90 seconds at 9 am: Relief rally

US Q2 growth surprises; Q3 indicators positive; But less drive for Sept rate hike; China blames US for share rout; UST 10yr yield 2.19%; oil higher, gold lower; NZ$1 = 64.7 US¢, TWI-5 = 69.1

28th Aug 15, 7:20am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news the relief rally seems to be gaining momentum on the back of some pretty solid data.

The American economy grew faster than initially thought in the second quarter, revised higher to +3.7% mainly on good domestic demand. This is one economy showing fairly strong momentum that could still allow the US Fed to hike interest rates this year.

However, the current quarter has seen the recent turbulent markets. And car sales in August look like they may come in less than expected. Still, July house sales were better than expected and the latest week of jobless claims were also better than expected. A mixed but generally positive picture for the world's largest economy.

A Fed member suggested overnight that the expected rate hike might not come next month. And a Chinese official said fear of that US rate hike was what caused the Shanghai stock market stampede, not anything to do with China's economy.

And the turbulence seems to be over for the time being. Chinese markets rose following their local rate cut, and American markets are higher as well.

As the calm returns, so does the fundamental pricing.

In New York, the UST 10yr yield benchmark is back to 2.19%.

The US oil price is also sharply higher, back over US$42 a barrel. Brent crude is back up at US$47 a barrel. Even the dairy futures prices have risen.

Gold has fallen further, to US$1,119/oz.

The New Zealand dollar has firmed to 64.7 US¢ as risk aversion fades. It is now at 90.2 AU¢, and 57.5 euro cents. The TWI-5 is up to 69.1.

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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15 Comments

by MortgageBelt | 28th Aug 15, 8:10am 1440706214

What happened to the predicted NZ OCR expected rate of 4.5% - the so-called new neutral?

by Stephen Hulme | 28th Aug 15, 8:55am 1440708959

Foundered on the shores of coercive people in high places exercising blinkered business acumen above their pay scale.The only palatable solution to hand is lower interest rates. Unfortunately as rates trend lower banks have less inclination to create credit and this week's foreign dislocations will feature more in a world already starved of wholesale credit growth. Our local bottom of the cliff victims being the taxpayers bailing out those associated with the Landcorp and Solid Energy etc. debacles. Fonterra cannot be far behind.

by Andrewj | 28th Aug 15, 10:08am 1440713282

Or Silver Fern Farms, going, going, gone to the man from China

by Sheep Shagger | 28th Aug 15, 11:07am 1440716832

Better not be!

by Andrewj | 28th Aug 15, 11:11am 1440717104

In todays NBR

quoteA Chinese-owned multinational is believed to be in the final stages of negotiations to buy into Dunedin-based meat processor Silver Fern Farms.It is understood that a Silver Fern delegation has travelled to China to pursue the transaction.

by Chris-M | 28th Aug 15, 8:15am 1440706540

Chinese blaming the USA for the share market crash - Really. The fact their market rose about 80% in a year because of their own foolishness was most likely the cause.
The fact that the Chinese government can make this sort of crazy assertion gives no confidence that they have a clear grip on the reality of the situation and that they will change anything meaningfully.
If anybody thinks that the crash in the Chinese market is going to stop at this point after such a crazy bull run has rocks in their head and all the intervention in the world is unlikely to change that.

by King of the whiners | 28th Aug 15, 8:41am 1440708103

Surprisingly informative article on Fonterra/dairying from the Herald:
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=115…

'''For many dairy farmers during much of Fonterra's 14 years, returns on assets and equity from farming operations have been poor. Analysts say that few farms cover their full economic costs (which include land, labour and capital) from farming.

The Ministry of Primary Industries' model dairy farms show accounting surpluses on farm assets of less than 4.5 per cent on average for 2008 to 2013. Profits and surpluses for reinvestment were highly variable.

Last year, industry consultant Peter Fraser and two colleagues surmised in a paper that farmers accept these uneconomic outcomes as part of "building a stake" in the industry and accumulating assets that will, in due course, deliver untaxed capital gains. From this perspective, farmers see their income as sufficient if cash flows cover farm costs, drawings and debt, but not necessarily their labour or equity.''

by childofthesun | 28th Aug 15, 9:24am 1440710668

Yes, KOTW it's an excellent article by Herald standards written by somone who has a clue. Some nuggets in there that are enlightening.

"Peter Fraser and his two colleagues also suggest that much of the growth in raw milk volumes is probably not profitable. They surmise that volumes have been increased as a result of farmers and their advisers taking an average cost rather than marginal cost approach. Fraser concludes that less intensive production is likely to be more profitable for farmers and better for the environment."
- Fonterra and all 10,500 farmer shareholders need to study ECON101.

"While the Australians have preserved effective competition at the farm gate, New Zealand's industry leadership has for decades focused on eliminating it. Fonterra claiming that it's our "national champion" is equivalent to saying we should have the All Blacks without the Super 15 and ITM rugby competitions."
- Our friends across the ditch have a far better grasp of competition and outcomes.

The model kicked for touch by the Aussies was proposed by McKinsey & Co who just happen to be consulting to Fonterra on their current restructure plan - what chance of an unbiased approach from them instead of a plan to reinforce the current model?

by Casual Observer | 28th Aug 15, 10:57am 1440716237

Fonterra and all 10,500 farmer shareholders need to study ECON101.

Not necessarily so.

The issue no one seems game to tackle is how much of that milk growth is as a result of DIRA requiring Fonterra to pick up any and all milk from farmers who wanted to supply it? Especially in the earlier days. Would there be dairy farms in Ranfurly, which is marginal, if not non profitable, for Fonterra to pick up milk from? You can substitute other places for Ranfurly and ask the same question.

by Henry_Tull | 28th Aug 15, 1:55pm 1440726958

So the Auckland Herald

Over the last 15 to 20 years actual dairy farming returns have not been too bad. The mistake you have made is thinking that each year we rebuy all our assets at the margin price (last man in price).

Just saying

We've never been a fan of accepting aggressive lending offers. But then thats the oz banks business. Best you match the last half of dairy debt against the production it delivered. The contribution their investment makes to the industry production or value seems not to match their returns.

The ave v marginal production is not black and white. You need think about how sharefarmers are motivated to build a herd. And cals at best seems to work in bands - why ppl are not happy with payout forecasters.

If the Ozzies were so good at upping fgprice, they would not have let the supermarkets shoot the place up so much, with bait pricing and copy cat product brands. - buyers agent as if... most over paid shop keepers on the planet. ..

Just look at the woolworths result. Take out the advantage they have from terms of trade with food suppliers. And as non food retailers, the retailing seems poor.

by Henry_Tull | 29th Aug 15, 8:36am 1440794202

grasping the nettle, and well done

Australian dairy farmers are being paid too much for their milk, says the boss of the world's biggest milk exporter, Fonterra. Most dairy processors in Australia, including Fonterra, are paying farmers an average of $5.60 a kilogram for milk solids.

Read more: http://www.smh.com.au/business/aussie-farmers-being-overpaid-amid-globa…
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page 7, and page 6 add a little background
http://issuu.com/ruralnewsgroup/docs/dna61_august

by cowboy | 29th Aug 15, 12:27pm 1440808033

well duh, NZ farmers shareholders get $4 and a bit, must own shares, no price war.
Aussi farmers get $5.60+ , in AUD, no need for shares, had massive price wars.

Fonterra went buying market share with farmers money. again. In other news, dog bites man.

by Henry_Tull | 28th Aug 15, 10:46am 1440715574

Shangj Pengxin look like taking a run at 2 Oz beef producers cps and Kidmans - meaning 550k plus head of cattle.
Seems that Hunan Dakang has some beef connections.

by cowboy | 29th Aug 15, 12:34pm 1440808485

As the Ccomputer company I was with, said once: We sell them very cheap in NZ, no margin (speaking to salesman who was _shocked_ at the price he could offer), we make margin back in factory :) :)
Because as long as the whole project is profitable why does it matter where the profit is made. That lets them make massive volume savings in the factory and automation end where they have a lot of control, and still compete on price alone vs local products. That is the big business supply-side model. It also means no small competitor can compete as there is no local margin to work with.

It also means
(1) no taxes at the NZ end, as there was no profit at this end.
(2) no big bonuses or salaries at this end as no margin to argue the point. Only dump quotas.
(3) no added value at this end
(4)no market competition at this end.
(5!) the cheaper and shittier they can can roll stuff of the production line, the more profits
(6!!!) all the profit stays in the country running the factories.

by Henry_Tull | 29th Aug 15, 9:00am 1440795633

He's the Scot who just sold David Jones to the Woolworths South Africa for $2.1 billion.
Now former brewing boss Gordon Cairns, as chair of the Australian Woolworths chain, has to sell a tough turnaround story to sceptical shareholders and penny-pinching shoppers. I think it's pretty clear the execution of Woolworths' strategy has been sub par for many years. Andrew McLennan

Cairns will formally replace outgoing chairman Ralph Waters on Tuesday marking the start of a new chapter for the troubled retail giant and its battered retail brands.

Read more: http://www.smh.com.au/business/retail/woolworths-chairman-gordon-cairns…
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