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Dairy prices unchanged in USD, down sharply in NZD; WMP weak; US Fed stands pat, still signals hikes this year; UST 10yr yield 1.60%; oil lower, gold higher; NZ$1 = 70.6 US¢, TWI-5 = 73.9

Dairy prices unchanged in USD, down sharply in NZD; WMP weak; US Fed stands pat, still signals hikes this year; UST 10yr yield 1.60%; oil lower, gold higher; NZ$1 = 70.6 US¢, TWI-5 = 73.9

Here's my summary of the key events overnight that affect New Zealand, with news the US Fed is turning more cautious.

But first up today, the overnight dairy auction brought no change to overall prices. However, the key WMP price did fall sharply. It is down another -4.5%.

But, as the Kiwi dollar has strengthened considerably since the last event, prices in local currency have sagged noticeably. Overall, prices in NZD are down -3.5%, wiping out the gain we saw on June 2. The WMP price in NZD is much worse, down -7.8%. It has been cheese, butter, and SMP prices that have trended up to limit the damage.

In China, they reported electricity use was up +2.1% in the year to May. This may be a better indicator or actual China growth.

Earlier this morning, the US Fed scaled back plans to hike its benchmark interest rates as economic growth has disappointed expectations. But it has still signaled that two more increases this year are on the cards. The Brexit vote in the UK was a key reason the Fed held today.

It said it expects the American job market to strengthen after a surprise weak May reading. And 11 of the 17 Fed policy makers expect more than one rate rise in 2016 even though that is one fewer than at the last count.

This latest assessment comes after stronger than expected retail sales were reported yesterday, producer prices rising more than expected, and better than expected factory conditions in the New York region which were all reported today. But the Fed's own assessment of industrial production nationwide was weaker in May.

Equity markets are higher today in New York.

However, the benchmark UST 10yr yield is basically unchanged following the Fed statements at 1.60%. Yesterday we saw local rates fall and flatten but overnight they rose, cancelling out that drop.

The oil price is falling today. The US benchmark is now just under US$48/barrel and the Brent benchmark just under US$49/barrel.

The gold price is up slightly and now up to US$1,291/oz.

And finally, the NZ dollar, which fell earlier in the day is back to the same levels it was at this time yesterday at 70.6 US¢, at 94.9 AU¢, and at 62.6 euro cents. The TWI-5 index is now at 73.9. We should also note that the embattled Nigerians have been forced to float their currency, which promptly tanked, in the face of their severe economic crisis brought on by low oil prices and rampant corruption.

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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10 Comments

The WMP price in NZD is much worse, down -7.8%. It has been cheese, butter, and SMP prices that have trended up to limit the damage.

The malinvestment consequences of out of thin air virtual bank credit creation once again bears down on the farm land banking speculators. How long before the glaring, unsustainable retail mortgage monster sucking up any disposable private income from remaining productive endeavour breaks as well?

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How long before the glaring, unsustainable retail mortgage monster sucking up any disposable private income from remaining productive endeavour breaks as well?

While we allow Foreign direct investment... this can go on ...and on....
There are plently of entities whos' cost of money is almost ZERO.... if not -ve.
Now that the ECB is buying corporate Bonds.... I can imagine that some entities can even weather buying assets that have -ve yields....

In terms of the people who are the "real productive producers".... they are being driven out and being replaced by the "financial elite".. ( for want of a better term ).... The new.."landed aristocracy"..... the Multinational... ( not possible to compete with someone who can borrow at almost 0% )

This is the end result of Global Central Bank Policy...
There will be no crash in New Zealand while the tap of Foreign investment is open.???.... or at least until Central Banks have a change in Policy direction...

just my view...

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The industrial sized chunks of foreign wholesale funding underpinning 21% of total NZ bank funding is borrowed at a credit premium to say I to 5 year USD Libor, but is swapped back to NZD funding rates plus a basis premuim to hedge forex exposure. The costs of these transactions offer little in the way of advantage other than placing the liabilities off-balance sheet and away from regulatory scrutiny. The added bonus, of course, is the C/A deficit is funded.

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yes... Farmers will service those Bank loans ...until they can't. .. and the the Farm can be sold to a Foreign entity for an uneconomic price , simply because a return on Capital is not the primary motive...
If unfettered... the whole of NZ can be sold..???
No need for NZ Banks to be financial intermediaries..????

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The foreign entity purchasing the NZ domestic asset will finance it locally via a tax haven subsidiary, but the employed plus plus interest cost markup regime will facilitate tax avoidance after financing costs register NZ profit losses. Meanwhile the usury profits are exported without impediment.

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Stephen... Is that a guess on your part..??
If I was a foreigner ( especially EUR, Japan, China)... I'd borrow at 0% in my homeland....and might not even bother to hedge the FX risk.... or else hedge it in my own way...
( and use the principles of transfer pricing...???? )

I don't see any advantage in borrowing locally..??

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We want foreigners to buy our assets because they pay the best prices. Having foreigners pay more for our assets means New Zealanders can't afford them. New Zealanders don't have enough money so we need foreigners to buy our assets.

Such circularity turns discussion into a tail-chasing dog, particularly when sales of farmland to Chinese are involved.

However, Chalkie reckons one aspect is often overlooked.

Why would an overseas buyer pay more for an asset than a New Zealander? Is it because they can accept lower returns on capital? Perhaps. Is it because they can sweat the asset more? Again, perhaps. But Chalkie reckons one reason stands out - tax.

There are huge tax advantages available to overseas investors that simply cannot be accessed by locals. They crank up the returns available to foreign buyers and make New Zealand assets worth more to overseas owners than to New Zealand residents. Read more

There is another glaring, but more recent, example laid out by the same author in respect of Haier, unfortunately behind NBR's paywall.

This does not deny your claim, but the foreign parent owner will borrow a cheap to fund foreign currency to offer as collateral against NZD funding utlising the FX hedging function of a cross currency basis swap.

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Take a look at just the WMP
- eg. the 6mth contract strip (index aside).
https://www.globaldairytrade.info/en/product-results/whole-milk-powder/
Very uncool.

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The world is spinning out of control as a consequence of decades of failure to address any of the fundamental issues, and supposed leaders now have no idea what to do, so they either do nothing or try more of what has already failed miserably.

It's going to be a very interesting northern summer, especially in America.

http://mead.uslakes.info/level.asp

https://robertscribbler.com/2016/06/14/death-valley-like-heat-predicted…

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Too committed to the "free market economy" and too blind to the chaos it is causing and firmly in the belief that their wealth and power will protect them from the consequences, irrespective of what they are.

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