Breaking news: Fonterra raises milk price forecast range by 30c, to possibly as much as $7.55. More soon.

US job openings shrink; equities fall; IMF downgrades 2019 growth; US threatens EU; EU & China make up; Aussie lending in credit crunch; UST 10yr 2.50%; oil down, gold up; NZ$1 = 67.4 USc; TWI-5 = 72

US job openings shrink; equities fall; IMF downgrades 2019 growth; US threatens EU; EU & China make up; Aussie lending in credit crunch; UST 10yr 2.50%; oil down, gold up; NZ$1 = 67.4 USc; TWI-5 = 72

Here's our summary of key events overnight that affect New Zealand, with news of more evidence the global slowdown is spreading.

In the US, there was a bit of a surprise in the data released in their JOLTS report. The number of job openings fell rather sharply, down by more than -500,000 at the end of February and way below expectations. This is the biggest fall since 2015 and the overall level is now at an 11 month low. One of President Trump's earlier advisers once said, "this is the one report everyone in Washington [watches]".

Equity prices are falling today after the US President threatened tariffs on European goods, while a cut in the IMF's global growth forecast, especially for first-world economies, fanned worries of a slowdown.

Wall Street is down -0.7% so far today in late afternoon trade. European bourses were down a similar amount. Yesterday Asian markets were generally stable.

The IMF says the world economy is at "a delicate moment" and they have downgraded their growth forecasts for 2019 - again. Now they say growth will be +3.3% rather than the earlier +3.5% with lower forecasts for the US (+2.3%), the EU (+1.3%), Latin America (+1.4%), Canada (+1.5%), and Australia (+2.1%). For New Zealand, their updated growth forecast is +2.5% in 2019. They still see China growing at +6.3% this year, and India growing at +7.3%.

The US Administration is weighing imposing up to US$11 bln in new tariffs on the EU as part of their defense of Boeing and attack on Airbus. It is a move that would represent a significant escalation of transatlantic trade tensions, but is also consistent with its downgrading of relationships with countries once considered allies.

Speaking of Boeing, total orders, an indication of future demand, fell to 95 aircraft in the first quarter from 180 a year earlier. Deliveries fell -19% in the quarter. 737 MAX issues are obviously behind this retreat.

The EU and China seem to be moving toward a stronger trade relationship.

In Australia, ratings agency Moody's is warning of the consequences of a too-sudden fall in house prices.

Official Australian data shows that the value of new lending commitments to households fell a chunky -8.8% in the year to February 2019 from the same period a year ago. Worse, February alone as down more than -15% from the same month in 2018. Lending commitments to businesses isn't showing anything like these sort of declines. It seems likely that bankers are just too scared to lend for mortgages unless they are certain things will pan out perfectly. (Don't forget, second-guessing regulators are threatening jail time.) They have a Hayne-induced credit crunch. Their home builders can see nothing but a decline in their work pipeline.

Meanwhile, major home loan lender CBA has cut home loan rates in a perhaps forlorn effort to stem the decline.

The UST 10yr yield is softer today at 2.50% and that is -2 bps lower than this time yesterday. Their 2-10 curve is at +15 bps and their negative 1-5 curve is wider at -12 bps. The Aussie Govt 10yr is little-changed at 1.89%, the China Govt 10yr is also unchanged at 3.29%, while the NZ Govt 10 yr is at 2.04%, and that is up +4 bps since this time yesterday.

Gold is up another +US$7 at US$1,304/oz.

US oil prices have slipped back a little overnight, now just on US$64/bbl while the Brent benchmark is at US$70.50/bbl. Russia has signaled it will raise output, reneging on promises it made to Saudi Arabia.

The Kiwi dollar is virtually changed this morning at 67.4 USc. Similarly on the cross rates we are at 94.6 AUc. Against the euro we are still at 59.9 euro cents. That leaves the TWI-5 at 72.

Bitcoin is also little-changed at US$5,203. China is considering banning bitcoin mining. This rate is charted in the exchange rate set below.

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

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The market more sure of the future of oil than of Saudi Arabia. "Reflecting the scale of appetite for the deal, bankers are pushing for the multibillion-dollar bond to come at a cheaper borrowing cost for the oil company than for Saudi Arabian government bonds, according to people familiar with the debt sale — a highly unusual quirk."

They don't frack in Saudi. Got anything from a non-Maltusian website? DeSmog blog - really?!

"Free cash flow for public E&P firms skyrocketed last year to nearly $300 billion, marking the return of the “super profit” for industry majors. For these players, this year could turn out to be another blockbuster.

“The fact that E&P companies are able to deliver the same shareholder returns despite much lower oil prices points to an impressive increase in profitability,” says Espen Erlingsen, head of upstream research at Rystad Energy.

A Rystad Energy analysis of estimated global free cash flows (FCF) for all public E&P companies since 2010 shows that FCF peaked in 2011. In the years between 2012 and 2014, FCF declined as E&P companies took on more commitments and investment budgets increased. In 2015, as the oil price collapsed, FCF was reduced considerably. Since 2015, FCF has recovered gradually to the all-time high we see today."

Am I the only one who is receiving hopeless formatting since site changes ?
Example of what I mean : your ' in this section ' vertical bar overlaying the article like the one above making it impossible to read. I use Windows on a desktop PC.

Just guessing, but probably because you are using IE. Microsoft themselves have abandoned that browser. Download and use Chrome or Firefox. We didn't remake the new version on compatable with outdated browsers. Sorry.

Brave perfectly formatted.

Not overly keen to promote ad blocking ... unless you are signed up to Press Patron of course.

In relation to Australia’s credit growth “They have a Hayne-induced credit crunch.” is it really Hayne-induced? They’re were lending outside what they were allowed to, isn’t this crunch of their own making? Blaming it on someone trying to enforce the existing rules is a bit disingenuous I think.

How quick would you approve a loan application, if a) you have been made responsible for the truth and accuracy of an applier's statements on income and expenses, and b) you could go to jail if you get it wrong?

I'm not sure that's a completely fair characterization. Yes, the penalties for irresponsible lending will be much stiffer from now on. However, the bank's previous use of the HEM (household expenditure measure) instead of actually looking at expenses is the key issue. The banks absolutely knew the HEM was a huge underestimate of household expenses and it's use was widespread as it allowed more lending.

So it is less about who is responsible for the accuracy of the loan application and more about the contents of the application.

I am not sure I agree on the 'misuse' of the HEM. The problem is that if you use applicant-specific expenditure measures, there is no way to assess whether a borrower has room to reduce their spending behaviour if they get into strife. But if you use the HEM basis, a lender will have a higher comfort that the borrower can 'revert to the mean' and make budget adjustments (sometimes uncomfortable ones) but still end up with a spending level that is 'average'.

The HEM took a thrashing in the Haryne review, but I am sceptical it was properly assessed there. They just used it as a bludgeon in some anecdotal cases.

I am also sceptical that the HEM is "a huge underestimate of household expenses". It is from too big a database to make that judgement. But for some people on high incomes and spending freely, they would get a shock. So in the sense that high income earners would feel more pain, yes I suppose you could be right. But for the rest of us, we might say "welcome to the real world".

"The HEM is defined as the median spend on absolute basics plus the 25th percentile spend on discretionary basics."
"Absolute basics are most food items, children’s clothing, utilities, transport costs and communications."
"Discretionary basics include take-away food, restaurants, confectionery, alcohol and tobacco, adult clothing, and entertainment."

The problem with the HEM is that it does not represent a median household spend, it is more basic than that. If you lined up loans made using the HEM vs. the actual household expenditure of those loans and found them to be close, then it would be broadly acceptable, but that isn't the case.

From the horse's (mortgage broker's) mouth;

I think it would be possible to create a "HEM" equivalent that more closely resembles actual spending rather than the poverty line. Yes, you could argue that when things get tough a household will stop buying alcohol, quit smoking, stop participating in school sports, pray the car doesn't break down, etc - but in reality would that actual happen? Mortgages arrears are rising across Australia which is no surprise.

My point being, the banks were not really worried about accuracy before but they are now after a royal commission. It is more a case of "value of new lending commitments falls after banks are told they are accountable for their behaviour in light of there previous indescretions."
Putting this on Hayne I feel is passing the buck. That's like blaming the police for a decline in speeding after they had a crack down on speeding. They are just enforcing rules that were very poorly enforced before (I bought and sold a house in AU in 2015-2017 and had an interesting glimpse into how loose everything was).

FYI, in March 2016, APRA reviewed bank lending across many banks and inconsistent industry practices were found in debt serviceability assessments. As a result, they issued APG223 in February 2017.

It is interesting reviewing the speech in March 2016 when it was given, and reviewing that same speech today in light of current property market conditions, and property market price trends. When there were rapidly rising property prices in March 2016, little emphasis was given to this speech, yet in the current environment of falling property market prices, many are now taking notice as the tightened credit conditions are impacting them directly in some way. This speech was the earliest signal to astute investors that the credit environment was changing and likely to tighten.

Here are some excerpts of some of their initial findings before APG223 was issued.

"The results of the first exercise showed that it was not uncommon to find the most generous ADI was prepared to lend 50 per cent more than the most conservative. We found this disparity was particularly the case for our hypothetical investor borrowers. Even for owner-occupiers, however, we saw ADIs willing to lend at levels ranging from 5x to 6.5x gross income. This was surprising since, with mortgage comparison sites and on-line calculators now readily available and mortgage insurers providing some oversight, one might expect to see reasonable consistency in how loan applicants are assessed."

Our analysis of the results focused primarily on ADIs’ assessment of income, expenses, and the calculation of debt servicing.

On the income side, the largest difference we saw across ADIs was the discounting or ‘haircut’ applied to non-PAYG income, including rental income on investment properties. Wage and salary income is typically given full value, but other less certain sources are generally subject to haircuts.

At the time of the first exercise in late 2014, some ADIs were applying no haircut (i.e. accepting these income sources at face value) whereas others were applying discounts of 20 per cent or more to reflect uncertainty and other costs. In the case of rental income, bearing in mind the cost of real estate fees, strata fees, rates and maintenance, not to mention periods of vacancy, the 20 per cent norm that we observed did not seem particularly conservative. All ADIs are now applying at least minimum haircuts on uncertain income sources, and some have gone further to apply larger discounts to rental or other income. Figure 4, showing the net allowable income relative to total gross income, illustrates that there is still some variation in discounting of income for NIS purposes across ADIs, but overall the approaches are more conservative than in the first survey.

Some ADIs also include anticipated future tax benefits from negative gearing on a rental property in the calculation of allowable income. We did see a few ADIs applying more aggressive interpretations in this regard, where negative gearing tax benefits increased the possible loan size for one of our hypothetical investor borrowers by up to 10 per cent. More prudent practice is not to rely on negative gearing to get a borrower over the line.

On the expense side, the major differences across ADIs seen in the original exercise related to whether the ADI used a benchmark living expenses measures, such as the Household Expenditure Measure (HEM), the customer’s own reported expenses, or a more targeted calculation of the benchmark5. Most people have a hard time actually estimating their own living expenses, so the customer-declared figure may not be particularly accurate. However, the basic benchmark measures are also simplistic; scaling expense assumptions to the borrower’s income level (and potentially other factors including geography) is a more realistic and prudent approach.

Figure 5 shows the increase in expense assumptions in many of the ADIs; about half of the ADIs in our exercise were still using the basic HEM, but others have moved to implement more sophisticated approaches or are in the process of doing so. At a minimum, all ADIs now reflect the customer’s declared living expenses where these are higher than the benchmark.

Estimation of interest and debt repayment costs is the other key area where practices differ across ADIs. In this respect, I will focus on the interest-rate applied in the assessment, as well as other parameters such as the assumed amortisation term.

Given the predominance of variable-rate loans in Australia, it has been standard practice to add a buffer (or impose a minimum floor rate, or both) in the serviceability calculation. This aspect is critical because it takes into account the possibility that interest rates could rise over the life of the loan.
In APRA’s letter to all ADIs in December 2014, we expressed an expectation that interest-rate buffers used are at least 2 per cent above the loan rate, with a floor of 7 per cent. This expectation was based on a view is that serviceability needs to be tested at interest-rates on a ‘through the cycle’ basis; that is, assuming interest-rates could at some point in a 30-year loan normalise to more historical average levels. It is easy to forget that as recently as 2011, mortgage interest-rates were above 7 per cent. Using both a buffer (to cover shifts relative to actual rates) and a floor (to provide a minimum benchmark) is good practice.

The interest-rate buffer has probably been an easy target for competitive pressures. Prior to APRA’s close examination, interest-rate buffers were often in the range of 1-2 per cent. The minimum floor, if there was one, was often in the range of 6-7 per cent. Some ADIs had either a buffer or a floor, but not both. Some applied the buffer to the new loan, but not to existing loans.

Figure 6 shows the change in the minimum (floor) assessment rate between the 2014 and 2015 exercises. All ADIs in our exercise have brought their assessment rates up to at least 7 per cent, and most are above this level.

In a few instances, some ADIs that already applied relatively higher floor rates have in fact, lowered these to stay ‘in the pack’, or to counteract tighter policies elsewhere in their approach. This illustrates the finely balanced nature of the serviceability calculation, where small changes in parameters can lead to appreciable differences in how each ADI perceives its own competitiveness.

The treatment of the borrower’s existing debt also has a material impact on the overall NIS outcome. Many borrowers have existing mortgages on other properties. Failing to stress the interest-rate on those loans is not particularly sensible and undermines the prudent serviceability assessment. We found that some lenders were not doing this at all, or were applying a lower stressed rate than they were to the new loan.

In practice, it is not entirely straightforward to apply an interest-rate buffer to existing debt without full information on the terms of those loans. Many ADIs do not have application processes and systems that are set up to capture all of a borrower’s outstanding loans and the rate, term and repayment schedule, and ADIs are concerned that doing so could slow down the approval process. However, reasonably prudent proxies can be devised, and in the longer-term we would expect ADIs to enhance their systems and processes to capture more complete information on prospective borrowers’ other debt.

The next chart shows the interest rate used in the serviceability assessment for an existing mortgage commitment. Here, the changes from APRA’s first exercise to our second one are even more striking. There remains considerable dispersion in the rate applied for this hypothetical investor, which results from the different methodologies used by different ADIs.

Another area that our investigations have highlighted is the extent of interest-only lending. Interest-only lending, particularly among owner-occupiers, has become considerably more commonplace in the last few years. This may be due to products that offer flexibility in repayment options (such as offset accounts) and interest-rates (split fixed/floating-rate loans). Our serviceability investigations confirmed that prudent lending criteria applied by ADIs to interest-only loans do in fact reflect the borrower’s capacity to service the repayments including the principal amortisation. However, the hypothetical borrower exercise showed that some ADIs were not reflecting amortisation over the shortened repayment term; we have since clarified expectations in this regard.

In its recent review of interest-only lending, ASIC has indicated that an interest-only term of more than five years for an owner-occupier could be at risk of non-compliance with responsible lending obligations unless there is clear demonstration of the borrower’s objectives in taking out such a loan6. APRA supervisors have also queried ADIs as to the rationale for lending to owner-occupiers at lengthy interest-only terms. More recently, some ADIs have recently moved to implement more prudent maximum interest-only periods, with five years now being more common, although a number of ADIs still offer interest-only periods up to 10 years.

In summary, the hypothetical borrower exercise illustrated a material tightening of lending standards that we believe is appropriate and reflects more sensible risk assessment practices. Between 2014 and 2015, the maximum loan sizes that could have been extended to our four hypothetical borrowers declined by, on average, around 12 per cent for investors and 6 per cent for owner-occupiers. The actual change for individual ADIs was greater, up to 25 per cent in some cases. This should not be interpreted as an indication that actual loan sizes are shrinking, however, only that the maximum allowable loan for a given borrower income profile is now more conservative.


The Boeing 737 MAX crashes and the problems encountered with the 787 Dreamliner have certainly shaken my confidence in Boeing. Now I am quite relieved when I find my aircraft is an Airbus when the opposite used to be true. This could have huge consequences for the American aviation industry.

I am now no longer putting money on Trump winning the 2020 elections. He has lost a huge amount of support from his most ardent fan base who now look upon him as an ineffective and unstable loser. His position seems irrecoverable. He probably has retained the support of the evangelical boomers but that's about it. No new legions of voters are waiting in the wings to come to his aid.

Strange how Italy's Trump-like leadership believes the EU threatens its sovereignty but giving China the keys to the kingdom by succumbing to the OBOR initiative is right for the country in every way.

Presumably part of the Italian push back against Germany. The EU effectively performed a coup d'etat on Italy a few years ago and installed a government of their choosing. One Italian paper ran with the heading Quatre Reich:

Italians have long memories.


Hi DC, if I may I'd like to offer a bit of constructive critique of the new layout. In general terms i can see that it is somewhat of an improvement, but it lacks the former list of recent comment streams. I found these highly useful as they would draw into both articles and the comment streams from your readers. Some of the comment streams are as educational as the articles themselves, and many are highly entertaining. It'd be great if you could get your IT geeks to find a space for them?

It seems to be a popular request. We are looking at it.  :)