Dairy prices drop -2.4%; IMF sees sour impact of rising household debt; US car sales rise; Japan sentiment improves; EU tackles Amazon on taxes; UST 10yr yield at 2.33%; oil and gold slip; NZ$1 = 71.6 US¢, TWI-5 = 74.4

Here's my summary of the key events overnight that affect New Zealand with news of a surprise fall in dairy auction prices.

This was a disappointing auction. Overall prices fell -2.4% in USD terms. The drop was unexpected and is the largest fall in over six months. Dragging prices down were WMP prices which represent about half the volume. These were expected (via the derivatives market) to rise to US$3,300/tonne and an expected +5.7% rise. In fact they fell to US$3.037/tonne, a -2.7% drop. That is a completely unexpected turnaround and there will be some investors nursing steep losses on the derivatives market.

In NZD terms, the fall was not as steep. Overall prices fell just -0.1% as the NZD has weakened nearly -2¢ over the past two weeks. There was 37,990 tonnes of product sold in this auction, which is the largest volume since August 2015. Today's result will have analysts revisiting their payout predictions for the upcoming season. There is clearly push-back from buyers at these price levels.

The IMF has released research that shows encouraging rising debt, especially household debt, used to soften the effects of a recession works for three to five years. But after that, things turn sour. This is based on a study of more than 80 advanced and emerging economies. And the implications are clear. Remember, we are now ten years into a cycle like this and the IMF doesn't see a neat way out of the problem.

The OECD said overnight that inflation is now up to +2.2%, driven by food and energy prices.

In the US, carmakers like GM, Ford and Toyota posted solid sales gains in September., some of them sharply higher. But that was amid heavy consumer discounts, and surging demand to replace hurricane-damaged vehicles. However, it has given the US industry relief from months of declining results.

In Japan, consumer confidence edged up, a boost for Prime Minister Abe who has had an unexpected election thrust on him. He is behind in the polls, but overnight his main rival, the Tokyo governor and the power broker who engineered the snap election, said she would not run in the election.

Meanwhile, it has been revealed that the Japanese yen is now the third-largest component of global reserves, after the dollar and euro. China’s yuan slots in in seventh place, also being behind the pound and Australian and Canadian dollars. We regularly ignore the power of the Japanese economy, but it continues to impress in the background.

In Europe, the EU’s antitrust regulator is set to order Luxembourg to retrieve hundreds of millions of euros in allegedly unpaid taxes from Amazon.com who is based there. (But some of those taxes will presumably be for transactions originating in New Zealand, so that may set up a complicated discussion between Wellington and Brussels.)

In Australia, building approvals have avoided a second consecutive month of decline, although the overall trend shows residential construction is cooling. Permits for apartments rose +4.8% in August, but are down almost -30% over the year. All the key east cost markets have seen declining building approval activity in recent months. New home sales picked up in August however as first home-buyer incentives kicked in.

In New York, the UST 10yr yield is holding at 2.33%.

The price of crude oil is down slightly again and now under US$50.50 a barrel, while the Brent benchmark is under US$56. 

The price of gold has lost another -US$2 overnight, now at US$1,271/oz.

And the Kiwi dollar is again softer after the dairy auction and will start today at 71.6 US¢ and that is a three month low. On the cross rates we are now at 91.4 AU¢, and 60.9 euro cents. Our TWI-5 index is now at 74.4.

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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36 Comments

It makes complete sense that a discontinuity on a curve: when a jump in debt occurs, can only have a temporary benefit. It can be described by the optimists as now being a "new normal" but at some point (at the most extreme: when the person dies) it has to either be paid back or the debt forgiven.

"EU antitrust regulator to retrieve hundreds of millions in unpaid taxes from Amazon ... including transactions originating in New Zealand, may set up a complicated discussion between Wellington and Brussels"

ZB news last night - Winston Peters wants the 3 petrol companies to pay for the costs incurred using the military to assist with the fuel transport during the pipe line digger damage break at Ruakaka - reasoning that they are big enough and profitable enough. BP, Z, Exxon-Mobil

That raises the issue of how much tax these outfits pay on their NZ profits. Michael West is having a field-day at the expense of Exxon-Mobil in Australia on the fact they dont pay tax and never have - ever - never - which makes you wonder why they would pay any tax in NZ, and if they arent then on a competitive basis, BP and Z cant afford to be paying tax either

Be interesting to see if Peters gets any mileage out of his demands.

Anyway best of luck with your suggestion about Amazon and Brussels and Wellington

Given New Zealand's negative economic news, for the past 24 hrs, Barfoots must be due to release another month of 'unexpected' weak sales volumes, with commentary on how there is light at the tunnel's end, given the election is over, its sunny, its spring ,its pent up demand, realistic vendors, hungry agents ....

It's what I've been saying all along - it's not just FHBs that can't get onto the property ladder/escalator, but the people who want to trade up to the next level - they can't afford it, so I believe they're doing the sensible thing and renovating their properties if possible. Which is very bad news for agents!

David , Interest.co.nz should do some investigative work into the shakedown we are about to get for the Auckland revaluation of properties .

The Auckland council is doing a RATES REVALUATION and they will be using the deemed value as if "YOU SOLD YOUR PROPERTY ON 1 JULY 2017 "

This is patently unfair , that was the peak of the property bubble .

It would be much fairer to asses the properties on a 3 year average given the abnormal circumstances of the past 36 months in the market .

In my case for example our suburb has gone from an average selling price of $500,000 to over $1,2 million.

This increase has been as a direct result of Auckland councils incompetence in facilitating the orderly growth of the city , causing massive distortons in the market .

Now we are expected to pay for their cock-up

Its frankly BS , and we need a survey as to what Aucklanders really think

You really are a ray of sunshine boatman - why don't you sell off part of your Greenhithe ranch

Its not that simple , much of it is covenanted indigenous trees , and I would not want it developed anyway .

The issue is we already pay a disproportionate amount amount in rates when compared to family who live on the South Island , totally out -of kilter with what we actually get in return from Auckland City and that august body of overpaid public servants .

https://www.greaterauckland.org.nz/2015/05/05/are-aucklanders-paying-too...

There is even better commentary than this, but I'm pressed for time at the moment and can't be bothered finding it.

Thanks for the link nymad , but we need to remember that a dollar is a dollar whether its in Chch or anywhere else in NZ .

We are paying way too much for the supposed 'privilege " of living in Auckland .

And the city of Auckland needs to live within its means , just like you and me

You're getting that back in property value, though. The land is only valuable because of the people around it, and the people around it require infrastructure. The council is already maxed out borrowing to put as much of the burden on those following as possible (though some sharing via debt is of course fair), and the central government is already extending extra credit tot he council to circumvent its traditional debt ceiling.

I agree Boatman but Akld voted the twerps in so only a couple of years to wait before you get the chance to kick the clowns out.

Bahaha.
You are so pathetic, Boatman.

It is patently unfair that they are valuing your property the same incompetent way they have done for the past 30 years?
You never kicked up a stick when they had your valuation redone in 2014 and enjoyed 3 years of arbitrage as your property appreciated. That is just as "patently unfair".

Yeah right , as if this rates increase will help make Auckland into the worlds most liveable city ?

Auckland is fast becoming an exclusive city ....................by excluding everyone in the middle class, and being exclusive to wealthy migrants .

Its an unsustainable model

@nymad .............. how much do you pay in rates ?

Imagine a young family trying to buy an Auckland home with a rates billl between $5,000 and $10,000 per annum on top of a mortgage of a million dollars ?

Auckland Council is the parasite that is doing everything to destroy its host

So, you are advocating that we subsidise everyone?
With what money? With what productivity?

Auckland Council is fast going broke, Boatman.
The reason?
For far too long the residents of Auckland have underpaid for the services they receive/demand.

BOLLOCKS nymad , Auckland Council has been living beyond its means for way too long.

It has a fleet of something like 800 vehicles ( and they dont own a single bus or a single waste removal truck ) . Imaging the cost of just fueling and insuring such a fleet ?

What the hell do they need 800 vehicles for ?

Some heads of department have top line SUV 4x4''s ( I have taken photographs of some of them and they are not Utes but full on SUV's ) .............. who on earth needs a $100,000 SUV in Auckland , maybe its to traverse those awful unsealed roads in our city ?

Phil Goff was actually horrified when he discovered that he had a fleet of 800 vehicles .

And there are something like 300 people earning between $100,000 and $200,000 per annum ?

What do these people do ?

How can any non -professional job in the public sector , where decisions are made by committees, where there is no personal accountability , and you have to steal to get fired , be paid between $100,000 and $200,000 ?

And we have to pay for this while we mortals have to get by on not much more than the median wage .

Boatman.
I guess grapes taste extra sour when you don't know how to make wine.

@nymad , I pay my rates without any grudge , but the current level of rates in Auckland is doing little to make the city affordable .

The real problem I have is a lack of financial discipline within the city administration

That's where you are wrong, though.
It's the current low level of taxes/rates that are making the city unaffordable.

The financial discipline is an issue, as it inevitably is in every public institution.
Whether you are qualified to comment on the intricacies of it though, is another matter.

Okay , I am not qualified to comment in a professional sense , but I am paying , just like you and the other 490,000 households in Auckland , for this city to function properly .

And I expect them to do their job properly , with good financial discipline .

Wrong, Akld has been paying for services it doesn,t get and some it doesn,t want but you voted for a chocolate covered turd and are now finding out what a nasty taste it leaves

You understand the that only the relative value of your property influences the amount you pay? If all properties doubled in price then the proportion of rates each pays is the same. Only if Greenhithe has increased more than the Auckland average, you would pay more (which seems fair).

In fact, given that there is a fixed cost plus a value cost component to rates,higher value properties actually pay less as a percentage of value.

Council valuations don't set rates levels. They set the way the total rates collected are shared between property owners. Those with higher valuations pay a proportionately higher share, those with lower valuations pay a proportionaltely lower share.

In theory, if every property value went up by the same proportion, your rates bill won't change if the Council set an unchanged 'rate'. But that 'rate' is going up by +2.5% for Auckland Council, so you should expect your rates bill to go up +2.5%. Any more, and that is because the value of your property went up by more than others. But an equal number of property owmers will see their share change decline.

David , Your argument is sound, however given the state of the city's finances and their profligate tendencies, we are at great risk of a sudden administered rates shock .

On the topic of Auckland city's direction , GOVERNANCE NEW ZEALAND has a breakfast next week ( 12th October ) at Minter Ellison where the speaker is the Auckland City's chief economist .

It should be good , because the Auckland city chief economist seldom does such events .

From memory Len Brown decreased the fixed annual component of rates at the minimum legal level, the effect of which was that the variable component had to be set at a much higher level which increased the rates in the higher priced suburbs to the chagrin of those on fixed income.
The other bit missing bit from your comment David is debt. Behind the scenes, the council has now maxed out on debt which is galling given the reduced services most suburbs are now experiencing. In addition to this, projects which were going to be done and which were canned, are now being put forward but only if "targeted rates" are levied!!!!!!!!!!!!!!!!!!!!!!!
The council really is being managed by people who are not prudent one little bit.

A sudden administered rates shock could be answered with a sudden show of disapproval, 100,000 angry ratepayers outside the Townhall would have a decisive effect on Councilors voting intentions on rate levels as they also considered the adequacy of their life insurance.

The same themes that have plagued the sector throughout 2017 remained evident in August. The first is non-residential construction, or capex. This part actually contracted year-over-year (NSA) for the second straight month. As with overall construction spending, activity here was up rather sharply, 9%, in the nine months through November 2016, but is down a little more than 3% in the nine months since.

Clear reluctance on the part of the business sector to invest productively is a function of profits and cash flow. There has been little growth in those going all the way back to 2012 (in the corporate sector), followed by contraction throughout 2015 and 2016. Profits have only recently begun to rebound and so far it isn’t nearly as robust of an upturn as may have been expected.

If businesses are hesitant to increase their capital budgets, state and local governments are even more cautious. Total public construction spending has been trending lower for more than two years, going all the way back to June 2015 and the abrupt economic effects of the “rising dollar.” Read more

The Hot-and-Bothered pedigreed elites are still at it

Editorial in todays NZ Herald beating the hostage-drum again, questioning why Winston Peters with only 7% support among voters should get to choose the next PM
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11929120

The editorial goes into great depth to echo the vitriolic rant by Duncan Garner

I disagree with all of that pedigreed elitist nonsense

Bill English and Jacinda Ardern will make the decision themselves - it depends on the level of ardour in their wooing and which one makes the most concessions. It's quite possible both refuse to make any concessions at all to NZF, and Peters says OK, sort it out yourselves while we go and sun ourselves on the cross-benches.

What bothers me is National entered into coalition talks at their previous 3 elections and their was no blood-letting at all. Was it because the MaoriParty and UF and ACT all rolled over too easy? Fool them. They should have ganged up and extracted some major concessions - they didn't - why not

Our esteemed opinion-setters and leaders never wonder about that - do they

The editorial writers and elitists would gain credibility if they spent their time demanding open transparency with full publication of all concessions the 2 majors are willing to provide - lets see it

Let's have the negotiations conducted out in the open for all to see

I have been turned off Duncan Garner in a big way.

Suitcases are back in fashion

Shanghai restaurateur David Hu said he’s nervous about wiring money to Australia for a home purchase because of China’s crackdown on currency outflows. Instead, he plans to carry the cash in a suitcase.
https://www.bloomberg.com/news/articles/2017-09-28/chinese-money-seeps-t...

Does anyone know the limit for cash that can be legally brought into NZ?

I don't think there are legal limits as to amount/value. But there are legal obligations by the importer to report any amount over NZ$10,000 when coming through the border, plus there are legal obligations to satisfy AML/CFT rules. And banks and other institutions have legal obligations to "know your customer" and know where monies originate, and to report every suspicious transaction.

But there are obvious cracks in coverage relating to lawyers and real estate agents (not to mention other non-financial traders). Real estate transactions are "known" sanitising routes (but don't ask me how because I don't know this detail).

Do illegal currency dealers make the best investors. Why would they then suddenly follow the local laws and norms of the state they purchase in?

Meanwhile, it has been revealed that the Japanese yen is now the third-largest component of global reserves, after the dollar and euro. China’s yuan slots in in seventh place, also being behind the pound and Australian and Canadian dollars. We regularly ignore the power of the Japanese economy, but it continues to impress in the background.

Hmmmmm...

After years of keeping its allocations private, China is now letting the IMF incorporate its ratios into the global data -- but staggering the inclusion over a two-to-three-year period to prevent observers from determining the exact makeup of the country’s world-record holdings. Read more

Agreed the Japanese economy has been and remains impressive however the debt level is terrifying at over 200% of GDP.