Dairy prices hold; US tourism drops; US building permits up; US current account deficit rises; Canada budget deficit jumps; Aussies rethink 4 pillar policy; UST 10yr yield at 2.24%; oil and gold slip; NZ$1 = 73.2 US¢, TWI-5 = 75.2

Here's my summary of the key events overnight that affect New Zealand, with news Australian regulators are re-thinking the risks of their 4 pillar banking policy.

But first, today's dairy auction has brought a small gain, the second in a row. But in fact, prices have been essentially flat since May. The gain in US dollars was +0.9% with the key WMP price up +0.6%. In New Zealand dollars, in fact overall prices were -0.2% lower and that is because the Kiwi dollar has found some strength overnight. Volumes sold were their highest in almost a year although these auctions only represent a small part of the product the NZ dairy industry actually has available, probably less than one third.

Fonterra's annual result will announced next Monday (September 25) and that this latest auction would suggest it won't be changing the current $6.75 milk price forecast.

In the US, the international distaste for their politics is having an effect on their economy. Tourism is down sharply in 2017, down -4.2% compared with the same period a year ago and a loss of US$2.7 bln in tourism spending. In the similar period of the previous Administration, tourism was up +6.4%.

Separate data shows that American building permits were up a very healthy +8.3% year-on-year in August while housing starts inched up +1.4% on the same basis. A pipeline of work is building there.

And the US current account deficit, which is the broadest measure of US trade, rose to -$123.1 bln (NZ$) in the second quarter - its highest level since 2008. That is -2.6% of GDP. We will get our New Zealand equivalent today, expected to be a similar -2.7% of GDP. Our track is declining.

In Canada, they ran a smaller budget deficit that was expected, but it was still much larger than the year before and is growing after a string of nine such deficits. Prior to the GFC it regularly ran surpluses. A recent change to a left-leaning government has boosted spending far more than revenues. Still, the current deficit is 'only' a bit less than 1% of GDP. Their federal debt is more than NZ$700 bln however (ten times more than New Zealand's).

In Norway, their sovereign wealth fund built on the back of its oil resources has reached the value of US$1 tln for the first time since its establishment in the 1990s, meaning that each of its 5.3 mln citizen owns about NZ$250,000.

In Australia, their competition watchdog wants the "four pillars" policy that prevents big bank mergers or sale to be put under the microscope, saying there is an argument it insulates the banks from fierce competition.

In New York, the UST 10yr yield is still firming ahead of the Fed announcement tomorrow and is now at 2.24%.

The price of crude oil has slipped again to be over US$49.50 a barrel, while the Brent benchmark is just under US$55.50.

The price of gold has also slipped, down -US$2 at US$1,305/oz.

But the Kiwi dollar is up today. It is now at 73.2 US a rise of about ¾c. On the cross rates we are also a little firmer at 91.4 AU¢, and 61 euro cents. And the TWI-5 index is now at 75.2 and that is a one month high.

If you want to catch up with all the 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

what a lot of foresight the politicians of yesteryear had in Norway, pity ours only focus on three years and dont plan long term.
are the aussie government rethinking the 4 pillars because they are now too big to fail, and they dont have the balance sheet to back them like they did in the GFC so they can carry on as per normal.
I'm not sure people appreciate how things could have gone i the aussie government of the day had not stepped in as these same banks do most of NZ banking as well

Our Superfund is the equivalent which is sitting at $35b. We're a long way off from $1t and the Government hasn't added any money to it. Then again this is no different from the Government Pension which was underfunded by 75% leaving us forking out for that mismanaged and dodgy scheme.

The fundamental problem being that banks hold all the money and therefore the power and politicians being reluctant to hold them to account. The Aussies seem a little unusual in their regulator does seem to be trying to do it's job properly. However the fundamental problem persists - that any money deposited into a bank becomes the banks property, and depositors are just unsecured creditors. That need to change, before bank behaviour will change.

So based on the above analysis people don't like Trump's policies and, therefore, are not going to the US on holiday but the taste for American goods and services increases. Maybe some empirical evidence please.

Agreed, I have a feeling this decrease in tourism may be more correlated with a strengthening USD and higher inflation than has been present in the last decade, rather than a change in political party.

No strong empirical evidence on my part to support the hunch, bar the facts that the USD has strengthened and inflation is creeping higher.

Don't agree that "taste for American goods and services increases". May be the reverse. The only thing holding up US exports are aircraft sales (and military equipment). Otherwise US exports are weakening.

Evidence for both (tourism, exports) is in today's detailed Current Account data

Also don't agree the US dollar value has much if anything to do with this. The USD index is now where it was in 1993, 1997, 1999, 2003, 2005, 2009, 2015. Yes, it swings, but within a tight +/-10% range only.

The empirical evidence I was after is the cause for the figures not the actual figures. Correlation is not causation.

Causation may actually be the horror stories coming out of some terminals where tourists have received some pretty appalling treatment by Homeland Security staff. Personally I was a little concerned having travelled through recently, and having to pick up a connecting flight with a narrow window, but i found the Homeland Security staff polite, helpful, courteous and the total process of entering the US largely painless considering. Indeed some wry sense of humour emerged as well from them. May have been the Kiwi passport that helped, but everyone I saw was being treated the same.

Norway does have a housing bubble. I like the way they fund education, with Norwegian students getting scholarships to universities overseas.
They are heavily invested in the USA which could be problematic.

I was looking at electric cars yesterday and thinking about PVC on on the roof and charging the car. If I could do that, get a something like a Nissan leaf and run it off the roof of the house, the surplus generation going back to the house then I am thinking it's a game changer. Maybe the new Toyota will be worth waiting for? It would only be economic due to the high taxes on motoring in NZ.

https://techcrunch.com/2017/07/25/toyotas-new-solid-state-battery-could-...

My new farm bike
http://www.ubcobikes.com/

What are your thoughts

Electric cars are not a game changer - Above anything, you need a reason to travel - that reason is industrial society - which is fossil fuel based. See this presentation - slide 11 visually spells it out
http://www.feasta.org/wp-content/uploads/2017/01/Systemic-Change-Rev-7.pdf

Solar panels also may make sense individually - terrible for the grid as a whole (and the 1 to 4 tonnes of coal burned per panel means pollution is actually brought forward ...)

https://www.businessinsider.com.au/131-years-to-replace-oil-2010-11?r=US...
"It Will Take 131 Years To Replace Oil, And We've Only Got 10" ... written in 2010

Despite a recovery that is now the third-longest on record, America is trapped not in a 1970s-style, double-digit inflationary upsurge, but a slow-inflation quandary. Price growth jumped in August, driven by energy and accommodation prices, yet investors still doubt inflation will be strong enough to merit more than a couple of interest-rate rises before the end of 2018.

“It is a puzzle and raises a real question what the Fed should do next; I would have thought we would have been seeing more inflation pressures by now,” says Jon Faust, a former adviser to Ms Yellen at the Fed now at Johns Hopkins University. “At a time when there is a confusing economic picture we don’t know who will be judging that picture in a few months’ time at the Fed. That added uncertainty is not a good thing.” Read more

A cease and desist order must be enacted in order to pause matters, until central bankers do understand what they are doing.

Whether in response to rising scorching tensions with the US, or simply to provide support for the ruble, on Tuesday Russian President Vladimir Putin instructed the government to approve legislation making the ruble the main currency of exchange at all Russian seaports by next year, RT reported citing the Kremlin website.

The head of Russian antitrust watchdog FAS Igor Artemyev, many services in Russian seaports are still priced in US dollars, even though such ports are state-owned. So, in order to "protect the interests" of dockworkers and their complyees with foreign currency obligations, the government was instructed to set a transition period before switching to ruble settlements.

While Russia's stated motive for the unexpected redenomination of trade at some of its largest trading hubs has to do with domestic economic policies, there is speculation that the timing of this decision has been influenced by the recent diplomatic fallout between the US and Russia, the result of which would be an heightened demand for the ruble, especially since it is rather complicated to find alternative sources for Russia's largest export by a wide margin: crude.

And while it is still early to discuss whether Moscow has launched the "Petrorouble", Putin's rejection of the Petrodollar in yet another aspect of economic life will raise quite a few eyebrows around the globe. Read more

Yes, they have to do someting. The Russian ruble has halved in value from 2015 to 2017 (going from 30 to the USD to 60 to the USD), making them poorer, and extending their recession.

Do you think this action will help though? Personally I doubt it. We will know in about a year.

I think they would be better a) tackling endemic corruption and b) investing in non-oil activity. Neither is likely to happen though. Plus demographics are against them in a massive headwind.

Re: The 4 Aussie Pillars...
"Matt Barrie, who rarely minces his words, says the Australian economy is "completely stuffed", over-reliant on the property boom and the innovation debate is incorrectly focused on mining, which is an industry in decline. Barrie is blunt but he is one of the country's few successful entrepreneurs alongside the founders of Atlassian, SEEK and WiseTech Global, so knows what he is talking about."
http://www.afr.com/brand/chanticleer/two-sides-to-australias-innovation-...

Great read from Chanticleer. But its quoting of chief Gubmint scientist Alan Finkel is fox/henhouse stuff. Because t'other factor that's going to get Oz into trouble is their electricity supply.

They are currently (sorry) back-pedalling fast on the notion that coal-fired generation has to be shut down. SA literally blew up Playford A (90Mw) , stopped Northern (520Mw) plus Playford B (240Mw), and VIC has shuttered Hazelwood (1600Mw nameplate). The SA-VIC interconnect has a capacity only of 650Mw, and as VIC is now finely balanced between demand and generation, it has little average surplus to send across the border. With the kerfuffle over Liddell (2000Mw nameplate), scheduled for decommissioning in 2021, continuing, it seems that Oz has discovered the limits to wind and solar penetration versus a stable grid.

The SA black system in September 2016 is a direct result of the enforced retirement of dispatchable power (wind and solar are not reliably dispatchable) and there have been a series of load-sheds and shorter blackouts across the state since then. There has been a scramble for reliable synchronous generation, culminating in a diesel-fired turbine install on a just-in-time basis http://www.adelaidenow.com.au/news/south-australia/state-government-to-p...

AEMO (the market operator) recently issued a prediction which, while couched in bureaucratic terms, shows that electricity supply in the southern connected states is likely to be under considerable strain ('tightly balanced') this coming summer (the first without Hazelwood): here http://www.aemo.com.au/Media-Centre/National-Electricity-Market-remains-...

Not an inducement for power-intensive industries. And the retail price of them electrons is now the highest in the world: http://www.afr.com/news/australian-households-pay-highest-power-prices-i... (paywalled).

So that's some background for the Oz situation.