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Oil prices jump; NZD slumps; Brazil in recession; Japan factory output falls; UST 10yr yield 2.18%; gold price unchanged; NZ$1 = 63.5 US¢, TWI-5 = 68

Oil prices jump; NZD slumps; Brazil in recession; Japan factory output falls; UST 10yr yield 2.18%; gold price unchanged; NZ$1 = 63.5 US¢, TWI-5 = 68

Here's my summary of the key events overnight that affect New Zealand, with news Japan has now joined China with some soft data. Even India reported disappointing growth. And that comes after Brazil re-entered recession.

But first, we start today with some of our own tough news to absorb. Oil prices are rising very fast. It is not entirely clear what is driving them, but yesterday's US$45/barrel price is today's US$48/barrel - remembering that it was only on Friday that the price rose through US$40/barrel. The Brent benchmark is now at US$54/bbl.

An unexpected dip in US production, plus signals from OPEC that they may cut production seem to have combined to drive crude prices higher. For us, that means pump prices are about to jump higher, just as they had slipped back to NZ$2/litre.

And that jump could be quite high. Our exchange rate opens this morning at just 63.5 USc. That is its lowest level since 2009, a six year low. This has also moved quickly.

Recall it was 71 USc at the beginning of June and 78 USc at the beginning of the year. Worse, we are slipping against both the Aussie and the Japanese yen as well. We start the day with the TWI-5 at 68, its lowest in more than three and a half years. Not only will petrol cost more, everything imported will likely rise in price. This is an effective -14% devaluation since early January, a -4% devaluation during August alone. (That's about the same devaluation that the Chinese did that rattled markets.)

Our trading partners are struggling too. Beijing late last night issued a raft of decrees to boost state owned enterprise reforms and the stock market, after it ended its worst month in four years. (It also arrested a reporter and extracted a confession for reporting on the market struggles in a way that Party bosses weren't happy about.) China has also made it easier for their elderly to claim the Chinese state pension when they live abroad.

And, industrial output in Japan unexpectedly fell.

In New York, the UST 10yr yield benchmark is holding today at 2.18%. Our swap rates fell in August, but fell faster at the short end than the long end so we saw an overall steepening of the curves.

The gold price is unchanged today at US$1,132/oz.

The New Zealand dollar starts today at 63.5 US¢ which is a whole cent lower than this time yesterday. It is at 89.2 AU¢ also a cent lower, and 56.6 euro cents. And as noted earlier, the TWI-5 is now at 68.

If you want to catch up with all the local changes yesterday, we have an update here.

The easiest place to stay up with event risk today is by following our Economic Calendar here »

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55 Comments

....this is just the beginning.

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I thought last week was the beginning. Or is this the new beginning of the end?

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Go buy some more houses OU.

.....and we'll see how that works out for you.

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Petrol prices must be due a big bounce in the next few days ($2.10 plus?) as oil prices have now bounced a whopping 27% in less than a week, and the NZ$ has continued its slow decline:
http://www.cnbc.com/2015/08/30/oil-prices-fall-on-profit-taking-rate-hi…

Also worth noting, that contrary to prior propaganda, the US shale industry has had to slash production as it cannot live with $40 oil. US oil production fell by 300,000bpd in just May and June alone.

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Maybe it's lucky shale wells decline so quickly and have such short lives.

Imagine what will happen to production once they work through the current frack backlog, production will fall off a cliff unless the rig count increases.

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Biggest leading indicator of the NZD is Roger Kerrs comments! Yesterday he was discussing the robustness of the NZD and solid support at 65cents dispite international market wobbles...

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I agree, he gets it wrong every week.

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Hes training to get the job at Goodman Sacs...

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GS have actually had some very accurate analyst coverage of the Australian economy for some time now, much more bearish than their peers and much more correct...

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Farm diesel in the UK is 34p a liter. Diesel and gas at the pump are around a £1 a liter. How do we end up with such expensive fuel?

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A: Taxes we impose on ourselves. But I think you overlooking the exchange rate. NZ petrolk pump price is NZ$2.04. At £1/liter that is equiavlent to NZ$2.42 and 20% higher than NZ. It is the UK that is more expensive (and far, far more expensive for pump diesel).

NZ farm diesel carries much more excise tax than the UK equivalent. But then farmers in the UK get heaps more subsidies / breaks/ advantages. But they still do their standard amount of complaining.

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But we used to be half the price, we have poor train and bus services and our cars are no where near as economical. All farmers complain.

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We don't have poor train or bus services and our cars are just fine.

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In HB we have poor alternatives to a car.

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Sure but HB is worth less than a smear to our economy so it doesn't really count does it.

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No, not when your economy is built around inflated asset prices.

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...and in most of NZ the overwhelming majority could get by with a bike to commute.... you dont actually need more public transport (Auck excepted), just an attitude change.

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Have you seen the hills in Wellington.....

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LOL, yes, though the ppl in SUVs driving them like maniacs is more of an issue.

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......yep, but high heels are not recommended.

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Wellington woman are known for their attractive legs. It's all the walking up and down the hills that keep them in shape.

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But I think you overlooking the exchange rate. NZ petrolk pump price is NZ$2.04. At £1/liter that is equiavlent to NZ$2.42 and 20% higher than NZ. It is the UK that is more expensive (and far, far more expensive for pump diesel).

Are New Zealanders earning twice the average nominal NZD income when compared to what their UK cohort counterparts are earning in Sterling? - I think not. Thus, without too much effort an Englishman finds petrol cheaper earning the same nominal salary as a KIwi.

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yes and very much, no, the thing is NET.

When I left the UK in 1995 my car insurance was going up to 1500hundred sterling per year, per car with 60% no claims. Same car here in NZ (Audi Quattro), $345NZ a year, I triple checked and got it in writing that they had the right car model as I could not believe it was correct. My flat insurance was 800sterling a year to protect nothing (I'd cancelled it) here, $24 a month NZ. So while I earned less here (and still do I expect) my costs are far lower.

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nonsense, cost of living in NZ is much higher. When i was in the UK my transport costs were NZD200/year for occasional tube rides, as i rode a bike, and $200/year to be a member of a car club that i never used once i had fitted out flat and done all my trips to Ikea. Baked Beans were 14p/can, Home contents was 184quid/year, utilities were half what they are in auckland, and most importantly a full 568ml pint of beer was less than NZD6 at any pub and any time of day.

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No I do not agree, maybe we see a time difference plus you have to compare like with like, same car both in the capital same driver. Sure my tube costs were also low but NZ public transport was also pretty cheap actually, of course outside of city centres much of rural NZ has no public transport. transport also depends on peak and distance especially in the UK, my god father had to pay over $3000sterling a year for his tube pass before he retired (15 years ago), about the same distance - $272/month for waikanae today (cant see an annual pass).

My point was the same car had a huge difference insurance, ditto house contents, so I am doing an oranges with oranges. Cheap beer in the UK, well that is long gone. I will agree beer in NZ is crazy but then I dont drink it.

Some things in the UK are way cheaper like B&Q ie DIY and computers so it isnt all losses.

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Farmers are getting £75 for lambs and I can buy half a lamb at the butcher for £50, thats way more competitive than anywhere in NZ. My car car is super cheap to run here, third party insurance with National farmers union is under £300, it takes £44 to fill and does 44mpg, diesel with no road user charges.
NZ has got bloody expensive for a commodity producer without much depth to it's economy outside flicking houses and trying for tax free capital gain on dairy farms. I don't think NZ can afford all the pen pushers for much longer.

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UK pump deisel is the total pay however as you dont have to buy mileage as well. I much prefer that method.

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UK farm fuel is red as its untaxed hence 34p a litre its not allowed to be used on the road. PS The other colour is green for London transport, in which case you have stolen it.

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Assange: What Wikileaks Teaches Us About How the U.S. Operates
https://archive.is/lM5vW

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just opening of the eyes is all that is needed.

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1 pound at pump at 0.41 currency conversion is more expensive than us???

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1 / 0.41 = ? That is the $2.43 question.

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When David talks doom and gloom you can be sure we all all in a mess.

But not to worry the TPP will save us.

A bunch of broke countries trading with each other will make us all rich

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Not even David can put a positive spin on what is currently unfolding in the world.

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JK is certainly talking some nonsense currently. He would only have to visit the odd regional capital and see just how many shops and businesses are closing with staff being collateral damage of course. It is obvious to everyone except him that the economy is struggling at best.

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We are getting some immigrants arriving in our provincial area, they are generally opening dairies and takeaways or 2$ shops... great for regional development.

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the closest JK gets to the regions is visting field days once a year.
as for talkin nonsense currently agree he got caught out badly yesterday when he confused all the fiqures in the bank survey
me thinks past his use by date and time to move on

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Lotta 'unexpectedly' in that there Report, DC.....

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I imagine it will come to be his most frequently used word in the next 12 months......

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JK, BE....etc etc.

eyes wide shut.

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Given the circumstances with low dairy prices, a lower exchange rate seems very healthy to me. Given the option of a lowish exchange rate or very low interest rates in terms of easy monetary policy, I would advocate for the exchange rate. Unfortunately for the last few years we either get both or neither, and that may still be true going forwards.
I doubt inflation will suddenly do anything silly, and not threaten going above 3% in a hurry. Even in the very unlikely event that it were to, the RBNZ can look through short term effects of oil price changes. Or at least that was the story when they were going down, so presumably remains the rule going up.
The pendulum on trans Tasman migration just may start to move the other way, and that would help pop the Auckland property bubble- both rents and prices- so there will likely be domestic deflation outside of petrol prices. Surplus global capacity will keep the lid on most other imported costs.
So, it's not all bad.

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Wonder if anyone is giving odds on whether the Olympics will go ahead;

http://www.cnbc.com/2015/08/17/brazil-is-in-crisis-ahead-of-2016-olympi…

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will they even have any water?

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They have water, but the real question is what is in the water. Shit sums it up pretty accurately.

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Wait and see what the dollar does when Fonterra unravels this month when it opens their accounts.

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'Unexpectedly' according to whom?

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'Free-market' ideologues and 'techno-cornucopians'!?

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gamblers,

"Once prices began to move higher, investors scrambled to buy oil to stem losses on bearish bets. That rush propelled a rally that put both the U.S. and global oil benchmarks into bull-market territory Monday, defined as a 20% gain from a recent low."

So the Q is whose right? EIA has long been criticised for awful forecasting while the "peak oilers" were poo poo'd as pessimistic and defeatist, but oh dear their projections are better.

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It could be nothing more than noise right now. Sure those who follow the output such as us expect decline, but a huge drop in 1 or 2 months is more likely to be data error, or corrections of errors IMHO.

What is the real interesting thing is this jump. The talk for the last month has been the expectation of a large drop in price centred in Iran being allowed to sell oil again and Saudi refusing to cut back, so why the significant bump up? Some data about to come forth? ie insider trading?

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Does anyone wonder about a link between the migrations into Europe and overpopulation.?
Overpopulation won't reveal itself unless other things are controlled for but it could easily express itself in wars.

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More a lack of resources, but yes when we eat fossil fuels and that is going to decline shortly to zero by about 2050 then we cant support 7billion let alone 9billion. this suggests the migrations we see now are nothing like we will see in the future.

"Precipitating the rally—crude rose 27% in three sessions—were several factors, including a downward revision of U.S. oil output and a report that sparked speculation the Organization of the Petroleum Exporting Countries may be considering cutting production."

strikes me as gambling, nothing more.

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Yep. It's pretty obvious to anyone with a brain that more people = less resources per head, especially in countries that can't import large amounts of resources from other regions into their country.

There's going to be a heck of a lot more migrants heading for Europe in the future.

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And cashed up Europeans moving to Auckland... Dun dun daaaaa!

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and .. not just cashed up Europeans ..

also those who have decided to get out while the going is good

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....trickle will become a flood..http://www.csr.utexas.edu/grace/

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