Dairy prices slip again; Powell very positive; China equities dive; Italian bond yields jump; RBA upbeat; AU banks no longer unquestionably strong; UST 10yr at 3.06%; oil unchanged, gold jumps; NZ$1 = 66 USc; TWI-5 = 70.1

Dairy prices slip again; Powell very positive; China equities dive; Italian bond yields jump; RBA upbeat; AU banks no longer unquestionably strong; UST 10yr at 3.06%; oil unchanged, gold jumps; NZ$1 = 66 USc; TWI-5 = 70.1

Here's our summary of key events overnight that affect New Zealand, with news Aussie bank strength is no longer world leading.

But first, today's dairy auction brought yet another small decline and they are now mounting up. This is the fourth in a row and the eighth in the last ten auctions. Since this time last year, overall prices are down -14%. Since the start of 2018 they are down -6%. We are back to prices last seen in October 2016. The key milk powders are down a little less than the overall in today's auction. Overall in NZD, prices are actually -2.2% lower than the last auction. New season farmgate milk payout estimates are already looking shaky. Volumes sold overnight at auction were a high 41,981 tonnes, the highest since August 2015 and +10% more than at the equivalent auction a year ago.

In the US, the Federal Reserve Chairman noted a "remarkably positive outlook" for the American economy that he feels is on the verge of an "historically rare" era of low unemployment and tame prices.

While China might be on holiday, Hong Kong is not, and yesterday their stock market took a major dive, down -2.4% on the day. A lot of Chinese companies are listed there and investors are nervous about China's immediate economic prospects, especially its export prospects. Beijing may be able to control the narrative inside the country, but this is where the real sentiment shows up.

We should also note, that yields on Italian bonds took off sharply higher again yesterday as doubts quickly overwhelmed last week's more sanguine views. Italy's new government's cavalier attitude to debt and deficits is a growing risk to the euro.

In a largely optimistic statement on monetary policy released late yesterday, the RBA said business conditions were positive while public infrastructure investment and resource exports helped Australia's strong annual economic growth of 3.4%. But they noted that a key uncertainty is the outlook for household consumption. Growth in household income remains low and debt levels are high. They kept their policy rate unchanged at 1.5%.

There is a widely held goal for Australian banks to be "unquestionably strong", which is defined as having their risk-adjusted capital ranked in the top quarter of all global banks. But while most global banks have been bolstering this measure, the main Aussie banks have been on the defensive responding to other more political distractions. And they have slipped fast on this measure, according to the latest S&P assessment. They are now in the bottom half of these rankings and have a lot of work to do to get back to where they were.

The UST 10yr yield is unchanged at 3.06%. Their 2-10 curve is now just on +24 bps. The Aussie Govt 10yr is at 2.67% (down -1 bp), the China Govt 10yr is at 3.66% (unchanged due to the holiday week there), while the NZ Govt 10 yr is at 2.64%, and also unchanged.

Gold however is rising fast today. up US$13 an now at US$1,202/oz in New York.

US oil prices are unchanged today and still at just over US$75/bbl. The Brent benchmark is now just under US$85/bbl.

The Kiwi dollar is starting today a little lower at just under 66 USc. On the cross rates we are a little firmer at 91.8 AUc, and at 57 euro cents. That leaves the TWI-5 at 70.1.

Bitcoin is now at US$6,510 and and another dip of less than -1% since this time yesterday. This rate is charted in the exchange rate set below.

This chart is animated here.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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Interests Oil and Petrol pricing chart appears to be running off its page..

First comes prolonged stagnation, then politics.

China’s real risk has always been eurodollars. Far from a savings glut, the Chinese system suffers from another looming “dollar” squeeze. In many ways, the last one never really ended.
https://www.alhambrapartners.com/2018/10/01/chinas-industrial-dollar/

Oil Shock Has Already Started in Emerging Markets
https://www.bloomberg.com/view/articles/2018-10-02/emerging-markets-oil-...

I am picking that the Chinese communist party had been buying shares in its own stock markets over the last week to prop it up. Maybe there is a problem with it buying Kong Kong stocks when their staff are on holiday so the real market is having its say?

Australia is still heading for an interest rate cut and bank rating downgrades.

Note that yesterday the RBA removed the reference to "emergency low" interest rates. This is the first step in positioning for a cut.

Thanks Andrewj, will do. I'm predicting a rate cute, but it doesn't mean I think it's a good idea that will fix anything. The RBA has form.

Just going to repost this here as I think some will have some opinions to share on the why..

Only 55 people/couples have so far entered the ballot for kiwibuild homes.

https://www.tvnz.co.nz/one-news/new-zealand/dozens-would-property-owners...

Because it is a bloody joke

But what's the punchline? Why are so few signing up when we have a huge "housing shortage" and these are "affordable" new build homes in Auckland?

The price?
The quality of the house?
Unavailability of finance?

The price vs the size and quality of the houses is all wrong.
Why would I commit to buying one of these shoebox when house prices are sliding worldwide?

So if prices weren't sliding world-wide you'd have a different opinion of them?

No, not for the papakura ones at least. A 1.5 hour commute doesn't appeal to me at all so it's the location as well.
Maybe I'd take a look at the Unitec builds when they're completed but they haven't even broken ground yet so they're likely still years away.

People would have more faith in the Auckland property market were the city productive and had legs to stand on.
Most factors that fueled economic growth in the city over the past 5 years - export education, real estate, tourism, hospitality, retail, construction - are built on unsustainable stimulus such as high immigration, low interest rates, worker exploitation, etc.
The real question is - if tourist numbers, interest rates and migration inflows fell back to long-term average levels, what value to the national economy would Auckland as the "growth engine" have to offer?

Ah , I take it you are from somewhere where the odour of cow poo is ever present?

No cow poo odour here. Just the smell of nice coffee in the morning and aroma of fine wine at sundown paid for with your tax dollars, I am afraid.

Just wondering why you are saying Auckland is not productive.. when one of the biggest sectors in Auckland is manufacturing. High(ish) value add, as opposed to bulk quanitities of raw commodity export like the regions.

https://www.interest.co.nz/business/92746/auckland-regions-annual-gdp-bi...

I guess it comes down to whether you can afford the repayments. And if you can then you would not be purchasing one of these houses, surely? There are better options available.

Pragmatist.

Not enough buyers able to afford and finance a purchase at the lower end of the market. Heaven help the rest of the market ..... Ever played Jenga?

https://www.youtube.com/watch?v=BAjZjTU_1pg

I think you misread that. It's 55 applicants for the 18 homes in that one small development. It's not 55 for all KiwiBuild homes ...

Yes, 55 applicants for the only completed kiwibuild homes that are about to be balloted. only 217 total that have completed the pre-qualification process so far.

I looked at this a while ago. The asking price for a terraced house in Papakura seems to be higher that the market price for that property type in that particular zone. You can buy very large sections (with old houses I admit) for cheaper. I thought at the time it did not make economic sense to buy a McLennan property (kiwibuild or otherwise) as it was overpriced for what it is.

Pragmatist, the 55 applicants are only for the 18 Papakura home, a much better ratio than today's open auctions, I would suggest. Still you might expect more?

Also I don't understand the following statement if someone can enlighten me:
"Altogether the 55 applicants have made about 650 individual ballot entries for the 18 McLennan homes"

Can't fairly compare them to Auctions, there is no bidding, the price is fixed and known, so not even similar in the buying dynamics, no worries about being outbid etc.

According to all those that were screaming about middle class welfare and taxpayer subsidised homes, it should be like the boxing day sales queue for a $50 60" Flatscreen TV.

For homes that have had a marketing campaign that is unrivalled (except maybe by "the block"), that are supposedly "affordable" (and according to some here way under market value) and in Auckland, yes, I expected a whole lot more trying to buy them. When was the last time you heard of an open home program getting 500 groups through in a weekend like the Kiwibuild showhomes did?

What happened to all those people that were saying they were going to sponsor their offspring into these "middle class handout" homes? Perhaps they took a look at them and realised they aren't subsidised, and there is no great value for money deal to be had here.

the 650 ballots.. each house is a separate ballot, so theoretically, if all 55 had entered for every house there could be 55 * 18 = 990 ballots. But obviously some only want (or could only get finance for) the 3 bedroom places, or the 4 bedroom places. And some would only want the end houses etc.

The Fed’s No Longer Guided by Concept of Neutral Rates
https://www.bloombergquint.com/view/the-fed-s-no-longer-guided-by-concep...

Banks have lend money on speculative assets which includes family homes, the problem with this kind of lending is that wealth disappears in a crash unlike investment in production and real things, where we still keep the means of production. God help us.

Aussie Banks Dowgrade and circular financing.

I asked this yesterday and be keen to find out.

Does anyone have any idea where I could find out what proportion of kiwisaver funds are invested in Australian Bankin shares. The reason that I ask is that if the economy in Australia is 65%-70% geared towards housing debt and we get quite close to those numbers then it could present a bit of a challenge in the future.

If FHB's need to strip kiwisaver (and are being encouraged to do so by the media and banks) so as to fund deposits for house purchasers to help prop up the banks bubble. What happens if the FHB's deposits get smashed because of an over-exposure to Aussie banks in their kiwisavers, which suddenly take a dive. Could this not lead to a self fulfilling spiral as the whole thing rolls over?

The cynic in me thinks that it wouldn't be at all surprising if the banks are using the liquidity from kiwisaver to lend. I.e the young are providing the liquidity to facilitate the lending that it re-enforcing the bubble and preventing them from buying

More fact to it than cynicism I'd suggest.

I recall similar in one of the DFA podcast a couple of 'tricks'. One being that the State and Federal first home buyer grants were lifted substantially post gfc, the reason given to assist that buyer group. Recent memo info has merged that the real reason was to keep house prices up and thus protect the banks.

Another was to allow self manged retirement funds to borrow and invest into housing. Another 'trick' to keep the housing bubble going.

So all in all, dirty tricks dressed up as helpful public policy to help their bankster mates.

No wonder a crash is unfolding over there - and coming soon to a place near you.

Yep, this is a big part of how it works, it's been going on for years and it never should have started.

House prices have started falling across major population cities in other developed markets as well.
The average price level in the US does not say the complete story - house prices are stagnating or dipping in a few Tier-1 cities while houses in Tier-2 cities enjoy a bull run as more companies and skilled workers are relocating into these cities and towns.

http://www.abc.net.au/news/2018-10-01/chart-of-the-day-global-house-pric...
https://www.seattletimes.com/business/real-estate/seattle-home-prices-dr...

"While everyone in Europe, Japan, and the US was gripped last year by inflation hysteria, really recovery hysteria with rising inflation as its key symptom, Communist China was battening down the hatches. It made for an incredibly stark juxtaposition, the idea that the global economy was soon going to be running at full strength but where the government inside the engine of that growth was preparing more and more for the opposite case."
https://www.alhambrapartners.com/2018/10/02/tighten-those-hatches-further/

Vancouver Home Sales Crash 44% As "For Sale" Inventory Soars
https://www.zerohedge.com/news/2018-10-02/vancouver-home-sales-crash-44-...

We all need a roof over our heads. Ideally. Right? We need food and clothing and with any luck, a good job and a nice country to live in. It's not much to ask. Somewhere between 15-20% of the planet's population can claim this. We are one of them. Our first world problems of over-priced housing and high cost of living are a small price to pay, I think. Sure, we have some home-grown third-world sectors in NZ but they are still pretty well off compared to the great unwashed (80%). If it blows up then it blows up. It blew up in America in 2007-09 with over 7 million people losing their homes. That was the price they paid for their greed. It will happen again. Greed's a killer, every time. What eill the trigger be this time? The Aussie banks? Chinese corporate debt? Trumps tariffs? A bond market crash? Nobody knows for sure how it will happen, but it will. Then we'll all have to get on pretty well with our nieghbours, or else!

"Good Morning from Germany where savers got another hit. Real Yields (yields - inflation) has dropped to -1.83%, near life-time low following sharp rise in inflation to 2.3% in Sep. ECB partly to blame for suffering of savers. Acc to Taylor rule, interest rates would have to be 5%"
https://pbs.twimg.com/media/DoZiTQ7XcAAN9rL.jpg

I think I need to get my eyes checked.. for a second it thought it said rental yeilds at -1.83%.

And it’s going to get worse. The Modi government is reportedly pressuring the Reserve Bank of India as well as India’s publicly funded Life Insurance Corporation, now the largest shareholder in IL&FS, to bail out the firm lest India experience its own “Lehman Moment.” Opposition is becoming fiercely entrenched, which won’t help confidence in either the eurodollar or Eurobond markets.

There are no good options here.

According to a spokesman for India’s Congress, Manish Tewari, Indians are wondering why their government appears to be working so hard “to help save foreign investors’ money with the help of India.” The appropriate analogy may not be Lehman but AIG.

As with all things in modern monetary finance, there is much more to it. For now, it’s another warning about how things are getting serious, and just getting started. As I wrote earlier today, since August 9, 2007, the dollar will eventually come for everyone. Eurobonds as well as eurodollars.
https://www.alhambrapartners.com/2018/10/02/they-want-to-call-it-indias-...