US debt limit issues rise again; US inflation up; China trade rises, PwC barred in India; hard commodity prices rise, key US and China interest rates jump; oil and gold up; NZ$1 = 72.5 USc; TWI-5 = 74.1

Here's our summary of key events over the weekend that affect New Zealand, with news some key international benchmark interest rates have moved higher.

Firstly in the US, a failed effort at a bipartisan resolution to their immigration issues may have made it more likely that the Federal Government will run out of funding without the expected Congressional debt extension. That would shut down the Government. Exactly when that might occur is unclear, but it gets serious starting this week in Washington. Something to watch closely.

Also in the US, a rise in consumer prices in December and solid growth in retail sales which were up +5.4% in a year bolstered expectations that inflation is firming after a long run of softness. The CPI increases were their largest increase in 11 months on strong gains in the cost of rental accommodation and healthcare. Analysts suggested this is the start of an accelerated inflation track.

China’s exports and imports both increased for the first time in three years in 2017, but trade tensions with the US and cooling domestic demand are clouding prospects this year. Their trade surplus shrank -14.2% in 2017 following a -9.1% reduction in 2016. China's exports increased +7.9%, the fastest growth since 2011, but imports surged +15.9%, also the strongest rise since 2011. But China reported its largest-ever annual trade surplus with the US which is sure to raise tensions, especially as it is a stronger American economy that is partly driving the changes.

And China also noted that New Zealand has exceeded its cheese shipments to the country more than what is provided for in our free trade deal. So MFN duties are now applying.

Staying in China, one regional area there has had to revise its GDP numbers because of "different mathematics". It is part of a crackdown on dodgy data. In this case the GDP reduction for 2016 was -33.4% and in 2017 they will report growth of just +2.8%.

In India, PwC has been debarred from auditing any listed company following its failure to detect fraud at one of them in 2009. The move may result in major losses for the firm in the country.

Commodity demand is in the ascendancy these days with prices rising across the board especially for 'hards'. Of special note are the rising prices for aluminium and zinc.

In Germany, Angela Merkel looks like she has the basis of a deal with a left-leaning party to form a grand coalition government. Remember, Germany had an MMP election on the same weekend we did; coalition negotiations there have taken much longer.

The UST 10yr yield is unchanged at 2.55% today. However, the UST 2yr yield jumped above 2%, a key psychological level last seen almost ten years ago. And in China, the equivalent 10yr sovereign bond has jumped to 4.03% (+7 bp) its highest since September 2014, while the equivalent NZ 10yr sovereign bond is unchanged at 2.87%.

Oil prices are a little higher today with the WTI benchmark now just under US$65 a barrel, while the Brent benchmark is just under US$70.

Gold however is up strongly, up +US$16 to US$1,333/oz.

The Kiwi dollar is unchanged this morning at just on 72.5 USc. On the cross rates it is at 91.6 AUc, and against the euro it's at 59.4 euro cents. That puts the TWI-5 at 74.1.

Bitcoin has slipped again over the past 24 hours, by -US$250 this time to US$13,288, a -1.9% decline. Meanwhile, a key US trading platform has had issues. It is trading again however after frustrating many users. Also recall that last week South Korea said it is getting ready to ban trading in cryptocurrencies. And Indonesia is warning cryptocurrencies are illegal there.

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

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33 Comments

Possible problems for Australian superannuation funds? From the AFR:

"Most interest-only loans become principal-and-interest after five years, after which time loans repayments increase dramatically. We are now seeing that transition on a mass scale and that will continue to tip a lot of people over the edge.

"We've seen quite a few people who are facing significant losses because they're being forced to sell their investment property, and sometimes even the family home. It's been a sleeping problem until now because the strong rise in the property market has limited the extent of the losses. But now Sydney house prices are not experiencing the same returns that they were."

Mennon says that after the Future of Financial Advice (FOFA) reforms were introduced in 2013 – which banned financial advisers from receiving commissions on the sale of investment products – many had turned to property and set up real estate arms, where commissions were still permitted.

"We have seen these property spruikers advise people to move all of their superannuation savings into self-managed super funds (SMSFs) and to borrow money to purchase real estate.

"With all the property debt being carried by SMSFs, we're going to see huge losses across SMSFs if Sydney property prices continue to decline."

http://www.afr.com/opinion/columnists/cracks-in-the-25-trillion-superann...

So what's the next step? We'll have to wait and see, but it belies the blithe confidence that some have here that real estate is somehow an asset class immune to the market cycle, which only ever 'goes up', consequence-free. On a related note, maybe this kind of risk-taking is why the NZ government, when designing Kiwisaver, decided that NZers were essentially too dumb to be trusted to have full management of their own retirement funds, and we have no equivalent of SMSFs here in NZ. Perhaps there's something to be said for that argument after all.

Invest all your money in leveraged assets in a single asset class in a single location. What could go wrong?

Oh come now Hardly, everybody know that 'this time it is different'.

Hahaha yeah I forgot, property never goes down in value.

I'm sure there are plenty of Australians that have gone all in on property. I ran some figures on a $1m mortgage (assuming a home and investment property) to get an idea of the type of payment increases. At 4% interest only they would be paying $3333.33 per month and going to P+I with 25 years remaining it jumps up to $5278.37 which is a 58% increase in payment size. That sort of jump in payment will break most people's cashflow.

I'm aware of many people in Australia where their mortgage payments are up to 50% of their net monthly income. It's an exciting time to watch the property bubbles, especially with your link below showing negative gearing in the $4b-$8b range in Australia.

I know someone posted this link from Macrovoices yesterday in the comment thread, but it's a fascinating comparison of the US, Canadian, and Australian housing markets, including data on crane counts and estimates of construction activity.

It also includes this cracker quote about negative gearing use in Australia, considered from a US perspective:

Negative Gearing: Investing for losses

What is it?

Australians intentionally buy investment property that produces losses, both from mortgage interest expense
and operating expenses

Why?

1. They get to claim those loses against their taxable income
2. The capital gains from their property are sure to outpace the operational losses... right?

Spoiler alert
• This will not end well when the property bubble bursts.

Negative gearing is (and should be) a truly bizarre concept to an investor, but it makes perfect sense to most Australians because home prices have only ever gone up for the last 25 years. There is a pervasive and genuine belief that they can’t lose.

https://www.macrovoices.com/guest-content/list-guest-publications/1503-j...

The point is that only seeing asset classes increase year by year makes the thought of risk recede into the background, helped by a perverse tax system which many in Australia would like to remove but is a political hot potato.

In Australia, Nathan Birch owns a portfolio of 200 properties. Despite every indication he is in financial difficulty, he is spruiking the Gold Coast property market and plans to buy more!

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1197...

It's just a gambling addiction in another form.

Or....he's hoping to offload his portfolio to his acolytes?

On the other hand, some economists are predicting interest rate cuts due to the risk of slumping property prices dragging the economy down
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1197...

One economist - the Australian arm of 'capital economics'. But while that's the Herald Headline (shock!) what they actually forecast is that the OCR will remain the same (vs market expectation of 0.25% increase, much of which is factored into current market pricing). OCR remaining the same will not translate to lower retail rates.

The scenario where they predict a drop: "If the recent softening turns into a slump, then the RBA and the Reserve Bank of NZ may have to cut interest rates."

Even if it did drop, it's debateable if this would be passed on, given the same report points to the inherent issues with the housing market.

Given NZ has large exposure to fixed rates, which are driven by offshore rates (the US is looking to unwind QE in 2018), it seems unlikely that retail home loan rates will soften.

NZ floating rate is very high - certainly room for downwards movement.

That in turn means an upwards revision of the fixed rates, then.
Be careful what you wish for.

I think you miss the point - they predict an OCR cut would come if the property market slumps. Given that will mean higher risk for existing loans, it's hard to see that cut not being absorbed into higher risk premiums.

Haven’t many commenters here predicted a NZ & Aus property slump? Or even observed some slumping. / flattening in Auckland housing already?
So a recently bought $1 million house with an $800k mortgage, may soon be a $900k house with a $800 mortgage which is outside the original LVR parameters.

The following article talks about the everything bubble. The one where all assets have risen in synchronicity - thanks to QE. The stage appears set for a fresh crisis.

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1197...

Any guesses which pin is the first to drop? There are so many.

Not sure if you're missing the point on purpose, or trolling? The article you refer to speaks of central cash cuts in the event of housing falling sharper than expected. My point is that IF that happens, what expectation is there that this will equate to lower retail rates given
1) Most NZ loans are fixed, which are off-shore pricing derived
2) This scenario increases risk, so what the OCR gives, the risk premiums will likely take

All that suffer are savers. Leading to asset shift again, leading to funding shortfalls, leading to... higher retail HL rates.

Perspective. "‘Once Trump came into the Oval Office with a newspaper folded into quarters showing some story based on a leak from the White House. ‘What the f*** is this?’ Trump had shouted. Presidential flare-ups were common enough, but Trump often would not let an incident go, roaring on for too long before calming down.”

“A joke among Trump’s aides was that it was better to f*** up really big rather than have a series of daily minor mistakes, since Trump identified with the celebrated, all-points f***-up.”

“The White House problems . . . were organisation and discipline. The staff was too often like a soccer league of 10-year-olds.”

In fact, all three of those quotations are taken from another book about another president’s first year in office — The Agenda: Inside the Clinton White House, which Bob Woodward published in 1994. I just changed the president’s surname.

...How, after all, did the Clinton era unfold after its first, chaotic year? The president’s party lost control of the House of Representatives in year two. He still got re-elected but — as scandal after scandal surfaced — the other side impeached him, although he survived and, with the economy booming, even saw his approval rating rise.

I cannot guarantee Trump’s fate will be identical to Clinton’s. But what makes you so sure it won’t be the same old Shakespearean drama — just with a different cast?"

https://www.thetimes.co.uk/edition/comment/rages-scandal-chaos-its-a-nor...

Most of what we hear is just a full campaign media fight against Trump.
NZ TV news just repeats the CNN line and clips.

A lot of CNN stuff just repeats what Trump himself has said. They haven't seemed to need to embellish.

CNN is on a campaign.

good. If you want to feel real sick, watch Fox.

Yeah, may well be. The point was they have an easy job at the moment, merely having to repeat Trump's statements and tweets word for word, point out him agreeing with the contradictory statements of every senator in the room etc.

Fox...Fox has a more challenging job...although they're preaching to the choir, which perhaps eases that burden.

Ah! So fellatio in the Oval Office is not as bad as an exasperated expletive or two?

Yeah, that ...is exactly what I said, obviously.

Why would you think I approve of the Clintons? They're deplorable people. Christopher Hitchens' book on them highlighted that well.

The last election was notable for it featuring two candidates running against the only candidate they had any chance of beating. Both stunningly bad candidates. I actually felt conflicted because I thought the Clintons deserved to lose but Trump was unfortunately too immature and incompetent to hold office - which is turning out to be correct. As retiring Republican Senator Bob Corker noted, the White House is turning into an adult day care centre.

Why does TVNZ and TV3 News never play clips from Fox News, or Sky News, for fair and balanced reporting?

People like to compare Clinton and Trump because they both had problems in their first year. But there are two important differences.

(1) Clinton recognised the problem and accepted discipline. Trump rejects it.

(2) Clinton was a great communicator - one of the best. Trump is an awful communicator.

Don’t forget Trumps approval rating is significantly lower than Clinton’s.

https://www.vox.com/platform/amp/policy-and-politics/2017/12/21/16798432...

Trump is what he is supposed to be - A Disruptor.
Clinton was what he was supposed to be - A Toady to the Establishment.
There's nothing wrong with either in moderation. But who has the harder job?
I support Trump, the idea. I have no affinity for the man or his business practices etc. But if we are to learn anything from history it's that when too many become too disadvantaged, we head for the barn and the pitchforks. ( Isn't that what the NRA is all about? )
My hope is that Trump helps us all avoid that....

Where is the disruption? Sure Trumps behaviour is unorthodox but he has no policies. He signs whatever the republicans give him which is the same shit they’ve been passing/trying to pass since Reagan.

You can't disrupt a system when you are inherently bound by the rules put in place to explicitly protect that system.

I don’t think that is the problem....

Hmm, a repeat of Friday's 90 @ 9.

Corporates must now comply with China doctrine or be punished.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1197...
So has the West now lost free speech?