Roger J Kerr says freight company earnings, skill shortage data, and rural fertiliser use all point to real economic growth. Your view?

 By Roger J Kerr

While short-term interest rates remain marooned at 2.70% with economic news/events/outlook not having any impact on their movements until much later in the year, long term swap yields have again bounced upwards from 4.00%.

There have been too many false starts over the past two years on US 10-year Treasury Bond yields increasing from below 2.00% to be comfortable now forecasting that this is the definitive move up that will drive NZ long tern swap rates higher.

However, recent stronger US economic data does support higher long-term interest rates even if Ben Bernanke thinks otherwise by pledging to keep US short-term interest rates at zero for another two years.

Global funds seeking a safe haven from the risk of Europe completely imploding always go back to US Treasury Bonds and the yield is forced below 2.00% again.

Provided the Greek bail-out package is signed off by the Greeks this week, European risk measures should continue to decline and reduce the safe haven buying of US Treasury Bonds.

The NZ 10-year swap rates have been held artificially low by the sub-2.00% US Treasury Bond yields, once that is no longer the constraint the economic fundamentals for our long-term interest rates of 2% inflation, 3% GDP growth and continued NZ Government borrowing for deficits suggest swap rates nearer 5.00% than the 4.00% of late.

In my view, the evidence continues to accumulate that most economic forecasters and the RBNZ will underestimate the strength of NZ economic growth this year.

Similar to 1993 and 2003 when growth proved to be much stronger than expected coming out of a downturn in the economy, the risk is that again monetary policy is maintained too loose for too long as the increased activity (thus inflation risks) is not recognised by the monetary authorities early enough.

Latest lead indicators that provide me with the confidence to maintain the upbeat economic view include:

• The NZ dollar currency market and the NZ sharemarket have increased this year in expectation of stronger economic growth. Upcoming earnings reports will see positive profit increases for listed companies that shift goods around the country e.g. Freightways, Mainfreight and Port of Tauranga. What this tells you is that underlying trade volumes are up big time,
• Even though last week’s historical employment data was not that positive, surveys and anecdotal evidence from the labour market suggests increased skill shortages and the demand/supply equation shifting in favour of the employee i.e. several job offers to choose from,
• Agriculture production is up strongly due to both higher prices and favourable climatic conditions. The result is large increases in farmer spending on fertiliser as the chart below demonstrates (disregard the big increase in fertiliser spend in 2009; that was exchange rate related as the Kiwi dollar plunged to 0.5000, increasing fertiliser prices temporarily).  Strong increases in agriculture GDP this year will dominate overall GDP growth statistics.

Net result of the above is GDP growth outcomes this year surprising on the upside.

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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com