US industrial production up sharply; US equities jump; Canada raises policy rate; big French dairy recall; interest-only loan shift worries Aussies; UST 10yr 2.56%; oil and gold unchanged; NZ$1 = 73.2 USc; TWI-5 = 74.4; bitcoin below US$10,000

Here's our summary of key events overnight that affect New Zealand, with news of a rout in cryptocurrency markets.

Firstly in the US however, industrial production rose sharply in December, boosted by gains in utilities output as cold weather swept across the country and increased the demand for heating. It was up +3.6% since December 2016, its largest calendar-year gain since 2010. But their factory sector was little changed from November, although year-on-year it is up +2.4%.

US corporate earnings are coming in strong for the December quarter and Wall Street is up, with the Dow again above 26,000 and almost +1% on the day. (Yesterday was a good day on the NZX with its NZX50 up +0.6% but not so good on the ASX with the ASX200 down -0.5%.)

The Bank of Canada has raised its policy interest rate by +25 bps to 1.25% on the strength of strong employment data and a rise in inflation. However, it said it will be cautious from here, warning that uncertainty tied to the future of the NAFTA is likely to exert a drag on growth. It downgraded its 2018 growth forecast to +2.1% from +3.1% in 2017. It has credibility as a forecaster.

In France, family-owned dairy company Lactalis is widening a product recall to cover all baby milk manufactured by a factory at the center of a salmonella contamination. That involves sales to 83 countries and more than 12 mln cans. And today, police raided both the closed factory and the firm's headquarters.

In Australia there are increasing fears of the consequences of moving tens of thousands of interest-only housing loans on to principal-and-interest basis. There is more than AU$60 bln involved and depending on when they were taken out some conversions could see repayment levels rise by +50%. The flow-on impacts on general consumer spending are starting to be understood.

And staying in Australia, major insurers Allianz and Suncorp have been caught in a bald car insurance scam. Together they will refund a combined AU$65 mln in premiums to more than 100,000 customers, after selling insurance via car dealers "that was of little or no use", according to ASIC. Allianz will refund AU$45.6 mln to 68,000 customers and Suncorp will refund $17.2 mln to 41,200 customers. There is growing anger over the situation.

The UST 10yr yield is unchanged at 2.56% today. The equivalent 10yr China sovereign bond is up +1 bp at 4.03%. The equivalent NZ 10yr sovereign bond is down -1 bp at 2.89%. But there was a sharp fall in the premium investors need for NZ Govt credit default swaps and that is now just +13.5 bps and a record low.

Oil prices are little changed today with the US benchmark now just under US$64 a barrel, while the Brent benchmark is now over US$69.

Gold is also little changed, up +US$2 to US$1,336/oz.

The Kiwi dollar is rising this morning and is now at 73.2 USc. On the cross rates it is at 91.4 AUc, and against the euro at 59.6 euro cents. That puts the TWI-5 at 74.4 and little changed from this time yesterday.

The really big movements are in the cryptocurrency markets. Bitcoin has fallen sharply again over the past 24 hours crashing below US$10,000 and at one point reaching US$9,200. It has since bounced back up to be just back under US$10,000 which is a -$US1,200 net drop in 24 hours. Intensifying regulatory fears seem to be behind the plunge.

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

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34 Comments

It’s funny, I never knew that paying my mortgage on interest-only was an option.
I thought interest-only was only for people in financial stress or for emergency situations.
Most homeowners on P & I would be glad to have been on a normal Table after 10 years surely.

That's how it should be! Scary essentially buying a house on a credit card. Only rationale is for selling and capital gains... but in terms of servicing, one shouldnt borrow if they cant afford P&I

Surely when they stress tested those people’s ability to pay, they did so on the basis that they would make principle repayments? I say that sarcastically. Why is it that banks and individuals can’t make decisions in their own self interest. Interest only is obviously a huge risk. Why is it so widespread in our banking system and theirs.

When you think about it, anyone who wants interest only probably shouldn’t be approved for it. There mere fact that they want interest only suggests that they either intentionally or unintentionally don’t have the cashflow to make greater payments if required.

And another thing is that these interest only loans have been taken out at the very worst time in recent history. ie While interest rates have been at their lowest. Now that interest rates are slowly starting to rise, there cannot be any other outcome than to see a large rise in mortgagee sales. (Admittedly from a low level).

How long can borrowers make interest-only payments? Surely there comes a point after x number of years when the bank says they have to start repaying the principal balance too?

For the everyday person 5 years and then it must switch to P+I on at least a 25 year term. Some will refinance but when credit is tight refinancing options disappear.

There's a number of interest only mortgages that will be coming up in Australia and NZ with the price surges over the past 3-4 years. Given that about 75% of Australian investors are on interest only the problems will heat up for the next 4-5 years.

"anyone who wants interest only probably shouldn’t be approved for it"

That might be a little harsh Hardly.

Imagine you are a sculptor who sells only 4 large pieces a year and payment is slow from your dealers. Your wife works though so cashflow is okay most of the time. Because you are self employed you have to manage your won tax, which you are not that great at - being an artist and not an accountant. At the end of the year income overall looks good, but over half of it is not cashflow stable

So you and your wife buy a house on a interest only mortgage and make your principle payments as and when cashflow permits, which in reality is pretty ad-hoc.

In their circumstance it's a good option.

I have always found it rather absurd that one should pay interest on a mortgage security instrument that they personally create......and even more absurd is the concept of letting another person/entity clip the ticket daily from the created instrument.....

The drop in cryptos combined with Bitconnect (the largest crypto scam promoted on youtube) has people freaking out.
https://www.marketwatch.com/story/this-cant-be-happening-suffering-and-s...
https://www.reddit.com/r/Bitconnect/comments/7qwjcx/this_cant_be_it_i_lo...
https://www.reddit.com/r/Bitconnect/comments/7qx0kv/im_literally_shaking...

The main crypto thread on reddit has also posted suicide hotline numbers.

Of course bitcoin tends to cycle rapidly over a year or two with regular crashes. So this is why I often post warnings about cryptos which the media does not. Good luck to those that have cryptos, and I hope you haven't been trading on the exchanges using 95%+ margin.

I would like to wish good luck to my fellow wage slaves who keep their heads down and are also trying to keep their heads above water and better their own lives and those closest to them.

Dear Hamish,

Always keep your head up and look life square in the eye. It is rarely as good as it looks and rarely as bad. The sun will come up tomorrow.

Cheers

Ralph

Bitcoin is worthless and has no foundation of value.

All the fools that bought when it was over $19000 US are going to pay for riding the speculation wave.

It's everything it promised not to be. It's now prohibitively expensive to actually use it ... miners won't work on small sell transactions and many of the platforms in Australasia market don't even allow sells! In fact it's possible there is nothing to sell, since these outfits aren't regulated and may not even have the bitcoin 'in stock' you think you bought.

Cryptocurrency & distributed ledger is great as a tech, but it's open source right, so no IP and nothing that makes Bitcoin specifically a good store of value. Greed is going to catch a lot of people on this one .. the worry is, what's the chain reaction....

Have a look at what convinces people to invest in Bitconnect (volume warning).
https://www.youtube.com/watch?v=7f18bv76QVs#t=795s

dictator, this guy must be an associate of Brian Tamaki ;-)

Australia, interest only to Interest + principle. The self entitled speculator has just got a rude awakening - the table just shifted beneath them. A slow long and painful deleveraging cycle has just begun.

I cannot see how this can all end well for NZ either.

your spot on RP, this deleveraging will have to be slow to avoid complete carnage. But clearly international intentions are to deleverage.

For some it will be death by a thousand cuts and others asphyxiation while I expect the squeeze to felt widely

Principal repayments now. So it's pain for some folk, but a very good thing for them and everybody else.

bigblue, the truth lies within the price distribution breakdown. Explains the increased median ;-)

Quote, "there are approximately 30% fewer investors in the market with many looking to sell their portfolio
rather than expand it"

Interesting how the focus is only on prices and not on the sales volume, which would explain the distortion of the proportion of houses sold.. usual media hype..

Yes volume down due to the 40% LVR but may increase now that has reduced to 35%. Interesting to note these figures for Auckland
Franklin district up $60,000
Manukau up $40,000
North Shore up $76,000
Papakura up $85,000
Rodney up $9,000
Waitakere up $24,000
Auckland City down by $62,000 .

take papakura for example, majority of houses sold are the new ones built over the last year.. that has basically pushed up the 'median' prices up, but if you look at the older houses, they are actually selling for less than last year prices.. so again, its the distortion in the price range..

Firstly in the US however, industrial production rose sharply in December, boosted by gains in utilities output as cold weather swept across the country and increased the demand for heating.

Hmmmmm...

One primary piece of manufacturing and therefore industry that is absolutely not booming is autos. Motor Vehicle Assemblies, the Fed’s Industrial Production proxy for domestic car production regardless of the name on the vehicle, were just 11.1mm in December. For 2017 as a whole, every month in it came in at less than 12mm, with a very steep drop-off in July at model yearend production closeout. These factories are un-humming now for more than a year, suggesting this is no minor, random fluctuation. Read more

Consumers unable to extend debt profiles to purchase new vehicles?

You lucky sods. Crypto is on sale for a short time only! This is a golden opportunity. It has bottomed, buy right now before it bounces back with a vengeance (and it will).

Then make sure you dump it before it crashes again next time. (and it will)..

Absolutely. This volatility is great for accumulating more crypto as it crashes its way higher and higher.

knock yourself out

It says a lot about the state of world finance today that a central bank feels it needs to be "cautious" at the dizzy heights of 1.25%.

Exactly!!!!

The economy is good so they plan to raise wages and salaries, but not hire more people. They would hire more people, but they can’t find qualified labor. This “labor shortage”, I guess, means they won’t add to their own business capacity. Something’s obviously missing here.

What owner would ever pass up profit opportunity? It sounds more like business owners, as consumers, keep saying the economy is good because that’s what everyone else is saying.

Basic economics dictates the owner would absorb whatever additional costs, whether increased wages to directly address the shortage or those that come with hiring less qualified fill-in candidates, rather than forego the opportunity. Econometrics, for all its big faults, uses a profit maximization function because that’s how the world works. If the economy is truly good, and this is the central part, that’s the only consideration; what follows are mere details of how the business will do whatever it takes to cash in on it.

If, however, the economy seems just OK, which counts as “good” these days, then apprehension and caution are more fitting (even then I have to wonder).

This idea of a “labor shortage” is one that has been perpetuated for years now. It almost has to have been given the further depths of the unemployment rate. It starts right from the top, and by that I mean where all mainstream economic narratives come from. Read more

It's like getting vertigo in the basement

Crypto-currencies are a crock of you -know-what

Those most dependable of human characteristics in full flow with crypto's.

Ignorance, Greed and Stupidity !

Nothing new here - makes Tulips a better deal - at least you could admire them on your dinner table.

How on earth could you value Bitcoin at substantially more than the Australian listed property sector when it produces no cash and has over a hundred near identical competitors ?

Buffett will be proved correct yet again - this will not end well - particularly for many sucked in at later stages at values beyond mid boggling to anyone with a pulse and a few neurones still firing.