Dairy prices rise strongly; US trade deficit falls; German factory orders fall; airfreight declines; RBA goes dovish; UST 10yr 2.68%; oil and gold unchanged; NZ$1 = 68.5 USc; TWI-5 = 72.8

Here's our summary of key events overnight that affect New Zealand, with news the long-predicted decline in international trade seems to be underway.

However, today's dairy auction has brought significantly higher prices. Overall in US dollars prices are up +6.7% from the previous auction. That is now the fifth rise in a row and the largest. Since the beginning of December, prices are now up almost +20%. That is enough for dairy companies to dust off their farm gate milk price forecasts. The key WMP price was up +8.4% and SMP was up +3.9%. This dairy season milk flows are up strongly, so these prices will be on top of that, a virtuous impact. The only negative is that the New Zealand dollar is rising.

In the US, their trade deficit fell in November from October in delayed results released overnight, and by more than expected. Much lower imports caused the fall, but the overall deficit in November was still higher than the same month a year ago. The deficit with China fell marginally but is still running at more than -US$33 bln/mth.

Canadian building permits rose much more than expected in December. In fact, a fall was expected.

In Vancouver, their once red-hot housing market continued to cool as the number of home sales fell to the lowest level seen in a January in 10 years. Only 1,103 homes were sold, down almost -40% from the same month a year earlier. The situation in Toronto is much lower as well.

Mexico consumer confidence also came in much better than expected.

German factory orders went the other way however, down -1.6% when a flat-lining was expected.

Global airfreight volumes came in with weak growth in 2018, up +3.5% but have ended the year with December declining by -0.5%. This was the worst performance since March 2016. Freight capacity, however, grew by 3.8% and putting more pressure on this market. The decline in international trade has been expected for a while and now seems to be here. It was particularly acute in the Asia/Pacific region which was down -4.5% in the month.

In Australia yesterday, slowing growth has forced their Reserve Bank governor to back off from his tightening bias and declare "the probabilities appear to be more evenly balanced" between an interest rate hike and an interest rate cut. Market reaction was swift with the AUD falling sharply. The NZD also fell in its wake against most others but rose sharply in the direct relationship, pushing us up to 96 AUc immediately after.

The UST 10yr yield is lower today at 2.68% and falling -2 bps from this time yesterday. Their 2-10 curve is now just on +17 bps. The Australian Govt. 10yr yield is at 2.17% and a -7 bps slump overnight. The China Govt. 10yr yield is unchanged at 3.15% because markets there are closed of course, while the New Zealand Govt. 10yr yield is at 2.24% and unchanged. Markets have not marked down the New Zealand in the same way for Australia.

Gold is little-changed at US$1,312/oz.

US oil prices also little-changed at US$54/bbl while the Brent benchmark is lat just on US$62/bbl.

The Kiwi dollar will open today in offshore markets at 68.5 USc, representing a slight softening overnight. On the cross rates we are at 96 AUc after the Aussie was marked down heavily following the RBA review, and at 60.2 euro cents. That puts the TWI-5 down to 72.8.

Bitcoin has fallen today to US$3,364, a drop of -1.7%. 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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"Someone, somewhere, somehow received a nod and wink on Monday morning that the banks would actually come out of the royal commission better than expected....With the banks down a quarter per cent, some trader ... decided to buy a half billion dollars worth of the major banks ahead of the report...That half-billion plunge at 11am was worth a quick $22 million profit on Tuesday morning."

Can't be right, they said no leaks....

Perhaps Mr Kerr could hop over to Marin Place and advise Mr Lowe or share medication.

'German factory orders dropped by 10.8% year-over-year (unadjusted) in the final month of 2018, according to estimates from DeStatis released today. Everything I just wrote about US trade and how it starts to piece together the market action for December goes doubly for Germany’s manufacturing recession in that very month.

It is a recession. This kind of decline you just don’t find outside of one. The last time German production was beset by this level of obloquy was May 2012, the worst month of Europe’s last overall contraction. Minus eleven percent is equivalent to October 2008.'


Brexiteers should have been prepared for the shattering intervention of the US. The European Union always was an American project.

The destruction of the British Empire Trade system was a long standing US policy objective. When Britain joined the EU under US instructions it was the final capitulation at the end of empire. The US was committed to destoying the old trade networks based on the GBP sterling. The result, we became part of the US trade network and adopted the dollar.

Suez can be seen in this light. It was more about the US stopping Britain and France regaining any of their former power. We have all believed the propaganda stories we were fed as teenagers.

The transfer of power began with the establishment of the US Federal Reserve and the subsequent ability of the US to destroy the British gold standard put in place by Sir Isaac Newton and adopted worldwide. This was done by insisting on repayment of war debts by Britain, France and Germany, leading to the manic credit expansion of the 1920s and the depression of the 1930s. The misery inflicted by the US on Germany caused the rise of National Socialism.

It was Barzini all along.

Here is a thought I had this morning:

If all other things being equal price is a function of interest rates, and interest rates are a function of inflation then home buyers are better off with higher inflation even though it means higher interest rates.

Let me explain. If a buyer has $1000 per fortnight for mortgage costs and inflation is 2% and their wages increase by 3% then their mortgage costs reduce relatively slowly compared to their income.

If they have mortgage costs of $1000 per fortnight and inflation is 4% and their wages increase by 5% then it is much faster.

So a low interest rate/low inflation rate environment seems favourable for home buyers but it means repayments remain high relative to income. Something that wasn’t true previous (due to high inflation and decreasing interest rates, a very benevolent combination).

Keep in mind I’m not talking about the real value of the debt here - that is of course addressed by the interest rate. But because the repayments equal interest rate plus principle, and because repayments are the primary constraint for purchase, it means interest rates are irrelevant and only inflation matters. And if only inflation matters you are better having more than less because your repayments are fixed (assuming rates stay the same on average over the term).

I might not have put that very well but hopefully people get the gist. Obviously this only works if prices move in relation to interest rates but there is strong evidence that this is the most important factor.

If I was smarter I could put this as a formula.

Repayments are a function of income and interest rates
Interest rates are a function of inflation
Income is a function of inflation
Prices are a function of repayments (such that repayments are constant relative to inflation/interest rates)

Therefore, the higher inflation the more quickly repayments reduce relative to income.

Yep. The corollary is the banks want to keep mortgagors in debt for as long as possible.

I have already done it for you, a reworked quantity theory of money. M.V=P.Q becomes (M.V)+i=P.Q

Don't be deluded by CPI, real inflation is the expansion of the money supply. The money supply must expand at the rate of interest so that payments can be made. Murray86 and Andrewj have it right below, the redistribution of wealth is built into the system. Interest rates, and wages, must go down over time. The only way you win is asset price inflation, until the bubble bursts. The interest rates tell you the proximity of the bust, the closer to zero the closer you are.

Can you please explain how that works?

Withay and I questioned it a while back but got no response.


by nymad | Fri, 09/11/2018 - 11:01

Reading this - yes, Withay, this needs more explanation.
Scarfie - please explain why you would modify MV = PQ to be (MV)+i = PQ?

Velocity of money reflects demand, so surely is a function of i already. Instead you are saying V = f(...,i) + i.
Plus money supply is exogenous to interest rates, so you are now saying that it isn't?
Also, how do you define the identity i - that isn't apparent given the natures of M and V.

To be perfectly honest Nymad you are not smart enough to understand. Or perhaps you are so blinkered by your education that you don't want to understand. Plus I also find that you are more interested in an argument than understanding. So I won't explain it to you. If Withay wants to know he can get my email address from David and I will send him the piece if wrote back in 2013. There are a few I have sent it to for peer review, and they are better minds than you sorry,(including a few from these forums) so I don't need you to attempt to pick it apart.

One of these I need to do a complimentary piece explaining the more advanced thinking I have done on the matter, like that assets that command a yield can act like money.

FYI I made the prediction back in 2013 that interest rates would trend down, as would the velocity of money. Also that the money supply would keep expanding. Lets just wait and see how the predictive power works out eh, nothing better than prediction as validation. The latest out of the FED was expected by me, as is the US 10yr turning downward again.

Haha. Okay, Scarfie. Whatever you say.

Those should be pretty straight forward things to address. Having been trained in Macro up to Masters level, I think I'd be able to grasp the ideas.

So if you can't spell them out to me, I don't fancy your luck on getting anywhere in the Macro world. Especially as a non trained economist and even more especially so if you are proposing a reconsideration of a pretty entrenched theory.

FYI peer review is obviously not what you think it is - It isn't sending it to people on the interest.co.nz comments thread. It's a working paper release and a journal submission. And judging by what you have said so far, you would be getting a very polite letter declining your submission before any referees were even considered.

I wish you all the best though. Keep at it!
God knows you will need it.

They are actually self evident, if you had any brains you would not need it explained. You may be educated, but a masters only requires an IQ in the 120-125 range, which isn't particularly impressive.

Well. No. They aren't. Hence why I queried the logic.
Like I said, it should be a pretty easy objection for you to address if you knew what you were talking about.

And. FYI - PhD level. Just not in macro.

Ha, I know right. Why would anyone question entrenched theory?

I mean, it's like questioning whether the sun revolves around the earth. Before long someone might start questioning whether humans are the intelligent species, rational self interest and all that. Someone might even question the validity of economics and whether there are any real "laws" based on any real concepts.

We mustn't let critical thinking run amok. The truth is to be preserved at all costs.

I am having trouble with the consistency of units in this equation.
The multiple MV would seem to have units in dollars per unit time, as does the multiple PQ
However, the parameter i just has units of 1/time, no dollars.

yes I think you are onto something here and I have often thought the same. Imagine going through a shock period of 10 percent interest rates for a few years. It would be brutal, but if you could pull through you would come out the end with a third of your mortgage effectively repaid. The other point is that sometimes interest rates are high to counter a rising property market - so if rates are going up it may be because your property is increasing in value

A shock period isn't 10%. NZ has seen 10% on any number of occasions over the last few decades. We even saw 20%+ at one stage. Maybe that was a shock to some, but the principal to be repaid wasn't as much as it is today - so the 'shock' repayments weren't that bad. Today, it's the size of the debt that will be the killer, and on two fronts; Interest Rate and Capital Price. ( you can throw in Unemployment as well if you like)
In previous times the Capital Price protected the vulnerable ( they could sell; get out flat or even make a 'profit' if they couldn't afford their property). Today? That's not on the cards.
Interest rates will likely not be the problem ( they will be lowered to protect the banks' balance sheets - keep borrowers solvent) - Capital Prices falling, will.

Hmm, I remember a period (around 1990 I think) where our mortgage interest was 16% and our recently bought first home declined in value around 10% in 18 months. Happy days.

what happens when inflation is at say 4% and the wage increase is only 2 or 3%? More in line with reality I think?

thats my experience, a theft of wealth by stealth. Thats nothing like today where collapsing growth is running faster than Central Banks can react.

Model might need expanding a bit. ie the productive economy and non-productive for inflation. So rates, power, insurance all increasing at 4~5% per annum but wages are more like 1%. The problem then is CPI looks like its 2% (Say) but in reality the productive sector is in deflation of 2% to cope with the rentiers taking 4%+.

Example for the last 3+ years all and in fact more than my meagre pay increases have been absorbed by rates, power, insurance, public transport increases. This means I have less money in my hand in real terms to spend.

Why is this a bigger issue? because if ppl are only watching the headline CPI % they dont see the productive sector crashing under the weight of its costs it cant recover. I'd suggest its been like this for a decade now and looks to continue into the foreseeable future. At some point this is going to get ugly IMHO.

Yeah this discussion assumes wages equal or exceed inflation no matter what it is. I agree there are issues about how the CPI represents real life cost pressures. The biggest concern for me though is housing inflation, not necessarily in terms of rent but in terms of the pressure to save deposits and pay mortgages. I think the CPI underestimates the pressure people feel to cut all the smashed avocado toast out of their life to save for a house.

And of course the tax you pay is rising faster than the rate of increase in wages/salary owing to income tax bracket creep.

Low interest is not favorable for buyers - it is favorably for sellers. Just part of the hogwash put pout there to keep things spruiked.

A low interest rate environment is not favorable for those looking to buy their first home. The amount required for a down payment today are many times higher than in the past, but the interest return on savings/term deposits are much much lower. That means anyone saving for a deposit who doesn't have the luxury of living at home will spend more time paying market rent (dead money). So that's 3 things going against first home buyers looking to get on the property ladder.

So here are the two maxims of housing I propose:
• If there is a changing macroeconomic environment (either cyclical or one off change) then you are better buying with high inflation/high interest rates than low inflation/low interest rates.
• If there is a stable macroeconomic environment then assuming your wages increase at or above inflation you are better off with high interest rates/high inflation than low interest rates/low inflation.

Oops: Low Interest Rates a “Factor” in Slowdown of Economic & Productivity Growth: NBER

Powell, Draghi, Kuroda, et al.: Did ya see this NBER study?


The national party is going to release new policies this year.


I hope they’ve given their real ‘policy machine’ the Labour Party a heads up because otherwise they’ll only have policies from the back catalogue to steal like Michael Cullens tax plan.

The big question: Will or will not the housing crisis exist in their new policy landscape?

It sounds interesting / promising and perhaps even slightly radical, but I expect we will just get the usual unimaginative, middle of the road Nat stuff

U.S. Banks Win $21 Billion Trump Tax Windfall Then Cut Staff, Loaned Less