News and Opinion, sponsored by RaboPlus

By Roger J Kerr

It appears to me that there is more to the recent rally downwards in two to five year wholesale swap interest rates than the market just re-assessing and recalibrating of when the RBNZ will lift the OCR this year.

Since early January the three-year swap interest rate has declined from 5.15% to 4.50%.

The extent of this pull-back is telling us that more market participants (large investors and borrowers; not the banks as they are mere intermediaries) are perhaps buying into our view that there will be a paradigm shift downwards in the RBNZ “monetary policy neutral” interest rate from 6.50% to 5.00%.

The comment about the banks being mere intermediaries is not strictly accurate however – these days they are large buyers and holders of liquid securities (e.g. NZ Government Bonds) as they comply with new RBNZ funding ratio regulations.

What this also tells you is that the banks are doing very little new household and business lending; the cash is just piling up on their balance sheets.

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Australia’s December 2009 quarter’s gross domestic product (GDP) came out at +0.9%, seasonally adjusted, according to todays release from the Australian Bureau of Statistics.

This what what the market expected and was up from a (revised) +0.3% for the previous quarter. Year on year, GDP was +2.7%, not a shabby result in the middle of a global recession.

By comparison, New Zealand managed minus 0.7% in the year to September 2009. Our December GDP results will be released Thursday, March 25, 2010.

Growth in Australia came from private investment in machinery and equipment (+0.8%), public capital investment (+0.6%) and household consumption (+0.4%). Offsetting the growth were imports of goods and services (minus 1.6%).

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By Roger J Kerr

There were no surprises with the weak employment data last week, causing both interest rates and the NZD to decrease.

Yet again the moneymarkets and bank economists have been forced by the economic facts to push their timing of OCR interest rate increases back to June/July form the previous March/April predictions. Go back a couple of months to early December a number of the bank economists were confidently predicting the first OCR increase in January 2010.

Unfortunately you never see any explanation as to why those forecasts were so wrong.

These interest rate forecasters are either just guessing with these very changeable predictions, or they are just so removed from what is actually happening in NZ businesses and industry sectors that their economic theory always dominates over the reality.
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By Roger J Kerr

As we enter the New Year there are wildly divergent views on how the NZ economy will perform this year, therefore marked differences in view as to the timing of interest rate increases from the current loose monetary settings of a 2.5% OCR.

Over the next two months I would not expect the short-term interest rate market to move away from their current forward 90-day market pricing of 0.50% lift by March and 2.00% to 4.50% by December.

However that does not mean that the RBNZ will deliver to current market timing/amount expectations.

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New Zealand GDP rose 0.2% in the September quarter from the June quarter, which was less than the 0.3-0.4% that most economists had expected. Growth in the June quarter was revised up to 0.2% from 0.1%, which suggests the New Zealand economy has emerged from the recession, but only just. (Update 2 includes My view below)

The New Zealand dollar immediately fell to 69.9 USc from 70.3 USc prior to the release of the data, which suggests the Reserve Bank may be slightly slower to hike the OCR next year than previously expected. This would make the New Zealand dollar less attractive relative to other currencies.

Here is more detail from Stats NZ below. We will update this article with more info and reaction through the morning.

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Bernard Hickey details the key news overnight in the final 90 seconds at 9am for 2009, including news from the New Zealand Herald that that the trustee for the First Step funds set up by Money Managers and Doug Somers Edgar has referred evidence of ‘improprieties’ by borrowers from First Step to the Serious Fraud Office for investigation.

Around 7,000 investors are owed NZ$457 million and NZ$170 mln has already been lost. Investors have only received NZ$223 mln back so far from their frozen funds.
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