Air travel grows strongly; US targets payday lending; US and Canadian trade deficits grow; "Prepare for hard Brexit"; Aussies on diet in August; UST 10yr yield at 2.35%; oil up, gold unchanged; NZ$1 = 71.2 US¢, TWI-5 = 74.2

Here's my summary of the key events overnight that affect New Zealand with news of some new ground-breaking protections for very vulnerable borrowers.

But first, passenger growth in the world's airlines was very strong in August, up 7.2% year on year. In the Asia/Pacific region, international passenger traffic grew +8.6%. Interestingly, this data also shows that Australian domestic air travel actually fell.

The OECD reported higher economic growth in the June quarter for almost all its members, and the highest in at least 3 years at about +2.5% pa.

The US is clamping down on payday lenders with some tough new regulations that may shrink the industry dramatically. That is because these lenders rely on fees, especially from defaulters, as part of their business model. Under the new rules, lenders will be allowed to make a single loan of up to US$500 with few restrictions, but only to borrowers with no other outstanding payday loans. For larger or more frequent loans, lenders will have to follow a complex set of underwriting rules intended to ensure that customers have the means to repay what they borrow. This industry has grown in New Zealand as well - we count 18 active brands in the local market. Their MO here is the same as the US, targeting vulnerable people. By the way, President Trump is actively seeking ways to role back these protections, but his chances are not high.

There was data out for the American trade deficit overnight for August. And while the monthly numbers came in pretty much on expectations, it is interesting to see the difference in the eight-month 2017 track compared to the same period a year earlier - mainly because the new US Administration said they would "improve" the situation of persistent trade deficits. But the reverse has happened. These deficits in goods and services traded are +8.8% higher this year than in 2016 (which was lower than 2015). They have gone backwards on this measure.

The Canadians also reported their trade deficit, and that is widening too. Lower exports to the US are the reason here.

And staying in Canada, planned major oil and gas pipelines from their oilfields to major markets are getting cancelled. This comes after persistent opposition in communities along the routes, and from some indigenous groups.

In Europe, German companies operating in the UK "must prepare for the worst-case scenario of a very hard exit" from the EU says the head of Germany's powerful business lobby group. He warned those not making provision for the event that the UK quits the bloc without a new trade agreement "would be naive." Meanwhile there seems to be a rush of American and other international financial institutions to rent large amounts of space in Frankfurt.

And the ECB said it discussed options for scaling back their QE program at their September policy meeting, but worried that the strengthening euro might upset the region’s economy. Lower for longer there, it seems.

In Australia, they are starting to think that the surprise stalling of their retail market in August may be a turning point. Spending in cafes and restaurants and on takeaway food plunged -1.3% in August to be only a little higher than it was the previous August, and lower per person after taking into account population growth. Apparently Aussies were dieting in August, said one analyst. The "lucky country" hasn't had a recession for over 25 years, but the next one seems to be getting closer.

In New York, the UST 10yr yield is up +2 bps at 2.35%.

The price of crude oil is up a little today and now at US$50.75 a barrel, while the Brent benchmark is under US$56.75. This gain is because the OPEC output restraint agreement looks like it will be extended.

The price of gold is basically unchanged today, still at US$1,273/oz.

And the Kiwi dollar is slightly lower at 71.2 US¢, but that is actually now a four month low. On the cross rates we are now at 91.3 AU¢, and 60.8 euro cents. Our TWI-5 index is now at 74.2.

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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34 Comments

when you have so many people struggling to pay mortgages in Australia, it is not a surprise consumer spending is dropping, it like a wheel, cheap rates, bigger loans, less spent, rates need to go down to boost, even bigger loans
http://www.dailytelegraph.com.au/moneysaverhq/stressed-home-loan-custome...

I often ask why we have so many mortgagee sales when we have record low interest rates. Most of the mortgagee sales with data were purchased 10-15 years ago for a price often in the $250k range. Yet after making payments and interest rates ending up at a low now they are having their house sold for them. There's some exceedingly poor personal financial management going on.

There's only so long that borrow to spend can go on for. That time is shorter with the current credit tightening.

Really? Why do you ask that?

Our data shows there are just 41 mortgagee sales listed on the main property websites this week. If you go back to the same week in 2007 it was 104. In 2008 it was 374.

I don't think there is any evidence whatsoever of "so many mortgagee sales". A few, yes, but at near record low levels.

Mortgagee sales were much lower last year. I've noticed there's quite a turnover of the properties that are listed (people are buying them).

You have changed the topic by referencing 2007/8. How many properties would be mortgagee sales if we had the 8-10% interest rates that were common at the time? How is it that the properties I've seen bought 10-15 years ago that survived the GFC are now in trouble? What has really changed in household finance?

Given the low interest rates we should have next to no mortgagee sales much like last year.

Could it be the banks are dealing with distressed owners in a different way? So rather than scare the market with mortgagee sales, the bank 'manages' the client through a 'voluntary' sale process.

Banks will always push for voluntary sales first. Check Cowpat's response below as that is accurate with respect to the process.

Dictator, the mortgagee sales have not altered significantly over past year. David is not telling porkies. The reality at present, is that in the majority of cases , before one sees a listed mortgagee sale upwards of 12 months will have passed , once a bank has become involved .All avenues are generally exhausted before the lever is finally pulled, and often common sense or finality takes over.. Undoubtedly there probably is significant mortgage stress out there, but there is no "GFC " at present , nor have house prices fallen significantly but obviously if 8-10 percent mortgage rates were sustained we would see a myriad of problems.

I do think everyone is a little bit too wrapped up in GFC. I see a slow moving price falls, but I don't think we should be seeing any significant or widespread mortgagee sales with the low interest rates. At this point we aren't, and as I pointed out before most are still managing to sell. Although I think mortgagee sales should still be at a lower rate than what they are.

At this point people are having typical issues of loss or reduction in income, divorce, the occasional financial screw up with consumer debt, etc. What I'm more interested in is how long this will go on for before we hit real problems like default rates climbing above 5%.

In terms of the GFC, actually I think its the opposite, ie its true meaning / effect is mostly being ignored. ie everyone wants to get back to business as normal grow for ever on a finite planet economics / ilifestyle.

In terms of mortgagee sales I think these happen after the main event, which hasnt happened, yet. The main event will happen, the only Q is when / how far is it away. When it does happen I think it will also be a) fast and b) huge financial event as per 1929 only faster, way faster.

I agree. A lot of the houses going up for mortgagee sale should be almost half way through paying off the principle if they are an owner occupier. The original purchase prices on the sales I've been looking at should provide the owner with very low payments with today's interest rates. We shouldn't be seeing issues with those mortgages but we are. As discussed in previous comments the number of mortgagee sales is still very low.

I suspect we need to hit a consumer debt tipping point where households have no choice but to default on debt, or an economic event occurs before we will have a rapid crash.

Half the principle is only paid off after 2/3rd of the mortgage period i.e. after 20 years of a 30 year mortgage.

15 years ago what was the common term for a mortgage? 20 or 25 years? Isn't the 30 year term more of a recent trend?

I agree that price falls are likely to be small, all things being equal.
The problem is, all things are not often equal in life.
An economic shock in China is the most obvious trigger for a crash here.

And the ECB said it discussed options for scaling back their QE program at their September policy meeting, but worried that the strengthening euro might upset the region’s economy. Lower for longer there, it seems.

Time to call a halt.

Central bankers are steering the economy without the benefit of a reliable theory of what drives inflation, a former top Federal Reserve policymaker said, as he called for policymakers to pay less attention to theoretical models and more to actual data.

Daniel Tarullo, who left the US central bank’s board of governors earlier this year, said economists displayed a paradoxical faith in the usefulness of unobservable concepts such as the natural rate of unemployment or neutral real rate of interest, even as they expressed doubts about how robust those concepts were.

He was particularly doubtful about the weight inflation expectations play in rate-setting policy, given the “range and depth of unanswered questions” about how they are formed and measured.

“The substantive point is that we do not, at present, have a theory of inflation dynamics that works sufficiently well to be of use for the business of real-time monetary policymaking,” said Mr Tarullo in a speech at the Brookings think-tank in Washington. Read more

What affect will an Australian recession/housing market crash on NZ? Obviously, lower exports to Australia but will Australian banks in NZ tighten purely on issues in Oz? Would is trigger an NZ credit crunch? And is there a psychological connection? Ie if Australian sentiment deteriorates, will NZ also based on a perceived connection?

If the Aussie banks face a capital squeeze in AU, then the NZ businesses will be squeezed too. Over the last few years, the NZ operations have out-performed AU ones but have not had more resources due to the squeeze from their parent companies. If AU sneezes, NZ will catch a cold.

I thought we were already having a credit crunch? . I thought we were already In debt to our eye brows. Isn’t it 40% higher than the high of 2007. Weren’t houses in Auckland not that long ago going up 10 to $20000 per MONTH. Now slightly down but that’s a massive change and why wouldn’t it keep going down. It’s unlikely we’ll get much help from lower interest rates because they’re already low so the market can’t be very good because low rates normally help a market to go up. I think the only reason the market has gone down slowly is people keep trying to find hope in data or a election or summer. Sadly the housing market has been aloud to go up far to high. The bad data to come out is only round the corner and banks will try and hold back as much as they can with mortgagee sales but like David said 2008 was 374 mortgagee sales. We aren’t there YET. but let’s get real to help people in there financial direction , every way you look at this correction it’s should be a lot worse than 2008. Wake up people. Don’t take the risk if you have to much risk , selling now could still be a good option, or tighten your belt. Don’t believe the lies about the impact of overseas investors, they were aloud to start this mess and they are ending it. No CG anymore. There’ll be some pain of the next few years but for the good because without FHBERS and affordability we have nothing. We need to move away for this high debt to help investors and flippers. Money in our pockets each week to spend on the economy

O4, I get very confused reading about all this dept (=department) rather than debt (=money owed)

Sorry I always seem to do that. I corrected it

no worries, just triggers my pedantic gene :)

So the solution ... you guessed it ... mus be even lower interest rates! Until capitalism has no return on capital. The system is broken because capitalism requires growth of money supply (and by default the resources we burn through each year underpinning this new money)... and we are hitting widespread resource limits... .
The next crash will be 2008 on steroids - but it wont be for the good. Because slashing interest rates to get things moving isn't possible & doesn't solve the underlying resource issue.

2002 to 2012 wasn’t that bad , try and run the economy a little smoother. Don’t try and find excuses that your house is actually worth today’s prices. The buyers from overseas were a one time wonder and everyone got greedy. That doesn’t mean prices should stay up where they are at all. Sorry to disappoint. Message me in 2 years and we’ll comment on how things went

I think you are missing the wider point - its not an NZ issue - its a capitalism issue - we continually need MORE debt to keep the trucks running (ie for the economy to actually tick over). Debt pulls the economy (or consumption) forward ...

The work around "solution" since 08 has been to pour this new debt into asset prices (ie printed money which amounts to more promises stacked on previous promises about the goods and services that the economy can deliver in future...)

This kept the debt rolling... but the ugly side effect is its driving returns on capital to zilch. A capitalist system cant work with zero returns on capital. How can (eg) a pension scheme work if there are no returns on savings invested? When savings (deferred consumption) are pointless, what system are you left with?
House prices are neither here nor there. They don't actually produce zip.

I'll add this to my calendar. So with specificity, in 2 years what are you expecting?

continued stagnation?
recovery?
Great Depression mk2?

Of course Steve Keen got caught out on timing...its always the timing.

I never thought they could kick the can this far. Maybe they can squeeze out a few more years?

Steven. Nothing to exciting or unexpected. If a was to guess at some numbers going on a wide range of information at hand how much housing could drop being very hard because of the different range of incomes to house prices and areas but how’s this, from house prices in Auckland from $800000 to 3 million I’d go a drop of about 20% to 50% . If we’re lucky 10% to 25% , with most of these drops happening quite quickly, say a year. If the overseas investors exit maybe we go back to 2007 high as a shock . I can’t see where the demand and money is going to come from

1929 on sterioids.

yeah thats probably more accurate

04normal, it does sound like a credit crunch has started yes. But having been in the UK during their credit crunch, I was wondering if an Oz recession would trigger a much more serious one than currently occurring in NZ. In the UK, banks were going through 6-12 month personal bank statements with a fine tooth comb, asking about the minutia of spending and any personal debt was a no no when applying for a mortgage. Only those with 60% LTV and excellent credit scores were able to access the super low interest rates. And when a lot of people came to the end of their interest only fixed rate, they were not able to remortgage at all, and were totally screwed. And this was before the macro prudential regulations were passed (the 4.5 DTI ratio and LVR's).

I hear the saying "if Australia sneezes NZ catches the flu" a lot but if Australia hasn't had a recession for 25 years then the shock to NZ must be something of an unknown?

Gingerninja. I don’t think Ozzie will make that much differents here. Mainly because we have big enough problems coming up ourselves coming up. Hope is a very strong thing and for the last 6 months it’s only been hope holding this market together. The biggest hope was national getting in . Also the hope relaxing LVRS could change things. It doesn’t really matter long term who gets in only short term. Id give it 0 to 3 months to see some change in listings on trademe. 6 months to a year of higher than normal sales going down then stagnant for a long period. Shame this has to happen but owell

04normal, I agree that NZ looks to be coming to the end of the economic "up" cycle and there are plenty of downsides looming. The concern might be that if Oz starts contracting at the same time, it would trigger a deeper recession, spreading into all sectors (tourism, exports etc). The same for if China has a hard landing.

I agree . Actually the chances of not going into a recession are slim. We could even get hit like the GFC but hit badly here because of the way the housing market is set up at the moment with debt and the banks being connected to oz. I’d be more worried tho about this little 3% of overseas investors that brought into Auckland hahahahaha. And they decided to leave there nz investments in mass. A run. There’s only two things I’ll be watching after the elections , trademes lists with sales. Then in a few months if prices drop there’s a second surge of listings. Of course there’s the nz first deal to consider which could speed things up. Up to now they correction has been quite slow. Listing very low. People have hope. I’m expecting listing to grow extremely fast soon. Buyers will be god

When one looks at it objectively , we should also crack down on pay-day lending here .

Its a dirty business of exploitation of vulnerable , often not well educated, sometimes desperate people and the rates and fees they charge these folk are usurious .

If we really want to alleviate poverty among low income earners and families , the first step would be to protect low income earners and regulate cash loan businesses.

The first step would be to have reckless lending provisions enacted .

The next step would be to ensure that interest and fees can never exceed the original sum borrowed , so even if the borrower defaults , the total debt cannot exceed the principal sum borrowed X2 .

This legislation exists elsewhere , and it works

Yvil. "I have just walked out of this afternoons Barfoot and Thompson auctions ( Wednesday) . There seems to be a very clear trend, lower prices houses were passed in, higher end houses sold" The usual plethora of vested pitiful comments ensued , irrespective of the facts. Question, when does a house sold at auction , not actually sell at auction. As an aside Barfoots sales continue to crater.