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Brazil's credit rating downgraded, milk prices drop in China despite food prices increasing, improving employment and weak inflation complicate Fed rate decision; UST 10yr yield 2.22%, oil and gold up; NZ$1 = 63.1 US¢, TWI-5 = 67.5

Brazil's credit rating downgraded, milk prices drop in China despite food prices increasing, improving employment and weak inflation complicate Fed rate decision; UST 10yr yield 2.22%, oil and gold up; NZ$1 = 63.1 US¢, TWI-5 = 67.5

Here's my summary of the key events overnight that affect New Zealand.

The price people pay for milk and dairy products in China has dropped over the past year, despite food prices rising across the board.

Milk and dairy product prices dropped 1.2% year-on-year, when averaging the January to July change. This is despite food prices rising 2.1%, with veges up 5.3% and grain up 2.5%. On the bright side for New Zealand exporters, the price of beef rose 1.3%.

Rising food prices have largely contributed to China’s consumer price index increasing by 1.3% over the year.

On the topic of dairy, futures markets are predicting the price of whole milk powder will increase a further 10% at Wednesday morning’s GlobalDairyTrade auction.

Standard & Poor's has downgraded Brazil's credit rating to junk grade, despite the government’s efforts to regain investors' trust and pull Latin America's largest economy out of recession.

The faster-than-anticipated downgrade from investment grade has rocked Brazilian financial markets and will increase borrowing costs for the government and Brazilian companies. Brazilian assets will also suffer, as the risk of investment goes up.

The US job market is continuing to gain momentum. The number of claims for unemployment benefits dropped in the week to September 5th, marking the 27th week claims remained below the 300,000 threshold, which is usually a sign of a strengthening labour market.

Yet weak inflation pressures will complicate the Fed’s decision whether to raise interest rates. US import prices fell 1.8% last month, as the cost of petrol and other goods dropped. Import prices in the US have declined in 12 of the last 14 months.

In New York, the UST 10yr yield benchmark is down slightly to 2.22%.

New Zealand 1 to 5 year swap rates have dropped 8 to 9 basis points, following the guidance from the Reserve Bank’s Monetary Policy Statement. If these levels continue, banks will have the room to cut fixed mortgage rates even further.

The US benchmark oil price has inched up to just below US$46/barrel, while the Brent benchmark is at US$49/barrel.

The gold price has risen today, but is still very low at US$1,111/oz.

The New Zealand dollar is making some gains against the US, following its plunge after the OCR was cut yesterday morning. It’s now at 63.1 US¢.

The dollar’s dropped nearly 2¢ to 89.0 AU¢, due to a mixture of our OCR cut and fairly upbeat employment data released across the Tasman. The dollar’s fallen to 55.9 euro cents and the TWI-5 has dropped to 67.5.

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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11 Comments

The collapse in the US shale oil industry picks up steam:
http://www.bloomberg.com/news/articles/2015-09-10/shale-companies-get-re...

''With one-sixth of major independent oil and gas producers facing debt payments that are more than 20 percent of their revenue, austerity has replaced the swagger that characterized the earliest days of the oil bust. Contracts that locked in higher prices are expiring, leading banks to reduce credit lines in coming months. ''

''Illustrating the tough choices companies are facing, W&T Offshore Inc. announced Sept. 1 the sale of acreage in West Texas’s Permian basin, the highest oil-producing area in the U.S., for $376 million. The price amounted to about $8,000 an acre, less than a fourth what was paid for similar land in another deal just months ago, according to an analysis by Raymond James.The Houston-based producer spent $120 million more than it made during the first six months of the year, and has drawn about half of a $500 million bank loan. ''

Remember the BS we were being spun earlier in the year about how US shale oil was going to see the Saudi's off the park? US weekly oil production has tumbled 400,000bpd since July and is dropping like a stone (down 90,000bpd just in the past week). The shale oil Ponzi is nearing its end game.....

The impacts of a low price are indeed far reaching,

a) North sea oil, http://peakoil.com/production/north-sea-oil-at-serious-risk-of-shutdown

uneconomic at current prices.

b) US stripper wells, cannot find the piece but a % of these will be going off line as the effort to get so little oil is simply not worth it now oil is $50.

yet shale can still make money? got to wonder...

40 bux a barrel versus 100 plus, you will see supply come off and at speed. From what Ive read they can cap these wells and use the earth as the storage facility and tap back into them with ease at a later date. Lets see where the oil price goes once production stops

Once US production falls back towards 8.5mbpd (1st quarter next year) I would imagine oil will trade back in the $60 plus range. With the NZ$ seemingly heading for 0.55 to the US$ petrol prices here would get pretty pricey if that happened, and would cause the RBNZ more than a few problems....

Yes, main street and SMEs would be in dire straights. A 15% drop in oil suggests say 30cents a litre on petrol? Lets say oil goes back to $90 a doubling while at the NZD is still at 0.55, so $3 / litre petrol? even $2.50 would seem painful.

I currently use about 1 tank a month so my fuel cost goes from $80 to $100, $20 more a month for me is no biggee. I know ppl who use 1 to 1.5 tanks of petrol a week (and a bigger car / SUV) adding $150plus a month is going to be noticable. What does the RB do? to combat this "inflation" raise the OCR? taking even ore money out of ppls pockets? a double whammy, yes bound to end well.

It isnt taht simple, the problem is the finance/debt (and some smoke and mirrors),

a) servicing the debt much of which is junk bond status and has a significant interest rate on it. Leaving the oil in the ground is not much use.
b) futures, many fracking wells have a 3 year life so the driller gets a futures contract at a price that makes sense to drill to get the payback over 2 or 3 years. The problem is if the futures contract was say $90 for 3 years the driller is happy but the futures buyer is losing a shed load of $s. The thing is many specualtors having been caught with their pants down wont be back for a second round. (The ones that do will be burnt in round 3).
c) leaving the oil in the ground and not drilling more wells leaves a large support industry used to good margins and work with no income, they are going bankrupt at a great rate of knots. Another avenue where someone is losing capital hand over fist.
d) Oil companies report reserves which are based on the current oil price ie economic to extract. Example a 1000000 barrel field at $90 is a 700000 barrel field at $40. Also there is a Q, was that 1000000 ever real?

Kind of suggests some significant losses going on and possibly significant fraud yet to be uncovered.

So sure once the supply drops and the oil price goes back to $90~100 it then takes time to drill to supply. Meanwhile an economy has a huge brake put on it do to energy cost and goes into recession again collapsing demand. maybe just as more supply comes on just like this time, messy. A rinse and repeat, how long will speculators play the game and take significant losses?

Smaller shale operators go bust allowing the big boys (who can access cheaper funding) to take them over at a bargain price, and get value out of the reserves once oil prices bounce? On a fundamental basis it seems impossible for a barrel of oil to be worth 2/3 less within a year or so, speculation, market manipulation has to be happening (keep prices high to suck small players in at highly leveraged operations so they can be bought out later once prices pushed down?)

It is indeed a very interesting and complex situation made opaque by vested interests, incompetency and possible fraud.