Here's my summary of the key events overnight, with news the New Zealand dollar spiked and is continuing to gain following Spencer's speech and Australia's rating downgrade.
The Deputy Governor of the Reserve Bank, Grant Spencer, yesterday announced tighter LVR rules are on the way, but didn't pin anything down for definite. The Kiwi has since gained nearly 1 US¢ and is creeping closer to parity with the Aussie dollar. The market seems to believe a lack of concrete action to calm the raging housing market, makes it harder for the RBNZ to justify a rate cut next month.
Westpac economists disagree, saying the high dollar already presents a serious challenge to the RBNZ’s forecasts of a return to the inflation target, so any further gains in the currency will only add to the case for lower interest rates. ANZ's economists say they technically still pick an August cut, yet it's a delicately balanced situation as there are no guarantees a cut will weaken the dollar, but it's pretty certain it'll add fuel to the housing fire.
A parity party could be on the cards, as the New Zealand dollar hovers at around 96.6 AU¢. The RBNZ's announcement aside, the Aussie dollar took a knock yesterday afternoon, following Standard and Poor's switching Australia's outlook from stable to negative, in a warning that its AAA rating is under threat. The ratings agency has said the outcome of the country's election has hampered its prospects of improving its budgetary performance. ANZ's chief economist Cameron Bagrie has tweeted he still reckons the New Zealand/Aussie dollars will hit parity.
Over to the US, new data shows private sector employment grew more than expected in June. The ADP Employment Report shows the service sector recorded gains while the goods sector saw losses. The growth was led by an increase in small-business jobs, while large multinationals appeared to be struggling a bit, with the Brexit not expected to help. Markets will be paying close attention to the US Labour Department's non-farm payrolls report out tomorrow.
The UST 10yr yield remains low at 1.39%.
The 1-5 year NZ swap curve opens in negative territory today. At 2.24%, the 1-year swap rate is now 2 basis points higher than the 5-year rate (2.22%). This particular swap curve has not been this negative since October 2008.
The price of oil has dropped to a two-month low, as the US's weekly Energy Information Administration disappointed markets. The US benchmark oil price has dropped US$2 overnight to US$45/barrel, while the Brent benchmark has sunk US$3 to US$46/barrel.
The gold price is down to US$1,358/oz.
The NZ dollar has risen nearly 2 AU¢ to 96.6 AU¢, and is up nearly a cent to 72.2 US¢ and 65.3 euro cents. The TWI-5 index has jumped 100 points to 75.9.
If you want to catch up with all the local changes from yesterday, we have an update here.
The easiest place to stay up with event risk today is by following our Economic Calendar here ».
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22 Comments
Major banks' credit rating outlook cut to 'negative'
I will be interested to see how quickly they have to raise interest rates
http://www.smh.com.au/business/banking-and-finance/major-banks-credit-r…
Surely an emergency OCR cut must be on the cards. The limp non event speech by the Reserve Bank has strengthened the NZD overnight. The banks must now be on massive margins - Kiwis need to negotiate harder for fixed mortgage rates under 4% - don't just sit back and take 4% rates from the banks just because that seems comfortably low.
Westpac economists disagree, saying the high dollar already presents a serious challenge to the RBNZ’s forecasts of a return to the inflation target, so any further gains in the currency will only add to the case for lower interest rates. ANZ's economists say they technically still pick an August cut, yet it's a delicately balanced situation as there are no guarantees a cut will weaken the dollar, but it's pretty certain it'll add fuel to the housing fire.
Surely, it's past time to dismiss bank economist nonsense, just as shareholders have rid themselves of their employers. It's not for the damn right poor to keep susidising an enormously destabilising wealth transfer to the already wealthy.
Furthermore, it's not as if focusing on a self-serving narrowly defined inflation index to affect interest rate repression for savers has gone unnoticed by those that presume to detect unsustainable financial states.
A monetary policy regime narrowly focused on controlling near-term inflation removes the need to tighten policy when financial booms take hold against the backdrop of low and stable inflation. And major positive supply side developments, such as those associated with the globalisation of the real side of the economy, provide plenty of fuel for financial booms: they raise growth potential and hence the scope for credit and asset price booms while at the same time putting downward pressure on inflation, thereby constraining the room for monetary policy tightening. Borio page 12 of 38
And:
More importantly, the banking system does not simply transfer real resources, more or less efficiently, from one sector to another; it generates (nominal) purchasing power. Deposits are not endowments that precede loan formation; it is loans that create deposits. Money is not a “friction” but a necessary ingredient that improves over barter. And while the generation of purchasing power acts as oil for the economic machine, it can, in the process, open the door to instability, when combined with some of the previous elements. Working with better representations of monetary economies should help cast further light on the aggregate and sectoral distortions that arise in the real economy when credit creation becomes unanchored, poorly pinned down by loose perceptions of value and risks. Borio Page 17 of 38
Possibly - but the issue of substance is to get beyond dynamic stochastic general equilibrium modeling
Better qualified others have a view.
As always, the BIS is relentlessly empirical, and worth reading just for that. But, for me, the biggest value added is, perhaps surprisingly, the analytical architecture on which all this rich empirical work is hung. Here is how they put it (on page 11):
It is tempting to look at the global economy over time as a set of unrelated frames – or, in economists’ parlance, as a series of unexpected shocks that buffet it about. But a more revealing approach may be to look at it as a movie, with clearly related scenes.
The temptation to which they refer is of course the temptation to which the currently dominant strain of macroeconomic thinking, at least within academia, has yielded with gusto, i.e. the Dynamic Stochastic General Equilibrium model in its various variants. The BIS is signalling that it is doing something different. Read more
The RBNZ is looking like a possum in the headlights. There are things they can do to influence the currency down, but not reduce interest rates. Fairly simple things at that.
At current levels the currency must be doing irreparable damage to trading industries, and to the current account.
Speaking of new cars and thank god it is Friday!!
Nothing like a Ford Truck.
New Truck built by a company we didn't bail out.
I bought a new Ford F250 Tri-Flex Fuel Truck
Go figure it runs on either hydrogen, gasoline, or E85.
I returned to the dealer yesterday
Because I couldn't get the radio to work. The service technician explained that the radio was voice activated.
'Nelson,' the technician said to the radio.
The radio replied, 'Ricky or Willie?'
'Willie!' he continued and 'On The Road Again' Came from the speakers.
Then he said, 'Ray Charles!', and in an instant ' Georgia On My Mind' replaced Willie Nelson.
I drove away happy, and for the next few days, Every time I'd say, 'Beethoven,' I'd get beautiful classical music, and if I said, 'Beatles,' I'd get one of their awesome songs.
Yesterday, some guy ran a red light And nearly creamed my new truck, But I swerved in time to avoid him.
I yelled, 'Arse Hole!' Immediately the radio responded with,
Ladies and gentlemen, An address from The Prime Minister
Damn I love this truck....
Stephen, Indeed; I seem to live in a cohort who think it's normal to cruise around Turkey, or have an annual trip to Florida, or similar. If the current account was somewhere close to balance; or was funded by selling internationally either goods or services, then fine, but given it's pretty clearly based on maxing out credit on largely unimproved property, this sort of behaviour is far from sustainable.
I did live in Dubai for a while, and their economy was based on selling or leasing bits of desert for property development; albeit they did encourage and manage an awful lot of actual development. They also encouraged a lot of industries to sell services in particular. And they addressed infrastructure like transport, up to a point at least.
Am not saying they are a model at all; I suspect some of their citizens would prefer less clogged roads and other things, but at least their economic model was understandable. It did rely on massive immigration to be sustainable.
Here the government seems either an incompetent possum, or is not being very honest with its citizenry on what type of economy it is building.
You raise an interesting point. What is the optimal financial position to be in right now.
Owing money to the bank, knowing full well you can never pay it back if they ask. or
Saving money in a bank/investments, knowing that at any second you will lose it all.
Either option and you are stuffed. So might as well take the holiday and live in debt.
Matthew, you wrote somewhere else that the RBNZ are unable to influence markets, or are too small to influence. Well they seemed to do OK yesterday when they uttered a few words of 'non-speak' and drove the exchange rate up 1 cent.
But I do agree what you have written here about the IMF phone call. Its happened before.
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