90 seconds at 9 am: Diverging tracks

90 seconds at 9 am: US retail sales better than expected; China's output stalls; Japan facing higher interest rates; Israel cuts to devalue its currency; NZ$1 = US$0.824 TWI = 77.2

14th May 13, 8:44am by David Chaston

Here's my summary of the key news overnight in 90 seconds at 9 am, including news of contrasting fortunes.

Firstly, economic news from the US surprised overnight. Retail sales unexpectedly rose in April, pointing to underlying strength in their economy and leading forecasters to bump up second-quarter growth estimates.

Less impressive however was news from China which recorded a modest improvement in its industrial output and retail sales in April but the slight gains were not enough to erase concerns over a weak recovery.

More worrying however was news from Japan that government-bond prices tumbled across the board for a second straight session Monday, bucking the central bank's aim of using huge purchases of bonds to lower interest rates and spur investment. Any rise in interest cost in Japan could sink their new policy direction.

They have enormous debt levels and can hardly afford the interest at the moment. They only have to reach 2.8%, when all government revenues will need to be used to pay that interest. The very last thing Japan needs is rising interest rates.

Israel’s central bank unexpectedly cut its benchmark interest rate to a three-year low of 1.5% and announced a program to purchase foreign currency to limit gains in the shekel. Early indications are that the strategy is working.

All eyes today will be on the Aussie election budget and what it says about the future of their economy.

However, interest here will also be on an expected announcement that Chinese-controlled Synlait will be partially floated on the NZX.

The NZ dollar starts today at 82.4 USc and nearing its low for the year, 82.9 AUc, and our TWI now stands at 77.2.

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20 Comments

by Stephen Hulme | 14th May 13, 9:16am 1368479802

Israel’s central bank unexpectedly cut its benchmark interest rate to a three-year low of 1.5% and announced a program to purchase foreign currency to limit gains in the shekel. Early indications are that the strategy is working.

Global rate cutting policies are the cause of the extreme disruption experienced in the JGB market.

No investor/trader is being being paid for credit or liquidity risk, so it’s hard to justify taking position.

Extremely low rates and exclusion from the moneyness of assets associated with regular closure of sovereign bond trading platforms forces a re-think of the return /risk parameters.

Unfortunately this change in thought patterns spreads like a virus to all other vulnerable sovereign debt markets where it is clear to all if the QE veil fails in one nation, it's just a matter of when and not if it will fail elsewhere.

by Stephen Hulme | 14th May 13, 2:13pm 1368497626

Goldman Sachs is trying to soothe the frayed nerves of unrelenting JGB sellers.Read article

in fact the JGBi market (when adjusted for a planned consumption tax hike in 2014) implies a considerably lower expectation of inflation (around 1%) to 2015 (the end of Abe's predicted 2Y plan).

There is always the need of an explicit adjustment caveat to correct the priced reality - it's now a normal assumption that so called "free markets" cannot be expected to discount the all known factors without the imposed adjustment.

Is Goldman facing unendurable margin calls on speculative long positions?

by Colin Riden | 14th May 13, 9:33am 1368480800

Firstly, economic news from the US surprised overnight. Retail sales unexpectedly rose in April, pointing to underlying strength in their economy and leading forecasters to bump up second-quarter growth estimates.

David, is the following about the same retail sales?

Karl Denninger blogs in response to the flollowing April retail sales data:

http://market-ticker.org/akcs-www?post=220677

"The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for April, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $419.0 billion, an increase of 0.1 percent (±0.3%)* from the previous month, and 3.7 percent (±0.7%) above April 2012. Total sales for the February through April 2013 period were up 3.7 percent (±0.5%) from the same period a year ago. The February to March 2013 percent change was revised from -0.4 percent (±0.5%)* to -0.5 percent (±0.2%)."

Note that February to March was revised down; this of course makes a 0 into a +0.1%.

Let's look inside the unadjusted figures, which is where I always go as they're counts and not subject to "let's add our own personal fudge factor to the number!" games.

Down this month were autos, furniture, electronics, food, health and personal care, gasoline, clothing, sporting goods, general merchandise, miscellaneous retailers, internet retailers and food and drinking establishments. What was up? Building supplies. That's it.

Some of the changes on an unadjusted basis were colossal. Electronics were off 11%. Food and beverage stores (groceries) were off 7.5% (!!) Gas was off about 4%, but remember that gas prices have been coming down, so the volume is likely close to unchanged. And internet-based sales were down 1.2%.

Sucks? Oh yeah -- but for "adjustments" the real figure was -2.6% for April.

You judge whether the "adjustments" are warranted -- or pure crap.

by Andy Rodgers | 14th May 13, 10:08am 1368482937

CR - Excellent analysis, MSM reporting is just propoganda. Why does DC continue regurgitating it?

by Stephen L | 14th May 13, 10:58am 1368485906

Virtually all the news reports in the US report the number as a positive; while adjustments do make sense to me. Easter, one less day in the month, seasonal factors are all in play. The census bureau may or may not be accurate in any one month, but it is widely recognised as being impartial.

David most definitely should report it.

A sample news report:

http://www.washingtonpost.com/business/us-retail-sales-edge-up-01-percent-in-april-with-sales-of-autos-and-clothing-up-and-gas-down/2013/05/13/65322b82-bbca-11e2-b537-ab47f0325f7c_story.html

by Stephen Hulme | 14th May 13, 12:35pm 1368491750

The question of impartiality in respect of US government departments is definitely in the eye of the beholder. Read article

by Colin Riden | 14th May 13, 8:15pm 1368519303

Why does DC continue regurgitating it?

Maybe there is an explanation here:

http://www.oftwominds.com/blogmay13/EricA-pt2-5-13.html

by Henry_Tull | 14th May 13, 10:51am 1368485460

China Dairy: 2012 Example 2012 farmgate price:in China $10.87 /KG MS

Synlait Milk sale/IPO:

Bright Dairy fell 2 percent to close at 14.85 yuan yesterday, before the announcement. The stock has gained 51 percent this year, against a 1.2 percent decline in the Shanghai A-share index.

Mengniu, the country’s largest dairy producer, said on May 8 that it had agreed to buy 26.9 percent of milk supplier China Modern Dairy Holdings Ltd. (1117) for HK$3.18 billion ($409 million) to gain greater control of milk supplies amid food safety concerns in the country.

Take a look at Modern Dairy:

http://www.moderndairyir.com/en/aboutus_ourfarms.htm

and

http://www.moderndairyir.com/hongkong/01117/events/14/EN/FY2012%20Annua…

2012: 4,314,400 ton of milk at protein 3.1% and fat 3.7%.

431,400,000 kg * 6.8% = 29,335,200 kg MS

2012 Milk Sales (RMB): 1,677,615,000 / 39,335,500 = RMB 57.18 / Kg MS

RMB to NZ$ = 0.19: 57.18 * .2 = NZ$10.87

EBITDA Margin 26.4%

and this from a standing start in Sept 2005.

Q: How are the Fonterra Farms in China going

as an aside: PRC of late, not known for selling things..

by Andrewj | 14th May 13, 10:56am 1368485792

http://www.dairyreporter.com/Regulation-Safety/Report-shows-Chinese-made-formula-better-and-cheaper-than-imports

by Henry_Tull | 14th May 13, 11:11am 1368486682

see page 20 of the power point for the:

Standardized and Scalable Farm Design Achieving Scientific Logistics

Management of Cows, Workers and Materials

If it is approx. NZ$10.87 kg/MS. at margin of 26.4%, then Opex is say NZ$8.00 for mega scale, all indoors/mechnical feed lot operation...

by Colin Riden | 14th May 13, 11:56am 1368489414

Production per cow currently 740 kg MS, expecting 850 by 2017.

Cold comfort there for Fonterra's strategy on China.

And production would appear to be without any dairy efluent being applied to land.

by Henry_Tull | 14th May 13, 12:08pm 1368490122

Beware the Irish, a leading global agribusiness consultant is warning New Zealand's food exporters.

Ireland is gearing up to take on New Zealand in its prized Asian markets, KPMG agribusiness head Ian Proudfoot told a conference of agriculture industry leaders in Wellington today.

http://www.stuff.co.nz/business/farming/agribusiness/8666657/Ireland-ey…

"They're not innovating to be as good as us, they're innovating to be better than us," Proudfoot said.

"They look at New Zealand as a role model and they want to be 10 per cent better."

The Irish would aim at the same markets and with the same products, because that was where the money was.

"I see a significant disruptive event coming to global agricultural markets and what that will do to prices I'm not entirely certain, but it is something New Zealand cannot afford to ignore," Proudfoot said.

In some areas, Ireland was ahead of New Zealand already.

by Colin Riden | 14th May 13, 1:07pm 1368493642

So Henry, when are NZ dairy farmers going to demand an industry strategy that is about more than the provision of cheap milk to processors?

Californian dairy producers at least recognise that they have that problem:

http://www.hoards.com/13apr25-california-dairies-leaving

"What you hear time and time again in the questions that department economists ask at hearings is, its concern is the viability of plants.

Its equation essentially is that there are 1,700 dairies and 60 plants. If we lose a bunch of dairymen it bothers them, but not near as much as losing one or two plants.

The department has a belief that plants must buy milk cheap in order to survive.”

Meanwhile, in NZ we have DairyNZ dictating a 'cheap milk for processors' industry strategy on behalf of the processors.

by Andrewj | 14th May 13, 1:49pm 1368496152

Thanks Colin

Destroying productive capacity

“But the effect of its policy is to destroy the productive capacity of the dairy industry. There is really no arguing that. I think the game changing difference is the banking industry, which made tons of money on the California dairy industry as it expanded all over the country, has begun to look at the dairy industry much differently. Clearly, without access to capital we never could have built what we built, and that access to capital is pretty much being cut off today.

by Henry_Tull | 14th May 13, 3:33pm 1368502399

Well first they have to realise such. Finding we're getting less than made in China is a good start -lol.

It was part of the deal re Fonterra, that Fonterra will take any and all milk, location no problem, at what is really a clearing price...

We remember the day when finding a coy to take new production was a problem.

The a2 model has potential, the Synlait one maybe less so (if ..).

The policy folk are just looking at the revenue (price * vol) margin/profit not in their thinking.

Banks did what they do, we have seen the bankers answer (produce more).. And emotive borrowers charged in..

by Colin Riden | 14th May 13, 7:40pm 1368517220

Well first they have to realise such.

Don't dairy farmers get pissed off that they pay industry levies that are then controlled by processors to ensure they don't realise such.

Or is the message control so complete farmers don't even notice?

by Henry_Tull | 16th May 13, 11:33am 1368660804

On the units budget the levies are as a net off of milk revenue. So not shown as on farm cost. We spend all our time (and f advisor/accountants tell us) to work on the things we can control, within farm boundary..
So its an after everything else thought.. and then, what can you do...

Maybe Fonterra farmgate price should be named.
as the lowest price,
the market clearing price...
the price at which anything will be taken..
the minimum price...

Imagine if Fonterra showed the tanker charges for each and every supplier (some do help out with collect costs).

Some corporate processors contracts give those processor discretion to pay 25 cents below Fonterra price... - go figure...

by Henry_Tull | 27th May 13, 5:31pm 1369632677

Fonterra Dairy Farning in China

http://www.stuff.co.nz/business/farming/dairy/8717483/Why-export-when-y…

Currently, the farms sell all the milk at the gate and do not process any into Fonterra products. In a highly competitive Chinese market the product is protected from sabotage with specially leased padlocked tankers and a record-keeping system that ensures the milk's traceability.

The brand's reputation means they can charge a premium for their quality and transparency in a country paranoid about food safety.

But with China's milk consumption increasing 7 per cent annually, there are plans for China farms' milk to be turned into Fonterra products within the next two years.

"We are not building farms in China just to have a farm in China - it has to be a part of a bigger play," Morris says.

Despite New Zealand's high quality dairy reputation being grown on fertile green fields, intensive confinement farming does have a role in the future of New Zealand agriculture, she says.

"Absolutely it has its place. I think there is a place for confinement farming throughout the world, definitely."

Simon Day's travel was funded by the New Zealand China Friendship Society.

by Stephen L | 14th May 13, 10:59am 1368485953

So the Israelis have joined the club of nations printing to keep their currency competitive; their excuse of a new natural gas field coming onstream is a less good excuse than say Christchurch Earthquake effect. Their gas will improve their current account; our rebuilding, albeit necessary, will worsen ours, and with the current financing arrangements, have the double whammy of lifting our exchange rate due to the capital flows to fund it.

Ironically, given Bill English clearly is very excited, Scrooge McDuck like, to have an extra $1.7 billion to play with as a result of selling off prized and irreplaceable power generating assets; he could have far more easily clicked his fingers Israel like, and had the $1.7 billion anyway. And we would still own the power generation. And our ewxchange rate would not be made worse through the process.

by Grant A | 14th May 13, 8:19pm 1368519559

Hopefully that's humour Stephen