Dairy prices rise again; equity markets await Fed signals; US housing starts weak; China retreats into its shell; German sentiment falls; UST 10yr at 2.83%; oil slumps but gold up; NZ$1 = 68.5 USc; TWI-5 = 73.2

Here's our summary of key events overnight that affect New Zealand, with news the oil price is down very sharply today.

First up however, there may be some disappointed dairy derivatives trades today. The NZX Futures market has priced good rises in advance of today's dairy auction, but in the end the gains were very modest. Overall prices were up +1.7% in US dollars and +2.8% in New Zealand dollars. The good gains in WMP just didn't materialise and the great gains for SMP didn't either although SMP did rise +3.4%. This auction ends the year with a second consecutive rise, but over all of 2018 prices are down -6% in US dollars, down -4% in NZ dollars. Volumes sold by auction for the year were up +5% to 658,000 tonnes and that represents only 3% of NZ's milk production. Most is sold directly rather than through auction.

Elsewhere in major markets, sentiment is in a holding pattern ahead of the US Fed rate decision and the pressure building to not follow through with their expected and previously signaled +25 bps rise. We will know at this time tomorrow. The US bond market is rallying (yields are falling) and the USD is slipping. Wall Street is holding (S&P500 up +0.9% in mid-day trade).

Meanwhile, US housing start data came in a bit better than expected although the level is -3.6% lower year-on-year. Expectations weren't very high. Building permit levels are flat.

In China, President Xi made an 'important' speech today promising more openness, but without specifics - yet again - and signaling even tighter party controls and an inward-looking siege-view of the world. His promises are now of no consequence; how he acts is the key.

And in China, debt pressures are rising. Major corporate bond defaults are surging as regulators move to clean up some of the debt mess. Investors will take the pain. Yesterday in Shanghai, equities ended the day down -0.8%. That takes the 2018 drop to -23% and a real bear market.

And China’s holdings of US Treasuries shrank for a fifth consecutive month in October, falling to the lowest point since May 2017 as the country beefs up measures to support the yuan amid the trade war. Actually, most countries are letting their holdings of US Treasuries fall, an indications that the cost of financing the ballooning US Federal debt is likely to rise in 2019. Foreign holdings are down -2% on a year when total US debt rose +6.3%.

In Europe, Germany’s IFO business sentiment index slipped by slightly more than expected to a 2-year low. Germany has produced another big government surplus, and their foreign wealth now amounts to a staggering €1.8 tln, or more than half of Germany’s annual GDP.

The UST 10yr yield is now at 2.83% and sinking another -3 bps. Their 2-10 curve is up to just under +17 bps. The Aussie Govt 10yr is at 2.42%, down -2 bps, the China Govt 10yr is at 3.41% and up +1 bp, while the NZ Govt 10 yr is at 2.48% and down -1 bp.

Gold has regained more ground and is now at US$1,249, a +US$4 rise today.

US oil prices have slumped again today by almost -US$2.50 to just over US$47.50/bbl. The Brent benchmark is now just under US$57.50/bbl. Severe oversupply, especially from US fracked crude, is behind this sharp drop. We haven't seen crude oil prices this low in more than a year. When they were last this low, UL91 discounted pump prices were NZ$1.74/L.

The Kiwi dollar is +½c higher today at 68.5 USc. On the cross rates we are up more at 95.5 AUc, and at 60.3 euro cents. That puts the TWI-5 at 73.2.

Bitcoin is now at US$3,513 and a +1.8% gain overnight. This rate is charted in the exchange rate set below.

This chart is animated here.

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30 Comments

“Elsewhere in major markets, sentiment is in a holding pattern ahead of the US Fed rate decision.” Ah yes, sentiment and interest rates - the cornerstone of our current markets.

And if those fail...
"Army on standby as Cabinet agrees to implement 'no deal' plans in full" (Telegraph.UK)

Is that a "Full speed ahead and damn the torpedoes" moment? The Brits are a funny lot, but once the Army is involved they can rally round the troops with surprising passion. I think it could very easily become a full on battle cry.

The government had to go through the motions of bending over backwards towards the EU, as they are fearful of being blamed when things go wrong. My guess is the momentum to actually, like, you know, actually, like, really exit the EU, could build very rapidly from here and take the government by surprise.

Also, when government ministers encounter the Army approach to achieving objectives they suffer a total culture shock. The no messing, get it done, solve the problems approach is in total contrast to the consultation, prevarication, on the one hand, and on the other, delay and get expert opinion, meetings and committees world that government ministers live in.

David - are you sure your decimal point is in the right place? 658,000 tonnes is 3% of NZ annual dairy production?
The total NZ dairy production figure you may have used in your calculation is tonnes of milk collected - less than 10% of this milk is actual product, the rest is water.

sounds a bit of a mess in the USA.

'The dairy markets are depressed and the impact is obvious, particularly in the Eastern half of the nation. Dairy cow slaughter is 5% ahead of the 2017 pace, despite the smaller milk cow herd. Some dairy producers are taking a heavy discount on their cull cows to ensure shackle space at overcrowded slaughterhouses. Only the best heifers and milk cows command a price that recognizes their value as a dairy animal and not just a source of ground beef. Many dairy producers are looking to sell a share of their assets, hoping to raise enough cash to survive until prices improve, but there are precious few buyers. Supply vastly outweighs demand for dairy assets. Livestock, feed stock, and rolling stock are offered at firesale prices.'

This is my idea of good news for NZ dairy, the EU is chomping through it's powder pile, the USA is culling and both the EU and USA have stable or falling milk production. It's taken a long time but mr market is starting to get it's way.
I still wouldn't buy a dairy farm but I think it is looking better for medium to longer term.

Andrew - the problems are going to show up closer to home very soon. With the .15c per kg "recovery" by Fonterra from our January milk check I have been surprised at how many successful farmers have had to go back to their banks for support. There is anecdotal evidence of a number of smaller suppliers quietly exiting the industry. In the past their supply would have been replaced with new entrants. With the new resource consent process requirements conversions are going to be few. Fonterra needs some wins or the trickle of departures is going to increase. $6.00 is okay but okay isn't enough for many to want to continue.

Are those problems a lot to do with internal costs? When I started farming my gross income on 300 cattle was around $300 pr head. That 90k gave us a good living. Rates were $500 insurance about the same, accounting fees under 1k etc. Today my rates would be over 10k accountants 6k insurance 6k, you get the drift. No way could I have anything like the life style only the debt is cheaper
There is a world of difference between costs of %20 of gross income and costs of %80 of gross income.

In the mid 70's I went to prep school (I was gifted) we were getting 147 a pound for our bull beef, the school fees were $170 a term. A new Mazda b1600 was three grand, we were rich but never new it.
Next year bull went to 47c pound, that's a crash, margins stayed pretty good.

Andrewj - what measure is a "pound"? Must have been before my time.
A lot of the coming grief is self induced. A neighbouring farmer had $30k taken from his cheque account by his bank recently. He was horrified - his bank was wanting some principal reduction off his mortgage.
Mostly it's the constant increase in costs. Some servicemen are charging up to $250 just for mileage and time taken to travel to our farm, before they even start work. Water pump guys are charging $100 per hour. And health and safety policy means a number of jobs around the farm are taking staff longer to complete.

Are increasing costs the problem or the fact your money is plainly worthless?

Hmm.. what happens when it gets too expensive for our food producers to produce food?

"what happens when it gets too expensive for our food producers to produce food"

Exactly the coming problem. Low prices.
Commodity prices across the board (most importantly OIL) just cant be held up high enough to keep producers viable .... new DEBT/credit helps holds prices up but we are tapping out on new debt takers
The system really is insolvent.

https://ourfiniteworld.com/2018/11/28/low-oil-prices-an-indication-of-ma...
https://www.bloomberg.com/news/articles/2018-12-17/boj-s-3-5-trillion-of...

But, but, perfect competition will drive prices down and everybody can consume more for less.

Retail Melts Down Before Christmas in the UK, Spreads to Continent'
https://wolfstreet.com/2018/12/18/europes-retail-sales-meltdown-before-c...

A worldwide global liquidity pullback like that has led to “selling UST’s” by foreign central banks. Foreign systems require dollars no matter what (dollar short) and if the eurodollar system won’t make available a reasonable supply (dollar shortage) the options for any overseas system is either liquidation or support. Often some of both.
https://www.alhambrapartners.com/2018/12/18/eurodollar-university-inputs...

Dow up ~350 not long ago - now it's gone negative for the day again.
Anyone carrying a position of note into this next few weeks MUST know something pretty everyone else doesn't. And guess what? There are a few people out there who do! (My guess? The oil cartel elite know what they are going to do next and are getting themselves set)

Free Advertisement for Gull in Herald (hypocrites):

Gull spokesperson Rohan Mehta accepted it had been a "rollercoaster ride" with oil prices reaching record highs recently but said the company now wanted to pass on some savings.

"It's been a rollercoaster ride this year with oil prices reaching record highs. They're easing off just in time for Christmas, so we're passing on the savings.

"As Kiwi motorists look forward to a much-awaited Christmas break, Gull would love for their customers to have a little extra to spend on themselves, their family and friends."

Don't knock Gull - we have one in our town and our prices esp diesel can be 10-20c cheaper than a neighbouring town without one. In fact our fuel prices can be some of the lowest in NZ because of Gull's presence.

Yesterday I bought diesel twice and the difference was 30c. The more expensive was in Auckland though, the cheaper one was Allied self serve.

Caltex truckstop diesel via Kiwi Fuel Cards is $1.1590 + 0.115 regional tax - 0.08 standard discount = $1.194, for Sector A (Auckland - ish)

scarfie - since when did your pushbike run on diesel?

Ha. Fed has to put interest rates up at this meeting, or the US stock market will collapse, as not doing so would signal recession imminent. It's show business.

China selling US-Ts is not show business. It is deadly serious, as it suggests internal collapse in China. Dead man walking?

Also dead man walking is Germany, of their supposed massive wealth, most is in such things as Target 2 imbalances, aka unrepayable debt from bankrupt EU countries. Anyone wanna buy Deutsch bank? Er, anyone...

Dominic Chappell will! One Euro and he'll be off to see what the pension fund has left in it.

Douche Bank is another Bail-in waiting to happen...then they will be back to their old practices...I was gonna offer to buy it...but could not raise a smile, over funny munny, never mind a few hundred Billion Dollars picking someone else's pockets....in Euros....or even a Yaun.

I was gonna call Fiat again, and see if they had printed more...but they said, gonna stick to Automobiles as there was more movement. But if petrol goes through the roof, that might stop again.

This debt debacle is giving lending a bad name...So I stopped...spending this Christmas.

Cannot beat a Borrower, when all is said and done. So I do not bovver...

Merry lead up to Christmas....Santa and Christ may be a bit disillusioned this year....God knows why.

Prezzie for Australian housing, as APRA to remove cap on IO lending January 2019. Will sentiment prevail.

Lighting the fuse!!!!! Now stand well clear!!!!

Thanks Andrew. The links make for great reading & I'm slowly trying to understand them, but it sounds as if they don't fully understand it themselves. If they're having trouble balancing the big balance sheets, then there's not much hope for us little guys. The best I can do is stay out of debt until things have worked themselves out, or, do things at this stage of play, ever work themselves out?
I have to comment on the 2020 thing. Used as a nameplate for perfect vision 20/20 is coming to a planet near you. The irony of having perfect vision in 2020 could be applied to the capital markets story. I can see God having a really good laugh with this. Especially if it blows.

I don't think anyone knows the eurodollar shadow banking empire. It's unregulated off balance sheet credit creation, by ledger liabilities between banks.
It's the unknown that is keeping others who have the liabilities on their balance sheet 'as good as money" up at night. It's the shrinking balance sheet that is creating the $ shortage or you could say limiting the creation of ledger liabilities.

20/20 vision is just standard vision ... so you see what the majority see
which currently, is not a lot