Dairy prices slip -1%; Dow hits 23,000; US factory output recovers; Canada tightens mortgage rules; China ODI slumps -42%; S&P pans 'baby steps'; UST 10yr yield at 2.30%; oil slips, gold slumps; NZ$1 = 71.7 US¢, TWI-5 = 74.4

Here's my summary of the key events overnight that affect New Zealand with news China's clamp on outbound 'investment' has been very effective.

But first, today's dairy auction was an uninspiring event for everyone involved. Overall prices were down -1% in US dollar terms, fractionally more in New Zealand dollar terms.. The key WMP price was down less, by -0.5%. It was the sharp fall in the skim milk power price that caught the eye, down -5.6% and back to levels last seen in May 2016. And the butter price was also weak, down -2.5%, but it is still at a relatively high level. Overall dairy prices though have held in a very tight range since that big jump one year ago. Today's -1% fall is the second in a row however on top of the -2.4% two weeks ago. The industry will want to be sure that this trend doesn't continue if it is to hold its new season payout forecasts.

Meanwhile on Wall Street, the Dow Jones Industrial Average rose above the 23,000-mark for the first time earlier today, boosted by strong earnings reports. But it has slipped lower in later trading. The broader S&P500 index is also slightly lower.

New data from the OECD shows that all the gains in employment post GFC have been in the services sector. Most of those gains have been impressive. But manufacturing and agriculture have both raised output via mechanisation rather than adding people.

Broadly in line with market expectations, American industrial output picked up modestly in September, a sign a key sector of the economy is weathering the hurricane-related disruption that hit the prior month. Industrial production rose +1.6% year on year in September.

Canada’s banking watchdog unveiled tougher mortgage-financing rules that take effect on January 1, 2018 that could further sharply slow mortgage borrowing and therefore house buying in Canada. These rules involve a +2% interest rate stress test, tighter LVR rules, and measures to prevent banks from circumventing the LVR regulations. In many ways their 'new' approach mirrors recent RBNZ and RBA actions.

China's outbound direct investment dropped a massive -42% year on year in the nine months to September. There was only US$78 bln released, an average of US$15 mln for each of the 5,159 companies approved. That fast slowing takes outbound investment to countries involved in the Belt and Road Initiative to US$9.6 bln accounting for only 12% of the total ODI. Those Belt & Road investments are the ones getting approval, reinforcing the idea that politics rather than opportunity is playing a new heavy role in rationing these funds.

New analysis by S&P has dismissive of China's efforts to control leverage in their economy, calling moves so far as "baby steps" that don't really address the risks involved.

In London, Swiss bank UBS asked staff overnight whether they would prefer to relocate to Amsterdam, Madrid or Frankfurt after Britain leaves the European Union in a survey sent to its investment bankers. London's role in the European financial system is starting to unravel and the speed seems to be accelerating. An OECD plea will however probably fall on deaf ears.

In Australia, the release of the RBA's minutes shows them warning that any further increases in the currency would hurt growth. And they say they are not about to raise their 1.5% benchmark interest rate any time soon because high levels of household debt and weak wages growth are "likely to be constraining influences".

In New York, the UST 10yr yield is now at 2.30%.

The price of crude oil is slightly lower today and now just over US$51.50 / barrel, while the Brent benchmark is just over US$57.50.

The price of gold however is down very sharply, slumping -US$19 to US$1,284 oz.

However the Kiwi dollar will start today pretty much unchanged at 71.7 US¢. On the cross rates we are higher at 91.4 AU¢, and at 61 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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21 Comments

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10

not raising interest rates because debt levels are now too high, maybe a signal that short sharp shocks are what was supposed to happen to clean out the system and let growth restart, instead of keeping those on life support going.
i dont disagree some of the measures taken after the GFC helped but now they hinder as they were left in place too long

October episode of the monthly govt funded soap "we are doing something"

Multi-National Tax Avoiders get another free-pass free-kick
The NZ Govt via its agent IRD announces another round of vigorous crackdowns on the Tradies
http://www.stuff.co.nz/business/industries/84398961/ird-fights-growing-c...
It's all over the headlines of the media again yesterday as the MSM do the Governments bidding with the October episode of the monthly soap "we are doing something"

The builder doing cashies is unlikely to hire crack lawyers and accountants to fight their reassessment. It's as simple as that really.

Conrad you’re absolutely right
The purpose of targeting Tradies is purely economical
Breathtakingly obvious that the IRD won’t step on any politically connected toes by going after hapless tradies
Working class are easy targets and as you say they will easily roll over or be bankrupted
If the IRD really wished to clamp down on taxation where was their voice when for years foreigners speculated in Auckland homes and were free to take hundreds of millions in untaxable capital gains out of NZ ?
This must be the third time NZs IRD has had a crackdown on simple tradies
If they really wanted to catch tax revenue they need only ask for the Australian tax departments excellent automated audit system which does a complete tee audit in minutes not days
Or maybe they could go after another ChCh property developer and destroy him perhaps
Sadly like in the police there are some sociopaths in tax departments all over the world
You just hope you are never singled out by one

As a salary earner I pay PAYE. No 'cashies' possible for me, however I'm been offered (supposedly) a lower price by tradies for cash, over the years, where the main component of the work is labour. There is one electrician notorious in my area for it. It's not fair to HONEST tradies and PAYE tax payers alike. They should have a bounty on these toe rags.

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11

Not raising interest rates because debt levels are now too high - this is no less than a ticking time bomb. It would take debt forgiveness on an unprecedented scale to stem the fallout from the next crisis.

There is no such thing as Debt Forgiveness (to expunge debt)....someone...always ends up with the liability. Any 'debt forgiveness' will be worn by us all - we tax donkeys, as we have done the cost of supporting The System since 2008. Could it have been different; would The System have survived without ongoing intervention? We will never know.....

And remember Debt forgiveness is the same thing as wealth forgiveness. So pension funds, stocks , asset values ... everything takes a big hit. The pie really will be smaller & this negatively hits Demand (affordability) ... which is also the current problem
So whatever a reset looks like, it cant be what we think of as capitalism. Capitalism would instantly require more Debt.

Debt forgiveness is also cash flow forgiveness. If a lot of debt disappears it also eliminates a lot of cash flow which can cascade into a larger problem of more debt forgiveness.

yes agree

The RBA and it's ilk are under the control of incompetent ideologues who have absolutely no idea how to short circuit the vicious circle debt infested economy they once proudly created. A new start without them is called for.

Witness Bill English prior to the election trying to push debt up further - via increasing FHB grants and pressuring the RBNZ to remove LVR restrictions.

Seems a mite irresponsible to me.

Debt is the reason we now have the massive global monolith which maximizes use/leverage of all global resources (great for (human) living standards, not so great for the environment).
The "new start" alternative has to mean local and a simpler, smaller pie. Think 1929 & worse.

With Trade me Auckland listings up over 10000, using the last 3 month sales volumes there is about 6 months supply of property currently available.

Interesting stats from Ireland, current available rental stock nationwide is now below 3000. In Dublin just 1121 properties were available for rent as at August 1 2017.

New analysis by S&P has dismissive of China's efforts to control leverage in their economy, calling moves so far as "baby steps" that don't really address the risks involved.

Exactly.

China’s banks are still bingeing on short-term financing, defying analyst predictions that they would wean themselves off such debt as regulators intensify a crackdown on leverage.

Sales of negotiable certificates of deposit -- a key funding source for medium and smaller banks -- surged 49 percent from a year ago in the third quarter to a record 5.4 trillion yuan ($819 billion), according to data compiled by Bloomberg. While strategists had predicted in June that the NCD market would shrink, it turned out to be one of the few funding channels left as officials drained cash from the interbank market and asked lenders to strengthen risk controls. Read more

UK September inflation over 3.0 percent , highest since April 2012. Pound weakens , after central bank comments. Even Winston has to understand, not everyone can have a weak currency at the same time, particularly if there have been policy mistakes.

I think we will see any amount of delay delay delay in letting UK leave europe... similar to the "Feds will raise rates just not quite yet" storyline ... because a slumping pound might set off all sorts of ugly financial contagion

"So the BOE is facing surging inflation in a slowing economy with sagging consumer spending due to inflation eating into purchasing power. This is not a nice scenario"
https://wolfstreet.com/2017/10/17/weak-consumers-slowing-economy-uk-infl...

I can't help but wonder if the threat of the UK losing its unearned income banking privilege will see them join hands with the US, their dollar hegemony under threat of erosion, in conspiring for war somewhere, everywhere. Perhaps attacking Russia/China on both fronts.

If/when London loses its financial hub status UK will take a very very long time to recover, if ever.