Dairy prices up strongly again; US service sector strong; Vancouver housing in doldrums; China trims growth target, taxes; RBA sanguine; UST 10yr 2.74%; oil stable and gold drops; NZ$1 = 67.9 USc; TWI-5 = 72.6

Dairy prices up strongly again; US service sector strong; Vancouver housing in doldrums; China trims growth target, taxes; RBA sanguine; UST 10yr 2.74%; oil stable and gold drops; NZ$1 = 67.9 USc; TWI-5 = 72.6

Here's our summary of key events overnight that affect New Zealand, with news China has downgraded its 2019 growth aspirations.

Overnight, there was another good dairy auction with prices rising +3.3% overall, and the key WMP price gaining +6.0%. In New Zealand dollars, prices actually gained +4.3%. This is the seventh consecutive rise and brings the 2019 gains to +24%. Volumes offered were normal, and today's rise bolsters the farm gate milk price forecasts most dairy cooperatives have made recently.

Elsewhere in the US, sales of new single-family homes rose to a seven-month high in December, but November's out-sized jump was revised lower, pointing to continued weakness in the housing market. The December tally was -2.4% lower than the same month a year ago.

And updates to the services PMIs were out overnight in the US. Both pointed in the same direction. The ISM one said the expansion was growing stronger. And so did the Markit one. Both have the expansion in the US services at a good level. These rises moved the US dollar higher.

In Washington, the Administration has signaled it will scrap India’s and Turkey’s participation in a privileged trading program that allows certain developing economies to avoid tariffs on some exports to the US.

In Vancouver, sales of residential housing has reached its lowest level in more than a decade. In fact, sales are more than one third lower than the same month a year ago.

Mexico consumer confidence rose much more than expected and to its highest level since this metric has been measured in a record that goes back 18 years.

Amid slowing growth, China's premier has announced that they will spend about +10% more on rail infrastructure in 2019 as part of its growth-enhancing stimulus program. That involves a spend on these rail projects alone of NZ$175 bln.

And that slowing growth has brought another unexpected boost. They are to cut taxes and fees by NZ$440 bln to prop up growth by encouraging more economic activity. A cut was expected but this is larger than most analysts estimated.

Both measures are part of Beijing's plan to lean against their slowing economy, one they themselves forecast to grow by "between 6% and 6.5%" in 2019. That would make it the slowest rate in 30 years, and down from the 6.5% target they had in 2018.

In the EU retail sales came in higher than many expected. After a weak December, January retail grew by +2.2% above the same month a year ago, and satisfyingly higher than inflation.

In Australia, a $120 mln residential mortgage bond made up of Suncorp mortgages suffered defaults to a trigger level where investors may not get all their money back. It is being described as a 'canary' moment. But only time will tell. However, it is probably the first ever such event across all RMBS in Australia. Most of the mortgages in this bond were from Queensland.

Meanwhile, the RBA has left the official interest rate on hold at 1.5% for the 31st month in a row. Many other analysts think it is just a matter of time before they will need to cut their official rate but the central bank still sees 2019 growth at about 3% as their labour market remains strong. And they only see the fall in Melbourne and Sydney house prices as an 'adjustment'. It was a relatively upbeat assessment.

The UST 10yr yield is marginally firmer today at 2.74%. Their 2-10 curve is still at +18 bps while their negative 1-5 curve has vanished. The Aussie Govt 10yr is down -2 bps to 2.16%, the China Govt 10yr is up +2 bps to 3.23%, while the NZ Govt 10 yr is down -3 bps to 2.20%. Local swap rates rose marginally yesterday.

Gold has fallen again, down to another -US$5 to US$1,283/oz.

US oil prices are little-changed today at US$56/bbl while the Brent benchmark is just on US$65/bbl.

The Kiwi dollar is at 67.9 USc and a little lower from yesterday. On the cross rates we also a little lower at 96 AUc. Against the euro we are little-changed at 60.1 euro cents. The TWI-5 is now at 72.6.

Bitcoin is firmer at US$3,821 and a rise of about +3.3% since this time yesterday. 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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13 Comments

Regarding the Suncorp report above, National voted to allow NZ banks to issue "covered bonds". I don't think it will be very far away before we will see whether this was a prudent decision on behalf of term deposit holders (which of course now includes those in kiwisaver).

'Those who do not learn history are doomed to repeat it.'

I don't think term deposit holders were that keen on it at the time. However banks needed Capital.
Nervous depositors do not make a stable banking system, lets face it depositors don't want to be left naked when the tide goes out, a life times savings washed away can lead to nasty outcomes.

I think you have that back-to-front. RMBS have been around for a long time. The RBNZ "covered bond" rules were put in place to limit the extent to which banks could do them, and the nature of mortgages that could go in the pool. Those regulations capped their ability.

It is fair to ask why these securities are extracted for the benefit of a certain class of investor, but it is quite wrong to imply those RBNZ rules opened things up.

We should also note that at A$120 mln, this RMBS is very small indeed. I don't know how many mortgages are actually in there, but at an average of $250,000, that would only be less than 500. Even for Suncorp, that is a truly tiny slice. Canary perhaps, but perspective is important.

Did RMBS have the effect of reducing interest paid to depositors? It seems likely they did, or the banks would not have used them. It seems the societal damage done to ordinary depositors by low interest rates is greatly underestimated. Wealth is transferred by stealth from ordinary people, thereby weakening the bonds of trust upon which a civilised society is based. Low productivity is encouraged, and stagnation, resentment and decline follow.

It may have put a cap on them but shortly after this rule was put in place their issuance soared.
Another obnoxious thing was how quickly the banks removed some risky mortgages from the covered bond pool and put them into the general term deposit covering pool after the Chch earthquake.

China dairy tariffs reset in in the New Year. Perhaps Mr Trump will change all that. USA dairy is shrinking with lower heifer numbers.

"Chinese milk powder imports are often very strong in January, and this year is no exception. Zero- and low-tariff quotas reset when the year begins, prompting a surge in shipments. China brought in 128.6 million pounds of SMP in January, up 25.4% from the previous record, set the year before. At 402.2 million pounds, Chinese imports of whole milk powder (WMP) bested the January 2018 record by 32.1%. China’s infant formula imports surged 38.1%.'

"Behind everything is the same thing. Keynes was right. Inflation is one monetary evil, but its twin is far, far worse. At least with inflation things are moving, Chinese peasants are progressed up into the middle class even if it is more expensive when they get there.

Deflation, however, is when everything stops; Dante’s Hell was freezing cold. It doesn’t have to be all at once like in the early thirties, this can be a prolonged affair dragging out across more years than anyone cares to remember. The frog isn’t being slowly boiled, it is being progressively frozen. It is now almost completely frigid, too cold to be able to leap out of the icy water. Stuck here without any other options, it must conserve its energy as best it can and hope that it can somehow survive.

If given a choice, you pick the heat of high inflation over this every day of the week; until you realize it isn’t your choice. It never really was."

https://www.alhambrapartners.com/2019/03/05/china-has-no-choice/

China says it all. Just like Govt and Local Govt hereabouts, it's all about 'stimulating growth' within a finite system.
https://www.theguardian.com/world/2019/mar/05/china-economy-target-cut-t...

With no more PlanB than anyone in the West. And the same need to kick the can down the road. Rail projects or highways of national importance - alle same thing.

I thought China may have addressed the Limits to Growth better, given the one-child thing. But apparently not - keeping the masses in line is more important, even if it eventually kills the masses.

What if All the World’s Economic Woes Are Part of the Same Problem?

https://www.nytimes.com/2019/03/05/upshot/what-if-all-the-worlds-economi...

Interesting piece - but what it tells us most is that economists (and economic reporters) only sense there's something wrong. They may even be savvy enough to realise the problems are interconnected.

But none of them seem to realise they've hit the physical and physics limits to growth, with a never-bigger debt overhang. All bets, as they say, are off.....

“In Vancouver, sales of residential housing has reached its lowest level in more than a decade...”
Notice how the housing markets that kicked the can down the road during the GFC are all starting to turni in unison now: Canada, Australia, NZ, Hong Kong.

a must see on how deep into the mire Australia really is.... Economic Catastrophe is almost unavoidable

https://www.youtube.com/watch?v=h71cHHBAnMQ