Dairy prices turn up, US services PMI stable, US trade deficit eases; Canada housing markets rebound; Aussie consumer confidence falls; UST 10yr yield at 1.82%; oil dips and gold higher; NZ$1 = 66.3 USc; TWI-5 = 71.3

Dairy prices turn up, US services PMI stable, US trade deficit eases; Canada housing markets rebound; Aussie consumer confidence falls; UST 10yr yield at 1.82%; oil dips and gold higher; NZ$1 = 66.3 USc; TWI-5 = 71.3

Good morning, wherever you are. Here's our summary of key economic events overnight that affect New Zealand, with news consumer confidence in Australia is weakening.

But first, at the initial dairy auction of the year, prices rose +2.8% in US dollar terms from the previous event, but only +1.9% in New Zealand dollar terms. The gains may disappoint some given the state of the international dairy supply changes and they only make back half of the big previous auction drop. But they won't be changing any payout outlook for the current season which is now past its peak. Volumes sold were +15% greater than the same auction a year ago, and today's prices are +13% higher than a year ago. SMP rose +5.4% from the prior event but WMP was up only +1.7%.

On Wall Street, its risk-off today, with the S&P500 down -0.3% in mid-day trade. 

The closely-watched US ISM services PMI was stable in December, at a moderate expansion of 55 and suggesting GDP is growing at +2.2% pa. While that is better than some other recent measures it isn't a significant outlier.

And the American trade deficit for goods and services narrowed slightly to -US$43.1 bln in November and -US624 bln for the year but that is because trade is shrinking. Merchandise imports were down -7.6% in the month from the same month a year ago but services imports were up +3.4%. Goods exports were unchanged year-on-year while service exports were up +3.5%. The trade wars are all about the flows of goods and the Americans seem to be making no progress. If there are any gains, and they are minor, they are in services an area that has escaped the tariff wars. Their goods deficit with China is still running at -US$350 bln per year and while lower, it is not significantly lower.

And it seems unlikely they will get help from China anytime soon despite the Phase One deal. A Beijing minister said overnight that China will not increase its annual low-tariff import quotas for corn, wheat and rice to allow stepped-up purchases of agricultural goods from the US. Only the Americans claim the deal will increase ag trade; the Chinese have been silent on the matter.

And it seems Chinese bargain hunters were out in force on the Hong Kong stock exchange during the height of the protest movement there. That will explain why the Hang Seng index fares quite well during that period.

In Canada, housing markets are in a strong rebound in December both Toronto and Vancouver after a year of lackluster activity.

In Europe, retail trade volumes grew +2.2% in November from the same month a year ago and that was much better than the +1.5% gain expected and the gain in the prior month.

In Australia, consumer confidence fell -1.7% just last week alone to its lowest level in more than four years. A drop in confidence at the start of the year is unusual for them and almost certainly reflects the impact of the catastrophic bush fires over the weekend. Another view on consumer confidence will be released later tomorrow by Westpac.

Similarly, Aussie job ad levels tumbled sharply in December, but the reasons for this are more broad and can't be blamed on the bush fires.

The UST 10yr yield will start today a little firmer at 1.82%. Their 2-10 curve has also moved little overnight, now at +27 bps. Their 1-5 curve is at +8 bps. And their 3m-10yr curve is holding at +29 bps. The Aussie Govt 10yr is down -3 at 1.19%. The China Govt 10yr is little-changed at 3.18%. And the NZ Govt 10 yr has dipped marginally, down -1 bps to 1.53%.

The price of gold is continuing its upward march, up another +US$8, now at US$1,572/oz.

US oil prices have dipped slightly to be just over US$62.5/bbl and the Brent benchmark is also lower at just over US$68/bbl.

The Kiwi dollar will start today lower at 66.3 USc which is almost -½c lower. On the cross rates we are still firm at 96.3 AUc. Against the euro we are holding at 59.5 euro cents. That puts our TWI-5 at 71.3.

But bitcoin is up sharply today, up another +5.3% to US$7,932. The US-Iran crisis is said to be fueling the rise. 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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... real estate in the South Island has reached an " inverted yield curve " moment with average Dunedin house prices above those of Christchurch ..

QV says Dunners has boomed 18.3 % last year to $ 514 680 ...

Chch grew 2.3 % to $ 507 852 ...

Palmy North 13.7% - $484,000.00
Keep printing central banks - stocks and house prices, gold, bitcoin, can only go up faster and faster!

When I visited Dundedin recently I was stuck by how it looks like Christchurch used to look, with all the old buildings. It’s really quite a beautiful little city, but definitely cold, and a lot of the buildings need better insulation. Indoor/outdoor flow is not a big thing there, just keeping warm indoors is.

. . I was at the splendid farmers market @ railway station last Saturday ... 10'c at 10.30 a.m. ... wind chill temp 7'c .... everyone in puffer jackets : the great Dunedin summer !

I’ve always said the Dunedin railway station is the coldest place on earth.

Having grown up in Dunedin and experienced the Dunedin employment market, I can say the house price activity down there is ridiculous. There are no jobs to support these prices.

Investors dont care. Leverage away. Ex ASB economist clearly stated that investors always go large in the regions post Auckland coming off the boil. What they miss is that everywhere...is not Awk.

Re dairy auction "Volumes sold were +15% greater than the same auction a year ago, and today's prices are +13% higher than a year ago. SMP rose +5.4% from the prior event but WMP was up only +1.7%."
It's very weird that farm prices have dropped significantly.

... I'd say that's due to a combination of the 4 Aussie banks getting tougher , foreign buyers being held up by the OIO , and regular government rules changes ...

Who'd go out in public and proudly announce " I'm a dairy farmer " ... there is a perception that they're the pariahs of the farming industry . ..

GBH,

You may have seen a report that A Senator Mike lee-a libertarian Republican- walked out of a Senate briefing(on Iran) saying that it "was the worst briefing on a military issue" he had seen in 9 years. He will now support a measure to curb Trump's authority in Iran.

Still think that he is growing in competence? Yes/No? Personally, I find it a little scary that this ignorant, lying narcissist who probably couldn't find Iran on a map unaided, should have his fat finger anywhere near a nuclear button.

I think its the risk involved in lending to agribusiness. Given the price volatility and environmental concerns of dairy, banks are far more hesistant to lend to someone looking to go all in on a dairy farm

Richard Duncan this morning:

Corporate debt to GDP is at a record high. The previous three peaks in corporate debt to GDP were followed by recessions.
The increase in Corporate Sector Net Worth has been weak, only 11% since the first quarter of 2008.
Share buybacks have amounted to $4.4 trillion since 2012. Had corporations not bought back those share, Corporate Sector Net Worth would be 26% above its current level.
Corporate Profits After Tax have been flat since 2012 based on the National Income and Product Accounts published by the Bureau of Economic Analysis. However, S&P 500 corporations have reported a 57% increase in profits since 2012. Why the disconnect? Are the companies listed on the S&P simply better managed or are they just better at cooking their books?
Shares are trading on high PE multiples. The S&P 500 PE is 23 times vs. an average of 15.8 times since 1871.
Corporations are paying just 1% of GDP in taxes. They have not paid less since the Great Depression. The average level of corporate taxes to GDP since 1934 has been 2.6%. If corporations had paid 2.6% of GDP in taxes in 2018, government tax revenues would have been $329 billion higher and the government could have invested more. Consider that the annual budget of the National Cancer Institute is just $6 billion.
With debt to GDP at a record high and earnings flat since 2012, the Corporate Sector is the weakest link in the US economy. Large share buybacks have slowed the growth in Corporate Sector Net Worth and undermined the Sector’s ability to make long-term investments.

Management focus on short-term profit maximization (and share price appreciation), without regard for long-term growth is a leading cause of the United States relative economic decline, as is the Corporate Sector’s unwillingness to pay taxes.

The failure of US Corporations to make sufficient long-term investments in the country’s future makes it all the more crucial for the government to step in and invest on a very large scale.

Leverage
thats the only game in town

The simple truth is Central Governments have back shoveled 14 trillion dollars into the financial system since the GFC. The capitalist system is broken and on life support.

.. the capitalist system is not broken , its perfectly fine... just one part , the banking industry has let us down .... badly . .

And , rather than fix them up . .. no sackings nor jail time after the GFC .... the course of bailing them out was chosen ....

... hence where we find ourselves today... with investment bubbles popping up all over the place ...

The capitalist system has been knee-capped by the privileged few, US bankers, lawyers, bureaucrats and politicians in particular.

Have you got a couple of paragraphs/url that you use as a summary description of capitalism.

Free markets and price discovery. Not manipulation.

Do we know where that happens.
Esp. Point3.

13
up

This version of capitalism is broken and on life support. Diagnosis - as David makes the case repeatedly - is artificially low interest rates and central bank asset purchases.

The central banking system needs to be completely overhauled. Interest rates should be set by market demand for capital, not by some ideological “economist” who can’t find inflation even though he’s caused deflation by creating overcapacity. The only thing that inflates is asset prices. Madness.

. . over the years a number of high profile business people have called for the Federal Reserve to be abolished ...

Had we done the hard yards and revamped the banking industry , much of the current scenario would not have occurred ...

Abolish the banks. "Money" supply, credit creation in the hands of corporations, it's a no brainer that this is one of the fundamental issues.

Creating capital out of nowhere. It's a miracle!

It's becoming a casino!

Stock exposure has exploded at JPMorgan's federally-insured bank

https://wallstreetonparade.com/2020/01/stock-exposure-has-exploded-at-jp...

Federally-insured banks are not supposed to be making large speculations in the stock market. They are supposed to be using bank deposits to make loans to worthy businesses and consumers to help grow the U.S. economy and keep the United States competitive on the global stage.

But according to the official reports from the federal regulator of national banks, the Office of the Comptroller of the Currency (OCC), since December 31, 2010 the federally-insured bank owned by the monster trading house of JPMorgan Chase (JPMorgan Chase Bank NA) has increased its equity (stock) derivative bets from $337 billion to $2.4 trillion as of its latest report for the quarter ending September 30, 2019. (The data is found in a graph titled “Table 10” in the appendix of each of the quarterly reports published by the OCC.)

During the period that JPMorgan Chase’s positions in stock derivatives have exploded, both its own stock price and the Dow Jones Industrial Average have been on a sharp upward trajectory. (See chart above.)

Yes those who invested in Dunedin rather than Christchurch have certainly benefited from their decision. They were smart and have been handsomely rewarded.

Would prefer the market to be what it is in ChCh than Dunedin any day.
People have made plenty since the earthquakes in ChCh and with prices very stable and rental yields being excellent in ChCh, we couldn’t have it any better.
Why would anyone want to be paying $500k for an old cold weatherboard house in Dunedin with students to damage, when I can get excellent returns and no damage in ChCh?
Defies logic!
Your envy of successful investors Gordon is not very becoming of you!
2020 is it the year that you take me up on my challenge??
No you won’t because you have not got investments despite what you say otherwise you would be up for the challenge?

The MAN is right, never been easier to buy a house in Christchurch, and the yields better than 20 years ago. There are plenty of quality tenants if you have double glazing and a heat pump, which is not unusual in Christchurch. Just brought two units side by side, 252k each, in a top area, absolute mint condition. find that anywhere else in NZ.

Marton

Grey mouth.

Thames ... but a bit higher

Have been commenting that house price in Auckland in Mid Million Dollar range are going out fast and at a premium .

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=122...

Quaterly best increase in house price is bound to happen as prices were lower (Fallen) earlier and have bounced back since October. All positive data suggesting that house price have jumped is correct and is based on last 3 months perfomance, what has to be seen is how market now reacts with high prices as FHB are out of picture and so are many speculators in absence of future CG in short period but with fewer listing, chances of it going up is more but one never knows as markets (Housing as well as stock) are in vulnerable state - One catalyst and is all over as overly inflated.

So Barfoots December report will show an increase in median/average pricing ?

Are investors in Auckland now accepting of 4% gross yields, because at current price versus rental levels, that will be a common yield. The old ' rule's used to be 5-6%.
Perhaps that's still considered better than a term deposit, with the cream on the top being prospect of capital gain.

... with the cream on the top being the prospect of a tax free capital gain ....

Delicious ! ... it's a no brainer to invest in houses ...

I am still not convinced a CGT would make much difference. For example, if the rate was 25% there is still plenty of room for gain.

. . me too ... CGT is a shocker ... and Sir Mickey dished up a draconian version of a bad tax ...

Land Tax ! ... an annual small impost of 0.5 % on the value of all land ... no exceptions , no exemptions ... no ability to be avoided .... cheap to implement , simple to apply...

Yep!

All any taxes would make is to force prices up even more!
Capital Grotesque Tax in Australia hasn’t helped reduce prices as they are far higher over there.
People that think that the Australian houses are cheaper than in NZ are sadly deluded in general

The Man - wages are way better in Australia which gives the illusion of cheaper housing

The Man - wages are way better in Australia which gives the illusion of cheaper housing

... as I said , CGT is a bad tax ... why tax the wealth creation incentive . . Barking mad ...
.
Land Tax , taxes the unimproved land value ... lots of moola taken from the rich , to offset against PAYE and business taxes .... encourages work and business profits.....

Land tax is different - increasing the cost of holding land drives down the price.

And the American trade deficit for goods and services narrowed slightly to -US$43.1 bln in November and -US624 bln for the year but that is because trade is shrinking.
Exactly!!!!

Late in 2018, in response to the Trump Administration imposing large tariffs on certain Chinese-made goods, GoPro announced that it was going to shift a large amount of its production out of China.

That was, after all, the whole point; if cheap labor and unfair trade practices had stolen manufacturing jobs from the US, then raising the price on products they now produce was meant, and expected, to level the economic playing field. Bring those jobs back.

And they are coming back, at least to North America. GoPro as well as several other multinationals decided to get out of Asia entirely to avoid the trade wars. But they aren’t building new facilities in America, they are (and have already) taking it to Mexico. Link

The price of gold is continuing its upward march, up another +US$8, now at US$1,572/oz.

Some of the heavy hitters have backed up the truck and are loading up on silver. According to some, it's the only thing cheap enough to buy anymore.

Gold spiking this afternoon...my stocks are racing. Markets suddenly realizing Iran ain't going to sit idle. Prepare to be hit with higher oil prices and all that come with it.

Silver price racing too. I follow / own gold-related stocks on the ASX such as EVN, GDX, NCM, NST, OGC, SLR.

Quite a spectacular day you don't see that often with gold stocks.

Gold will come crashing down when it turns out there is deflation (no inflation) and Iran/Iraq appears to be just hot air. I just sold some physical, but hey I am a contrarian. Too many people positive on gold so time to do the opposite.

Gold will come crashing down when it turns out there is deflation (no inflation) and Iran/Iraq appears to be just hot air.

Doesn't make sense. If this were the case, surely the gold price relative to JPY would have been benign over the past 20 years.

I just sold some physical, but hey I am a contrarian. Too many people positive on gold so time to do the opposite.

Depends what you mean by "too many people." The vast majority of people have zero exposure to gold and the media pays little or no attention to it.

Vast majority of what? New Zealand? Duh not even the central bank of NZ holds any gold.

Gold overbought:

https://www.bloomberg.com/news/articles/2020-01-06/gold-has-been-this-ov...

Believe what you will. I have listened to all sides of the game extensively. I decided some time back it made sense to have at least some of my wealth in gold. Over bought - nah I doubt it...most people have none. Just understand it's not gold that goes up or down.... it's everything else around it that is moving.

Gold cannot be made or destroyed, duplicated or copied or traced. It does not rely on the the credit worthiness of another party to keep it's value. It is the ultimate store of value, unable to be crushed by any govt, dictator or crisis - it endures regardless. Having some of your portfolio invested is a no brainier.

Gold overbought:

On the RSI. Meh.

The precious stuff has a long way to go yet. China, Russia, India, Turkey & Iran (to name a few) have been increasing their gold reserves. Poland recently had their physical gold reserves repatriated from the UK. De dollarisation is well under way. Be prepared for a new global currency wether it be crypto or otherwise that’s backed by gold. I’m long on gold/silver.

LOL - I had a client who bought $350 million of silver around $7.50 an ounce in the 90's via Comex. His brother bought $750 million of platinum. They had their own bullion repository in Zurich which my bank delivered to. Later, either Credit Suisse or UBS bought it from them.

https://www.theguardian.com/us-news/live/2020/jan/07/trump-news-today-li...

Rocket attacks on 2 airbases. 2nd wave of rockets fired. Here we go

https://edition.cnn.com/2020/01/07/politics/rockets-us-airbase-iraq/inde...

Missile carriers being tracked are edging closer to US interests in Kuwait and Qatar

Update - Iran officials quoted saying that if US retaliates to this rocket attack, they'll hit Israel courtesy of Hezbollah
https://www.theguardian.com/us-news/live/2020/jan/07/trump-news-today-li...

I am picking dead cat bounce, regime wise.

All out war is in no one's interests. It's all fireworks and hot air.

The Fars News Agency (Iran) is tweeting an image of the attack, using a picture they gave to news agencies in 2017 when Iran struck ISIL targets in Syria.

Re Cindy Otis.

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