90 seconds at 9 am: Consequences bite

US economy data weakens; Ford imposes huge layoffs; Japan's growth rises; China's mortgage rates up; equities sag; Aussie power prices up; UST 10yr 2.41%; oil and gold unchanged; NZ$1 = 65.4 USc; TWI-5 = 70.4

21st May 19, 7:46am by David Chaston

Here's our summary of key events overnight that affect New Zealand, with news a pall is starting to appear over some core data as the trade consequences start to bite.

In the US, the Chicago Fed's National Activity Index is pointing to lower growth in the April portion of the second quarter of 2019. This was below expectations and a deeper fall than for March and has been driven lower by a weakening factory sector. This data confirms earlier Fed data and that makes it three of the past four months in decline.

That sagging may be one reason Ford is cutting 10% of its salaried workforce. That involves about 7000 jobs.

Japan has reported its economy grew +2.1% in the March quarter of 2019 and that follows growth of +1.9% in the previous quarter. While these are better than expected, some of this 'growth' is because net exports are falling - that is imports are falling faster than exports and this is not really a strong signal of an expansion.

In China, home mortgage interest rates fell in the March quarter (see pg 3), a sign that their looser credit policies are feeding through to the housing markets. The average rate borrowers pay in China is 5.68%.

Equity markets are in a funk today. The S&P500 is down -0.8% so far. European markets ended their sessions down about -1.5%. And yesterday Asian markets were lower with Hong Kong down -0.6% and Shanghai down -0.4%. Tokyo actually rose yesterday - perhaps on the good GDP data, up +0.2%. In the 'glow' of the election result, Australia's monied investors added +1.7% to their market. (Aussie banks saw their values pushed up much more with CBA up +6.3% on the day, Westpac up +9.2%, NAB was up +7.9% and even ANZ was up +7.8% - all in an investor relief rally.)

And Australia is benefiting by the extended rise in iron ore prices. The gains are remarkable and are lasting much longer than you might expect, even after the Brazilian crisis.

But among the rises post-election are Australian electricity prices as markets grab gains after prime minister Morrison said his government will be hands-off in this sector.

The UST 10yr yield is +2 bps firmer at 2.41%. Their 2-10 curve is now at +19 bps and their negative 1-5 curve is at -15 bps. The Aussie Govt 10yr is at 1.68% and up +4 bps since yesterday. The China Govt 10yr is up +2 bps to 3.30%, while the NZ Govt 10 yr is up +2 bps and now at 1.84%.

Gold is virtually unchanged this morning at US$1,277/oz.

US oil prices are firm today, now just on US$63/bbl while the Brent benchmark is just on US$72/bbl.

The Kiwi dollar is holding at 65.4 USc which is its new lower level. On the cross rates we at 94.6 AUc. Against the euro we are similar at 58.5 euro cents. That all makes the TWI-5 little-changed at 70.4.

Bitcoin is now at US$7,768 and that is -2.7% lower than at this time yesterday. 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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12 Comments

by rastus1 | 21st May 19, 8:17am 1558383479

Sums it up...self perpetuating dynamic.
"Investors see that the ability to normalize monetary policy declines as leverage rises, which suppresses interest rates, which lowers the cost of capital for growth companies, and this subsidizes their rising market share without requiring profits, which reduces inflation expectations, which reduces r-star and gives investors confidence to increase leverage.”

https://www.zerohedge.com/news/2019-05-19/hedge-fund-cio-investors-have…

by RickStrauss | 21st May 19, 9:03am 1558386188

Counting on central banks to prop them up. Where'd the free market and its survival of the fittest disappear to?

by powerdownkiwi | 21st May 19, 9:59am 1558389554

Obama answered you in 2008. Free-market economics needed a Government bailout. The irony being that the bailing was done using an irredeemable IOU (the US Govt can never get out of debt in meaningful terms from here on in) is something we shouldn't lose sight of. But the bankers will attempt to have themselves saved (we're essential to economic survival/growth, runs the self-justifying argument) at the expense of others. We have that as a clear precedent.

The more interesting spread - and it's increasing exponentially - is that between what the biosphere and the Laws of Physics allow, and what our combined future-bets expect. There is precious little literature in the space, and a lot from the economics side is hopelessly ungrasping of the trend to entropy, or the limits imposed by Carnot's T1 - T2 difference-requirement (for work to be done). Some even think the remaining split between theoretical maximum and current achievement, allows infinite opportunities for growth. The physics side, of course (correctly) see this as a progress of diminishing-returns, taking more and more effort to produce less and less gain, trending towards zero.

Thus physics can explain the trend to lowering 'productivity gains', whereas economics is left urging Government to fund Commissions to help the 'Free Market' get 'back on track'. It would be funny if it weren't so consequence-laden.

https://dothemath.ucsd.edu/2011/07/can-economic-growth-last/

I also suspect that those questioners in the intellectual space, but coming from the economics persuasion, find it hard staying in the peer-group - research funding dries up, the flat-earthers turn away and the powerbrokers move to remove. As we saw with Yanis Varoufakis

https://www.theguardian.com/commentisfree/2015/jul/06/yanis-varoufakis-…

by Withay | 21st May 19, 10:33am 1558391608

"Free-market economics needed a Government bailout." I wish they would have let the free market be free. We need a system that can rise and fall as naturally as possible (even though it's rise wasn't natural in this case). It's so damaging to try and artificially engineer economies up all the time. We then complain about the system and not the interference when faced with the inevitable problems. Rediculous

by scarfie | 21st May 19, 11:08am 1558393711

From what I can see of economics as practised is that efficiency of profit comes before efficiency of resources or labour. In fact once you start down the track of producing for profit without regard for efficiencies then you can't go back within the system you just started, it becomes unaffordable. It is process of what I have termed maximum extractive value. That, but its very nature, is parasitic.

by Withay | 21st May 19, 11:55am 1558396536

That's where I think sound money comes in. It is a natural inhibitor against speculation/parasitic economic behaviour. If you have the time, have a look at the following:
https://www.youtube.com/watch?v=fjhLp8AHAYc

by scarfie | 21st May 19, 2:39pm 1558406358

I agree with you that sound money is desireable, where I disagree is that you are unlikely to ever get it. The inertia in the current system is too great, and as I point out it doesn't go backwards. To implement would require giving up all forms of unearned income in the system now. That would also include pension schemes. Stocks, bonds, interest in the bank, rental income, all gone. Can you really perceive that happening?

I've been mates with Iain Parker over at Public Credit of Bust and will give you the same advice I have given him. For New Zealand to break from the international banking system we would need to gain energy independence first. While we need to buy oil in USD you can forget breaking from it. It also seems a fast track to getting invaded.

by Framan | 21st May 19, 11:16am 1558394173

Yes that pretty much sums up the "La-La Land" the market is in. Federal Reserve can't raise interest rates because of risk to highly leveraged borrowers. Big business sees improved bottom lines due to lower interest payments so investors leverage more to to cash in on better big business returns. And so it goes on!

by Boatman | 21st May 19, 11:58am 1558396700

Wow an 8% rise in power prices .........now that's price gouging when inflation is benign , and the infrastructure was built and paid for by Grandad's generation.

Worse still , it was done in unison, which smacks of collusive behaviour.

Australia clearly needs a watchdog to act as electricity price regulator to curb this type of abuse by state-monopolies or oligopolies .

by powerdownkiwi | 21st May 19, 12:14pm 1558397648

Boatman hasn't read the piece elsewhere here, pointing to the relationship between money and energy. After he's done that, he can swot up on entropy.

I wonder if you get entropy wives?

by waymad | 21st May 19, 4:22pm 1558412538

It's much more complex, and much sadder, than the headline suggests. Oz has a plethora of 'renewables' subsidies, and a power bidding system which guarantees both privileged buying of 'renewables' - they are the first used - and which loads carbon taxes (under another name, natcherally) onto the coal (brown and black) generators which carry the 18Gw baseload. Plus there are levies to ensure that when the sun does not shine (predictable weeks in advance) or the clouds form (less predictable on an hourly basis, hopeless a month out) or the wind stops (even less predictable hour to hour and completely impossible to predict even days out), then there are fast-reacting generators on hand to fill the inevitable gaps. Plus 'demand management' which consists of turning off large chunks of industrial load. So the baseload coal generators get to pay for:

their own running costs
The carbon tax because Coal is Haram
The levies to ensure the renewables are covered by sufficient reliable generation to handle the quite inevitable (and mostly impossible-to-predict) outages
The subsidies to e.g. rooftop solar (which, without battery storage, simply causes the dreaded 'Duck Curve' - needing a very high ramp rate for other generators to handle the circumstance of El Sol setting but the domestic demand continuing unabated)

If this sounds convoluted, expensive, fragile, near-impossible to manage - well, welcome to Australian electric grid world (excluding WA, of course, which has no interconnect with the rest). It is, and more.....

And yet pundits gape in wonderment when 'wholesale prices spike'.........Jo Nova is the go-to resource here. Actual power system engineers like TonyFromOz are frequent commenters there.

by Mrs The Point | 21st May 19, 2:46pm 1558406778

Ford is laying off workers because their cars are unreliable rubbish and people aren't buying them. The glory days for the blue oval are long over.
https://www.youtube.com/watch?v=EyWaGIhPhpU