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Dairy prices rise; US current account deficit narrows; China faces unrest over housing; PBoC rushes to cover interbank failure; Brazil beef ban grows; UST 10yr yield at 2.42%; oil lower, gold up; NZ$1 = 70.6 US¢, TWI-5 = 75.3

Dairy prices rise; US current account deficit narrows; China faces unrest over housing; PBoC rushes to cover interbank failure; Brazil beef ban grows; UST 10yr yield at 2.42%; oil lower, gold up; NZ$1 = 70.6 US¢, TWI-5 = 75.3

Here's my summary of the key events overnight that affect New Zealand, with news of worrying financial stresses in China.

Today's dairy auction brought something of a surprise result. Analysts who had been watching the derivatives markets had expected to see a -5% fall, but have been treated to a +1.7% rise instead. WMP actually rose +2.9%. These rises were not quite as much in New Zealand dollars but they were rises nonetheless. Before the NZX opens today, Fonterra will also announce their half year financial result and given their share price ($6.22) has moved little since mid January, investors are not expecting anything out of the ordinary.

In the US, their current account deficit for the December quarter came in lower than expected. It is now running at -2.4% of GDP (and that compares with New Zealand's at -2.7% and Australia's at -4.6%).

In China, the risk of social unrest over soaring property prices has grabbed the attention of policy makers. Big Chinese cities have launched a new round of lending curbs and purchase restrictions in an effort to cool overheated property markets. Even the official media is warning that some cities are in a bubble. Sky-high prices in cities including Beijing, Shanghai and Shenzhen are stoking anger, even among relatively well-off professionals.

And China is facing unrest in its financial markets as well. Their central bank had to inject hundreds of billions of yuan into the financial system after some smaller lenders failed to make debt payments in the interbank market. These injections followed missed interbank payments from rural commercial banks on Monday.

More countries are banning Brazilian meat imports and that is extending the squeeze on supplies. Beef prices are rising.

In New York, the UST 10yr yield has slipped another -8 bps today and is now at 2.42%. CDS spreads are still falling. In fact our banks are facing the narrowest spreads in more than 9 years and as key index dipped below 80.

Oil prices are softer today yet again and now just under US$47.50 for the US benchmark, while the Brent benchmark is under US$51 a barrel. Goldman Sachs analysts say in a research note that new production projects and a fresh shale boom could boost oil output by a million barrels per year and result in an oversupply in the next couple of years.

The gold price however is up US$9 to US$1,242/oz.

And the New Zealand dollar starts today just a little bit higher at 70.6 USc. On the cross rates the Kiwi dollar is at 91.5 AU¢, and against the euro is at 65.2 euro cents. The NZ TWI-5 index is at 75.3.

If you want to catch up with all the 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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15 Comments

Good to see beef prices on the way up and WMP steady, log prices also up, we need a strong productive agricultural sector earning those export dollars

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Pity about the green house gases....

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Perhaps the next big development could be make the mozarella directly from the grass and skip the cows altogether
Fermentation...mutter...mutter...

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Already happening - www.perfectdayfoods.com

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I trust, like A2, we are in there boots and all, not waiting for change to give us another kicking.

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“Data continued to suggest that there had been a build-up of risks associated with the housing market,” the Reserve Bank of Australia said in minutes released Tuesday of this month’s meeting where it held interest rates at a record-low 1.5 percent. “Growth in household debt had been faster than that in household income.”

Entitled elite transferring wealth at other's cost?

The RBA’s warning comes as the economic divide in Australia sharpens with house prices more than doubling in Sydney since 2009 and Melbourne’s similarly surging as investors tap cheap money. Meanwhile in the west, the heart of an unwinding mining-investment boom, property prices are falling and businesses are going bust as demand is weak. Read more

"Stimulus" had no other intent, than to replace jobs with debt to finance imports which funded foreign exporter's wages. Meanwhile, the already rich domestic minority speculated with cheap fabricated bank credit.

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Any correlation with the clampdown on moving capital into overseas markets (housing) and the rising bubble of major cities in China?

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Correlation or causation?

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Either way if it leads to the Chinese government having to cauterize the bubble it could get real ugly!

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I think so. Excessive Chinese stimulus has money chasing investment because bank deposit returns are so low. If they shut off the ability to seek better rates offshore, then all this funding chases higher returns at home.

That is why PPI inflation has taken off. It is why Chinese CPI is rising fast (other than for food). (And these links are the official ones.) And it is why there is a rush into housing 'investment' chasing the capital gains that small-time investors believe will be there when they see a herd rush.

I doubt it can end well. It is a gigantic public policy fail. But then, QE always couses severe distortions.

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Interbank lending dysfunction is the stuff GFCs are made of.

Before you know it, China's big players can't roll their commercial paper and a bank credit seizure turns systemic.

And China sure loves its commercial paper these days.
http://www.reuters.com/article/china-exchange-cp-idUSL4N1E24OX

I'm sure Xi Jinping has his arms right around this.

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Some of you actually know what you are talking about.
How long can the musical chairs in china continue?
I guess we could look at Argentina as a model?
And we should not claim its fixable, we havent fixed the US or the EU, just bandaged it.

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China’s total credit reached 255pc of GDP at the end of last year, a jump of 107 percentage points over eight years. This is an extremely high level for a developing economy and is still rising fast .

Outstanding loans have reached $28 trillion, as much as the commercial banking systems of the US and Japan combined. The scale is enough to threaten a worldwide shock if China ever loses control. Corporate debt alone has reached 171pc of GDP.

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If Brazil supply at the cheaper end, will these countries be prepared to pay more to fill the gap?

http://www.stuff.co.nz/business/farming/90701599/higher-prices-likely-f…

Brazil tends to operate at the lower end of the market, and fetches prices about $2 per kilogram less than what New Zealand beef does.

Also, if the ban is in place for any length of time, who can dial up production to fill the chicken orders:
http://www.agrimoney.com/news/brazil-meatpackers-shares-tumble-as-scand…

In chicken, China relied on Brazil for 86% of imports last year, with Argentina responsible for 9% and Chile and Poland other major origins, although, as stated above, rumours of China suspending purchases of the meat from Brazil remain unconfirmed.

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JBS is also a big player in the USA, I think they have over %25 of the beef market but huge in Chicken and pork too. The biggest player in the USA meat industry. They also own 5 rivers feedlot operation with 980,000 head of cattle on feed.

https://fiveriverscattle.com/pages/default.aspx

http://edition.cnn.com/2017/01/24/opinions/trump-ranchers-first-100-day…

Brazil had a 2 year operation into 33 meat inspectors out of 11,000 in the country, The press hyped as rotten beef but I'm not convinced it was as bad as the China scandal where the meat had been refrozen 4 times.

The USA ranchers really want Brazil out of their market.
http://www.tsln.com/news/beef-from-brazil-to-soon-arrive-in-united-stat…

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