Dairy prices weak again; US housing starts weak; German sentiment dives; Draghi signals new stimulus; G20 US-China meeting on; Facebook announces Libra; UST 10yr yield at 2.06%; oil and gold up; NZ$1 = 65.2 USc; TWI-5 = 70.3

Dairy prices weak again; US housing starts weak; German sentiment dives; Draghi signals new stimulus; G20 US-China meeting on; Facebook announces Libra; UST 10yr yield at 2.06%; oil and gold up; NZ$1 = 65.2 USc; TWI-5 = 70.3

Here's our summary of key events overnight that affect New Zealand, with news central bank signals suggest more stimulus is on the way.

But first up today, there has been another negative dairy auction, the third in a row. Prices dropped -3.8% today in USD terms and -2.5% in NZD terms. Whole milk powder prices are down -4.3%, butter down -5.7%. Today's event takes overall prices back to where they were in February. This auction cement's in more than an -8% fall since early May and will not help holding the farmgate milk payout forecasts.

US housing starts in May have come in -4.7% lower than for May 2018. Building permits are down on a year-on-year basis as well.

Updated April data shows that China, and most other countries, decreased their holdings of US Treasury securities.

Canada manufacturing sales fell unexpectedly in May.

In China, the May data for house price levels show them rising at a sustained clip, up more than +10% pa in many major cities.

And in the Philippines, anti-China sentiment has flared, triggered by their Government's weak response to China's encroachment claims in the South China Sea.

A closely-watched German survey of business opinion, the ZEW survey, fell sharply in June.

And that may be one reason the ECB boss signaled that the central bank could roll out fresh stimulus as soon as July, sending the euro lower. Essentially, this reinforces the fear of the European economy slipping back into recession. It also brought a rebuke from the American President.

Meanwhile there are reports circulating that Trump is considering removing Jay Powell as the chairman of the Fed.

In the trade front, an 'extended meeting' between the Chinese and US presidents has been confirmed at the Japanese-hosted G20 summit later this month. The Chinese say they are keen to communicate 'fundamental issues' to the Americans.

Equity markets like the prospect, and the S&P500 is up +1.1% so far today. European markets were up even more overnight. Markets also like the prospect of more central bank stimulus.

Facebook has announced it will take on the global financial system by creating a cryptocurrency called Libra, a payments system powered by blockchain and a digital wallet. All this is part of a plan to move into lending. It is likely to run into substantial regulatory opposition.

In Australia, yesterday's release of the RBA minutes shows they think wage and inflation growth there is still some way off and further rate cuts will be needed to stimulate their economy and jobs. Analysts now see their 1.25% policy rate cut aggressively over the next few months and could go as low as 0.75% by the end of the year.

The UST 10yr yield is now under 2.06% and down -3 bps from yesterday. Their 2-10 curve is slightly narrower at +19 bps while their negative 1-5 curve is wider at -25 bps. Their closely-watched 30 day-10yr yield is sharply negative now at -13 bps. The Aussie Govt 10yr is down -3 bps at 1.36%. The China Govt 10yr is down -1 bp to 3.26%, while the NZ Govt 10 yr is down -2 bps to 1.65%.

Gold is up +US$8 today at US$1,346/oz.

US oil prices are +US$2 higher today, boosted by hopes on the trade front. They are now just on US$54/bbl. The Brent benchmark is now at US$62.

The Kiwi dollar is firm against the greenback at 65.2 USc. On the cross rates we have risen slightly too to be at 95 AUc. Against the euro we are up to 58.3 euro cents. That puts the TWI-5 up at 70.3.

Bitcoin off yesterday's highs overnight, down -2.5% to US$9,036. 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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17 Comments

Comment Filter

Highlight new comments in the last hr(s).

'After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.'
Milton Friedman

That dairy auction was pretty emphatic.

Redcows - remember the last time $7.00 was the opening forecast? Didn't it end with a $4 by season end?
Just wanting to cheer you up while we wait four months for our next decent milk cheque. .

Oh yeah I remember well. And the time before that.

Signals of an approaching global recession are growing stronger. The question is, will it be a short dip or more like a lost decade. (think Japan)

Some would argue that parts of the world have already had a lost decade of their own since the GFC.
Italy's real GDP per capita was higher in 2000 than in 2018. The Greek and Portuguese economies haven't fared much better either.

If after a recession, we were to lose all per capita dollars we've added to our economy plainly from asset inflation flaring economic activity, how far back would that take us?

It's been a lost decade for many young aspiring First Home Buyers in New Zealand.

First priority was for MPs owning an average of 3.4 properties bought cheaply to inflate their own personal nest-eggs.

12
up

Central Bank madness takes centre stage again - doing the same thing and expecting a different result. Higher and higher asset prices and lower and lower yields. Surely there comes a point when assets are earning so little income that pension funds et al have to become net sellers to fund liabilities? Then what happens?

Yes. I'm not old enough to have seen this kind of cycle before.
How long can asset prices continue inflating, not because of real value but low rates make them the only way to get returns?
What happens next?
(On another note - not a popular figure around here, I know - but didn't Marx describe something like this - that capitalism would always have booms and busts, because the market would always reach a point where no more interest could be extracted from investments, that the rate of return on capital would always eventually reach zero and require wealth destruction before the cycle can restart?)

I believe it was Ludwig von Mises, that sounds like the Austrian school of economics. Quite interesting and relevant today - theres nothing wrong with not being old enough to have seen these cycles before, because you can look back at the thoughts and work of those who did and make your own judgement.

https://en.wikipedia.org/wiki/Austrian_business_cycle_theory

Markets also like the prospect of more central bank stimulus

Nonetheless, the Fed executed a significant drain operation today, compared to recent historical actions.

Is the Fed having to defend the fed funds corridor floor or does a primary dealer have a client in desperate need of pristine collateral? - Link

Robert Kiyosaki about his newest book “Fake”, how he determines what is real and what isn’t and most importantly what you can do to protect the real assets that you currently have.

https://www.youtube.com/watch?v=gFyAjsNweTg

https://www.resilience.org/stories/2019-06-18/economics-101-and-ecologic...

Wonder if an economist would care to mount a rebuttal.

Based in fact, of course.

I remember the late 1980's early 90's when things like real estate went backwards, in Auckland no less. We lived through it, but it was a good 7 years before we got our noses back in front. Boom & bust - that's capitalism for you. Once you know the cycle it's not so bad. It's harder when you're younger I must admit, but you've also got more time on your side to earn it back. Don't panic just yet. But don't buy just yet either.

Mecury Energy announces the interest rate on $300m of capital bonds. Bookbuild complete, and the rate they are paying is..

The interest rate for the Capital Bonds to the First Reset Date (11 July 2024) will be 3.60% p.a., which is the minimum interest
rate set out in the terms sheet for the Capital Bonds dated 12 June 2019. The margin has been set at 2.10% p.a.

So unless i'm reading this wrong, Mercury has secured $300m by issuing subordinated bonds rated (BB+ by S&P) at 3.6%.. to cancel out their old bonds issued in 2014 that were costing them 6.9%. Who needs a risk premium for subordinated bonds anyway...

Oh well, it should help preserve my dividend payments..