Dairy prices rise again; US data weakens; Canada home sales poor; EU growth slows; S&P500 rises +1%; China spruiks stimulus; NZ a high-tax country; UST 10yr 2.72%; oil up while gold slips; NZ$1 = 68.1 USc; TWI-5 = 72.3

Here's our summary of key events overnight that affect New Zealand, with news the economic news may be bleak but equity markets are up today.

Firstly some good news however, dairy prices jumped +4.2% at today's dairy auction, their fourth consecutive rise, led by a +10% rise in SMP. There were also gains above +4% for butter and cheese and WMP rose +3.0% at this auction. The result takes prices in US dollars back to levels last seen in August 2018. However, the New Zealand dollar has been rising at the same time and today's +4.2% rise in US dollars translates into just a +1.9% rise in local currency. However prices in local currency are their highest since September 2018 and today's result will have dairy companies dusting off their farm gate milk price payout forecasts. It seems unlikely this event will trigger any change, but further rises might.

In the US, a gauge of business prices fell in December from November, another signal of moderating inflation. Over all of 2018 however, producer prices are up +2.5%.

In the New York region, a Fed survey of business activity declined sharply and much more than expected in January to its lowest level since mid 2017, suggesting a quickening deceleration in domestic factory activity.

Sales of existing home in Canada had their worst year in 2018 since the GFC and were especially weak in the Toronto area. Higher mortgage rates and new mortgage restrictions are behind the downturn. December sales activity fell -19% from the same month a year ago and average prices are down -4.9%.

Germany is reporting that its economic growth, the engine-room of Europe, is losing momentum. It grew for the ninth consecutive year, but in the two previous years, their GDP increased by +2.2%, whereas in 2018 it expanded by only +1.5%. And in comments to the European Parliament, ECB boss Draghi has warned overnight that EU growth is weaker than it looks. And fund managers are warning that a hard Brexit Britain is 'ininvestable'. A key parliamentary vote on Brexit is imminent.

But none of this news is dampening equity investors as risk is back on the agenda. Wall Street is up more than +1% in afternoon trading even after lackluster gains in Europe. But cues were taken from Asia where Tokyo was up +1% yesterday, Hong Kong starred, up +2%, and even Shanghai joined the party, up +1.4%. Locally, the ASX200 was up +0.7% and the NZX50 was unchanged.

In China, it is a coordinated talkfest to promote growth that is clearly flagging and quite quickly. Even more stimulus is on the way and multiple national Government agencies signal easing programs. And that includes big tax cuts, and possibly an official interest rate cut. Banks are responding with increased lending, but more debt may not be what they really need. Their mid-sized businesses are struggling, regional growth targets are being missed, and some key regions are calling for belt-tightening. It has the whiff of some policy panic.

Trade tensions are mounting in the background even though markets see progress on top-level trade talks. China is now instructing SOE firms to avoid travel to the US and other Five Eyes countries - and that includes New Zealand. And they say, if you must go, make sure you only travel with a 'clean' laptop.

A new report from the OECD shows that New Zealand's corporate tax revenues as a percent of all tax revenues are about average (15%) while in Australia they are slightly higher. But as a percent of GDP, we are very high - in fact the world's fifth highest after Cuba, Malaysia and Fiji. Our statutory rate (28%) is in the top quartile as is the effective rate (but we are well below Australia on that). All this comes after the same study shows that corporate NZ gets very low government support. So we are in a high-tax, low support environment.

The UST 10yr yield is holding at 2.72%. And their 2-10 curve is little-changed at +17 bps. The Australian Govt. 10yr yield is at 2.29%, up +1 bp. The China Govt. 10yr yield is also up +1 bp at 3.15%, while the New Zealand Govt. 10yr yield is unchanged at 2.32%. Local swap rates have slipped lower again with the one, two and three year durations all at new lowest-ever levels.

Gold has slipped -US$2 to US$1,288.

US oil prices are up more than +US$1 today and are now just on US$52/bbl while the Brent benchmark is just over US$60/bbl.

The Kiwi dollar starts today marginally softer at 68.1 USc. On the cross rates we are also softer at 94.7 AUc, but stronger at 59.8 euro cents. That leaves the TWI-5 little-changed at 72.3.

Bitcoin is little-changed overnight, now at US$3,620. But there is this. This rate is charted in the exchange rate set below.

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

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47 Comments

Dairy up. Waterways down. Clean Green image dying. I'd rather dairy was down and the industry dying myself.

And then how would you have NZ pay for all the imports we consume?

You wrongly assume that NZ does not have the ability to create quality food in a responsible manner. This is where value lies, not in having a country polluted and filthy from it's food producing industry.

Tourism will suffer from this shyyt industry as will the image of the food we produce.

the word 'consume' in economic parlance refers to all traded goods not just food.

Tourism is the 'dirtiest' industry in NZ. Each tourist on average represents nearly 1000L of fuel burnt.

..no argument form me, tourism is a low value industry - especially how we do it. Based on low wages, nz tax payers pays and tax free air travel. Yes NZ..we have really chosen two beauties to base an economy on.

https://www.stuff.co.nz/national/crime/109950329/police-probe-cryptocurr...

1.4M users hitting refresh on their browsers with fingers crossed.

https://twitter.com/whale_alert/status/1084444049313021952

48,029,306 #CENNZ (1,176,596 USD) transferred from #Cryptopia to Unknown wallet

1.4m users? Perhaps attracted by New Zealand being a safe place to do business.

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17

Business tax rates are an international competition, one we choose to loose. So, since NZ is a poor place to invest in productive, tax paying, businesses, they never prosper and we end up importing capital to pay for our imports. Imported capital flows into low productivity speculative businesses, such as Auckland property and NZ housing in general. It flows in with new immigrants and in through the Aussie banks.

This is daft, yet both Labour and National and the Red/Greens and the suck up to Winston mob all think it is Very Clever. Sigh.

And without new businesses being developed, and existing ones growing, we remain a low skilled, low wage economy that becomes increasingly left behind by other high tech countries. And with no decent share market growth options in which to invest funds, we remain a cash in bank, borrow to buy houses economy.

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11

Fascinating insight into how government administration works:

On an average day, roughly 15 percent of the employees around me are exceptional patriots serving their country. I wish I could give competitive salaries to them and no one else. But 80 percent feel no pressure to produce results. If they don’t feel like doing what they are told, they don’t.

Why would they? We can’t fire them. They avoid attention, plan their weekend, schedule vacation, their second job, their next position — some do this in the same position for more than a decade.

They do nothing that warrants punishment and nothing of external value. That is their workday: errands for the sake of errands — administering, refining, following and collaborating on process. “Process is your friend” is what delusional civil servants tell themselves. Even senior officials must gain approval from every rank across their department, other agencies and work units for basic administrative chores.

Process is what we serve, process keeps us safe, process is our core value. It takes a lot of people to maintain the process. Process provides jobs.

https://www.zerohedge.com/news/2019-01-15/senior-trump-official-i-hope-l...

Could be NZ civil servants too!

So many are very good at talking the talk, presenting themselves, but are always able to move on before the consquences of their decisions can come home to roost.

China Auto Sales Plunge 4th Month in Row. 2018 First Down-Year since 1990: Welcome to the Club of Saturation & Decline. China's consumers rattle global automakers: GM’s sales drop, Ford’s sales collapse.

https://wolfstreet.com/2019/01/14/china-auto-sales-plunge-4th-month-in-r...

China will rebound from today's 'peak pain' but Maoist revival blights the future
https://www.telegraph.co.uk/business/2019/01/14/china-will-rebound-today...

Having Trump as a scapegoat gives Xi Jinping the opportunity to make unpopular decisions. Maybe he will impose the rule of law and clear out corruption and introduce more effective democracy. On the other hand he could take the choices that protect him and his cronies at the expense of the Chinese population. I'm old and cynical but you never can tell maybe the spirit of Mandela and Gorbachev is in him.

May down by 230 votes and pound recovers. Must be a sign of strength of character that she didn't resign. It's now up to the EU to compromise.

Why on earth would you compromise with the other party in turmoil and disarray? Surely you have them on the ropes and things have a higher chance of turning your (EU) way. The UK has made its bed and will have to live with the consequences.

while the UK may be in turmoil David, therre has still been debate over who needs who the most in Brexit. Time will tell, but you have to ask who, or which group of figures you believe the most.

On balance I suppose I am pro-Brexit. It is certainly the more exciting path for the UK. However I cannot see the EU whether successful or a failure being much influenced by Brexit when the UK was only a small component by population and economy.
Logically the EU has one aim: to prevent other countries following. It thought it could do this by trade barriers but it has already achieved its goal - whoever tries to leave the EU is likely to see their political party fall to pieces.

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12

The UK needs a hard Brexit and get completely clear from the undemocratic EU.

and that is where i sit. i am pro Brexit because of the undemocratic effects of the economic policies around the so called "free market" and consequential globalisation that resulted.

I still don't understand that there are people who argue for both the free market and the EU without understanding that if the market were truly 'free', there would be no need for the EU!

Why would you not grab the chance to get free from the EU (Rome) after spending 100s of years and bloodshed to get free in the first place?

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10

To me it is about sovereignty. We have inherited a rich tradition of conflict resolution that gives legitimacy to our government decisions. The UK system, which we have inherited, is the product of centuries of evolution, not top down design. The EU system is fundamentally undemocratic on a very deep level and not that different philosophically from the CCP, ie, the bureaucracy is meritocratic, therefore it should be in charge and answerable only to itself.

Agreed Roger, and globalisation tends to undermine democracy is some respects.

UK is 16% of EU's GDP. That's a lot.

UK imports more than it exports from the EU - the EU needs their trade more than UK does.

Aside from border controls issue the UK needs to get out because the PIGS, with huge youth unemployment, low birthrates (ageing populations) and massive state debt are going to default within next 1-2 decades and destroy the Euro. Do not want to be attached and paying for that mess.

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10

London is the world financial centre for foreign exchange. Britain is the number 2 contributor to the United Nations. Britain is the world number 5 military power by spending. The list goes on. The country was bankrupted by WW1 and 2 followed by Socialism and collapse (or destruction by US interests) of its international trading system. The final capitulation was begging to join the EU on US instructions in the seventies, which has held it back ever since.

Britain is a special place, despite the fashionable anti-colonial backlash. (Would Maori really have done better as a Belgium, Dutch, US or German colony?) Most of our conception of a civilised society is derived from concepts that evolved over centuries in Britain. The birth of our modern world in the industrial revolution took place primarily in Britain. We tend to focus on the misdeeds and overlook the good stuff.

Maori may have done better as a French colony. It nearly happened. OK Algeria and Vietnam are not Australia and Canada but at least the food would have been better. Maori can ask Tahitians.

Well said DC. Brexit is discussed at length, daily in the UK. In the EU it's not discussed much, not many care about Brexit

This has been one of the largest general strikes in the world, writes Vijay Prasad from Kerala, in a roundup that also includes observations on Brazil and Palestine.
https://consortiumnews.com/2019/01/14/a-workers-struggle-in-india-to-mak...

https://www.zerohedge.com/news/2019-01-14/french-riot-police-deploy-semi...

According to an article on ''ONE ROOF'' 40% of nz households don't pay any tax given their family support income.If thats correct then our economy is a sham.

when you get more people on welfare than paying tax your democratic economy is doomed to go the route of Venezuela.

Agree. It's ridiculous that we have WFF and the Accommodation Supplement, for example.

They should have been reduced or eliminated under National.

What's the alternative to WFF and Accomodation Supplement though? Wouldn't want to upset the business community if they had to pay real wages, imagine what the business confidence surveys would say....

Exactly. The alternative is wages sufficient to attract employees, and more realistic rents for property investors. No one wants that sort of capitalism.

As an aside, presumably the pension would sway the figures significantly with a large swathe of older folks receiving a benefit.

A friend of mine has custody of 2 children, His ex has a very well paying job and multiple rental properties and has been showing virtually no income due to losses and paying virtually no child support because of this. This is upstream of your comment... but the winner pre ringfencing has been..... THE BANK !! Hooray !

That is slightly incorrect. 40% of households RECEIVE more in welfare than they pay in tax. Around another 10% or so are in a neutral tax situation where tax benefits equal payments. So only half of all NZ households actually pay net taxes.
https://www.stuff.co.nz/business/81429047/small-number-of-taxpayers-bear...
https://www.statschat.org.nz/2014/12/10/not-net-tax/

'Back in December 2017, MBIE signed a three year contract worth $112,000 with the Wellington private security firm ZX Security Ltd, to train large numbers of its staff on how to create and maintain false identities on social media - in order to harvest information from the general public.'

http://www.scoop.co.nz/stories/HL1901/S00020/gordon-campbell-on-mbies-so...

Fortress Russia: How Can NATO Defeat Moscow's A2/AD Strategy and Air Defenses?
https://nationalinterest.org/blog/buzz/fortress-russia-how-can-nato-defe...

A reasonable policy is to just wait. Russian economy is teetering, they're in serious demographic decline and oil and gas that they are so reliant on for income is going to become much less valuable over next 2 decades.

In a world ever more dependant on machines and computers demographic decline can be an advantage. Certainly wealth per capita increases even if managing decline is harder than managing ever-lasting growth. The countries with rapid population growth are not an advertisement for success. Ref NZ's productivity, congestion, lack of infrastructure and trained teachers, etc.

We may have a high corporate tax rate but many of those corporates pay no tax or run monopolies. The real cost of this is born by regular kiwis paying way more for goods than they cost elsewhere.

http://www.stuff.co.nz/business/opinion-analysis/10400785/We-need-to-tal...

A pair of old but informative links. They ought to be printed and delivered to every tax-paying household just before the next election.

This Isn’t The First ‘Fed Pause’

Something big changed between 2017 (three rate hikes) and 2018 (four rate hikes) and it wasn’t the extra 25 bps. The global economy isn’t going to be sailing into globally synchronized growth with federal funds around 150 bps and then on the precipice of full downturn with the addition of just 100 bps more.

The strongest economy in decades would never have been cut off by another 1%, at least if it was actually strong in any realistic sense.

https://www.alhambrapartners.com/2019/01/15/this-isnt-the-first-fed-pause/

Okay, the numbers don't read that well, but we've been here before. Okay, maybe not exactly here but you get my drift. Each new down turn is always slightly different from the last, keeping everyone on their toes, but that's as it should be. "C'est la vie." as our friends the frogs say. Anyhow, it'll clean out the cowboys once more, and that's a process you have to do reasonably regularly in my book.