Dairy prices rise; Wall Street drops sharply; US trade positions confusing; WTO worried; inflation rising; UST 10yr at 2.89%; yield curves slump; oil and gold higher; NZ$1 = 69.3 USc; TWI-5 = 73.8

Here's our summary of key events overnight that affect New Zealand, with news Wall Street is down sharply today.

But first, tomorrow Fonterra will update their farm gate milk price forecast and today we got the results of the latest dairy auction. On the face of it, it was a good event with prices up +2.2% from the prior auction two weeks ago. This was the first rise in 14 auctions dating back to May. In that time prices have fallen -22%. The downer on all this is the rising New Zealand dollar exchange rate. Today's +2.2% result is actually only +0.6% up in local currency. So it means very little in the overall scheme. Still a rise is better than a fall, but it won't change Fonterra's calculus tomorrow, when a number of analysts expect them to cut their payout forecast.

Elsewhere, on Wall Street they have had a sudden change of heart about what the China-US trade talks all mean. They are now following the bond market view and today the S&P500 is down a massive -2.4% in early afternoon trade. That means it's 2018 gain is a mere +1.2%. Today's about-face is a major event in terms of market sentiment.

Part of the change of heart is that there appears to be confusion about what Xi and Trump agreed. It looks like Trump just made up some parts of the "agreement" especially around car tariffs and the Chinese didn't really concede that point. The Chinese aren't publicly calling him out on the point however. And the 90 day time-out remains.

Even though it is growing, the WTO says global trade is in a crisis and the benefits cannot continue "when large countries take unilateral action which deviates from common rules and principles". They say the traditional goods trade is the most vulnerable, but the future is bright for digital trade.

The OECD is reporting that inflation rose to +3.1% in the group in October, up from +2.9% the month prior and boosted by rising energy costs then. Of course, they have fallen back sharply since.

Along the same lines, the EU is reporting that their producer price inflation rose sharply in October by +4.9% pa.

Back in the US, the powerful head of the New York Fed says that more rate hikes are coming in 2019, showing recent dovish assumptions about where the Fed is may not be quite right.

In the UK, ratification of the Brexit deal is not going well in their parliament. And the top EU court has given 'remain' proponents a new channel to undermine the government's deal.

In Australia, the RBA held its policy rate at 1.5% as expected, noting that inflation remains low and stable, employment is growing, and economic growth is on track. They are upbeat on higher wages. Only house prices, and their falls in some large cities, are on their watch list, and they see that as a necessary rebalancing. They aren't buying the 'biggest-threat-to-the-economy' line.

But what might be a threat are food prices. The severe drop in their wheat crop output due to drought risks grain-based foods rising sharply in price. Australia has lowered its wheat production forecast by -11% to the smallest in a decade amid a crippling drought across the country's east coast that may cut exports from the world's fourth biggest supplier and raise prices region-wide. Their winter crop production is forecast to be -20% below their 20 year average.

The UST 10yr yield is still on a downward path at 2.89%, a significant -10 bps drop. More importantly however, their 2-10 curve has slipped another sharp -8 bps to now be just under +10 bps and a clear 'fear' signal. The Aussie Govt 10yr is at 2.53% (down -7 bps), the China Govt 10yr is at 3.35% and down -5 bps, while the NZ Govt 10 yr is at 2.54% and also down -7 bps. Our 2-10 swap curve is now under +80 bps for the first time in more than two years.

Gold is up +US$4 to US$1,237/oz.

US oil prices are a little higher today at US$53/bbl. The Brent benchmark is now just on US$62/bbl. An agreement within OPEC for output cuts seems close.

The Kiwi dollar is starting today at 69.3 USc. On the cross rates we are unchanged at 94.2 AUc, and up at 61.1 euro cents. That puts the TWI-5 at up to 73.8 and its highest since April.

Bitcoin is firmer, now at US$3,916 which is a +2.7% rise from this time yesterday. This rate is charted in the exchange rate set below.

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62 Comments

"Banks are hoarding liquidity because, as I’ve noted constantly for a decade, money market rates no longer obey the formerly strict arbitrage-driven hierarchies. And you can’t blame them; if money markets aren’t predictable, what other choice do banks have? It becomes self-reinforcing during the worst moments.

This matters more so at certain times, these moments, and we happen to be experiencing another of them right now."
They targeted a monetary rate that nobody uses in order to project a story that nobody believes just so the media would write about an economic recovery that doesn’t exist. The Fed is truly a joke, and though it isn’t funny it is for now the only one we can tell. Until enough people hear it, we are stuck in only bad scenarios.

https://www.alhambrapartners.com/2018/12/03/cue-the-bad/

"Banks are hoarding liquidity". Everyone should be hoarding liquidity! Getting caught with an illiquid asset this time around could be fatal, even if it was a near miss last time.

With the Dow down over 750 a few minutes ago, I'd suggest 'enough people (have heard) it'.They've always known, but until the consensus breaks, it stays in the background. One of these days over the notoriously thin Christmas period we could have a 1,000 pointer....or worse!

Wot? no Santa rally?? Sad!

The economic downturn which eventually led to all the things we remember had begun within months of the UST curve flattening and inverting. And that was with an actual growth period behind it. We have no such thing today, no matter how many times you hear about this economic boom.

In other words, the US (and global) economy starts off this period of uncertainty already having been a decade languishing without growth. This is the part of the UST curve nobody talks about; as I’ve written constantly, it’s not just that the curve has flattened and now inverted it is where this has taken place in the nominal spectrum.

We are, I believe, about to find out. Like the eurodollar curve inversion, these deep, important markets are saying that trouble isn’t out there in the distant future it is right here, right now. Any big, enormous consequences of these monetary disturbances might be that distant, but the road toward them is being laid down and paved today.

https://www.alhambrapartners.com/2018/12/04/curve-not-crazy/

Looks like the UST 5 year minus 3 year spread inverted.

It’s important to keep in mind the timeline between inversion and economic slowdowns — it’s not instantaneous. The yield curve from three to five years dipped below zero during the last cycle for the first time in August 2005, some 28 months before the recession began.

https://www.bloomberg.com/opinion/articles/2018-12-03/u-s-yield-curve-ju...

Enlightening discussion on HN: https://news.ycombinator.com/item?id=18593407

A look st B&Ts auction results for last week shows that they cleared just on a third with a number of those sold prior and post auction.

So only about a quarter sold under the hammer.

So no uplift in the last week of November, sorry spruikers you might have to set your sights for February but I wouldn't hold my breath ......

who didn't see this coming

Completely foreseeable.
"No more dinners with female colleagues. Don’t sit next to them on flights. Book hotel rooms on different floors. Avoid one-on-one meetings.
In fact, as a wealth adviser put it, just hiring a woman these days is 'an unknown risk.'"

https://www.bloomberg.com/news/articles/2018-12-03/a-wall-street-rule-fo...

Married men not dining alone with women would seem like sensible advice. I'm sure a lot of wives would agree.

I don't see why men cannot have their own safe spaces too.

I agree with men having their own "safe spaces" however the article talks about the work environment which shouldn't be restricted to one gender only. I don't have the answers but I don't think segregation is the way forward. We have to be able to deal with each other and perhaps more interaction would be more beneficial than less? Interesting problem created by a backlash to an existing problem.

Segregation definitely not the answer. How about men keep their hands to themselves? Why the hell should woman have to forego careers because men can't control themselves!

You're completely right ECB - they shouldn't have to. Hopefully women can continue to stay strong and throw the Harvey Weinstein's of this world to where they deserve to be. Such a shame that some men have been given such priveledge and power, so much so that women have been afraid to speak up....what a horrible system we've created...come guys - lets up our game...life is tough but behaving like creeps isn't the answer, nor is shunning women because were afraid of what 'fake news' might be raised against us (even if its untrue). Pretty sad situation really that we can't be honest with ourselves and partners, that these types of things are happening behind closed doors. Wheres the honesty, integrity and trust?

Saying "how about men keep their hands to themselves" is the same as saying people shouldn't do wrong things. No one will disagree with you. Everyone who does anything in life will come across someone doing something wrong, the important thing is how it is handled. The handling of the issue in this case is abnormal and I don't think productive. That is the problem.

I also think the sentiment in your comment is off as well. The issue in Andrew's link is that men are now scared of being falsely accused of harrasment (hence the drastic measures), not that they can't keep their hands to themselves.

What's your take on the Harvey Weinsteins and Bill Cosby's of the world Withay? And how did we let those types of guys operate in our society for such a long time without other men correcting their behaviour - because it would have been the right thing to do?

ridiculous!

Once again the PC brigade in overdrive.

I regularly have offsite meetings in restaurants and cafes alone with female employees including my boss, my peers and my subordinates.

Those who are inappropriate in these settings just need to be called out and everyone should feel safe and if not feel free to decline meeting in these environments.

Problem is some people are just pain crazy.

I have to be careful of Gay people, that they do not have the last laugh...

And that is a joke...just a play on words.

I have never had the Gall to ask a Lady to twerk on the 1st Date, never mind, the 1st time meeting....on stage in public.

The World is nuts....lost all reason....

Watch yer language, behave, ...have fun....only way to cope with it.

I would say it is the anti PC brigade in scaremongering overdrive. There is no need to be worried unless you are a bit pervy or sexist.

The worry is that a male will have a false harassment complaint laid if he does not agree with the female colleague on whatever matter, and there may be entrapment.

Seems a bit silly. Entrapment is not limited to sexual harassment. I'm sure males have been entrapping other males for years...

"The underlying dynamics changed in August and have worsened since. And this is still the tech boom.
It’s high time to unload houses and condos in Silicon Valley and San Francisco, one of the most expensive housing markets in the US. Sellers are now flooding the market with properties. Inventory listed for sale in those three counties that make up the area – San Francisco, San Mateo, and Santa Clara – surged by 102% in November compared to November last year, to 3,931 listings."

https://wolfstreet.com/2018/12/03/bubble-trouble-silicon-valley-san-fran...

Toll Brothers Shocks With 13% Plunge In Orders As California Falls A Staggering 39%

https://www.zerohedge.com/news/2018-12-04/toll-brothers-shocks-13-plunge...

Or do they see them as threatened by the ever increasing ferocity of bush fires?

RE comment Wall St: "That means it's 2018 gain is a mere +1.2%."
Don't expect to see that 10+% return on one's KS Growth/Agressive Fund given that this also reflected in other markets including NZ 1.3%. Nikkei down 6.25% YTD and S&P/asx down by 5.7%.
In fact anything better than "even" for that KS growth fund could be a good result.

Indexes (other than the NZX50) exclude dividends which typically make up half of your long-term gains if re-invested

Which is why I am always confused by people saying you need to be for the long term, you can't predict the market, etc. I mean who didn't see this coming? IMO the 10 year cycle is up, time to put your money in safe havens, wait for the crash, and then throw it around aggressively again later.

Which is what people also said in 2010, 2011, 2012, 2013, 2014, 2015, 2016 and 2017. Better to dollar cost average by buying in every month. You'll do better on average.

Depends if you believe in cycles or not. I personally believe in a 8 to 10 year cycle, so I didn't say it in 2010, 2011, 2012, 2013, 2014 or 2015. Of course the cycle theory isn't going to be 100% accurate - there will be times when you will be aggressive when you should have been conservative, and times when you will be conservative when you should have been aggressive. But I definitely believe the probability of a crash does increase over time since the last crash and your investment strategy should acknowledge that.

What about a longer term cycle - like the falling of interest rates since the 1980's? Could we have small and large cycles lined up this time?

I 100% believe in cycles. I also know from research and experience that the top and bottom are only visible with hindsight and trying to pick them leads to worse outcomes. The most likely way to get ahead is to continue buying diversified index funds regularly through ups and downs. (Note that this is a luxury property investors don't have due to the larger unit prices and slow-moving inventory.)

I just looked at the DOW 100 year history and it does seem that my theory would have been pretty crap in the 90's where there was fairly sustained growth from 1982 to 2000.
I do agree that you can't pick the exact time of the top and bottom. But I reckon you can pick some kind of probability of the current time being the top or bottom.

Rather than cycles, likelihood of volatile or changing tImes are more important to note.
Volatile times were picked by a number of commentators some months back due to a number of darkish clouds on the horizon (US-China trade war and their escalation, money and interest rate tightening by Fed ending a long period of QE, UE and Brexit uncertainities, etc).
It all comes down to what type of investor one is.
Yes, one can be passive and ride out the volatility and in the long run (7-10 years etc) one will do OK. Or one can be a little more active and note events and shift in response to significant changes in the outlook in the market.
Will one always get shifts right? Of course not.
I did post in mid August that after a period of sustained growth for the best part of a decade (due mainly to a world awash with cash - and consequently low interest rates) there was the likelihood of some volatility and consequently shifted to a less aggressive fund. Picking the end of the volatility is likely to be more difficult, but clearly markets do not see that time as being today.
It is interesting to note that Whineray/NZSuperFund mentioned in late August that volatility was expected and as a consequence a more prudent line was being taken with investments and cash set aside to react when appropriate. I also note that my KS growth fund had less in equities and more in cash than their targets. So fund managers do react and anticipate the market - so good reason for someone who want to be a little active in monitoring their own investment.
So if you are a passive, take what comes, that is one's choice.
However, I think if one wants to be a little more active then that is also fine. I am not suggesting one moves KS funds on a regular basis, but I have move three times over the past decade in response to the GFC (and back) and some months ago - as posted - due to current volatile situation. Will one get it right all the time? Of course not, but I would like to improve my odds and I have nobody to blame if I get it wrong.
Given the current events, changing funds now is like arriving at a great party too late and finding it a waste of time in doing so.

The best thing to remember in investing is that you are not special and only randomly lucky

Hi kiwimm
You continue to believe in "randomly lucky".
I trust that your KS fund manage gives it a little bit more thought.
Cheers

I think the evidence is on his side. Very few are able to outperform the market, and distinguishing any outperformance from luck is extremely difficult. Personally I only invest actively because I enjoy it - worst case I am paying for entertainment. Anyone who doesn't enjoy it I'd strongly advise to invest passively, stick in as much money as possible as often as possible, and forget about it.

People need to stop taking share markets seriously. It's all just a titillating game that people do to make their dull lives interesting. Trump and Xi agree to a trade war ceasefire, shares go up, next day people start worrying about what may or may not have been said and shares plunge. It's so silly but I think people actually enjoy this stupid game.

It is a game now but sadly enough, it can and does have real life consequences. The sharemarket is as broke if not more broken than the housing market - based mostly on speculation and protection from inflation, not yield or productivity.

A game does not make it trivial. It is a game of Power, the money just follows the flow of power and reinforces that flow. That is why those currently doing well are so very threatened by Brexit, Italy, Trump and the Gilet-Jaunes.

There has been a drift to enabling bright bureaucrats and their ideas that has lead to more and more concentration of power in all fields of life. So the power flows to the biggest immortal corporations, banks, governments, and international organisations, that these bright bureaucrats serve. They are selected on the basis of their competence and crucially, that their ideas lead to greater concentration of power.

The pendulum has begun to swing back against this process, which leads to change in the power arrangements in society, via interesting times. France is a thought leader for large parts of the world, so what happens there will probably spread.

Nice breakdown. Too true about concentration of power, world wide we're suffering from big business and big government. Let's hope the direction of the pushback is into positive territory.

Its about time that fuel was taxed in relation to its affect on the environment - not only global warming, but the local environment. Remember the days when kids could ride or walk safely to school by themsevles - these days I barely trust myself to cross the road safely let alone my kids We have slowly become so content with a car based society that we never look back to what we have lost.

bad urban planning, no urban planning, nothing to do with climate!

Or just bad pricing. If you don't charge people for the negative affects they are causing, then more people will cause them.

good design is the carrot.

Looks like the Gilet-Jaunes are triumphant:

https://www.bbc.com/news/world-europe-46437904

And so Roger, that unfortunately summons up The pit and the pendulum? The sword of Damocles? All a bit unwelcome for the start of summer but nonetheless the storm clouds are gathered.

So the power flows to the biggest immortal corporations, banks, governments, and international organisations, that these bright bureaucrats serve.

Or perhaps you meant 'immoral" here?

Totally agree Zachary, the only asset price that concerns New Zealand and indeed should only concern Interest's readers is the daily CV of Ex Expats home.

Haha. I spent years watching Bloomberg TV ticker prices for exchange rates. A visitor saw me doing that and said he couldn’t believe anyone would look at something so inane. Different strokes for different folks.

We don't care bout that, Expat.
Like cowpat said; just tell us what CoreLogic values your house at today.

It is curious what's going on. Low government bond yields in NZ and Aus. NZD rising when S&P falls. US-T following NZ government bond yields. Unusual and interesting.

People need to stop taking the property markets seriously. It's all just a titillating game that people do to make their dull lives interesting. Trump and Xi agree to a trade war ceasefire, house prices go up, next day people start worrying about what may or may not have been said and house starts plunge. It's so silly but I think people actually enjoy this stupid game.

man that 2-10 curve us plummeting!

But it's where it's plummeting from that's the real worry! Sub 3% 10's.
Last time -2008- at least we had ~5%; a bit of fat to play with. So. Who's up for 1.5%, 10's again?! ( and that was only 2 years ago!)

And other parts of the curve have inverted. https://seekingalpha.com/article/4226150-yield-curve-inverted-now
Here be dragons.

It was all the talk a couple of months ago but then it looked like a storm in a teacup for a while. But it is back.....

Spengler (David P Goldman) weighs in on the US-China trade 'deal' over at Asia Times, and finds a lotta show and little substance...quelle surprise.

And Chiefio (E.M.Smith - a guy more skilled in IT than most, right down to the silicon and machine-language levels) has a dim view of Bitcoin's biz model....or lack of one.

Sitting here watching QQQ (a tech Heavy ETF) fall like a rock. currently -3.83%. Its good to be long puts on this. :)

When do they expire? And I'm sure they weren't cheap! (Dow 815 down and falling!)

28 Dec & 18 Jan. the Jan expiries I bought way back when the market was only going up and up, they are nicely in the green already. The 28 Dec expires need another day like today and they'll be my xmas present to myself.

Just watching bloomberg, 93% of S&P500 stocks down for the day.

Why are NZ's swaps still so high? I want to fix but the 2 through to 5 year swap rates are still high and by the time I add the banks margin I'm better staying floating. The bank's economist was advising clients rates are more likely to fall from here. Any ideas guys?

we should see the USD weaken and our dollar hit 70 so all good fro petrol prices at Xmas

https://finviz.com/map.ashx

Seeing red.....all over....or is it just ....everything, not in the pink.

Well red is my fav colour, but not on that screen.