the risk of going under-water quicker. Could someone elaborate?

Probably more about the fact they will be buying with 5% deposits.. so 5% house price drop and the buyer is underwater, even if the bank has a govt guarantee.

Above poster beat me to it.

5% deposit is effectively kicking off your home loan with only 5% equity.

So the government guarantees that you're good for the remaining 15% (seems odd to me but lets take it at face value). This effectively drops the required deposit to 5% for those qualifying. Presumably this 15% is still part of the original loan, or perhaps the government loans it to you - it will still need to be paid back - it isn't a 15% discount on the property.

Should house prices drop, it won't take much for your 5% equity to be wiped out (the reason for the 20% deposit bar in the first place). Then you're in negative equity on your home, can't sell without taking a loss - and in some cases wouldn't be able to wipe the original mortgage.

Add to that that mortgages are geared to pay back interest rather than build equity over the first 5 years or so (banks like their money nice and early thanks) - then you're in that low equity position for a significant period of time - so it represents a much higher risk of the first home buyer being eaten by the market.

Thanks Poly. I was reading it with the view that the government would guarantee deposits for the buyer and so if their house value fell they can always get their deposit back on a sale. I was stupid to think the banks wont be protected...

Yea, it isn't to protect the man at the bottom.
The benefit of the subsidy accrues in most part to the existing home owner and bank. 'Ol Billy and Smithy announced something similar last election, too; increasing first home subsidies.

I guess actually fixing the affordability problem is just political suicide now.

Underwater immediately at 5% deposit.Why is it that commentators fail on most occasions to exclude the 4%plus all up cost of sales commission.advertising.legal costs.moving costs.
And any 5 percenter equity holder is well underwater with a 5 % drop in value.So many factors that are very likely to see aussie market fall further, rather than bottoming out soon.
It is callous electioneering at best, malign backing of vested interests more likely.

Because the vast majority of that selling cost is the RE fee, and thats not absolutely required, you can sell a house without a RE agent. The rest pales into comparison.. Lawyer and moving at ~$1k each vs $20k+ for the RE agency fees.

PBOC sales of US Treasury assets reduces China's domestic money supply (RMB), since the liability side of the central bank balance sheet.must match the reduced valuation of it's outstanding assets.

Exactly. It seems the modern take on mercantilism is to print up a $trillion dollars of RMB, and buy USTs with it. Spread it out over a year or two, of course, and disguise the origin (Belgium seem happy to help, for a small fee). This has the effect of pulling a balancing $trillion dollars worth of net exports out of the country. At least that was my take on the BIS study of how it is done.
https://www.bis.org/publ/work424.pdf

The recent direction of CNY in FX markets doesn't suggest a huge global appetite for RMB reserves versus USD equivalents - more a function of PBOC relieving Chinese based exporters of their net USD receipts in exchange for central bank RMB reserves. There is ample evidence to suggest these same exporting corporates are pushing the PBOC to weaken CNY to better facilitate USD funding for import purposes as export receipts and global eurodollar bank loans diminish.

Nasty. 49 of the 50 worst performing suburbs in NZ over the last year are in Auckland,, according to the corelogic report on the herald. Expensive North Shore and Auckland city coastal suburbs feature heavily.

Trump was right. China are currency manipulators, & masters at it. When you've only got one key advantage - size - then play it for what it's worth. Personally I see the yuan as over-valued by 2 or 3 times but we've bought into it as well, so who's the sucker here?