90 seconds at 9 am: Trade rivalry hits markets hard

Bond yields suddenly price in three Fed cuts; Wall Street drops again; China makes rare earth threats; China debt balloons; air cargo trade drops; UST 10yr 2.24%; oil lower and gold up; NZ$1 = 65.1 USc; TWI-5 = 70.1

30th May 19, 7:43am by David Chaston

Here's our summary of key events overnight that affect New Zealand, with news that the China:US trade rivalry is ramping up to the point it is serious for the world economy as impacts bite harder.

The recent bond rout is intensifying with prices sharply higher and yields sharply lower as confidence about the future leaks away. This is essentially being driven by concerns the trade situation is being mismanaged badly. US Treasury rates are back to overall levels last seen in 2007 and the market is now pricing in three US Fed cuts.

Wall Street is down another -1.1% today so far. And that means the fall in May is accumulating and now well above -5% so far, trimming the 2019 gains back to just on +10%. Overnight, European markets fell hard, down about -1.5%. And yesterday, Shanghai was actually up +0.2% but Hong Kong dropped -0.6% and Tokyo dropped -1.2%.

In the US, mortgage applications fell away in the latest data available for May. And mortgage rates dipped as well.

The Bank of Canada, which pushed through three hikes in 2018, held its policy rate overnight in its latest review. And it made no sign that it is about to resume those rises. Their rate remains at 1.75% and that is the first time in twenty years it has been above the New Zealand policy rate.

China is ramping up its threats to withhold rare earth minerals for export in retaliation for US moves in their trade war. These minerals are vital for the tech industry and China is a dominant supplier. And such minerals are crucial for US military equipment. The US sources 80% of its needs from China. But it isn't the only supplier; Australian sources will now get a shot in the arm.

China has a debt problem and its getting worse. Their overall leverage ratio, which measures outstanding debt in the real economy against nominal GDP, increased to 249% at the end of March, the highest since this series started more than 25 years ago.

The growing trade wars have brought a sharp drop in air cargo growth in April and the trend is clearly negative this year. International volumes were more than -5% lower than the same month in 2018 and down more than -8% in the Asia/Pacific region. Cost inputs are rising, trade tensions are affecting confidence, and airlines are cutting capacity. Passenger traffic grew however, up +5% for international travel globally, but up only +2.9% in the Asia/Pacific region. But this growth is leaking away and quite quickly.

Another problem is festering as well. Overnight both the EU and the ECB separately challenged Italy over its inability to control its ballooning public debt levels and the contagion risk that poses to all of Europe.

In Australia "everyone" is expecting an RBA rate cut next week. Borrowers will be the beneficiaries and banks are preparing to reset mortgage rates to fresh record lows. Savers will be on the short end.

The UST 10yr yield is lower by another -2 bps today and now at 2.24%. That is its lowest level since September 2017. Shorter tenors are down even more. Their 2-10 curve is down at +16 bps while their negative 1-5 curve is wider again at -27 bps. The Aussie Govt 10yr is at 1.49% and down -3 bps. The China Govt 10yr is also down -3 bps to 3.33%, while the NZ Govt 10 yr is down -5 bps to 1.73%.

Gold is up +US$3 at US$1,281/oz.

US oil prices are lower today and are now under US$59/bbl. The Brent benchmark is at US$69/bbl.

The Kiwi dollar will start today down nearly -½c at 65.1 USc. On the cross rates we are also lower at 94.2 AUc. Against the euro we are little-changed at 58.5 euro cents. That puts the TWI-5 down at 70.1 and about where it was at this time last week.

Bitcoin is a little softer today, now at US$8,680. 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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30 Comments

by sharetrader | 30th May 19, 8:09am 1559160552

how long before we also cut the OCR here, my guess at least once this year

by rastus1 | 30th May 19, 9:05am 1559163949

....and will achieve little or nothing.

by Advisor | 30th May 19, 8:46am 1559162787

US 30-yr mortgage rate is at the same level as it was roughly two years ago when the Fed Funds rate was half of what it is now. It has been more than 10 years since the GFC but the Americans are still weary of taking on long-term mortgage debt.
Too bad this financial prudence of theirs does not extend to other debt instruments such as credit cards, education loan and car loan.

by Andrewj | 30th May 19, 8:56am 1559163365

PIMCO, the credit market is heading for a crash the likes of which have never before been seen. Good clip at bottom of article
https://www.zerohedge.com/news/2019-05-29/pimco-riskiest-credit-market-…

by Foyle | 30th May 19, 9:14am 1559164471

5% drop in NZD over last 2 months is strongly inflationary - and will further negatively impact GDP given our record balance of trade deficits. Growth for the year will be further hampered.

by T-Bone | 30th May 19, 10:37am 1559169434

Agree it will inflationary, but wont it be positive for our trade deficit? Our exports become cheaper oversees/we get more NZD for them, which will also be good for our productive economy?

by Roger Witherspoon | 30th May 19, 9:15am 1559164509

Aussie mining has made them rich. Well done them.

by powerdownkiwi | 30th May 19, 11:59am 1559174384

RW - what does 'rich' mean beyond resource extraction?

by CJ099 | 30th May 19, 9:42am 1559166175

Some further news regarding Brexit: Boris Johnson ordered to appear in court over £350m claim.
BBC News: https://www.bbc.com/news/uk-politics-48445430
"Democracy demands responsible and honest leadership from those in public office,"

by profile | 30th May 19, 10:08am 1559167717

Why isn't "vote leave and a recession with 500,000 UK jobs lost" Osborne there then? The establishment using all there power to keep at the EU trough. A clear example of why free speech rights are sacrosanct.
You forgot to paste this quote from the link:
"If this case is allowed to proceed then the state, rather than the public, will be put in charge of determining the strength of arguments at elections."

by CJ099 | 30th May 19, 11:23am 1559172205

Sorry, Politician need to be held accountable for "Blatant lies" that drastically influence voters in to voting for them and therefore equates to misconduct. Did you miss this bit: "The allegation with which this prosecution is concerned, put simply, is Mr Johnson repeatedly misrepresented the amount that the UK sends to Europe each week," he said.

"It is concerned with one infamous statement: 'We send the EU £350m a week.'

"The UK has never sent, given or provided £350m a week to Europe - that statement is simply not ambiguous."

I don't think you realize that there are bigger forces at work if Mr Boris Johnson get away with his actions. Plus it won't be the majority of the UK public that gets to vote on Theresa May replacement as Prime Minister.

by profile | 30th May 19, 11:32am 1559172777

Politicians are held to account - apart from lame list MPs - but that is an aside. Did you miss the UK EU election results? How do that pan out for the Tories?

Leave it to the voter to punish politicians - not the establishment.

Perhaps you could throw a milkshake at Boris?

by CJ099 | 30th May 19, 11:49am 1559173754

Bit of a world away to be able to throw a milkshake at Boris, but I'm sure someone will get round to it considering he started the whole Brexit mess in the first place. See problem is; If Politicians think they can get away with blatant lies, that drastically influence votes in to doing really damaging things, then of course they'll just continue to lie more and more and cause even more damage. So no, I think they have every right to take corrupt Politicians to court and make them fully accountable for their actions.
"Democracy demands responsible and honest leadership from those in public office"!

by profile | 30th May 19, 12:05pm 1559174733

Milkshakes are funny but eggs are not. Boris needs to go to court but by the same standards Osbourne doesn't.

You're a perfect example of why voters should decide outcomes not personal biases of a limited few.

by CJ099 | 30th May 19, 2:21pm 1559182882

Clearly you're a bit confused and quite possibly deranged. The article that I posted was on the subject of Boris Johnson having very clearly lied to the UK voters and was now being taken to court over it. Ironically it is the UK people are the ones funding the case against Boris Johnson since it is a private prosecution launched by campaigner Marcus Ball, who crowdfunded £200,000 for the case. And now you're rambling on about throwing milkshakes and Osbourne? Without fully discussing your argument rationally, clearly you're trying to distract from the original subject to protect corrupt Politicians?? Are you a member of the National Party by any chance? :)

by profile | 30th May 19, 4:53pm 1559192028

How twee - "...the UK People are funding...". It is a orchestrated campaign to overturn a democratic vote.
“Once these prosecutions have established that politicians did indeed lie to voters our next step will be to take other action to prevent Brexit. This may be in the form of a judicial review… We will also work to reverse Brexit and ensure our membership of the European Union is not lost”.

Are you having trouble coming to terms with Brexit vote by any chance?

by CJ099 | 30th May 19, 6:02pm 1559196128

Humm... I think you'll find that Mr Johnson would be the one to do the most damage on that front if he was to ever become PM of the UK. And as far as freedom of speech goes watch of for Dictators like Mr Trump and his attack on the journalists calling them fake news. Yes Politicians can do a lot of damage if you allow them to not be held accountable for their actions.

Do you not realize that Brexit has had a loss of business impact on NZ too. I've seen several companies go under here due to the UK Pound having plummeted over Brexit, making it 'not cost effective' for the the UK to do business with NZ.

by profile | 30th May 19, 6:23pm 1559197424

The Brexit vote has been great for FDI and employment - ramming home how duplicious Osbourne was. Shame about the kiwi businesses youn mention but the FDI flows show overall it has been positive.

"The value of the UK’s foreign direct investment (FDI) rose by £149bn to £1.3t in 2017.

The Department of International Trade said this was the highest level of inward stock since records began."

by CJ099 | 30th May 19, 9:38pm 1559209083

Nope you still don't seem to get that Brexit hasn't actually happened yet and the implications behind it WHEN then do leave the EU. The UK is in a kind of having it's cake and eating it stage at the moment with it still being part of the EU and the Pound is deflated so their exports are doing much better. But that is all highly likely to change come the end of October this year when they're more than likely to crash out of the EU without a deal. Soon after that you'll see the UK job losses and the economic slide.
Oh and by the way and here's the irony; Did you know that if Britain can not form a deal with the EU then it has to form some kind of agreement with the EU to get its WTO membership terms to work.

by profile | 30th May 19, 8:40pm 1559205600

When do you think they will have the emergency budget? "George Osborne says he will have to slash public spending and increase taxes in an emergency Budget to tackle a £30bn "black hole" if the UK votes to leave the European Union." Note the term "votes to leave".

Same as his job loss prediction the mere act of "vote to leave" would bring on the four riders. "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." Maybe you misunderstood him?

by CJ099 | 30th May 19, 9:36pm 1559209015

Who knows, the who thing is a mess. And even though the Brexit deadline has been moved, it's too late to stop a lot of the job losses. Here's another Brexit reality slap in the face, hot off the press from the BBC: Brexit shutdown slashes UK car production by 45%
https://www.bbc.com/news/business-48451024

Quote: "Even though Brexit is delayed the factories still closed and production fell 44.5% according to the Society of Motor Manufacturers and Traders (SMMT)". In what it called "an extraordinary month", the SMMT said only 70,971 cars rolled off production lines.
That was 56,999 fewer than in April a year ago.
Mike Hawes, SMMT chief executive, said: "Today's figures are evidence of the vast cost and upheaval Brexit uncertainty has already wrought on UK automotive manufacturing businesses and workers.

See once all the trade tariffs and custom border delays start to hit the UK after Brexit then you'll see the economy slide. With business closing, further job losses etc..

by mfd | 30th May 19, 12:46pm 1559177190

It's a very different thing to make an incorrect prediction versus making an incorrect statement. Boris knew full well he was misrepresenting the truth at the time he made the statement - Osbourne was discussing a future possibility. Do you understand that there is a difference between things that can be proven false at the time they are said, versus things which later turn out to be false?

Now, once again, I have to go and have a shower for being pushed into defending Osbourne.

by profile | 30th May 19, 4:58pm 1559192283

He was the Chancellor of the Exchequer - the last thing he should have been doing was making highly political unsubstantiated claims. He had a Treasury at his disposal and still decided to bleat 500,000 jobs would be lost if people voted for Brexit. Only a remainer would have ever believed that sort of nonsense.

by CJ099 | 30th May 19, 6:22pm 1559197335

Yeah I don't think you quite get it. That was Osbourne's job loss estimate and based on "when" Brexit goes through and the UK leaves the EU, it hasn't happened just yet! It's an estimate, a prediction, a forecast. Really you can't be that stupid to not understand the difference between an 'estimated figure' of what could happen WHEN the UK leaves the EU (Should be in October this year) and a stated fact that Boris came out with?

by mfd | 30th May 19, 7:01pm 1559199673

The 500,000 estimate was from a Treasury analysis...

https://www.gov.uk/government/news/britain-to-enter-recession-with-5000…

by Audaxes | 30th May 19, 11:17am 1559171828

Bond routs are normally associated with panic sales of said securities as yields rise.

Moreover,

One year ago today, something huge broke inside the global monetary system. Exactly what, we may never know. I believe it was something to do with collateral and securities lending, the kinds of things that brought AIG to its knees in what doesn’t seem like all that long ago. In a rush, over several days, everyone around the world piled into the world’s safest, most liquid assets. Link

by ham n eggs | 30th May 19, 11:22am 1559172122

Bill Gates gets it..

Bill Gates Slams Unreliable Wind and Solar Energy
https://www.youtube.com/watch?time_continue=119&v=9xe3BWPsBTU

"there is no substitute for how the industrial economy runs today"

Without cheap resources and energy to exploit – money is worthless. Bill is smart enough to connect those dots and realize that infinite growth in a finite world is impossible. The bottom line is wind and solar consume energy and resources and the little energy they do capture is not as reliable, not as energy dense, not as easily stored or transported like fossil fuels. So, it is easy to see why solar and wind will not and can not scale to the levels needed to capture enough energy to power modern industrial civilization. The resources to build and maintain that much new infrastructure simply isn’t there

by powerdownkiwi | 30th May 19, 12:10pm 1559175049

Yes, but we have to be very clear, the fossil energy will leave us, and burning it will kill us.

So solar and wind are the way to go - just economic growth isn't.

If Gates wants to be in denial, well, says it all, really. In his own words, we are waiting for a miracle. What you have to do, at some point, is go with existing technology. And solar is what we have. He's arguing the old arrogance thing - we need to power Tokyo, not 'how do we fit into the system?

by profile | 30th May 19, 12:25pm 1559175937

And that is why Bill is getting into nuclear. Rolling his sleeves up and getting on with it rather than pandering to the chicken little tragics. Terrapower.com

by powerdownkiwi | 30th May 19, 12:35pm 1559176517

This is a systems dilemma. Single-issue get-out-of-jail-free cards do not qualify.

Multiple-facet adaption does.