Equity prices sink; bond prices jump; US tariff threats compound woes; US inflation up; Canada growth rises; China threatens a list; China PMIs mixed; UST 10yr 2.13%; oil sinks and gold jumps; NZ$1 = 65.4 USc; TWI-5 = 70.4

Equity prices sink; bond prices jump; US tariff threats compound woes; US inflation up; Canada growth rises; China threatens a list; China PMIs mixed; UST 10yr 2.13%; oil sinks and gold jumps; NZ$1 = 65.4 USc; TWI-5 = 70.4

Here's our summary of key events overnight that affect New Zealand, with news investors are hunkering down, quitting equities and buying bonds.

First up today, Wall Street is in a bad mood. The S&P500 is down -1.3% and this follows European markets which were all down more than -1% overnight. Tokyo was down -1.6% yesterday although Shanghai closed little-changed. This means that Wall Street lost -6.6% in May. Ending weakly doesn't bode well for June.

Bond markets aren't giving positive signals either with yields on benchmark bonds falling to levels we haven't seen since September 2017. Bond investors however are doing just fine with bond prices up more than +10% in May alone.

The spark is another capricious Trump decision to try to hit Mexico economically with tariffs over the social issue of border control. Everyone but the US President knows this tariff will be paid for by Americans. Maybe there is short-term political advantage among economically illiterate voters, but Wall Street and the companies listed there know this policy will cost American firms again, in the same way the China tariffs are. May has been the worst month of 2019 for American investors.

Oil prices have dived in the expectation that demand is about to sink.

Meanwhile, US inflation is rising. The Fed’s preferred inflation gauge, the price index for personal-consumption expenditures, rose at a +1.5% pa rate in April, its fastest gain in 2019. Other Fed data sees it rising much faster. Pass-on tariff costs are a part of this.

In Canada, their economic growth picked up in Q1 2019 with a surprise rise to +1.3% year-on-year. But this is still way below the numbers being posted south of the border.

And China says it will publish its own black list of businesses or individuals deemed to have violated market rules or taken ‘discriminatory measures’ against them, especially over Huawei.

China's official factory PMI fell back into contraction and fell more than analysts expected. Driving it down were steep declines in export orders. But their much larger services sector is still expanding at a healthy rate.

US importers are finding ways to avoid some of the tariffs on China-sourced goods. Meanwhile, today China's retaliatory tariffs take effect.

The UST 10yr yield has sunk further today, now just under 2.13%. That caps a stunning weekly fall of -19 bps and for all of May the fall is -38 bps. Bond markets are in full 'fear' mode. Their 2-10 curve is now at +21 bps but their negative 1-5 curve is wider at -30 bps. The Aussie Govt 10yr is at 1.47% and down -6 bps over the week (on top of last week's -6 bps). The China Govt 10yr is down -3 bps in the week to 3.30% (and has been an island of stability in May), while the NZ Govt 10 yr is down -2 bps this week, now at 1.74%.

Gold has jumped +US$16 overnight to US$1,305/oz.

The VIX volatility index is up this week at over 18 and above its average over the past year of 16. The Fear & Greed index we follow is still firmly on the 'fear' side.

US oil prices are down a spectacular -US$4 today and are now just on US$53/bbl, and that is a -10% fall in a week on top of last week's -5% drop. The Brent benchmark is now at US$65/bbl. The US rig count is marginally higher this week but is unlikely to stay there long. Still, they may stay high for a while because drilling costs are falling.

The Kiwi dollar is up against a falling greenback this morning at 65.4 USc. But that just puts it back where it was this time a week ago. On the cross rates we little changed at 94.3 AUc. Against the euro we are similar at 58.6 euro cents. That all makes the TWI-5 marginally lower over the week at 70.4. The yuan has stopped depreciating against the US dollar and Beijing has clamped its value at 6.89 every day this week, essentially putting it back on a fixed peg. But it may not last long.

Bitcoin has had a volatile week rising as high as US$8,869 and falling as low as US$7,954 for a +/-6% range. Today it is at US$8,412 and a +5% gain since this time last week. The bitcoin 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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Bonds markets have their money on deflation, they don't believe Centrals banks can get inflation started by cutting rates.

https://finviz.com/futures.ashx

Di Martino on deflation

https://podcasts.apple.com/us/podcast/macro-voices/id1079172742#episodeG...

https://www.zerohedge.com/news/2019-05-31/stocks-suffer-worst-may-7-year...

Excellent interview with Danielle. Impressive woman. Thanks.

Personal consumption expenditures, or PCE, provides a gauge of price changes in consumer goods and services, with the “core” measure excluding volatile food and energy prices serving as the Federal Reserve’s preferred measure of inflation.

Confronted with a novelty unprecedented in 4,000 years of interest-rate history (negative money-market interest rates are nothing new, but substantially negative note and bond yields are a post-2000 B.C. first), people not unreasonably suspected that something was wrong. And when something is wrong, you save more, not less.

Then, too, a saver needs more principal to compensate for less interest. The Rule of 72 is a handy guide for guesstimating the amount of time it takes one’s principal to double when invested at a certain rate of interest. Thus, for money invested at 1%, the doubling time is about 72 years. At .01%, it’s more or less 7,200 years.

It works in reverse, too. At minus 2%, your principal would be chopped in half in approximately 32 years. There’s nothing bond-specific about this particular calculation. At the 2% inflation rate that the central bankers actually strive to achieve, everybody’s principal is on the chopping block. Link

Tariffs seem to have become Trump’s weapon of choice. It is a weapon that may carry some weight however, the reality is that it while it may be effective, it is one that causes widespread carnage including impacting the US.

One headline claimed the dow was down 250 points due to the 5% tariff on Mexico, by the time I got to the office it said down 350 points. I'm getting the feeling that the perception is changing and people are starting to realise the tariffs are here to stay.

Even the Chamber of Commerce is contemplating legal action against the Whitehouse.

Tariffs are great for inflation.

I just totalled up my sales for May and they are only 40% of last years.

Sales of what Scarfie?

Scarves of course
He lives in Palmerston Nth if I recall

My sales aren't as easily comparable. Overall the last two months have been the same or better taken everything into account, whereas January to March had unusually high workload.

10 months ago I called for the 2-10 US yield curve to turn negative in August 2019, for US GDP to also turn negative in Q3 2019 and for the Fed to reverse the rates hikes in Q4 2019 & Q1 2020. Back then it was a long shot, looks more likely now

The Fed likes pegging the 3 month treasury rate. There are plans to start pegging the rates of longer term treasuries to make yield curve inversion difficult or impossible. Market manipulation is heading into crazy territory again.

NZ inc. had three main pillars to the economy. Agriculture, tourism and a property boom (*the third adding little value for the majority of Kiwis).

Since the FBB the third pillar is gone. If we read into what the bond markets are telling us tourism is probably going to have a dent and agriculture looks like prices aren't going to boom given the slowdown in China, EU and the US.

This bodes pretty badly for the local economy. 10 year NZ govt traded below 1.7% this week and will no doubt open next week in the 1.6x%. We shouldn't rejoice about the lower mortgage rates this will bring, we need to be acutely aware that this is an indicator of low growth and very low inflation for years to come.

https://www.bloomberg.com/news/articles/2019-05-31/a-600-page-textbook-a...

MMT Macroeconomics text book has sold out. Nice pic with AOC holding a copy. Time to get on the right side of history.