Here's our summary of key events overnight that affect New Zealand, with news rising interest rates are affecting developed countries and emerging markets alike, and not just bond investors.
In the US, home mortgage rates have now hit a seven year high. The average 30 year fixed rate mortgage (a standard American basis that works because the Federal Government agencies back up the financing for such a long term fixed, and one that allows an early exit) is now at 4.61%. A standard variable rate mortgage is now at 3.77%. These represent a +5 or +6 bps rise in just one week. Rising rates have traditionally held back their real estate markets, for both new builds and resales. Americans owe US$15 tln for housing loans, so a 1 bps rise adds US$1.5 bln to their payment load per year. In the past week that has risen by US$7.5 bln pa.
And it is not only mortgages affected by higher interest rates. American student loan rates are on the rise as well. That is a US$1.5 tln loan load affecting 45 million people, an impact much larger than for car loans.
Their trade dispute with China took a tough turn in Congress earlier today. The Republican measures to soften the impact on their farm sector couldn't get the votes in the House to pass based on the enormous deficit-raising cost. Bit of an own-goal here as the party who started the current trade war has been unable to shield itself from its local impacts.
In China overnight, they abruptly ended an anti-dumping probe into imported American sorghum, in the latest signal that Beijing is trying to reduce tensions as Washington seeks a more balanced trade relationship.
In Canada, their CPI inflation rose at the rate of +2.2% in the year to April. That is down from +2.3% in the year to March. Meanwhile Canadian retail sales rose much more strongly than expected, but that was only due to surging car sales. Otherwise they slipped unexpectedly. It is the third straight month Canadian inflation has been higher than the Bank of Canada target.
Meanwhile, the EU trade balance came in almost exactly where analysts had forecast, but that doesn't hide the surge in trade for both imports and exports which is really quite impressive. Their large surplus with the US swelled. Their deficit with China, which is even larger, grew as well. Overall, their surplus shrank a small amount.
And here is a rundown of what is happening in the emerging market economies being bashed around by the combination of a rising US dollar and rising US benchmark interest rates. These are the TIVA economies, and they are all on shaky ground. A couple of them fall over and that could trigger an ugly international reaction.
Firstly in Turkey, investors are pulling back. A plunging currency and sky high debt brought on by a government who "invested for development" based on cheap money is being undone by the interest rate/currency squeeze. And the country's leadership is pressing their central bank to cut interest rates as a solution. No-one, and not even their own central bank, think that is a good idea. The investor flight is likely to pick up as reserves dwindle fast. The IMF can expect them knocking soon.
Indonesia isn't in the same league at all. But it raised interest rates this last week because it has the debt and currency problems of the others, just not to the same extent. It is also in the middle of a resurgence of religious extremism tensions.
The most vulnerable of them all, Venezuela is teetering, a failed state about to descend into anarchy as an "election" looms. High oil prices no longer help it because so much of their infrastructure is down, or creditors are claiming the best bits. The regime could collapse at any point. Inflation is at Zimbabwean levels. The effect on the international system however may be very limited; everyone seems to have written their investments off already
Argentina thinks it has its crisis beat, but no-one believes that - in fact, not even them. Overnight they asked for emergency support, something the US is backing.
The UST 10yr yield is now at 3.06% and up +9 bps from the level at this time last week. But since yesterday, this is a -5 bps retreat. The Chinese 10yr is up to 3.72% (-3 bps) while the New Zealand equivalent is at 2.89% (up +1 bp).
The VIX is back into a normal range at 13.7, similar to where it was this time last week. The average index level over the past year is 12. The Fear & Greed index is near neutral and unchanged in a week.
Gold markets are now closed at US$1,293/oz in New York. That is unchanged since this time yesterday, but down a little this week.
Oil prices are down a little and are now just under US$71.50 and the Brent benchmark is now just over US$78.50/bbl. The US rig count was stable this past week after six straight weeks of gains.
The Kiwi dollar is ending the week down at 69.2 USc and a minor retreat over the week; it was 69.7 at this time last week. On the cross rates we are at 92.1 AUc and 58.7 euro cents. That puts the TWI-5 at 72.1.
Bitcoin is up from yetsreday, but down since this time last week. It is now at US$8,254.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
Daily exchange rates
Select chart tabs
35 Comments
The thing is, financial literacy is not typically taught, we all often find out via mistakes. And study after study has shown how quickly our brains tend to adapt to a scenario as the "new normal", and how terrible we are at predicting risk.
Really, this is what regulators and governments are supposed to protect us from. They are supposed to take a step back and accept that we are not all capable of operating in our own best interests and regulate to the extent that we have some protection.
I was hearing this week about a young couple who just bought in Auckland and had taken on a million dollar mortgage. They can afford it at current interest rates and they 100% believe that interest rates will not be moving higher.
That “young couple” has only ever lived in their adult years through the biggest credit bubble in our history. All they know is that property in nz is always a one way bet. There are lots of people who think like that. There are also many people in Auckland who have those kinds of mortgages. I think there is a more than reasonable chance that in a few years time borrowers like that will be cashflow or balance sheet insolvent, or both.
Gingerninja, I respectfully disagree with you that the "regulators and government" should protect us from our own mistakes. I far prefer to encourage personal responsibility and freedom.
Do not forget that "the government protecting us" means PEOPLE WHO HAVE BEEN PRUDENT AND MADE GOOD DECISIONS PAY FOR THOSE THAT HAVE BEEN WRECKLESS
Yvil, I don't mean to suggest that governments and regulators should protect us from every single mistake we could conceivably make. But there are scales and degrees.
I do 100% believe that banks should be prohibited from lending money above a certain level (DTI). Regardless of what that lending is for. I don't believe individuals are always financially literate enough to even know what is prudence and what is recklessness, and to simply throw those people to the wolves (ie banks) is unethical.
People, of course should be encouraged to take personal responsibility, but to do that very thing requires understanding, how can you be responsible for a decision that you didn't understand if you were not capable of understanding it? That's why there is the mens rea test in law. If you don't have full cognition, comprehension of the repercussions, intent etc, then your crime is judged differently. Not everyone is a good at maths, finance or planning even. I don't think it's fair to expect everyone to have the same level of financial savvy. I prefer to be a realist and acknowledge that we all have varying degrees of skill and talent and that overall, society is better off not trusting banks to assess and be trusted with our well-being. They have been proved many, many times to be incapable of this without regulation.
Well, i'm not going to indulge straw man arguments. Not every government "protection" is one step away from totalitarianism and the way those type of points keep getting made is tedious. I can't be arsed engaging with it.
Society is built on shared notions of ethics and fairness. That's what we have laws and regulations for. If the laws and regulations aren't enforced then what would we have? People are just lovely and can be trusted to be fair and pleasant to each other?
No, we have to have some kind of regulation, it's not a perfect system but it's better than the other options.
Gn, we have different views and that's fine, we are both entitled to our own opinion, and I truly respect yours. You speak about "fairness" in our society, which is a lovely concept, one that will yield you a lot of support in this site but I don't see fairness in our society. How can we comment about fairness on this site on our devices in a cosy home while others have so much less in NZ? I think it is somewhat hypocritical.
Worldwide rates are going up off the back of the Feds rate raising cycle. If they continue to raise rates they will be in recession in less than 12 months, and then guess what, they will begin to cut rates. Rates are capped as the debt load is too high. Until the debt load is paid down or incomes rise substantially over the course of years, I would be surprised to not have access to a mortgage rate locally with in a 5 at the front.
People talk about supply and demand, and economic theory. But at the end of the day, high rates mean recession, and recession means the ruling government is out of power for at least 2 terms. So politicians strong arm the supposedly independent central banks to suit their own interests. This is how things work in the real world. When the GFC hit, economists believed rates would rise, as money was in short supply. But the real world result was declining rates, because the powers that be trumped economic theory.
Not so Roger. US military expenditure is so entrenched that it's become a solution roaming the world looking for a problem. Shooting themselves in the foot often and the opposite of enhancing anybodys security including their own
Example Syria. If the US had just ignored the place, a million Syrians would not be dead.
Thanks for the personal attack and for speaking for "everyone", also for insinuating things I never said. Why don't you comment about issues rather than people.
But yes, I definitely believe this time is NOT different, the world is not about to end, property prices will still not halve in value etc... Bobster, this time is no different
My comments were entirely directed at the issues and in no way constituted a personal attack. I characterised your view, and my comments I think accurately reflect your view as expressed here over quite a period. “This time is different”, historic ratios re debt to income and yield are now irrelevant, we are in a bright new world, interest rates cannot and will not go up, there is no bubble, prices will not and can not fall, fill yer boots you can’t lose, bla bla
Yvil, you commented only weeks ago we are on a long slow downward spiral to another Great Depression. If so, then property could easily halve!; https://www.interest.co.nz/opinion/93542/patrick-watson-says-free-marke…
Did you just now do another flip-flop?
Funny how we people assume that the status quo of low interest rate will forever dictate the future. History has shown us over and over again that markets change, asset prices increase , decrease and revert to the median over time. How easy we forget. To think that rates will stay low forever is foolish and a poor investment strategy. To those who purchased inflated assets and carry high debts to service those assets I would begin to worry or better yet unload those obligations soon.
Funny how we people assume that the status quo of low interest rate will forever dictate the future. History has shown us over and over again that markets change, asset prices increase , decrease and revert to the median over time. How easy we forget. To think that rates will stay low forever is foolish and a poor investment strategy. To those who purchased inflated assets and carry high debts to service those assets I would begin to worry or better yet unload those obligations soon.
A long, worrying China long-term policy (is there any other sort?) read from testimony recently before the US Govt: a sample:
In developing the so-called Maritime Silk Road, Chinese firms have snapped up control of ports in Australia, Cambodia, Indonesia, Malaysia, Brunei, Myanmar, Bangladesh, Sri Lanka, Pakistan, Djibouti, Tanzania, Mauritius, Namibia, and Greece. These ports have been developed for military purposes, and many will control strategic choke points such as the Straits of Malacca and the Suez Canal. Most of China’s port deals are for a period of 99 years or more.
The phrase 'first commercial, then military' recurs throughout...and throwing a billion $NZD at the Pacific would be a rounding error compared to the depth of China's pockets.
Re Waymad's comments: I think Mr Trump & Co know this which is why they're playing hardball. Squeeze until you sneeze. WWIII started on September 11, 2001. It is mainly fought through economic means with as little real fighting as possible. The Middle east is the obvious 'traditional' war zone with the current focus on de-powering Iran before they get too cocky. But generally speaking, Americas economic war on it's selected foes has been pretty good. Russia's been squeezed and apart from some skirmishing in the eastern Ukraine, have been very quiet. Who wants to be a Russian anyway? And now he's focusing on China, whom he will pop at some point, the problem being is that it will affect us pretty much straight away, as we rely on China in this neck of the woods. Ho hum. But make no mistake, what we are witnessing is a fight for the right to run the planet for the next 20-30 years, and watching the speed of the Chinese developments over the last 5-10 years in particular, Mr Trump doesn't have a lot of time left if he wants to emerge victorious. I just hope economics can do it. But I doubt it. Either way it's a tough gig.
That is a dramatic way of putting it, but not altogether untrue. My way of thinking about it is that we are being courted by two Empires. So far each side seeks to get us to indebt ourselves to them. Auckland house prices are the result of money flowing in via two channels, one from each Empire. The CCCP money flows in with new Chinese residents, and the US money flows in via the Aussie banks.
As the Greeks found out, you are a colony of your creditors.
We live in interesting times.
The less Pollyanna view is summed up in two articles:
- ARM is being acquired by Chinese interests. 90% of mobile device chips use ARM-derived patterns....
- America is falling behind in R&D, as its higher education collapses into the comfortable ooze of soft degrees and identity politics, while China trains millions of engineers every year.
So for little Godzone, caught between two Great Powers, looked up to by the Pacific islands (generally with their hands out for Mo' Munny), looked down on by Australia as a soft back door, and effectively completely defenceless, it's a fine line to walk even for seasoned politicians. Which, and increasingly obviously, we are fresh out of.
The Chinese 10yr yield of 3.72% looks good and many commentators said the US 10yr would NOT get to 3% .. yet here we are. I suppose the NZ equivalent yield of 2.89% is attractive if you believe the NZ dollar is heading up, though currently it's trending down.
Currency ideally receives its value based on the demand for it and our current bond yields may need to edge quite a bit higher. Saying that Robertson has stated he wants the NZD at 0.63 cents against the USD. I wouldn't buy NZ bonds myself. I try to convert as many NZ dollars as possible to Gold, Kiwisaver, AUD and even Crypto.
The NZ financial sector is heavily invested into property, so much so it looks like a ponzi scheme. Now, I'm not saying the housing market will collapse tomorrow, but I am saying there are mortgagees/speculators who are dependent on 'greater fool theory' to generate capital gains AND renters to pay their mortgages.
Now if 'greater fool theory' continues (housing prices rise) how would that work or look .. well I imagine overcrowding of rental properties will dramatically increase and social services will experience a new 'breaking point'. Overcrowding is really the only way property investors can keep this ponzi scheme going, unless they're all willing to (which they mostly aren't/can) pay their extreme mortgages themselves.
Either way it doesn't look good for the NZ dollar so NZ bond yields will be rising and faster than the current 1bp increase. Expect to see the brain-drain coming back with a vengeance in 2019. I'm interested to see how this all shakes out.
Wow in the USA they do a 30 year fixed rate of 4.61%, you would take that in NZ in a heartbeat.
Long term the rates are only going to go one way, you cannot expect them to remain this low forever.
Its not going to get "Interesting" if they suddenly start to rise, we already know the outcome, its going to get "Ugly".
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.