90 seconds at 9 am: Moving to a new phase?

Equities recover some losses; yuan depreciates; EU factory output falls; ZEW confidence lower; Australian business confidence drops; UST 10yr 2.42%; oil up and gold down; NZ$1 = 65.8 USc; TWI-5 = 70.6

15th May 19, 7:43am by David Chaston

Here's our summary of key events overnight that affect New Zealand, with news we seem to be moving to a new phase in the trade wars.

But first, some of what was lost yesterday on major equity markets has been recovered today with the S&P500 up +1.1% so far today. That is about half of yesterday's drop. In European markets they seem to have recovered it all. Yesterday in late trade, Shanghai, Hong Kong, and Tokyo all posted steeper drops although nothing like the Wall Street falls of yesterday.

The driver of today's improvement is an expectation that the trade talks underway after the ratcheting up of tit-for-tat tariffs may result in a deal. But it actually more of a hope than based on any talking because the talking in Beijing hasn't actually started yet.

One growing factor in all this is that the Chinese currency is depreciating faster. Yesterday it reached 6.8 yuan to the US dollar and 7 is in sight. At the latest level, this represents a -1.3% depreciation in less than a month. At 7 to the US dollar, that would involve a -4.3% depreciation. This is the narrative the Americans will be focusing on, but actually it is the rising greenback that is moving the most. (The NZ dollar has depreciated -3% against the US dollar in the same past four weeks.) With little effort, the Chinese could manipulate their currency and it is surprising they haven't done so yet.

With tariffs in place, the China - US arm-wrestle is now entering a new phase, one that is both unclear and very uncertain. Currency may come into play, and the Chinese holdings of US Treasuries may also.

Across the Atlantic, EU industrial production is falling, but the "good news" is that these latest falls are not as steep as analysts were fearing.

And the closely watched German ZEW sentiment survey turned down in May, mainly on fears of what the US:China trade "squabble" will bring.

In Australia, the widely-watched NAB business sentiment survey for April was out late yesterday. It showed business conditions fell 4 points to +3 index points with declines across each of the components. The employment index saw a particularly sharp decrease, falling to -1, while trading and profitability each declined by 4 points.

The UST 10yr yield is now at 2.42%, and that is a small +2 bps rise so far today. Their 2-10 curve however is still at +22 bps and their negative 1-5 curve is settled at -13 bps. The Aussie Govt 10yr is at 1.70% and up +1 bp overnight. The China Govt 10yr is down -2 bps to 3.30%, while the NZ Govt 10 yr is also down -2 bps, now at 1.81%.

Gold is down -US$4 and now at US$1,295/oz.

US oil prices are a little higher today, now just under US$62/bbl while the Brent benchmark is near US$71.50/bbl. The flare-up in Persian Gulf tensions is growing with a new drone attack on a Saudi oil installation. The oil price seems remarkably relaxed in the face of this. And OPEC sees higher demand for its products in 2019.

The Kiwi dollar is little-changed at its lower level and now still at 65.8 USc. On the cross rates we are up at 94.7 AUc. Against the euro we are still at 58.6 euro cents. That leaves the TWI-5 at 70.6.

Bitcoin however is still rising strongly. It is currently at US$7,996 which is +2.5% higher than this time yesterday. And that means it is now above NZ$12,000. 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 ».

Daily exchange rates

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Source: RBNZ

Source: CoinDesk

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42 Comments

by powerdownkiwi | 15th May 19, 8:05am 1557864318

Two good bits of journalism recently.

The first is Joanne Black in the Listener. It may be she has perspective via distance, but her take on the NZ media kowtowance in the direction of censorship, is worth a second read. Having penned a piece on this and had it quashed by more than one Editor, I think we're heading for trouble of the 'chosen ignorance' kind. The delicious irony is that Black was once a spin-doctor for Bill English. Go figure

The second is Bryan Crump (Nights on RNZ) interviewing Dame Jane Goodall. She is articuate, measured, thoughtful, gracious - one of the best global citizens (one I rate ahead of Attenborough if you can get to hear her this trip, do so). Crump is perhaps the first, certainly the first in a long time, journo to ask about population, overshoot and resource-depletion. He deserves a medal, and our thanks. Perhaps it heralds a shift.
https://www.rnz.co.nz/national/programmes/nights/audio/2018694885/jane-…

This man certainly gets it:
https://kunstler.com/clusterfuck-nation/the-trend-is-not-your-friend/

They set a bar. I wonder how many others try and clear it?

by mikekirk29 | 15th May 19, 8:34am 1557866075

With a little effort the Chinese could manipulate their currency eh?
That is precisely why USA does not trust them.
This is in fact not allowed under WTO rules?
The ones they have not been sticking to for 18 years.
Fixing Yuan against the USD all these years is also I think not allowed?
And stealing IP from firms in China?
Trump is a Nationalist and not a globalisation fan.
China is not going to get away with it any longer

by Glitzy | 15th May 19, 9:04am 1557867881

David, there seems to be a little inconsistency in the commentary vs the bond pricing page. If you have a look at the 10 year NZGB on the pricing page the yield is 1.7+ whereas above its 1.8+. Market didn't move that much yesterday so something seems slightly out. Many thanks.

by Roger Witherspoon | 15th May 19, 9:18am 1557868691

The bitcoin price is sort of a Global Capital Flight Index. The Chinese don't want to depreciate the Yuan too much because it sets off capital flight from China, despite their draconian rules against it. Pushback against the sadistic mandarins in Beijing has a long history. "The mountains are high and the emperor is far away."

AEP :
Net outflows from China through the Shanghai - Hong Kong pipeline jumped to a four-year high of $1.6bn on Tuesday, the largest one-day exodus since China’s exchange rate crisis in 2015. Once it reaches Hong Kong it is being recycled rapidly across the rest of the world.
https://www.telegraph.co.uk/business/2019/05/14/hong-kong-sounds-alarm-…

AEP has more here:
Chinese no-dealers say their country can weather the crisis since dependence on exports has fallen to 18 per cent of GDP from a peak of 36 per cent in 2006.
https://www.telegraph.co.uk/business/2019/05/14/economic-intelligencear…

They say that in warfare you can tell who the good guys are by which way people flee. It is the same with capital.

by powerdownkiwi | 15th May 19, 9:36am 1557869816

They're exporting digits

The digits are held in server-farms. Which are just entropic heat-machines.

https://e360.yale.edu/features/energy-hogs-can-huge-data-centers-be-mad…

alle same bitcoin. Lemmings. Panic. Cliff.

by Withay | 15th May 19, 10:10am 1557871832

Those digits matter in the meantime however.

by rastus1 | 15th May 19, 10:15am 1557872150

..only in your head and a few others they do. Digital Tulips.

by Withay | 15th May 19, 12:11pm 1557879113

Ah, I see. I was thinking more in terms of the capital outflow from China as what PDK was refering to but if I read properly I would have seen he was refering to bitcoin. Kind of ironic though, fiat currency and bitcoin are not terribly different now our money is so digital. The biggest differences being fixed vs flexible quantity and that we are forced by law to accept one.

by Pragmatist | 15th May 19, 12:31pm 1557880290

You aren't forced to accept it.. feel free to forward any of that horrible fiat that comes your way to ASB acct # xxxxxx :) (you may want to retain some to give to the taxman.. not sure IRD takes digital tulips)

by Roger Witherspoon | 15th May 19, 12:58pm 1557881912

Some of those digits will end up in Auckland houses. If people are so desperate to get their money out of China, where the penalty is basically death, do you think they will not find a way around our rules?

by Withay | 15th May 19, 3:09pm 1557889753

"Legal tender" - coins or banknotes that must be accepted if offered in payment of a debt.
And as you say, we have to pay our taxes with it as well. Realistically through laws and structure we are forced to use it.

by dictator | 15th May 19, 9:48am 1557870499

The tariffs that are coming into effect are on so many products that it's many pages long. US consumers are already paying higher costs on the first round. If the negotiations sour then expect an escalation from China.

What interests me more is that Trump is losing so much money that it is reasonable to call him the person in the US with the lowest income. His skills at making deals are exceptional when it comes to being on the losing side, and his skill at losing is translating well to the trade war. I'm interested to see how bad the trade deal ends up.

by murray86 | 15th May 19, 1:23pm 1557883408

I think it would be ironic for trump. It seems he ran for the presidency to assuage his ego, but the resultant scrutiny has exposed just what a total prat he is, and is exposing the cracks in his empire. It would be ironic that the total will result in a complete collapse of the empire, and finally break him.

by profile | 15th May 19, 10:43am 1557873820

Brexit project fear vs reality. UK employment at record high, unemployment lowest since 1974 vs. "Britain would lose at least half a million jobs within two years of a vote to leave the European Union and a fall in the value of the pound would push up inflation sharply, finance minister George Osborne said on Monday."

What is it with elites and doom BS predictions?

https://www.gov.uk/government/news/uk-employment-rate-at-joint-record-h…
https://www.reuters.com/article/us-britain-eu-osborne/uk-would-lose-at-…

by mfd | 15th May 19, 12:35pm 1557880519

Amazing how often people show up saying how little effect Brexit has had, when Brexit has not happened yet. Do you think you're a little premature?

I hate to be dragged into the position of defending George Osbourne, but a cursory glance at some data will show he was correct in predicting the fall in the value of the pound and higher inflation.

by profile | 15th May 19, 1:39pm 1557884342

Re read George's quote. He specifically 2 years from the vote - not two years from Brexit as you imply. Could have the guy been more wrong or was he just duplicitous?

by mfd | 15th May 19, 3:57pm 1557892675

He was 50% correct. A higher score than many of the pro-Brexit statements of the same era. Like I said, I regret any situation that places me on the same side as Osbourne and personally I'm withholding judgement of the effects of Brexit until after Brexit (although I note that the Betfair odds now give a near 30% probability to article 50 being cancelled).

by powerdownkiwi | 15th May 19, 11:06am 1557875205

Well well well

Looks like we're on a roll:

https://www.newsroom.co.nz/2019/05/15/585927/raworth-on-the-fallacy-of-…

by nymad | 15th May 19, 11:23am 1557876202

Haha.
When you can't get published with peer review, write a book.

by powerdownkiwi | 15th May 19, 11:37am 1557877031

When your peers are peddling nonsense, point it out. And in the case of mainstream economics, it's not before time. We went close to wrecking the planet by blindly following a bunch whose literary pinnacle was 'Atlas Shrugged', so help us. Time these people were openly challenged.

by nymad | 15th May 19, 11:53am 1557877996

So. Again. Who cares about scrutiny or scientific integrity.
If you can't get published with scrutiny, write a book.

Science is about proving things wrong.
The literature (and peers) welcomes and incentivises this. To say you can't get published because your peers disagree with you implies that your proposition is wrong, not that everyone else is.

by powerdownkiwi | 15th May 19, 12:05pm 1557878750

Mainstream economics failed to account for energy, and it failed to account for the biosphere and if failed to account for depletion and it failed to account for pollution and it failed to account for extinction. All tabulated by REAL sciences.

All it told us was to worship - and I use the term carefully - a flawed tabulation called GDP. And it told us we could grow forever on a finite planet.

A more interesting suBsidiary question is whether those who peddled the growth-forever myth to the punters, should be made to redress the resultant damage?

by nymad | 15th May 19, 12:28pm 1557880138

Sorry, how did mainstream economics forget to account for energy and depletion?
Seems odd that economists spend so much time considering energy and resource markets, then huh. Someone should really tell them that they aren't supposed to be doing that.

I also find it extremely odd how in the past you have explicitly related GDP and energy as one in the same. Yet, think that economics is fundamentally ignorant of 'energy'. Coincidence that something you think ignores the effects of energy is almost by your own words nearly perfectly correlated. It's as if it endogenises some important factor...What could that possibly be...I wonder...

Tell me why we can't grow infinitely on a finite planet. Growth doesn't mean a increasing resource use, it means a growth production. These aren't analogous. Additionally, mathematically, why would an asymptotic growth path imply anything other than infinite growth?

by powerdownkiwi | 15th May 19, 1:29pm 1557883789

Thank you for that last sentence. I'll use it in my book. Can I call you an economics lecturer or?

by nymad | 15th May 19, 1:40pm 1557884437

Why a book? Surely you et al. are publishing in the scientific literature, right? ;)

by powerdownkiwi | 15th May 19, 3:44pm 1557891896

I had it peer-reviewed by a cohort of scientists. Real ones.

"Economists began to think of themselves as scientists, while in fact their discipline remained a branch of moral philosophy - as it largely does to this day"
Richard Heinberg, 'The End of Growth'.

by nymad | 15th May 19, 4:13pm 1557893580

Richard Heinberg - remind me what his h-index score is, again.
Or is this just going to be a merry-go-round of you quoting messiahs who, unsurprisingly, shun that annoying peer review process.

by powerdownkiwi | 15th May 19, 5:15pm 1557897349

I've coma across folk who have painted themselves into a personal-narrative corner before. Late in life, they end uf defending that which they haven't the life left to rectify. iIt's sad. My greater respect is for those who go 'mea culpa, I got it wrong' then do something about it.

I suggest, though that arguing for infinite consumption on a finite planet doesn't need expertise to belittle. The alternative would be that we could all get exponentially richer without tourism, dairying...... so clearly a nonsense. We'd be doing it if it worked, for the simple reason that we wouldn't have to.

Sorry, it's just too silly. Move on, eh? And if you're teaching that nonsense, apologise to your students and give them something real. Heck, I'll come and do a session for free.....

by nymad | 15th May 19, 5:20pm 1557897624

No one is arguing for infinite consumption of resources.
Where in economics does anyone suggest that resources are infinite? The challenge still stands for you to provide the name of one economist who doesn't believe in the finiteness of resources and, essentially, conflicts with the fundamental proposition of economics; scarcity.

You need to decouple one unit of 'consumption' from a single unit of physical resource.

I don't understand why you think I am a lecturer or teacher. Or why you would be more qualified to educate on economics. Especially seeing as you either ignore or misunderstand the fundamental premise of the subject.

by powerdownkiwi | 15th May 19, 6:21pm 1557901269

"You need to decouple one unit of 'consumption' from a single unit of physical resource"

tell that to the punters coming out of the supermarkets and big-box stores. (all the rest is pending ponzi)

Why wouls someone defend the indefensible so hard, if their life-story wasn't intertwined with it? Or are you in the 'finance indusrty' (but that's another oxymoron for another day).

by dmitri | 15th May 19, 1:05pm 1557882342

".. because your peers disagree with you implies that your proposition is wrong.."
lol, that's one hell of an argument (sure, of course it's flat...)

by nymad | 15th May 19, 1:32pm 1557883962

Ahh. I think that's exactly why flat earthers don't get published..
No academic peers have gone "Ya know what, sure. They provide no real evidence. But hey, why not."

by profile | 15th May 19, 1:45pm 1557884725

"Trouble at the lab.
Scientists like to think of science as self-correcting. To an alarming degree, it is not."
https://www.economist.com/briefing/2013/10/18/trouble-at-the-lab

by powerdownkiwi | 15th May 19, 2:11pm 1557886292

The flat-earthers have been peer-reviewing themselves for years (a flat earth is the only format capable of sustaining infinite growth).

I just remember the Waxman/Greenspan interchange:

Waxman: You found a flaw?
Greenspan: I found a flaw in the model I perceived is the critical functioning structure that defines how the world works, so to speak.

Him and everyone else who 'believed'.

by dmitri | 15th May 19, 5:07pm 1557896848

I was talking about medieval times when earth was perceived to be flat... and of that poor sole that tried to get the message across... Try to see things from other angels

by nymad | 15th May 19, 5:12pm 1557897141

What?
I'm pretty sure the intellectuals of the time were in agreement that the world was not flat.
It was the menial souls who believed the world was flat..

by murray86 | 15th May 19, 1:20pm 1557883222

When your peers disagree is it because of proven fact or you are going against the established conventional wisdom, which so often, has proven to be very, very wrong?

by nymad | 15th May 19, 1:28pm 1557883732

When your peers disagree with you, it's because you haven't provided enough proof/justification for your proposition.
Contrary to what you all think, there isn't some grand conspiracy out there in the scientific literature that only cohesive papers will be published.

by dmitri | 15th May 19, 5:10pm 1557897000

some time back, common wisdom was that the earth is flat, but few 'conspiracy theorists' didn't agree.// some got burnt

by nymad | 15th May 19, 5:23pm 1557897831

As above; it was not common wisdom among anyone who did not plough fields for a living.
We have known the spherical form of the earth for some time. Like them Greeks some 5000 years ago.

by powerdownkiwi | 15th May 19, 6:16pm 1557901002

What do you mean 'we'? You are advocating the flat form.

by Wrong John | 15th May 19, 1:21pm 1557883294

Chinese flight has been happening since they could find the holes to get their money & themselves out. You could argue it's been going on for hundreds of years. Certainly since the reality of our lousy birthrates & mediocre personal productivity first struck home in the 1980's (especially in NZ) the Asian invasion has been in full swing. Some estimate there are 50-60 million ex-pat Chinese living beyond its borders, which wouldn't surprise me. I can't blame them for wanting to get out, but I do blame them for the doubling of our house prices over that period. Right now we are seeing China under pressure for the first time since the 1980's & their only response is to buy the debts of those who fail & print more worthless yuan in the process.
The future is about a great experience not just more stuff. Quality, not heaps of shitty plastic cars from Asia. AI is our (NZ) future & we need to seriously apply this to our food chain science. This includes our farmers, with an impeccable provenance & sustainable credentials.
We need to lead this debate. Quality foods are our future.