90 seconds at 9 am: Dairy prices unchanged

GDT auction disappoints; US housing starts fall; eyes on Fed and BofJ; Aussie housing values hit AU$6 tln; UST 10yr yield at 1.69%; oil and gold unchanged; NZ$1 = 73.1 US¢, TWI-5 = 76.6

21st Sep 16, 7:28am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news markets are awaiting some important central bank signals today.

But first, the heady optimism that there would be another good dairy price rise today has been misplaced. The NZX Futures market has given a false signal, and not for the first time. Prices are up just +1.7% today, but the key WMP price is actually down -0.2%. In NZ dollar terms overall prices are up +3.1% on a slight pullback in the currency in the last two weeks.

Attention will now turn to Fonterra's result announcement tomorrow and whether that changes the milk payout settings.

In the US, the August data for housing starts fell more than expected as bad weather disrupted building activity in the South. However, a good increase in permits for single-family homes showed underlying demand for housing is still solid.

The US Fed's top policy makers have started their policy meeting today and we will know the outcome of any decisions this time tomorrow. Markets are in abeyance until then, although bets for any change at this meeting are minor. But there are some.

However, later today we will get news from the Bank of Japan policy meeting and this one may also have some important news for financial markets. Expectations of a big policy shift are high.

In Australia, data out yesterday showed that the total value of their housing market now exceeds AU$6 tln (NZ$6.2 tln). They have 9.7 mln residential dwellings and that compares with New Zealand's 1.8 mln, or 5½ times as many. RBNZ data on the value of our housing stock shows it valued at NZ$930 bln. Australia's average price is NZ$643,000 while ours is NZ$510,000, or -20% lower.

In New York the UST 10yr yield is little changed again today at 1.69%.

The oil price is also little changed but if anything marginally softer, with the US benchmark price now just under US$44 a barrel, while the Brent benchmark is now just under US$46 a barrel. Just as an indication of how tough it is for some traditional oil producers, Venezuela is now almost a failed state and it has started importing oil from the US.

The gold price is up a little at US$1,314/oz.

The New Zealand dollar is also just a touch higher today, at 73.1 US¢, and on the cross rates it is at 96.9 AU¢, and 65.5 euro cents. The TWI index is now at 76.6.

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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50 Comments

by sharetrader | 21st Sep 16, 7:57am 1474401452

meanwhile in china, will be interesting to see how their government tries to control this
http://www.cnbc.com/2016/09/20/why-chinas-property-bubble-may-be-inflat…

by PocketAces | 21st Sep 16, 7:59am 1474401580

They will control it the same way as everything else, with a very heavy hand

by sharetrader | 21st Sep 16, 8:05am 1474401946

they made a shambles of trying to bring their sharemarket under control before its crash. I am expecting the same here.
too many greased palms to be able to control or stop it

by InfoWars | 21st Sep 16, 8:03am 1474401824

We heard the same thing in 2013/14 and there was no spectacular crash and burn. Same thing will happen again.

by Penguin | 21st Sep 16, 8:24am 1474403094

Interesting article and connecting one's. Shenzhen on 70x price-income multiple, London on 16x and Auckland on 9.45x.
Shenzhen even more crazy since they are only Leaseholds.

by Boatman | 21st Sep 16, 10:15am 1474409743

You are right , Auckland has a lot of potential upside still , but I would stay well clear of this market .

by Penguin | 21st Sep 16, 11:13am 1474413232

I'm not sure there is big upside in Auckland. The big gains have been made. I don't see too much downside in next couple of years due to the supply shortage. I see immigration is picking up again. Is it really going to fall to 19000 in 2019 as the Govt anticipates? very much doubt it.

by MikeM | 21st Sep 16, 8:18am 1474402713

Everything is on hold until the Fed speaks tomorrow. GDT no exception. The consensus is no change but any positions should be well covered. It will be a turbulent ride if there's any surprises.

by Stephen Hulme | 21st Sep 16, 10:10am 1474409447

Back home:

New Zealand's sizzling economy has prompted Goldman Sachs to go out on a limb and call an end to the country's easing cycle.

Data last week showed gross domestic product expanded 3.6 percent in the year through June, putting New Zealand among the fastest-growing economies in the developed world and suggesting inflation should finally start to gather pace.

The Kiwi economy is ``too strong to justify further rate cuts,'' Tim Toohey, chief economist at Goldman Sachs Australia, wrote in a note to clients. He cancelled the two rate reductions he'd been forecasting and said the Reserve Bank of New Zealand will now hold its official cash rate at 2 percent through 2017. Read more

by Stephen Hulme | 21st Sep 16, 1:31pm 1474421493

After two days in office, the bond market is signaling Reserve Bank of Australia Governor Philip Lowe is likely to preside over the end of his country’s longest monetary easing cycle.

Swaps traders boosted bets the RBA is on hold for the rest of this year to 73 percent as of 10 a.m. on Wednesday in Sydney, up from 51 percent at the end of August. Australia’s cash-rate target, which the central bank trimmed to a record 1.5 percent last month, is seen just 16 basis points lower in 12 months’ time, close to the smallest easing bias seen this year.

Australia’s economy is benefiting after commodity exports surged 30 percent from a trough this year and from unprecedentedly low interest rates, the RBA said Tuesday in minutes of the Sept. 6 policy meeting at which it left borrowing costs unchanged. The central bank is seeking to maintain a 25-year economic expansion that has faltered in recent years amid the collapse of a once-in-a-century mining boom and the spread of global disinflation.

“Given where rates are, the case to cut further has to be pretty compelling and when the data is mixed on the activity front it is clearly not a compelling case,” said Su-Lin Ong, the head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney. Read more

by Boatman | 21st Sep 16, 10:12am 1474409579

BUT ........... The Fed is going to have to restore some value to the price of Capital at some point not long from now .

The current imbalance in the economic fundamentals where the value of a factor of production ( Capital ) has been all but destroyed, is unsustainable in the long run.

Its going to be messy , of that you can be sure

by steven | 21st Sep 16, 1:36pm 1474421773

You mean all these 1s and 0s ceasing to exist? least of our worries.

by Penguin | 21st Sep 16, 8:51am 1474404660

Fed won't do anything.Too risky ahead of election and consumers not spending as much as expected.

Going back to property another artice-a year old-demonstrates the mad world we are in. I didn't realise London prices were as high relative to earnings.

It is nearly 3 years since the LVR's game into effect. Imagine where house prices would be if they had done nothing?!

http://www.businessinsider.com.au/ubs-london-property-prices-completely…

by xelnaga | 21st Sep 16, 9:05am 1474405542

Probably would have overcooked and crashed by now.

Strangely the London median price and the Auckland median price are very close to eachother.

But London feels more achievable at the moment with its much lower mortgage rates and much more money if your work is skilled.

Predictions of housing busts never come to pass. Central banks and governments don't let asset prices find a balance anymore. Pump pump pump.

by Groen_mamba | 21st Sep 16, 9:05am 1474405545

And here I thought we were the most unaffordable country in the developed world! Seems we have a way still to go with a measly 9.5 times income ratio

by Boatman | 21st Sep 16, 10:08am 1474409314

@Groen -m , The 9 X income ratio is a factor of three key elements and if we deal with the issues there is going to be a price reality check . We are drinking a dangerous cocktail right now, and everyone is going to have a terrible hangover when the party is over

Firstly the world is awash with QE money , which has debased the value of money so its chasing yield (such as in NZ), and that money flowed into NZ Banks and the banks are throwing it at us like confetti

Just wait for the Fed to start increasing interest rates, its inevitable .

Secondly, we are packing new migrants in here like sardines, at a rate per hour we can neither cope with, and did not plan for , and that is boosting demand for property.

Just wait until the next election , Winston Peters will be the cog in a coalition of Government , and he will certainly make immigration an issue .

Lastly we have had an Auckland council town planning administration that has been utterly incompetent in facilitating the orderly development of the city .

Luckily , we now have a plan , and its going to help development .

In the meantime , I would not dream of buying property in Auckland , as the underlying value is simply not there , the yields simply don't exist. To get a yield, rents (already too high) would have to quadruple , and by implication wages would need to double to meet that scenario .Its not going to happen as wage rates are already maxed out .

Lastly , if the Government had the balls , it would ring-fence property losses ( ie not allow them as tax deductions for salary earners ) AND tax ALL speculators using funds from offshore ( borrowed at 2% )

by middleman1 | 21st Sep 16, 12:18pm 1474417080

Lousy yields on capital invested in real estate have been a fact of life for a very long time now. The entrenched perception that housing values will continue to rise means yield will continue to be largely disregarded as an investment risk factor by Joe public. I wouldn’t count on lowering yield being the trigger for a price correction. Hasn’t happened down in Christchurch where supply has largely balanced with demand. Property investors charge on, drawn like moths to the eternally burning bright light of capital gain. They ain’t gonna change their behavior any time soon.

by dtcarter | 21st Sep 16, 1:37pm 1474421879

So council planners are incompetent and its mere luck we now have a new plan? Gee where did this new plan come from.... couldnt be the incompetent council working on it for the last 5 years. The plan must have descended on golden plates down from tbe heavens.

by Noncents | 21st Sep 16, 9:49pm 1474451388

Is it really a good plan, and if it is, will the plan actually be followed.

You still have all the other regs in place to ensure each and every individual can fight any proposed build/development.

NIMBYs reign supreme.

by Groen_mamba | 21st Sep 16, 10:51am 1474411866

I hear you boatman, but lets forget about investment for a moment. Is it feasible to rent, or buy?
Do anyone realistically KNOW when this bubble will burst, and in the meantime, do we spend the precious years we have left on this planet being scared of the imminent doom approaching, and lets face it, there will ALWAYS be some sort of imminent doom approaching if you are looking hard enough for it.

I have been battling with this question for the last 3 years, and held back due to the inevitable "bubble bursting any minute" comments on this website and other media. I estimate this has cost me $100k-$150k up to now, thank you very much. I have decided to pull the trigger, and bought a house recently to live in, as life is too short.

by Stephen Hulme | 21st Sep 16, 11:45am 1474415122

Microsoft shareholders agree - borrow to capitalise tomorrow's earnings today.

After the close, Microsoft announced that its Board of Directors approved an incremental $40BN share repurchase program and confirmed that the company is on track to exhaust it's current $40BN authorization by the end of 2016. The buyback represents roughly 9% of Microsoft's outstanding shares.

The news comes just a month after Microsoft completed its largest bond offering ever, selling $20BN of new notes with maturities ranging from 10 - 30 years and yields ranging from 2.42% - 3.75%. Read more

by dictator | 21st Sep 16, 12:32pm 1474417920

Nothing gives me more confidence in a company borrowing money to buy back shares to increase the share price. It's great leveraging earnings as well. An ideal time to dump their shares.

by MikeM | 21st Sep 16, 12:33pm 1474418028

I have often wondered if there would be a balance sheet recession in corporate America were it not stock buy backs.

by middleman1 | 21st Sep 16, 12:33pm 1474418037

A well reasoned decision GM. My formative years were heavily influenced by well meaning people who had lived through the great depression. Risk aversion was their mantra. Half my life went by before I shook their doom laden perspectives off. I've done fine but sometimes look back at the wasted opportunities with regret. You are damn right - life is too short. Provided you have done your sums correctly and left yourself a little bit of freeboard should something unexpected happen, your decision to become master of your own universe will bring you immense satisfaction. You can't plan for apocalypse - not worth investing any time in thinking about it.

by dictator | 21st Sep 16, 12:50pm 1474419026

The doom scenario is the doom scenario, and there's no way to operate investments outside of it. Where ever you invest there is a bubble and cash is at risk in banks. So if you can afford to service a mortgage or be able to increase payments or shorten the term they you might as well get one.

The fact is there will be a crash of some size and some time in the future, no one knows when. It could be like Hong Kong and be 25 years later. I hope the new house works out.

by Groen_mamba | 21st Sep 16, 1:25pm 1474421113

Thank you for seeing my point, I was actually expecting a backlash because I'm not following the "advice" everyone is sharing here.

I have left myself enough room to adsorb quite a bit of increases. Until then, I'll be paying off extra on the mortgage.

by dictator | 21st Sep 16, 2:14pm 1474424059

I regularly state that people need to be extremely cautious and that people need to take measures in the event of a crash. Having a sound budget, not buying too much house for your needs and rapidly paying down debts are all good things. These are sensible measures to take.

What I more commonly come across on financial forums are people (usually in the US) planning on buying a house when they have a lot of credit card debt, no cash buffer for emergencies and only $4000 saved towards a deposit (that really should be used to pay off credit cards). There are many people making far worse financial decisions.

by Noncents | 21st Sep 16, 9:52pm 1474451575

" I have decided to pull the trigger, and bought a house recently to live in, as life is too short."

That's the key point. For the majority of people, it is shelter they are after - not an investment

by Stephen Hulme | 21st Sep 16, 11:52am 1474415574

A report from the National Institute on Retirement Security (NIRS) recently pointed out just how ill prepared American's are for retirement. The study by the NIRS found that the average American household has $2,500 saved for their retirement. Even worse, the study found that even people near retirement (aged 55-64) have only set aside $14,500 which should allow them to live very comfortably for about 2-3 months. Read more

Is New Zealand fundamentally different?

by KH | 21st Sep 16, 12:07pm 1474416457

So what do you need in New Zealand. About 2 million net assets (as a couple). Anything less would make me nervous. If you are unfortunate enough to live in Auckland you still need somewhere to live that you own, so maybe 3 million. And with all this, there are still some tricky uncertainties.

by dictator | 21st Sep 16, 12:39pm 1474418389

We have high numbers of people with either no retirement savings or are on an indefinite kiwisaver contribution holiday. In the US people have had 401K accounts for a long time whereas we have only had kiwisaver for a short amount of time. Generally we'll be as badly off or worse than in the US.

In should be considered that the US has had it really bad for jobs, under employment and low pay since the GFC.

We will have a crisis because even those starting with kiwisaver on their first day of employment will still have an inadequate amount of savings.

by ham n eggs | 21st Sep 16, 12:46pm 1474418779

I wouldnt waste money preparing for retirement - retirement belongs only to the cheap Oil age when economies were growing and could afford to fund a whole lot of retirees in the form of saved energy coupons. Regardless of any pixel numbers which say youve got coupons stashed, all thats available each year to consume is all that the world economy produces .. pretty soon, as money is being completely debased, your energy coupons wont be worth jack.
Like a Greek pension scheme, only worse, because no-one can bail the whole system out.

by Zachary Smith | 21st Sep 16, 12:50pm 1474419002

Do you have a solution?

by ham n eggs | 21st Sep 16, 3:43pm 1474429406

In short - there isn't one. The future simply can't pay. You cant replace a system built (and built to run) on ever INCREASING amounts of cheap abundant, dense energy with expensive, intermittent, low density renewables. There can't be solar powered freight for example ... it just not feasible. The increase requirement relates to interest payable / dividends etc ... so as the system becomes increasingly broke, returns fall to nothing ..

The future has to be able to deliver these promises or the system falls apart .. Gail Tverberg puts it well..
"Our whole system is based on future promises, and those future promises require some kind of compensation for the delay in obtaining the promise–interest, dividends, or capital gains. This is the way the “carrot” works, to make our system continue to move along"

by middleman1 | 21st Sep 16, 2:01pm 1474423296

Let’s say your scenario is fulfilled - that the move to renewables and development of new technology does not displace coal driven steam engines - sorry, meant to say oil powered combustion engines. For the value of ‘saved energy coupons’ in the form of share equity mortgages on future production to become worthless, the company would either have dissolved completely or their residual equity appropriated by the state. Just like that, here today, gone tomorrow. Not a slow death of sunset companies, no progressive creation of non-oil dependent energy and transport substitution technology, the current move to energy efficiency halted, population decline in high energy consumption countries reversed and of course, an end to further oil discoveries. What Armageddon style overnight event do you envisage will herald the dawning of your new pensionless age? And what if your horsemen of the apocalypse turn up 30 years later than predicted and by then this penniless fossil is not able to work ?

by steven | 21st Sep 16, 2:47pm 1474426036

Peak oil. Oil is peaking now in output per day and effectively gone from the world's economy by 2050 (probably earlier) so its not likely you have 30 years, probably not even 20. All the investments in the world assume a grow for ever on a finite planet business as usual model, not being able to work would put one in the victorian poor house category.

by ham n eggs | 21st Sep 16, 3:46pm 1474429575

exactly. But energy per capita actually peaked about 10 years ago, so we are already in decline phase, and economies to scale means it wont be a steady slope down.

by positivelywallstreet | 21st Sep 16, 4:01pm 1474430462

A worst scenario would be a return to pre industrial populations, Great Britain had about 10 million people in 1810 so we probably could support the same population , like the maori, mostly living in the Upper North Island.
Party on people!

by ham n eggs | 21st Sep 16, 3:58pm 1474430318

Reality is its all interconnected and you wont move freight by anything but Oil. A company can become worthless overnight pretty easy if a link in the chain breaks.
time frame is all relative, so who knows how and over what period it pans out. Personally, i think you will see Govts go on a huge infrastructure spending spree in the name of growth and demand (which is obviously essential for nobody down the track) ... which might give us a few years - so 2020's probably good, 2025-30 id be surprised if we all arent in complete crap.
But if you ask someone in Venezuela for example, its all happening much quicker...

by profile | 21st Sep 16, 4:27pm 1474432027

Anything but oil? "Peterbilt Motors is offering the Cummins Westport ISL G Near Zero NOx emissions natural gas engine for its Model 567, 520, and 320 trucks.

The new engine’s performance and efficiency matches the current ISL G with 320 horsepower and 1,000 lb.-ft. of torque available. The engine option is aimed at customers with linehaul, vocational, and refuse applications."

by ham n eggs | 21st Sep 16, 4:48pm 1474433325

Fair point - but can it be scaled up without massive infrastructural cost?

by profile | 21st Sep 16, 6:25pm 1474439121

Only thing stopping it is $40 oil. China are rolling out at scale. Given the diesel particulate death rates a few filling stating is a small price to pay.

by ham n eggs | 21st Sep 16, 8:43pm 1474447385

The $40 Oil is ironically the problem. If we cant get growth to lift the Oil price, how can a more expensive alternative logically replace it? In this case businesses would have to pay for conversions or new vehicles as well as all infrastructure changes.

by Noncents | 21st Sep 16, 10:35pm 1474454116

No, no it's not. To save for 20+ years of no work, with a work life of 40-45 is simply not possible.

As an example.

Assume that the current Pension provides a base level income you need to survive in retirement. That is $792.34 per fortnight for a single. So $20,600 per annum or $412k over 20 years.

From all my analysis, an assumption of 0% (yes zero) in investment return over the life of your saving, seems to be fair. This is based on
- inflation eating into your gains,
- at some point in 40 years you will experience a loss(es) of your capital
- possible legislature changes (e.g.Taxes. The GST change in 2010 knocked 2.5% off everyone's retirement at the time.)
- fees
- and an array of other unforeseen events that no-one can predict.

So in theory over a 40 year working life you need to put away approx $400 a fortnight to meet this. Median income is about $1000 a week, so 20% of my gross income needs to be put away for the bare minimum to survive.

So my biggest expenses are (in order)
Rent/mortgage = $400 per week (based on current NZ Median in greater Wgtn)
Retirement Savings = $200 per week
Tax = $160 per week (no student loan)
Leaving me $240 a week to cover everything else.

Which sounds great except for one thing - a median house in NZ is $459k, at 20% deposit I need 92k. To save that in 5 years I need to put away $353 a week.

As I can't put away that, it means I am paying rent for the rest of my life, which means that I have to somehow live off $792.34 a fortnight, even though my median rent is $800.

Who needs food eh?

by middleman1 | 21st Sep 16, 4:10pm 1474431022

Venezuela is a home grown disaster. Extrapolating their disastrous attempt to create a marxist utopia to Western democracies like NZ in support of an impending meltdown theory, is nonsense.

by ham n eggs | 21st Sep 16, 4:47pm 1474433241

No - it simply an illustration of what happens when a system set-up to run on the largese offered by high Oil prices suddenly finds itself with low prices and no fat in the system for the Govt to underwrite anything.
You need to think of it like this - a barrel of Oil takes so much energy to extract and refine, which then leaves so much excess for the system to consume. The surplus pays Oil cos, Govts to fund their promises and ultimately consumers to consume stuff. The Govt "tax" part is a biggie - thats how they make stuff happen - like an overhead that cant be shrunk. All money has to underwritten by energy to be worth anything.

by middleman1 | 21st Sep 16, 5:51pm 1474437106

Agree with your last sentence but not with the assumption underpinning your doomsday prediction - that the ratio of energy consumption to GDP is a constant and therefore unsustainable in an ongoing economic growth context. Technological advancement will deliver ongoing reductions in energy utilization rates per unit of production. The tipping point where growth must stop, will come. But unlikely to be within the retirement consideration phase of most commentators and readers of this site.

by ham n eggs | 21st Sep 16, 8:35pm 1474446929

the historical relationship between energy and gdp is close to 1, and Jevons paradox, means as efficiency utilization increases, more is consumed, not less.

by Zachary Smith | 21st Sep 16, 7:57pm 1474444650

There are possible solutions to this problem.

by ham n eggs | 21st Sep 16, 8:36pm 1474447000

please spell them out...