90 seconds at 9 am: Iron ore prices sliding

IMF and OECD see global economy improving; Canada housing starts jump; junk bond issuance leaps in Asia; iron ore prices slide; China targets 'spies'; UST 10yr yield at 2.36%; oil up, gold unchanged; NZ$1 = 69.6 US¢, TWI-5 = 75

11th Apr 17, 7:35am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news hard commodity prices are starting to fall.

But first, the IMF said it sees a more favourable outlook for the global economy this year and next than in 2016, but it has concerns for the intermediate term. Their assessment is broadly similar to that for the OECD.

In Canada, new data out for March shows housing starts their climbing suddenly to a ten year high, and far more than was expected. There is no slowdown in their housing markets, and in fact today's data is a staggering +25% gain on the same month a year ago.

Companies with junk credit ratings are issuing high yield bonds at twice the rate this year than last. And the real surge is in Asia where issuance jumped to NZ$23 bln from just NZ$2.4 bln. Half of the top six junk-bond deals by value this year are commodities-linked firms. Risk in this sector is heightened, especially in iron ore where prices are sliding. Not only is there a realistic prospect that China will buy less, supplies are being ramped up from Brazil, Australia and China itself. You know it is about to fall when a big investment house says 'buy'.

Expats working in China will find life that much more challenging. The Chinese government is offering up to NZ$100,000 'rewards' for dobbing in 'foreign spies'. A financial incentive this large is going to put every foreigner at risk of extortion.

Update: In England, explosive new information about the rigging of the Libor interest rate benchmark has an audio recording of one of the manipulators - the Bank of England itself.

In New York, the UST 10yr yield is slightly lower at 2.36%. Yields are being held back by safe-haven strategies over concerns about the April 24 French election and the tensions in North Korea.

Oil prices are up yet again and now just over US$53 for the US benchmark, while the Brent benchmark is now just under US$56 a barrel.

The gold price is basically unchanged today at US$1,253/oz. There is not much of a boost to the yellow metal from safe-haven strategies.

And the New Zealand dollar starts today a little higher at 69.6 USc. On the cross rates the Kiwi dollar is up to 92.9 AU¢ and against the euro is at 65.7 euro cents. The NZ TWI-5 index is now back just over 75.

If you want to catch up with all the changes yesterday, we have an update here.

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

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58 Comments

by sharetrader | 11th Apr 17, 7:44am 1491853493

meanwhile in Australia, baby boomer MPs vote against something to level the playing field for the younger generation

Cabinet stops negative gearing shake-up
EXCLUSIVE: Scott Morrison’s conservative Cabinet colleagues have shot down a plan to change negative gearing after Liberal Party research highlighted the critical issue of housing affordability.

by RickStrauss | 11th Apr 17, 9:23am 1491859427

These politicians are disgusting.

Interesting article on their particular brand of narcissism here: https://www.themonthly.com.au/issue/2016/march/1456750800/richard-cooke…

by Stephen Hulme | 11th Apr 17, 9:49am 1491860986

But first, the IMF said it sees a more favourable outlook for the global economy this year and next than in 2016, but it has concerns for the intermediate term.

Enough to rescue CalPERS?

As those of you who follow the CalPERS soap opera may recall, California Governor Jerry Brown pushed for the giant pension fund CalPERS to lower its assumed investment return from 7.5% to 6.5%. Given that the world is headed towards deflation and that CalPERS earned only 2.4% for the fiscal year ended June 30, 2015, Brown’s request seemed entirely reasonable. Instead, the board approved a staff proposal to move to the 6.5% target over 10 years. Read more

In fact:

At the December 21, 2016, meeting, the CalPERS Board of Administration approved lowering
the CalPERS discount rate assumption, the long-term rate of return, from 7.50 percent to 7.00 percent over the next three years. This will increase public agency employer contribution costs beginning in Fiscal Year 2018-19.

Calpers hasn’t calculated the dollar impact of reducing the investment return over the years, said the group, which derived its estimate from guidance the system sent in January.

Including the costs paid by cities and counties that run their own systems, the fiscal 2018 tab will be at least $13 billion to meet retirement obligations for public workers, according to the analysis, which is based on actuarial reports and audited financial statements.

Barring any changes to pensions, "several California cities and counties will find themselves forced to slash other spending," the group wrote in its report. "The less fortunate will simply be unable to pay the bills they receive from Calpers or their local retirement system." Read more

The politicians we choose are remarkably adept at blindly kicking our empty cans down the road.

by Andrewj | 11th Apr 17, 8:47am 1491857260

https://mishtalk.com/2017/04/10/required-pension-contributions-of-calif…

by ham n eggs | 11th Apr 17, 9:22am 1491859332

Yip - actuaries are concerned the pension funds simply wont be able to pay ... and thats even with arguably over optimistic return modelling. What cant go on forever, wont go on forever.

https://ourfiniteworld.com/2017/03/29/why-energy-economy-models-produce…

by ham n eggs | 11th Apr 17, 9:25am 1491859504

"Half of the top six junk-bond deals by value this year are commodities-linked firms. Risk in this sector is heightened.."

We need more debt to keep commodity prices up to viable levels. This is a real problem now that China is maxed out...

by gingerninja | 11th Apr 17, 9:29am 1491859754

Naughty naughty BoE tut tut

by Andrewj | 11th Apr 17, 9:46am 1491860774

The Bezzle: “Libor: Bank of England implicated in secret recording” [BBC]. Roll the tape:

In the recording, a senior Barclays manager, Mark Dearlove, instructs Libor submitter Peter Johnson, to lower his Libor rates.

He tells him: “The bottom line is you’re going to absolutely hate this… but we’ve had some very serious pressure from the UK government and the Bank of England about pushing our Libors lower.”

Mr Johnson objects, saying that this would mean breaking the rules for setting Libor, which required him to put in rates based only on the cost of borrowing cash.

Mr Johnson says: “So I’ll push them below a realistic level of where I think I can get money?”

His boss Mr Dearlove replies: “The fact of the matter is we’ve got the Bank of England, all sorts of people involved in the whole thing… I am as reluctant as you are… these guys have just turned around and said just do it.”

by Cowpat | 11th Apr 17, 9:40am 1491860414

Wellington the centre of a rental crisis, strikingly portrayed in last months media reports, with queues extending down the road, past the corner shop , up the hill ,saw rents for 2 and 3 bed properties fall last month according to Tenancy data. Auckland rents for a 3 bed up 2.5 percent on year.

by Andrewj | 11th Apr 17, 9:52am 1491861157

Got a British friend staying, asking me why at Morrisons in the UK you can buy milk for £1.00 ( $1.78 nz)for 2.27 L and yet in NZ for 2L he has to pay $3.69 ?

by Ms de Meanour | 11th Apr 17, 10:18am 1491862700

Because NZ retailers do not benefit from the economies of scale and the cost efficiencies that are available to retailers in larger, more densely populated markets.

by murray86 | 11th Apr 17, 10:38am 1491863934

In part, and taking into account DC's comment below, but Fonterra has told us before that the price they make milk available for the local market is based on what the rest of the world pays, not what it actually costs to get it to the supermarket. And as we have seen, when they drop the cost to the supermarket the price to the consumer barely changes as the supermarkets profit from the increased margins - a rip off all the way around.

And anyone notice that once opened a carton of milk only lasts a day or two, even when kept is a fridge? It doesn't seem to go off, as in develop a sour milk smell, but does coagulate and go solid, even when the Use By date is still a week out?

by positivelywallstreet | 11th Apr 17, 10:59am 1491865162

Looking over Davids shoulder I saw from Promar.
The average milk price for January 2017 stood at 27.04ppl, an increase of 3.66 ppl (15.7%) compared with the previous year.
Thats paying the UK farmer about 54 cents NZ per litre and retailing using Andrews figures about $1-70 per litre roughly. The price triples.
By Boatmans figures in NZ the same margin is 10.
I guess we should ask a politician for an explanation

by David Chaston | 11th Apr 17, 11:02am 1491865350

We certainly haven't noticed the sour milk you mentioned. In fact, the reverse. Our office milk seems to last much longer as 'fresh' than it used to. The date seems to come up faster than the milk goes sour - and we buy with at least five days on the date.

by KH | 11th Apr 17, 11:29am 1491866983

Yes David. It lasts so long I am suspicious of it. It probably has been doctored in some way to achieve that. It didn't last in the old days, which is why we had daily delivery.
Breads the same. Good bread - eg a baguette in France only lasts a few hours. New Zealand bread has probably been nuked in some way to make it last - but what is that nuking then doing to your intestines.

by Casual Observer | 11th Apr 17, 12:11pm 1491869489

The shelf-life of pasteurized milk held under proper refrigeration, defined as less than 45°F, can range from 12 to 21 days post processing.
https://foodsafety.foodscience.cornell.edu/sites/foodsafety.foodscience…

by canon | 11th Apr 17, 12:13pm 1491869631

https://qz.com/740959/science-has-found-a-way-to-extend-the-shelf-life-…

'Fresh' milk with a shelf life of nearly 60 days, would we ever see it imported?

Most supermarket milk has been pasteurized and if unopened can keep in the fridge for around a week. Milk that is heated to temperatures above 135ºC (275 °F) can keep as long as six months at room temperature if unopened. But ultra-high temperature milk doesn’t taste very good.
Scientists have developed a new technique that not only makes milk safer, but allows it to keep for nearly two months when refrigerated. And, it tastes as good as fresh milk. In tests, volunteers detected little difference in color, taste or smell up to 36 days after processing.
The technique adds just a fraction of a second to the lowest temperature pasteurization process. Invented by French chemist Louis Pasteur in the 19th century, this involves heating milk to temperatures of between 70 to 120ºC (158 to 248°F) to kill bacteria. The higher the temperature and longer the heating process, the safer the milk. But heating also deforms proteins and destroys vitamins and minerals while making milk taste lousy.

There were no signs of the milk going bad (i.e. bacterial growth) for up to 57 days—five weeks longer than standard pasteurized milk. This new process could not only extend the shelf life of fresh milk but also potentially allow it to be transported further, opening up new markets for farmers.

by Boatman | 11th Apr 17, 10:47am 1491864479

Nonsense Ms De Meanour , the extraordinary retai price of milk means you could ship long life milk here from the EU and make a massive profit .

It would also apply to Fresh milk if it had a longer shelf life , and airfreight would be too costly .

We are being screwed , and its got nothing to do with the size of our market but everything to do with the structure of our biggest industry .

by David Chaston | 11th Apr 17, 11:05am 1491865558

I have no idea whether that is true or not. But if it is, it will only be because EU processors get paid so little, and/or there are EU dairy subsidies. Why would our farmers want to follow a business model that will undoubtedly fail ?

by Henry_Tull | 11th Apr 17, 11:07am 1491865669

Supermarkets use milk as the hook to get shoppers in. Get you in.
Ever wonder why the milk chiller is at the back and or far end of the shopping hall?
Hint: Nothing to do with finding a plug!

https://phys.org/news/2014-03-science-supermarkets-good.html
https://blog.brightpearl.com/how-capture-impulse-shopper-effectively

by Andrewj | 11th Apr 17, 11:09am 1491865787

So what made you buy that expensive coffee yesterday? Smell, eye level blonde behind counter...

by Andrewj | 11th Apr 17, 11:13am 1491866030

did you read this article?
https://www.newsroom.co.nz/2017/04/09/18670/economy-target-exports

by David Chaston | 11th Apr 17, 10:20am 1491862828

Maybe because UK dairy farmers are going bust at those prices and NZ ones don't want to follow them? Certainly UK dairy farmers are leaving the industry fast.

by dictator | 11th Apr 17, 10:38am 1491863917

Correct it's economic warfare. The UK farmers dumping all their product on the market after the Russian sanctions were implemented were asking for trouble. Don't bring a knife to a gunfight.

The flipside of it is that the UK is an impoverished nation so there's only so much that can be charged for milk in a nation where the material standard of living is falling.

by Andrewj | 11th Apr 17, 10:53am 1491864811

But Poland is increasing production as is Ireland, British farmers are more than happy to ship tankers of fresh milk to Ireland, I see we are opening an embassy in Dublin.

I always thought that low prices increase consumption? Today in NZ we have a lot more families struggling to get by and paying through the nose for food.

by Casual Observer | 11th Apr 17, 12:01pm 1491868917

And a reduction in Dutch production on the cards:
Losing the nitrate derogation would likely lead to about a 500,000 head or 30% reduction in cows - equal to about 3.5m tonnes of milk being lost assuming lower yielding cows were culled first, Rabobank said. That was equivalent to 26% of milk production from 2015.

https://agrihq.co.nz/topic/markets-and-data/view/dutch-environmental-sc…

by KH | 11th Apr 17, 10:20am 1491862830

the answer to that Andrewj is that New Zealanders have fallen for propaganda that "growing the economy" and "growing GDP" is the path forward.
Never do we see the goal portrayed as increasing New Zealander earning more, or being wealthier, or owning more of their own country.
So if the interests of New Zealanders are not considered, why care about the price we pay for milk.
Another example. Just last week Paula Bennet rejected the idea of bed tax for tourists. So locals in Auckland and Queenstown both suffer from the impacts on infrastructure, and have to put hand in pocket to pay for it.

by RickStrauss | 11th Apr 17, 10:27am 1491863237

Yeah...crazy...surely the government should have some regard for the needs of New Zealanders?

by Independent_Observer | 11th Apr 17, 10:44am 1491864254

http://www.msn.com/en-nz/news/national/weve-got-nowhere-to-send-them/ar…

So why are we bringing more people while we still can't provide for what we have?

And how can we be the 'most liveable city' or whatever crap ZS and DGZ go on about when more and more people are sleeping rough/in cars? If the current trend continues, I'd say we're heading towards the most unlivable city in the world - unless of course you like the back seat of a car, or a mattress in a Marae.

by RickStrauss | 11th Apr 17, 12:19pm 1491869976

Perhaps more of those living in cars need to start parking their cars in the Double GZ for some people to vote beyond their own nose and portfolio?

by ham n eggs | 11th Apr 17, 10:38am 1491863893

It was far easier to increase the buying power for NZers by hooking up to the free trade wagon and increasing our consuming power ... simply earning more takes harder work and a longer time frame mindset. So neither NZers or politicians were interested.
We are caught in the global financial ponzi now - we made that choice way back

by Boatman | 11th Apr 17, 10:35am 1491863721

Thank you AndrewJ .

With all the feel-good advertising featuring Richie Mc Caw about how Fonterra feeds milk to needy kids , one would believe Fonterra is a benevolent society along the lines of the Salvation Army .

Reality could not be further from the truth

Fonterra's rent seeking behaviour is the worst example of the ugly face of monopoly capital.

It pays the farmers just 12 cents a litre at the gate for its milk , and I have asked more than once how that ends up costing us about 1000% more , with very little actual value add .

The margin is more than the oil companies make on a barrel of oil .

Go figure ?

And whatsmore , Fonterra owns companies overseas where milk is sold for less than it is sold to us Kiwis .

In South Africa, Fonterra owns a brand called Clover and the Clover milk retails for under a $1 per litre !!!!!

Its frankly disgraceful corporate behavior by what is effectively a monopoly in NZ .

by RickStrauss | 11th Apr 17, 10:43am 1491864228

So it almost looks like where farmers in some countries receive subsidies from taxpayers via the government, in NZ the subsidies are coming straight through the retail price of the milk...?

by Boatman | 11th Apr 17, 10:51am 1491864685

@RickStrauss its worse than that because we already allow tax breaks for our farmers through the profit smoothing clauses in our Tax laws , and writeoffs for all manner of stuff .

Effectively , NZ Dairy farmers pay practically very little tax when compared to other sectors of our economy

by David Chaston | 11th Apr 17, 11:09am 1491865792

Any evidence for that? Tax valuation methods for livestock bite both ways. You are being very selective ...

by Boatman | 11th Apr 17, 11:41am 1491867664

Farmers have access to many mitigating and ameliorating facilities with regards to tax issues .

I am not suggesting these are bad things , and almost all countries treat food producers as important and critical to stability .

We have things such a:-

Dispensation for the buy-up of agricultural consumables before the end of the tax year ( such as fencing and fuel ) to help reduce the tax bill

FARM INCOME EQUALISATION DEPOSITS ( these are complicated so Uncle Google will help)

100% deductions on development expenditure

Prepayments on leases on machinery to reduce tax

Depreciation allowances ( which we all get)

Defferring expenses incurred this year to the next four years when income may be higher ( to reduce tax )

Tree planting 100% deduction for people such as avacado and kiwifruit farmers which often creates huge losses spread over many years .

All these tax breaks are good for the economy as they are stimulating growth , but they all serve to reduce the taxes paid by farmers .

by Casual Observer | 11th Apr 17, 12:56pm 1491872175

Not just dairy farmers Boatman: Inland Revenue accepts that any of the following activities are carried on for farming or agricultural purposes:

Apiarists, beekeeping;
Animal husbandry;
Dairy farming;
Grain and seed growers;
Market gardening;
Orchardists;
Poultry farming;
Sharemilking;
Tobacco growing; and
Viticulture and growing grapes.

http://macnicol.co.nz/fact_sheetsfarming_or_agricultural___are_you_in_b…

by Boatman | 11th Apr 17, 12:24pm 1491870289

True , except do we grow tobacco ?

by Casual Observer | 11th Apr 17, 12:57pm 1491872248

IRD appear to think so. ;-) Link to my post now added.

by Casual Observer | 11th Apr 17, 11:43am 1491867788

Boatman don't know where you get that 12c/l figure from. Based on $6 milkprice on our farm we are getting 55.55c/litre. I have had this conversation with you before.

by Boatman | 11th Apr 17, 12:12pm 1491869551

I know you have but on average it takes 12 litres on milk to make 1 kg milk solid , and the farmers were not getting $6 /kg .

by Casual Observer | 11th Apr 17, 12:51pm 1491871910

Ajs comment was referring to current prices so in order to compare apples with apples we need to use current predicted payout. $6 is the Fonterra predicted payout announced for this current season and all advance rates are currently based on that being the full payout in October. That is what Fonterra will be basing it's pricing around. Payout for this month will be paid up at $5.16kg though our milk ratio is better than company average so we gain a few cents over the base rate.

by positivelywallstreet | 11th Apr 17, 1:28pm 1491874107

In that case New Zealand lines up well with the UK experience for fresh milk, i just bought some milk in the 4Sq store and $1.70 per litre retail appears representative.

by dtcarter | 11th Apr 17, 7:53pm 1491897192

The uk price was not per litre, but nz $1.78 for 2.27 litres. ( uk milk is sold by the imperial pint - 568ml). So nz prices are about double.

You think milk in this country is bad. Try baked beans or tinned spagetti. 11p and 14p respectively back in 2007 .you pay ten times that in nz.

by frazz | 11th Apr 17, 10:54am 1491864872

Is someone forcing you to drink milk? It's food for baby cows, try some alternatives

by Boatman | 11th Apr 17, 11:21am 1491866501

We did stop "drinking" milk , our children were banned from opening the fridge and drinking the milk ............. we could not afford it..

We drank fruit juice and other alternatives .

Milk was used only for breakfast cereal , tea, coffee and some cooking .

That was different to when I grew up , when milk was the thing you ( and all the kids in the street) drank after playing cricket on the back lawn.

Now its a luxury

by frazz | 11th Apr 17, 11:40am 1491867628

Yes another ladder the Boomers pulled up behind them...cheap milk

by Boatman | 11th Apr 17, 12:13pm 1491869602

LOL us Boomers cocked everything up , didnt we ?

by RickStrauss | 11th Apr 17, 12:20pm 1491870017

Haha, reckon we can give a pass on this one. Pretty minor compared to housing and education.

by Boatman | 11th Apr 17, 12:22pm 1491870168

I am not sure Baby Boomers are responsible for the housing crisis ............. you should look at our politicians and their migration policies and the village idiots we had in charge of planning Auckland City as the culprits

by RickStrauss | 11th Apr 17, 12:28pm 1491870526

Well, we also look at the voters for the politicians, those demanding the policies that are delivered...ultimately policies that benefit investors rather than young Kiwis needing a home. And the attitudes of those yelling at young Kiwis that it was just the same back in their day (it wasn't at all), and that no one did anything to help them (again, not true).

It's a Venn diagram - not all selfish investor-voters are boomers, and not all boomers are selfish investor-voters. Many boomers do care about what's being done to their children and grandchildren.

by Boatman | 11th Apr 17, 12:36pm 1491870982

I dont just care, I am actually quite peed off , my kids cannot afford houses in Auckland . Its a shame .

I wish there was a political party with a plan to address this mess , as I would vote for them .

Right now the only person with a clue is Winston who wants to stop immigration , which will help reduce housing demand .

I was hopeful for Labour having a plan but they are just as clueless as National

by RickStrauss | 11th Apr 17, 12:42pm 1491871373

I'm also looking for a party to vote for. I've voted National a number of times, and never Labour, but National have been abysmal and have sunk the chances of your children along with many others.

I see a couple of positives in Labour's policy - including limiting foreigners to new builds and suggesting they'll remove tax privileges for investment property. But more is needed.

Have you asked any party? (I'm genuinely interested.) I think parties need more direct contact from people who sincerely desire better outcomes for their children and grandchildren.

by frazz | 11th Apr 17, 12:54pm 1491872076

Yes and you won't change

by Casual Observer | 11th Apr 17, 12:04pm 1491869063

Yep and you grew up in a time of direct farming subsidies Boatman.
edit 'direct'

by Boatman | 11th Apr 17, 12:31pm 1491870671

Okay , I spent my childhood in various countries , but you are right .

Milk was a subsidized, price-fixed, controlled and cheap source of calcium, vitamans and protein for growing kids pretty much everywhere in the colonies and the Commonwealth, as well as in England .

Even bread was subject to price control sizing , etc

But so was housing and all sorts of services for the ordinary person on low wages .

We were trying to create a working mans paradise , which is a euphemism for socialist nanny state , so I am not sure it was so good , wages were terrible , and we had to walk to school and I never had nver even heard of a cappucino until I was twenty-something ,( A girl in the office invited me for a cappucino at lunchtime and I had to look it up in the dictionary because I mistakenly , and optimistically thought it was a sex position )

by Groen_mamba | 11th Apr 17, 2:24pm 1491877469

Just in from Harcourts. Highlights:
- Stock on hand +45.9%
- Sales down -13%
- Ave price +1.6% YOY!!!!!!!!!!!!!!! Can't wait for REINZ median coming in negative YOY
http://img.scoop.co.nz/media/pdfs/1704/Auckland_Marketwatch__March_2017…

by CJ099 | 11th Apr 17, 9:52pm 1491904365

Re Canada: More Americans than Mexicans claimed refugee status in Canada
http://www.nationalobserver.com/2017/02/17/news/more-americans-mexicans…