90 seconds at 9 am: US federal debt leaps by US$1 tln in a year

US inflation at 10yr high; US Federal deficit up sharply; China's coal stress; German sentiment dives; Brisbane apartment oversupply; UST 10yr at 2.96%; oil and gold lower; NZ$1 = 70.1 USc; TWI-5 = 73

13th Jun 18, 7:39am by David Chaston

Here's our summary of key events overnight that affect New Zealand, with news of fiscal wobbles in both the US and Europe.

Firstly, American consumer prices last month rose at their steepest annual growth rate since 2012, up +2.8% pa and exactly on analysts expectations and reinforces the Federal Reserve's own forecasts. Excluding food and energy, they are up +2.2% pa.

But of course inflation at this rate is undermining pay increases, so real pay gains have now evaporated.

The upshot of both these data sets is that the US Fed will almost certainly raise its policy rate tomorrow by another +25 bps to 2%. That would take it back to the level we last saw in September 2008 - a decade ago - and for the first time (ever?) will put the US policy rate above the New Zealand OCR.

Meanwhile, the US monthly Federal Budget deficit increased to -US$147 bln in May, -$20 bln above what analysts were expecting. Tax receipts were -9.7% lower than the same month a year ago, spending outlays were +10.7% higher. Fiscal management in the US is deteriorating quickly. Their public debt outstanding has reached -US$15.4 tln (not including "intergovermental holdings"), and that is up from -$14.3 tln in the same month a year ago - a -US$1.1 tln (+7.7%) rise in one year and the fastest deterioration in their history.

Their government might not be managed prudently, but American companies including those with a global presence, are certainly on the right side of the ledger. Deutsche Bank analysts have shown that the true trade balance with the rest of the world is +US$1.4 tln, rather than the officially claimed -US$0.6 tln deficit. This summary is well worth a read.

In China, times are tough in their coal belt. One city there failed to pay its employees salaries in May due to fast-declining tax revenues that are largely based on coal output.

In Germany, the mood among investors took a deeper-than-expected slide in June, weighed down by concerns about the impact of an escalation in a trade dispute with the United States and political instability in Italy. An even more unexpected slide is gripping the wider EU investor base generally. This poor outlook comes just a day before the ECB is due to meet and probably signal some sort of tapering plan.

In Australia, the Queensland government Treasury is warning that they may be in for a deficit-threatening downturn from a property market at risk of turning. They have concerns about the over-supply of up to 15,000 apartments in Brisbane's property market combined with a fall in apartment prices of more than -20% in recent years. Their central concern is that the turn will come as similar turns come in Sydney and Melbourne.

Closer to home, Greens minister Eugene Sage has approved a Chinese-owned company to purchase land to expand the existing Otakiri Springs water bottling plant near Whakatane. The company will now expand by investing more than $40 mln over four years to upgrade the plant and establish two new bottling lines. All the product will be exported to China in plastic single-use bottles.

The UST 10yr yield is at 2.96%, up +1 bp since yesterday. The Chinese 10yr is at 3.69% (up +2 bps) while the New Zealand equivalent is now at 3.01%, unchanged.

Oil prices are little changed today and the US price remains just over US$66/bbl. But the Brent benchmark has fallen by about -US$1 to just over US$75.50/bbl. Meanwhile, the official US estimates of likely future crude production worldwide have been scaled back. In 2019 they see demand unchanged, but supply out of OPEC falling. They also lowered their estimates for US crude production as well.

Gold is down -US$4 at US$1,295/oz.

The Kiwi dollar will start today marginally softer at 70.1 USc. On the cross rates we are however a bit firmer at 92.5 AUc, and 59.7 euro cents. That leaves the TWI-5 at 73 and unchanged since yesterday.

Bitcoin is still at US$6,698 which is virtually unchanged from yesterday.

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38 Comments

by frazz | 13th Jun 18, 7:58am 1528833509

"The company will now expand by investing more than $40 mln over four years to upgrade the plant and establish two new bottling lines. All the product will be exported to China in plastic single-use bottles."
Not very Green..and how much do they pay for the water?

by scarfie | 13th Jun 18, 9:09am 1528837795

It was the plastic bottles that caught my eye first off, but the real issue is the non-renewable fuel used to ship water around the world. About the only thing worse is shipping beer, which is mostly water and in a lot of instances goes in glass.

by waymad | 13th Jun 18, 10:09am 1528841347

Whoa there, cowboy. It's been signed off by the We Know Best crew, so what could Possibly be dodgy?

by Groen_mamba | 13th Jun 18, 8:03am 1528833822

Your Australia property market link is not working

by Roger Witherspoon | 13th Jun 18, 8:42am 1528836162

Here it is:
https://www.afr.com/news/politics/queensland-budget-treasury-warns-abou…

by Groen_mamba | 13th Jun 18, 8:51am 1528836714

Cheers

by Roger Witherspoon | 13th Jun 18, 4:05pm 1528862754

Have the Aussies outwitted the Chinese? Coming back later in the day, I began to wonder whether what has happened is the Aussies have lured the Chinese into building an excess of apartments by offering them easy credit terms. They are now encouraging them to sell them by tightening the credit rules. Buy now, pay later, becomes pay us back our money now. Result, cheap housing for Australians.

Of course, it must be an accidental achievement, I mean the Aussies aren't that clever, are they? Or are they???

by Nic Johnson | 13th Jun 18, 1:27pm 1528853237

Greoen-mamba - Don't tell me - it crashed!

by theglc | 13th Jun 18, 8:03am 1528833832

"concerns about the over-supply of up to 15,000 apartments in Brisbane's property market combined with a fall in apartment prices of more than -20% in recent years. Their central concern is that the turn will come as similar turns come in Sydney and Melbourne"

Oh dear! I wonder how many vacant apartments there are in Auckland with more coming on the market all the time........

by Houses Overpriced | 13th Jun 18, 8:19am 1528834791

There's never a mention about debt... isn't that the sole reason for banks tightening their lending? More so after the royal commission enquiry

by Groen_mamba | 13th Jun 18, 8:16am 1528834596

Met with a Chinese developer yesterday. Planning a development in central Auckland to be completed in 4 year's time for 2500 apartments alone.

"Of 75 projects under construction, 57 were expected to be completed by the end of 2019, providing an estimated 4534 new units"
https://www.stuff.co.nz/business/industries/104655884/auckland-develope…

by Uninterested | 13th Jun 18, 8:41am 1528836084

At the end of this link it says: (Talking about Goff), "To address housing issues in the city he set up the Mayor's Housing Taskforce in 2017 which, with help from the Government, would work on freeing up more land, building through economic dips and enabling innovation and efficiency in consenting."
What spin! The council spin doctor team must have spend a couple of days working on those meaningless words.

by Uninterested | 13th Jun 18, 8:42am 1528836157

And then the last we hear is that to the delight of the council, the Okura subdivision has been turned down.

by Shock | 13th Jun 18, 11:24am 1528845883

It looks very much like the real estate cycle is about to enter the hypersupply phase.

https://betterdwelling.com/global-real-estate-prices-are-synchronizing-…

by Zombie ponzi | 13th Jun 18, 8:16am 1528834578

The oversupply of Brisbane apartments was evident back in 2016 before we moved back to Auckland. I can recall being offered iPads and several weeks rent free as enticements to sign a lease even back then. At that time foreign buyers were buying off the plans but that has reduced since Australian banks tightened lending standards.
Australian state Governments derive far too much of their funding from stamp duty, so the current downturn will be very painful.
Australia still on track for interest rate cuts and federal Govt, state Govt and bank rating agency downgrades IMHO.

by Brock Landers | 13th Jun 18, 9:54am 1528840493

Why did you leave Brisbane? What are your thoughts on what its like living there?

by Zombie ponzi | 13th Jun 18, 1:26pm 1528853205

We moved back to Auckland to be closer to our family. If it was a financial decision we would 100% still be in Brisbane where we earned more and houses are cheaper. Brisbane is a great place to live, especially near the center close to the river. Public transport is pretty good as well. Brisbane feels a bit like a huge country town (which it pretty much was 25 years ago). The people tend to be laid back and friendly. The economy has been very dependent on property construction and mining/gas capex - both of which have fallen off massively in the past 1-2 years. I think it would probably be harder to move there and get a job now than it was a few years back.

Despite all of Auckland's problems I do love the place.

by Brock Landers | 13th Jun 18, 9:06am 1528837568

A very very interesting talk about what's going on in Sydney property right now.

https://www.youtube.com/watch?v=CHHhSKxyobg

by Bobster | 13th Jun 18, 9:13am 1528838035

Yeah, I posted that one too. The analysis available for the Aussie market is far superior to the analysis here for the nz market, which seems to be a lot of puff pieces by the RE industry and self serving garbage from the big banks

by Brock Landers | 13th Jun 18, 9:21am 1528838462

Agreed.

Favourite quote: "the higher they are the harder they fall".

by Houses Overpriced | 13th Jun 18, 9:56am 1528840594

Hopefully some of our mates on this site are well padded

by polygonalvector | 13th Jun 18, 8:50am 1528836657

That is a classic. What are your principles worth Minister Sage?

You're a Greens MP, you're the spokesperson for water issues - and you've just APPROVED an overseas investment to bottle more of our NZ water for export to China - AND said water will be exported in single use plastic bottles.

There are real principled MPs who would quit before rolling over like that - you should be ashamed of yourself. Your party should evict you.

The very next time you campaign on anything - remember that those plastic bottles will likely end up in the gullet of a dolphin somewhere.

by President of P… | 13th Jun 18, 8:59am 1528837189

I gave you a thumbs up for what really is contender for comment of the year... if i had more thumbs up to hand out I'd give them all to you....

Thank you - President of Property...

by waymad | 13th Jun 18, 10:12am 1528841558

It's pure Marxism: Those are my principles, and if you don't like them...well I have others.. (Groucho)

by RickStrauss | 13th Jun 18, 11:24am 1528845855

You guys need to look into things a bit more deeply. Earlier statements (paraphrased) were basically along the lines of:

unfortunately I've had to accept this company's request to expand. My hands are tied on this as they fulfill all the legal requirements, so I have no ability to say no. This just goes to show how essential it is that we change the laws to ensure that companies pay for the water they take.

Are you guys suggesting that rather than change laws ministers should dictate over them at their personal will?

What is of more interest is if they move ahead with royalties on extraction of such valuable natural resources. And personally, I hope their members pressure them to move on these matters of law as a result of this decision.

by Andrewj | 13th Jun 18, 8:51am 1528836660

''Like the jump in consumer prices in early 2017, inflation breakevens (the difference between the current yield on the same maturity UST bond or note and the current yield on a TIPS security; or, the amount of expected inflation compensation related to the average future projections of the CPI) are discounting the current one, too. In other words, the market is now seeing past the rise in oil prices expecting instead that over time inflation for the CPI index won’t average much more than around 2%."

http://www.alhambrapartners.com/2018/06/12/what-a-difference-a-few-mont…

by J.C. | 13th Jun 18, 9:08am 1528837722

Citibank abruptly gets the fear in Australia.

The Australian division of the global financial powerhouse Citibank has hit the brakes on residential property lending amid growing fears about a housing slowdown and its impact on the broader economy.

Citi, which is a major regional player across the Asia-Pacific, is cutting drawdown lines of credit on home equity and increasing interest rates in a tightening that targets both new and existing borrowers.

Citi recently warned a build-up of property risks could derail the Australian economy as borrowers are overwhelmed by the burden of servicing debt.

Some 1.9 million investment properties could also come under pressure to be sold as speculators with multiple properties or nearing retirement rush to sell as prices slid.

Citi also warned the traditional response of investors to ride out a downturn was now less viable because of high debt levels, particularly investors aged in their 50s and 60s

https://www.afr.com/business/banking-and-finance/citi-slams-residential…

by Bobster | 13th Jun 18, 9:22am 1528838549

Tsk tsk, citibank are such doom and gloom merchants, can’t they see the glass is half full! Looks like Sydney and Melbourne are going to go through a “sustained correction” for the foreseeable future, whatever that means. WA has been going through that for a while, for different reasons.

by Retired-Poppy | 13th Jun 18, 9:33am 1528839190

Yup, banks are turning off the taps, it's now game on. Expect one after the other to publically fess up to their aversion to property. The race to fortify balance sheets has now begun.

by Houses Overpriced | 13th Jun 18, 10:33am 1528842804

They need to come to the nz banks such as. DGZ,ECO BIRD...etc... cause prices never come down and they'll always be there to lend

by gingerninja | 13th Jun 18, 12:46pm 1528850817

The Oz example highlights the very similar risks in NZ.

Very high levels of mortgage debt is owned by investors. With most of those investors being over 40, many over 50/60. Not to mention the proportion owned by overseas investors.

Not all investors will be able to hold during a downturn. That's nothing but a comforting myth that many tell themselves to allay fear. In reality the risk to the investor is credit tightening. The low yield and the (even more dangerous)...negatively geared properties will highly unattractive to banks as they tighten. In a credit crunch environment, many will be unable to refinance, finding themselves stuck at the higher variable rates.

How many of these investors have cash enough to see them through a few years of tough times?

The investors I know have all have over 3 million in debt, all properties negatively geared and topped up from their salary. When I asked what they would do if they could no longer afford to top up from their salary, they said they'd sell one of the properties.

And that's how it starts.

We don't know the true extent of the "negatively geared" problem. Maybe it will turn out to only be a a small fraction of investors?

We also don't know how many investors are only just in positive territory or just at neutral and who may then become negatively geared if they are forced on to a higher variable rate.

by Bobster | 13th Jun 18, 12:59pm 1528851550

Negative gearing will be toxic to lenders for new investment properties. Interest only lending will substantially reduce. Interest only resets will kill some investors. Investors with multiple properties and high and deteriorating LVRs will face lender pressure to bolster LVRs, which may well mean the forced sale of a property to recycle the equity into other properties. To be honest I think the interest only issue is the most immediate problem, the negative gearing problem on existing investments may only become an issue later.

by Nic Johnson | 13th Jun 18, 1:49pm 1528854597

This will be a train wreck...and remember negative gearing didn't exist in the UK banking crisis, it does here.... Disposable income will tighten first as people look to prop up the investment debt, then discretionary spending reduction will lead to a few business closures and tenants not being able to front the full rent, more top up? or lose a tenant in a market where cost of debt servicing is rising and good tenants are in shorter supply (sorry there will be lots of good tenants, they just won't have the money they used to have). People forget that during the last credit crisis, smart phones were merely in their infancy of use... Everyone has a smart phone now and property app on their phone which will let them know of falling prices on a daily basis as reduction fuels reduction in a race to the bottom. The speed at which information on this crash will spread like wildfire.. Explains why Melbourne has already tanked 5% in 3 months.... We could be looking at 20% off there in a year.. The media and banks will do everything they can to stop mask the reality.

Going to take someone's advice and dig a vegetable garden, may dig an air raid shelter while I've got the spade out.

by gingerninja | 13th Jun 18, 1:49pm 1528854568

Yup.

Plus without homes going up in value, market liquidity will evaporate and real estate will suddenly become much less attractive to overseas investors too. So we have the potential of an overseas investor exodus.

by CN | 13th Jun 18, 2:30pm 1528857048

"The investors I know have all have over 3 million in debt, all properties negatively geared and topped up from their salary. When I asked what they would do if they could no longer afford to top up from their salary, they said they'd sell one of the properties.

And that's how it starts. "

Property investors believe that liquidity will be there when they want to sell. It is only when they actually list their property for sale, they can get an indication of the demand for their property. Sometimes properties remain listed for 12 months with no buyer at the seller's desired price. I heard a story recently of a property seller in DGZ with no visitors in the open home for 3 months.

I can also see a scenario where property sellers list their properties at the same time during a recession, so in that situation, you have a large number of property listings whilst demand for housing may fall due to job uncertainty affecting buyer confidence or an inability by the potential buyer to meet even more stringent bank lending criteria to finance their purchase, as disposable incomes fall.

If the seller urgently requires cash then they will lower their price expectations.

There is one other dynamic, not frequently talked about. If the property seller needs cash for some purpose, and has a large property investment portfolio which is cross collateralised with one bank, then the bank may retain all sales proceeds until the current 65% LVR level is reached. Under these conditions, the property owner may need to sell a number of their investment properties until the LVR of 65% for property investors is reached before they can receive any cash for their original needs. This would result in a number of properties being sold at the same time, and could result in a downward property price spiral.

by Bobster | 13th Jun 18, 2:50pm 1528858255

If a bank is to release its security over an investment property forming part of a portfolio for the purpose of the sale of that property it may require as a condition to that release that the whole or part of the proceeds are applied to pay down the debt secured by the balance of the portfolio. The bank will only do this to the extent required to restore the lvr or servicability requirement that the bank deems appropriate for that portfolio. There have been some posts in the past here highlighting instances where a bank has done just this. So even in a voluntary sale the lender may take the opportunity to reset at a lower lvr. If you don’t like it, refi them out, but otherwise you are stuck with it

by Andrewj | 13th Jun 18, 10:31am 1528842706

Gas prices in the States are hurting, I read about a Strawberry grower who now spends $1200 to ship product from California to East Coast, used to be $800.
https://www.gasbuddy.com/Charts

by bilbo | 13th Jun 18, 2:04pm 1528855483

Recently I've been seeing comments on here stating one of the banks is being dishonest and overcharging people on floating mortgages. However the thieving bank was never named. This concerns me as I need a choose a bank for a construction loan.

Is anyone willing to give me a hint here? Let's play charades. Three letters? Stars in the logo?