90 seconds at 9 am: Lowe unloads on negative gearing

Dairy prices rise on stronger WMP; US trade deficit falls, factory orders up; a Fed boss dumped; German bank to shed staff; RBA unloads on negative gearing; UST 10yr yield at 2.35%; oil and gold up; NZ$1 = 69.8 US¢, TWI-5 = 74.9

5th Apr 17, 7:35am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news dairy prices have inched higher today.

In today's dairy auction prices were marginally higher overall, up +1.6% in USD terms but with a concurrent fall in the currency, up +2.8% in NZD terms. Today's result was bolstered by a better WMP price which was up +2.4% in USD terms. However none of today's results will be enough for any dairy company to revise its payout forecast and the season's results will remain on a knife-edge (or 'finely balanced' as a corporate might say). SMP prices were virtually unchanged.

In other news, the US trade deficit fell from a near two year high in February as slowing domestic demand weighed on imports and stronger global growth boosted exports of American goods. The changes from the same month a year ago were minor however, although there was a +5% growth in services exports in the month compared with the same month a year ago, pushing up their US$21.4 bln surplus in services. The final data on February durable goods orders also came in better than earlier signaled.

And a prominent regional Federal Reserve boss has quit after admitting he leaked inside information in 2012. The Richmond Fed President said he was stepping down effective Tuesday in a letter that revealed his involvement in an alleged leak of confidential Fed information.

In Germany, their second largest retail bank has told its workforce that it will be cutting almost 8,000 jobs. A shift to new technology is behind the mass change; robots are descending on banks.

In Australia, their central bank governor has come out strongly against 'negative gearing'. He says it is fueling an unhealthy investor appetite for interest-only home loans and has slammed banks for signing up people for loans who should not have them. (Negative gearing is an extreme leverage strategy where you take out a loan on a property where the income from it is not enough to make the loan payments. Income from other sources, tax loss benefits, or capital gains then are used to make up the difference.)

In New York, the UST 10yr yield is unchanged today at 2.35%. Local swap rates are now the flattest they have been all year following yesterday's fall.

Oil prices are up today to just on US$51 for the US benchmark, while the Brent benchmark is just over US$54 a barrel. Falling US crude stocks are said to be behind the change.

The gold price is marginally higher again, up another +US$2 to US$1,254/oz. At that level we are now +8% higher than at the start of the year.

And the New Zealand dollar starts today lower at 69.8 USc, a three week low. On the cross rates the Kiwi dollar is up to 92.2 AU¢ and against the euro is at 65.4 euro cents. The NZ TWI-5 index is at 74.9.

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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18 Comments

by Brock Landers | 5th Apr 17, 7:53am 1491335628

Negative gearing is a rort on both sides of the Tasman.

The Labour parties in both Australia and New Zealand have promised to eliminate it when elected.

by two otherguys | 5th Apr 17, 9:14am 1491340477

Oh yeah ... indeed ... In 1984-5 in Australia .. Paul Keating then Treasurer of the then Labour Government .. cancelled negative gearing .. he re-instated it 1 year later ... because too many negatively geared investment properties were emptied out of renters and sold ... loud screams were heard

by SimonP | 5th Apr 17, 11:43am 1491349391

But most property investment in NZ is negatively geared ;-)

by sharetrader | 5th Apr 17, 7:54am 1491335687

neg gearing on investor housing should be long gone, but when you have those in charge making the laws partaking in the practice (from all political parties) it will not change
in short it is a subsidy that favours one group of people (investors) over another (owner occupier) when it comes to buying and owning a house.

by Roger Witherspoon | 5th Apr 17, 8:24am 1491337441

Small change though compared to banking itself which favours one group of people (bank employees and shareholders) over another (savers and borrowers).

by Wildcard | 5th Apr 17, 8:59am 1491339565

I'd say there's three groups; bank employees and shareholders, borrowers, and savers, with savers getting the short end of the stick.

by Foxglove. | 5th Apr 17, 8:04am 1491336244

If the capital gain was taxable then the mechanism would hardly be viable. Negative gearing only works mainly through tax breaks being available. Even so in normal circumstances, if the tax system is effective, the balance sheet is served better by making a profit and paying tax rather than taking a loss and getting a tax rebate. This government, ie Corporate New Zealand, will do nothing. We as taxpayers are considered no more important than any minority shareholder in any big corporate.

by donbond | 5th Apr 17, 8:07am 1491336441

Negative gearing. Everyone knows the truth but many policy maker themselves are taking advantage of it so why and who will change.

by Penguin | 5th Apr 17, 8:16am 1491337007

Is this the future? Renewable energy to Hydrogen and then water as the only emission.

https://www.youtube.com/watch?v=gahmKOUXzks&feature=youtu.be

by kiwimm | 5th Apr 17, 1:07pm 1491354425

It's not a very efficient process with only about 30% of the renewable energy returned by the hydrogen. Electric cars are much more efficient in this respect. However, it could be a good use of excess solar production (e.g. mid-summer at midday when no-one is home) once their is a grid surplus. The other option is to pump water back into reservoirs with this excess (about 70-80% efficient).

by Wildcard | 5th Apr 17, 9:00am 1491339637

Wouldn't getting rid of negative gearing simply push rents up?

by Stephen Hulme | 5th Apr 17, 9:10am 1491340222

In other news, the US trade deficit fell from a near two year high in February as slowing domestic demand weighed on imports and stronger global growth boosted exports of American goods.

Hmmmmm...

Though February’s exports were almost 5% more than in February the year before, they are 4% less than in February 2012. After five years, the US is still exporting a smaller amount than it did just after the events of 2011. The global economy simply fell off after that point and has never been restored – what recovery there might have been up to that point was rudely terminated. Read more

by Stephen Hulme | 5th Apr 17, 9:29am 1491341376

The 10-year swap spread is again zero; hurrah for it. To suggest it, or the others like it, heralds an end to the “dollar” issue is to help ensure instead the still unsolved “dollar” issue will last for at the very least one more monetary cycle. Read more

by Stephen Hulme | 5th Apr 17, 10:20am 1491344434

Speculators are betting heavily on higher US short term rates, meanwhile, the Federal Reserve is signaling they might slow down rate hikes and replace it with balance sheet reduction?

“The Fed has been a whole flow of mortgages for many years. And when the Fed buys mortgages, they don’t hedge any of the extension duration characteristics of mortgages… If the Fed stops buying mortgages, the private sector will have to start buying those mortgages, just as yields are going higher (ie: away from the average coupon). As you do that, those mortgages extend pretty quickly in duration. In that environment, those private sector holders have to hedge that duration extension risk by paying swap. So not only is the Fed making the private sector buy more duration as the mortgages extend that increases rapidly, and so I think two things happen. The curve sells off and steepens, and this becomes a good catalyst for what has been a very distorted swap spread curve (usually swaps trade at a lower yield than bonds, LIBOR risk should trade at a higher risk than government risk.)”

I have spoken about the strange anomalies in the swap market before - “How many other could never happens are out there?”. Heck, I even chronicled how, like an idiot, I was buying the swap spread “Only for the bravest and stupidest”

Back then I didn’t have a reason to bet on a return to normalcy except that negative swap spreads were dumb. But now I have a catalyst. The Fed’s shift in policy should cause the previously negative swap spreads to expand back to more normal levels. Read more

by dictator | 5th Apr 17, 11:53am 1491350018

They should have abandoned this policy last year. I'll be interested to see how the Fed's move affects the market.

by kdm17 | 5th Apr 17, 10:48am 1491346133

I will be voting based largely on credible housing and immigration policies and commitments. Lack of action in these two areas over recent years has been a joke and kiwis are and will pay the price. I suspect there will be a lot of other voters also influenced by housing and immigration.

by two otherguys | 5th Apr 17, 12:21pm 1491351719

The difference - NZer's remain silent

Fonterra and other major brands accused of extortion by pushing payment dates out to 120 days and then pushing short term loans onto their business customers to keep them afloat

http://www.smh.com.au/small-business/finance/pretty-close-to-extortion-…

by dictator | 5th Apr 17, 12:23pm 1491351833

Their victims should start charging interest. If the cost of not paying goes up they will have to change.