"Bloody good news" on the New Zealand economy and a widely expected interest rate cut in Australia means the well signalled risk of the New Zealand dollar strengthening against its Australian counterpart has come to the fore this week, says PwC partner Roger J Kerr.
Kerr, who specialises in treasury management, also told interest.co.nz in a Double Shot interview that he expects to see figures showing strong new job growth in the United States when the US Labor Department's monthly non-farm payrolls data is released Friday night New Zealand time.
"I think we're going to see another reasonably strong number. In recent months they've been up between a 160,000 and 200,000 increase for the month," Kerr said.
"Consensus forecasts for this one are 185,000. From all the other data that feeds into these monthly employment numbers there's nothing to suggest it's going to be a weak number."
"In particular I was looking at some house building stats in the US the other day and they are the strongest they've been for five years. So it is happening at the household level in the US, and it looks like the jobs are there and the jobs are increasing," Kerr added.
"So I'd be more on the side that it's going to be a stronger number, towards 200,000, (rather) than say back at 150,000, which would probably be positive for the US dollar."
(Friday night's figures showed US payrolls rose by 162,000 in July, the least in four months, and the unemployment rate dropped to 7.4% from 7.6%).
Fed watch
The US employment market is particularly important right now in the context of the Federal Reserve's quantitative easing programme. The Fed's Federal Open Markets Committee (FOMC) announced this week it will continue to buy US$40 billion worth of mortgage back securities, plus US$45 billion worth of longer-term Treasury securities, every month as it strives to improve the performance of the US economy.
That's on top of US official interest rates, the federal funds rate, being held between 0 and 0.25%. The Fed says such low rates are appropriate whilst unemployment remains above 6.5%. The Fed's also watching inflation closely, and says current low interest rates will also remain appropriate so long as inflation in one to two year's time is projected to be no more than a half percentage point above its 2% longer-term goal.
Kerr described the FOMC statement as: "Very middle of the road, trying to placate all aspects and not send the market off on a tangent they (the Fed) don't want it to go in." That said, he suggested the statement did express concerns about mortgage rates.
Kerr noted that long-term interest rates, US Treasury bond yields, had risen since the FOMC's June statement to 2.6%.
"And that in turn determines their mortgage lending rates in the US. And he (Fed chairman Ben Bernanke) wouldn't like to see rising mortgage rates in the US at the consumer end of the market slowing down, or impacting negatively, on their (economic) recovery. So a bit of a slight warning there," said Kerr.
"As always how the markets move from here will be dependent on the data. So if we get strong employment or other economic numbers in the US, markets are going to start to build in an earlier tapering (of the Fed's quantitative easing programme).
Aussie rate cut 'looks inevitable'
Meanwhile, Kerr said both interest rate markets and foreign exchange markets in Australia and New Zealand have priced in a 25 basis points cash rate cut to 2.50% from the Reserve Bank of Australia next Tuesday, August 6. This comes after RBA Governor Glenn Stevens signalled in a speech the outlook for inflation meant there was scope for further rate cuts.
"The RBA do like to surprise the markets and do the opposite to what they expect, but I think next Tuesday they will cut," Kerr said. "That looks inevitable now."
"If anything it might be sell the Aussie dollar on the rumour, buy the fact. I would say it (a cut) is fully priced in and I wouldn't really expect the Aussie dollar to be thumped again in the forex markets like it has in the last couple of days," said Kerr. "It has come down from US92c to below US90c and that has pushed the (Kiwi-Aussie) cross rate up to almost A89c."
He said there was a lesson for New Zealand companies exposed to the Aussie- New Zealand exchange rate, in the form of exporters and New Zealand companies with substantial businesses in Australia who bring back their profits, if they hadn't hedged against the risk of the Kiwi dollar rising against its Aussie equivalent.
There had been signals for some time that the New Zealand dollar would go to A85c and higher, Kerr said, due to Aussie dollar weakness against the US greenback and the Kiwi being relatively stable.
"We've had some bloody good news in New Zealand in the last week, the Fonterra increased payout on the milksolids for the dairy farmers, business confidence staying at record highs. It's all very positive in New Zealand so Kiwi dollar stays stable against the US, Aussie goes down, (Kiwi-Aussie) cross rate up," said Kerr.
'OCR hike likely next March'
Kerr said he didn't see the statement issued by the Reserve Bank of New Zealand last week after its Official Cash Rate (OCR) review as a shift to more of a tightening bias, as some economists had. The OCR was left unchanged at 2.50%.
"I didn't really see it as a tightening bias. He (Reserve Bank Governor Graeme Wheeler) was stating the economy pretty much as we see it," said Kerr.
"The domestic economy is stronger, there are inflationary pressures coming from the housing market (and) the Reserve Bank have clearly increased their inflation forecast for next year, somewhere over 2%. It's very low at the moment but their job is to look ahead at what inflation's going to be in 12 to 18 months time and then manage monetary policy on the basis of that."
"So it still looks very much on that the OCR will be increased around March next year, and the markets are building that in already and quite justifiably," Kerr added.
No chart with that title exists.
23 Comments
Hi Gummy,
I reckon the case for "negatively gearing" a property only works if one is only thinking about trying to minimise tax. Years ago I was "negatively geared," 'cause I didn't have much money and had a wacking great mortgage I was trying to pay off, and it was hell. Couldn't wait to make a profit and have some money to spend or reinvest.
But "negative gearing" always seems an odd way of thinking to me. A businessman should put profit first and foremost. He wants to stay in business afterall.
So to make a profit one should minimise the debt and other costs and maximise the income. That rules out "negative gearing" as some call it.
Only after the profit has been made should someone then look to minimise tax payments. It's no wonder people go bust if their focus is minimising tax. Their focus should be maximising profit. Logical to me.
I always think it better to minimise tax on profits, not minimise profits to minimse tax, if you can understand my explanation.
PS: This would be the longest post I have ever done! I am worn out now.
PS: This would be the longest post I have ever done! I am worn out now.
Fear not, others are ready and able.
Of course, people say a dollar tastes like a dollar wherever it comes from, but Chalkie reckons overseas buyers of New Zealand assets tend to taint their acquisitions with a bitter tax flavour. Read on
...... there's " peak oil " ...... first I've heard of it mentioned here at interest.co.nz ..... golly gosh , whatever will they come up with next .....
Ever looked closely at a used-car salesman's scalp ? ....... there's a massive untapped resource of oil ...... wide slicks all over the place , meebee billions of barrels worth ......and if you multiply it out by the number of used-car salesmen in the country , trillions of barrels ...... could solve the " war on energy " ....
NZ Herald today - oil companies in a slump as costs of getting the hard to get oil spiral upwards. Never mind the enviromental risks of pumping oil from kilometers deep oceans.
Fracking very expensive to do, not returning the amounts anticipated, endless amounts of drilling needed to maintain production, severe enviromental pollution...
So much for all the propaganda about an oil fracking nirvana.
Jeepers creepers , we are a little ray of sunshine this moaning , aren't we !
.... as we speak , the American natural gas industry is revolutionizing their economy , bringing the world's cheapest and cleanest fossil fuel into their manufacturing ... a 300 year supply ....
Landlord and GBH are Pollyannas:
In 1978 researchers Margaret Matlin and David Stang provided substantial evidence of the Pollyanna Principle. They found that people expose themselves to positive stimuli and avoid negative stimuli, they take longer to recognize what is unpleasant or threatening than what is pleasant and safe, and they report that they encounter positive stimuli more frequently than they actually do."
The reality is the Global Economy debt bubble popped in 2008 and the response has been to flood the system with massive amounts of more debt in a desperate attempt to reinflate the bubble and save the ultra rich. Of course it is just setting everything up for another crash.
The result is more assets bubbles which gets Landlord and co leaping around in joy like they did just before the last crisis.
The last "positive US job figures" showed most of those jobs were waiting tables or amusement park stuff. 75% of Americans struggle from one pay check to the next. Meanwhile the welfare bludgering rich banksters on Wall Street get handed countless billions in free money every month from Govt.
Yep, sure is!!!
Obamacare Full Frontal: Of 953,000 Jobs Created In 2013, 77%, Or 731,000 Are Part-Time
It's tough for the rich when they cannot impose usury upon the poor because they fail any credit risk test.
"Life is good my friend , and getting gooder everyday ...."
Market riggers, launderers and scammers like JP Morgan, Citibank, Goldman Sachs, HSBC would agree with you but then that is not surprising as the CEOs are men after your own heart.
"seems to me that you're leading " the war on Pollyannas "
Seems you are leading the war on Truth.
south paw... I am an investor.
And I know that in the long term the human spirit will triumph and good times will return.
I position myself for that return to the good times.
There's no doubt now the good times are returning.
People like you make me happy to gloat.
The US non-farm payroll data missed targets (coming in at 160, towards the lower end). So results were poor, but not the complete disaster some in Toyko were expecting.
http://online.wsj.com/article/SB100014241278873241700045786376229885402…
LoL - maybe the Tokyo traders should have focussed on US Factory orders to corroborate any pre-determined bearish stance - there are no shortages of bearish indicators except ever rising stock indices.
Once again here are two alternative perspectives on the US 'job growth' figures. Mish Shedlock and John Williams from Shadow Stats respectively.
"Digging under the surface, much of the drop in the unemployment rate over the past two years is nothing but a statistical mirage coupled with a massive increase in part-time jobs starting in October 2012".
"The official unemployment rate is 7.4%. However, if you start counting all the people who want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6".
"U-6 is much higher at 14.0%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years".
http://globaleconomicanalysis.blogspot.co.nz/2013/08/establishment-surv…
"The U-3 unemployment rate is the monthly headline number. The U-6 unemployment rate is the Bureau of Labor Statistics’ (BLS) broadest unemployment measure, including short-term discouraged and other marginally-attached workers as well as those forced to work part-time because they cannot find full-time employment".
http://www.shadowstats.com/alternate_data/unemployment-charts
yes underemployment is nearly as important as unemployment.
Pretty bad predictions for aus employment announced yesterday. Anyone (eg. most economists and financial 'experts') who think somehow NZ is going to plow on without any impact from rising aus unemployment needs their head read.
Tony Alexander predicted unemployment rate of 5-6% by year's end. I think Zoro at Westpac predicted similar. I maintain it will be close to 7% rising above 7% in early 2014 as another 70,000 - 80,000 students graduate from high school / uni looking for work
So NET 2% inflation, so if its still flat or heading down at xmas?
We'll have all the monopolies like councils, power companies etc looking for a 4%+ increases, in the late spring, Petrol, oil is heading up. If most ppl are like me with no wage increases on the horizon then just how these rises are absorbed makes me think, uh no.. inflation..
So Roger your mission if you choose to accept it. Please explain how with higher than normal un-employment, no wage increases just where inflation gets paid from...without deflationary pressues to not only compensate for the 4% guys but also gve 2% NET overall....
No one has explained that to me yet. except via more non-productive debt.
I fnd it interesting that well off ppl seem to think there will be inflation, somehow the price rises they see "just must feed through" maybe sit back and consider how with a national average wage of 45K? that works out.
regards
The FED is monetizing $85b month and we see no inflation.
We need to keep in mind that these headline numbers are important, so will be what they need to be.
Most here know the manipulation of Employment data over the years makes the headline number almost meaningless, as the revisions after the fact are the meat of the matter.
I for one "don't buy it".
162k, but "the improvement was only partly a result of more people getting jobs. More people also dropped out of the labor force. The unemployment rate refers only to people who are actively looking for work. "
So really it wasnt even 162k, but real number was what? 100K? < 150k?
"At the roughly 192,000-a-month average rate of job growth so far this year, it would take more than seven years to close the so-called jobs gap left by the recession" At 150k, 10 years?
Sage, best used to flavour pork....
regards
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