American household finances improve; TPP to be revived without the US; Australia at risk of Irish-style bust over interest-only mortgages; UST 10yr yield 2.24%; oil and gold up; NZ$1 = 69.3 US¢, TWI-5 = 73.5

American household finances improve; TPP to be revived without the US; Australia at risk of Irish-style bust over interest-only mortgages; UST 10yr yield 2.24%; oil and gold up; NZ$1 = 69.3 US¢, TWI-5 = 73.5

Here's my summary of the key events from over the weekend that affect New Zealand, with news the Aussies may have under-estimated the trouble interest-only mortgage lending may create.

But first, a US Fed survey in October 2016 and just published over the weekend found that most American consumers were doing better financially, but one group, adults without any college education, lost ground for the first time in three years. Another more recent survey for 2017 shows that things have improved from there, and the pace of improvement is quite remarkable, with some key anxieties falling by as much as 10%.

In Vietnam overnight Asia-Pacific trade ministers have agreed to resuscitate the Trans-Pacific Partnership trade deal, despite the US pull-out. Ministers from the 11 remaining countries are planning implementation by November this year which will bring tariff savings of over NZ$200 mln per year. One estimate by Japan says the deal without the US will increase New Zealand’s GDP by +3.4% and is worth an additional NZ$2.5 billion to our economy after 10 years. The US was at the same APEC meeting and reports are that the issue brought a "heated" exchange between them and the other members, especially over the new American view of 'protectionism'.

In Australia, their embrace of interest-only home loans is facing a fast and potentially painful reversal. APRA flagged the issue in March and now the main banks are implementing the reversal. The core shift is requiring at least 20% equity which will stress many borrowers who took out their loans recently. A respected Melbourne institutional investor, JCP Investment Partners, has warned that "Irish-style housing losses" for the bigger-than-recognised pool of riskier borrowers could wipe out half of the banks' equity capital.

In New York, the UST 10yr yield was unchanged at the end of last week at 2.24%. In China, the rate inversion for their Government bonds has gotten steeper with their five year now at 3.69% and their ten year at 3.64%. This is market inversion signal is that trouble is coming. (Just prior to the GFC, New Zealand had a similar inversion.)

The price of oil is firmer today by more than US$1. The US crude benchmark is now just under US$50.50 a barrel, while the Brent benchmark is just under US$53.50. The US rig count is now over 900, its highest in two years. It had gotten as low as 404 a year ago. Rig counts in the rest of the world are rising too.

Gold is up today by US$6 to US$1,252/oz.

The Kiwi dollar is a little higher today and is now at 69.3 USc. On the cross rates the Kiwi is at 92.9 AU¢, and 61.8 euro cents. The TWI-5 index is at 73.5.

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

We should also note that on Friday night, our own editor, Gareth Vaughan took out the award for best business reporting at the 2017 Canon Media Awards as the Business Journalist of the Year.

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

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There is a warning to New Zealanders here - and especially FHB - who have interest only mortgages that they are likely to face a double whammy. Not only is highly likely interest rates are to rise in the near future, it is also highly likely that the Australian owned banks may not renew the interest only provision. Currently a 4% interest rate on an interest only loan of $500,000 loan currently costs $20,000 a year or $767 per fortnight, this will be $1416 a fortnight if interest rates rise to 5.5% with a term of 25 years. How easy is it to find another $650 a fortnight or $16,920 a year (after tax that is)?

Disgusting, particularly the sleazy takeover of that vege business by McQuarie and Al Gore spivs!
Brazen theft really but you can see this right through the economy as financialisation pushes aside legitimate business and further marginalises their workers. Our farming sector is a prime example.

You need to check your math.

Interest only calculation is straight forward calculation ($767 per fortnight). Get Sorted mortgage calculator used to determine repayment for increased interest rate of 5.5% and a repayment over 25 year period ($1416 per fortnight). Difference is $649 per fortnight.
Not sure where you consider the error to be.

..vgood and a pretty scarry point you make.

Maybe it is the way you wrote, assume that the higher repaymt amount is int and principle (?haven't checked). Anyway no FHB should be on interest only, should be doing P&I and paying down fast as poss

Correct: the higher rate includes interest and (initially minimal) repayment of capital. But note: if a bank ceases allowing interest only payments and requires repayment of interest with principal over 25 years, then the additional of $650 per fortnight on the $500,00 loan in this example is required to prevent going into default.
The sad thing is that a number of mortgage holders in the past few years have financed at historically low rates and interest only loans (I think I read on this site some months ago as high as 40% of loans were interest only) to enable them to buy into a rapidly escalating property market. The pressure is now on the Australian banks to cease continuing with mortgages with interest only payments and it is most likely that when the fixed term of existing loans - be it 12 months or two years - expires, then not only is it likely to be at a higher rate but also require the added burden of principal repayments.
A number of mortgage holders - and especially FHB - are likely to find such a situation very difficult to meet.

Congratulations Gareth, very well deserved

Congrats Gareth. Well deserved for staying on the story of corrupt abuses of the NZ companies registration regime.

NZ interest only "investors" must be thinking about putting one or two of their shacks on the market.

Leaky, cold dongas you mean..

RE: US less TPP
One estimate by Japan says the deal without the US will increase New Zealand’s GDP by +3.4% and is worth an additional NZ$2.5 billion to our economy after 10 years.

Since the most recent nominal GDPE declaration came in at $261.120 billion, $2.5billion (+~0.96%) after 10 years hardly seems worth the effort. Surely the nation can do better than that concentrating it's efforts elsewhere?

No wonder Chinese sovereign 5s10s are inverted and NZ 10s remain depressed down at ~2.865%.

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The foreign ownership of NZ assets will increase dramatically once the TPPA is put into place.
We will end up incurring larger current account deficits due to stricter IP laws and more foreign direct investments and perhaps even larger BOP deficits. There would be a rise in economic activity on paper but fewer actual benefits to our domestic economy.
A closer look at the TPPA reveals large corporations are to benefit from it at the cost of small businesses.

I surely hope that this darned ISDS won't be included in the talks!!

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Congratulations, Gareth. Excellent recognition for your work and that of DC and interest.co.nz. More power to you.

But first, a US Fed survey in October 2016 and just published over the weekend found that most American consumers were doing better financially, but one group, adults without any college education, lost ground for the first time in three years.

Still miserable for the "basket of deplorables".

• Just under one-fourth of adults are not able to pay all of their current month’s bills in full.

• Forty-four percent of adults say they either could not cover an emergency expense costing $400, or would cover it by selling something or borrowing money, which has continued to improve from the 50 percent who were ill-prepared for this magni-tude of expense when first asked in 2013.

• Twenty-three percent of adults had to pay a major unexpected out-of-pocket medical expense in the prior year, and one-fourth report forgoing one or more type of health care in the prior year due to affordability.

• Approximately 24 million people, representing 10 percent of adults, are carrying debt from medi-
cal expenses that they had to pay out of pocket in the previous year.

Are the recorded improvements a result of pumped up election related deficit spending?

Congratulations Gareth Vaughan. Excellent work. Thanks to DC and Interest.co for supporting this work.

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Thankfully New Zealand has only 65B in interest only outstanding mortgages, thankfully interest only loans reached 52 percent of new lending two years ago, 40 percent one year ago, thankfully 'investors' only took up 55 percent of interest only loans, thankfully the majority of interest only loans was centered on one geographical location, thankfully that location only accounts for 55 percent of New Zealand's outstanding mortgage debt .I' m thankful we do not have an interest only Australian malaise , only its banks.

You can thank the RBNZ.

are these commercial mostly? please dont tell me lots of FHB's are doing this madness!

Steven - no I don't believe so. I caught up with a friend a few months ago. Was a FHB in the Auckland market 3-4 years ago. He's also purchased a rental in Auckland. Both properties interest only.

This is one of the many reason we have a bubble.....young people think they can just buy a property (or many properties) and pay the current low rates, interest only.

Interest-only loans with an expiry/reset date were one of the ticking time-bombs planted under the USA 2007/08 crash.

Well...their older folk were encouraging it, telling them it was a great opportunity and they had to be in.

Aussie (and by extension us) has more than interest only mortgages to worry about ...
http://www.abc.net.au/news/2017-05-22/the-trouble-with-china-and-what-it...

"China's slowdown will ripple through the global economy — but nowhere will the affect be greater felt than Australia.

More than 35 per cent of our export trade is with China, the bulk of it in iron ore, leaving us horribly exposed to any kind of conniption in the Chinese economy..."

So without the US involved maybe it will be a real trade deal? can but hope.

https://www.bloomberg.com/graphics/2017-feeding-china/
An ode to the joy of endless consumption.
Two things to note are the chinese appear to have attained or exceeded the protein consumption of the japanese already and the comments of the chinese mother at the bottom of the article.

Yes it does sound like they have some serious issues re farming practices. See the fertilizer application rates, almost 600kg/hectare!
Soil degradation, bees extinct in large areas, endemic overuse of antibiotics, ground water depletion and appalling pollution of land, water, air and soil. That Chinese garlic; not a good option!
As for the prawns it's almost like they're trying to engineer a global antibiotic resistant pandemic.
https://www.bloomberg.com/news/features/2016-12-15/how-antibiotic-tainte...

"In China, the National Health and Family Planning Commission began a campaign in 2015 to encourage citizens to cut back on meat and unhealthy foods "
Of course we New Zealanders are very good at swimming against the tide

I am cautious of Chinas Ag demand, are they trying to secure product or trying to source product cheaper by owning source?

WE never thought to go to Japan and buy Toyota so we can secure Hilux supply, or Sony to get Tv's, we are happy to buy in the market and so should China, price will sort out supply.

In Aussie they have just entered into an agreement with Gina Rienhardt to import over 800k cattle a year, they wish to import the best part of %10 of Australias cattle kill live and process in Asia.

http://www.abc.net.au/news/2017-06-09/gina-rinehart-signs-cooperation-ag...

and still buying

https://www.beefcentral.com/lotfeeding/gina-adds-to-beef-supply-chain-wi...

We are far to dependent on China, it's debt is out of control and the West is stuck with no growth the biggest consumers of Chinese goods.

meanwhile china is making big changes at home

http://dimsums.blogspot.co.uk/2017/06/china-plan-envisions-farm-business...

Thanks for the kind words folks. Additionally Diana Clement was a finalist in both the feature writer - business & politics and best investigation categories for her excellent work on Youi, and interest.co.nz was a finalist in the Website of the Year and Best News Website or App categories.

Yep. That work on Youi was great. Go Diana.

I thought my vision was failing, anyone interested in what shadow real estate inventory is sitting around in Auckland, need only check Trade Me or indeed RENZ listings this morning.

I have been closely watching the Auckland TradeMe listings and after they briefly broke through the 11,000 mark they fell back to around 10,750 and have been like that for a number of weeks now, staying remarkably static. There are a lot of sold stickers on signs around where I live.

Zachary, how many listings were on Barfoots books at months end. How many Barfoots listings are currently on Trade me.

The banks should be made to Phase out interest only mortgages over a 5 year period.