'An assertive rate hike cycle must start soon'

Bonds

More good NZ data expected today following strong business confidence data on Friday; OCR 'normalisation' imminent

3rd Mar 14, 8:20am by bnzeconomists

By Kymberly Martin

NZ swaps yields closed up 1-2 bps on Friday. On Friday night, US 10-year yields failed to break above 2.70% and ended the week at 2.65%.

On Friday, the extremely strong ANZ business confidence survey (70.8 from 64.1 previously) reminded the market of the buoyant state of the NZ economy. Taken literally it suggests that growth rates of 6%-7% ahead cannot be ruled out.

An assertive rate hike cycle must start soon. We see a first OCR hike on 13 March. NZ short-end swaps pushed higher.

However, offshore geopolitical concerns (Ukraine) continue to weigh on yields.

Continued NZD bond issuance also sustains receiving interest at the mid-curve. All up therefore, NZ short-end swaps closed up 2bps and longer-dated swaps up only 1bps.

On Friday night US 10-year yields pushed higher as the Chicago PMI and University of Michigan confidence survey surprised positively. However, subsequently the release of soft US pending home sales for January (0.1% vs. 1.8% expected), saw yields subside from 2.70% to 2.65%.

The market is likely to open with downward pressure at the longer end of the NZ curve, given US moves on Friday night and developments over the weekend. Russia has voted to allow the military into Ukraine, a move the US has condemned.

Otherwise it is a busy week ahead with plenty of central bank meetings (RBA, BoE, ECB) and US nonfarm payrolls at week end.

Today NZ’s overseas trade indexes will be released. We also expect NZ’s terms of trade to show further gains to fresh 40-year highs. This will provide further evidence to suggest the NZ OCR needs to be ‘normalised’ soon from its historic low of 2.50%.

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18 Comments

by MortgageBelt | 3rd Mar 14, 8:35am 1393788959

World conditions? Not relevant for NZ bank economists.

What is the new normal? 3%?

by steven | 3rd Mar 14, 9:01am 1393790481

I wonder on them really.

How are the bottom half of income NZers doing? For me I see a greater level of in-equality on more levels...taking averages that are skewed by some NZers doing very well and feeling confident masks a lot of NZers who I suspect are not and not. Then of course these lower income ppl are not of much interest to banks so probably odnt get asked on thier opinions...

Our manufacturers earn more per capita than farming, which one is doing gang busters? putting up interest rates effects the former disproportionally? and hence jobs.

6~7% "possible" yet JK has said before with the OCR this low we should be growing at 6%, yet are not. Now if the guy in charge of the country who is an ex-banker is so clueless.........

Then yes abroad

and then energy, its scarcity and hence cost.

If I could see in their fanciful musings that they were considering these huge issues and still thought this "recovery" was going to accelerate then, yes OK. They and Pollies all seem to look inward at the country (not just us but others economists in other countries do as well) yet talk about globalisation but dont seem to grasp all of globalisation, the "good" and the "bad" (good and bad can depend on your view point IMHO).

regards

by steven | 3rd Mar 14, 10:18am 1393795102

Further are our bankers now making the same mistake(s)?

"We now know that many key people at the Fed spent 2008, the year of financial doom, obsessing about inflation, which wasn’t a threat at all."

"..................Yet the economy didn’t come roaring back, and in fact still hasn’t. Why? Because the housing bust and the overhang of household debt are huge drags on demand, even if there isn’t a panic in the financial market.

So a pox on inflation phobia, and boo for the inflation-phobes who have learned nothing."

No comment on energy as a drag....

http://krugman.blogs.nytimes.com/2014/02/28/did-inflation-phobia-cause-…

by Boatman | 3rd Mar 14, 10:18am 1393795102

@ Steven , you are right and wrong about inequality among the lower 50% of income earners .

Many of these folk are doing really well if they live within their means , and dont have a pile of debt to service, but a signficant number are often poor money managers , and borrow from unsecured money lenders ( loan sharks) of which there are so many I have lost count .

Or , they get credit or multiple store cards and then mismanage them and go into default .

The vulnerable and financially illiterate need to be protected , and the only way to proted them is to hammer the lenders who lend to people already in debt, and who should not be granted so much debt they cannot ever rep[ay .

We need a vigorous legislative regime for these lenders , and the rules could follow the UK , Europe of even South Africa , which have laws that if you lend reckelssly and the borrower defaults you cannot revoer what is owed .

These laws protect borrowers from unscrupulous and predatory lending prcatices .

On the flip side , we have a support system for to very poor in the form of income supplements , community services cards , Working for Families , etc.

No one starves in NZ

The so called inequality you refer to is not anything like elsewhere

by dh | 3rd Mar 14, 10:37am 1393796246

The median household income (inflation adjusted) has been slipping, which suggests there are structural trends seeing a bigger proportion of the population earning below average wages.

Absolutely agree about lending practices, though.

by steven | 3rd Mar 14, 10:53am 1393797199

"really well" really? not my impression at all, and in fact the recent NZ stats and Treasury "cockup" doesnt seem to support that they are OK.

I agree (on the face of it) on more legislative protection, but the detail? I mean "unscrupulous and predatory lending prcatices " could cover normal credit cards, or even lending on hugely over-priced housing. The banks push this like sugar, yet these are the "reputable" end of the game. Then there is personal responsibility and moral hazard aspect. Make it easy for those who are "challenged" to get out of a contract and there will be ppl who milk it.

regards

by steven | 1st Mar 17, 12:27pm 1488324469

"OCR 'normalisation' imminent"

So I put in calender tabs to remind me to check predictions, 3 years later and "imminent" seems a little off.

by steven | 3rd Mar 14, 9:32am 1393792356

For the "sensible" (or maybe desperate) part of the world. I'd suspect < 2%. It has to be this way because energy is now such an over-riding overhead when making a good. The problem is when its smoke and mirrors financial goods thier production requires no real energy input hence we see such a distortion between main street and wall street.

(Here in NZ, I think we'll see an attempt at 4.5% until really or housing market collapses then we'll be in the same boat as most of the rest and have an OCR or <1%)

We need to fix this mis-allocation and until we do we will carry this risk of mis-alloction of capital causing and eventing a bigger Great Depression...

regards

by Boatman | 3rd Mar 14, 9:35am 1393792525

What does "normalisation" mean ?

In my book it must surely be a reasonable yield for savers of cash , who have put someting aside , whether it be to buy a home , or a car or saving to create a buffer during lean times , or for retirement.

So if total yields and returns on deposits are a net positiive after adjusting for inflation and tax , and you are not going backwards , then that is okay .

So I can understand the RBNZ wanting to get things back to normality, because I suspect that real interest rates for savers are negative right now

by steven | 3rd Mar 14, 10:00am 1393794001

Well japan has had virtually no interest in 30years, the japanese still save....(similar in china?)

So just maybe the high interest rates "enjoyed" in some western countires are an accidental by-product of inflation fighting and bear no resemblence to "normal"

Personally I think we will never see interest rates 7%+ ever again, at least not for long...

regards

by Boatman | 3rd Mar 14, 10:27am 1393795669

Firstly , there are huge cultural differences beween our attitude to money , saving and spending , and those of the Chinese and Japanese. We dont even have the same thought processes in this regard .

Even the poorest Asian street cleaner will have something squirreled away as savings .

Confucian rules which are followed by many indicate you should save around one third of your income .For a poor Chinese person this takes some dicsipline .

I would personally find this to be impossible , but a significant number of Kiwis dont save a bloody dime , and borrow on credit to get by .

Secondly , you may be wrong about interest rates , NEVER is a very long time.

by steven | 3rd Mar 14, 11:18am 1393798682

Then I'd suggest our "culture" of expecting high interest is the one that is only sprung up in the last 30~40 years and is wrong and has to be corrected.

Im happy that NEVER indicates that our descent from peak oil/economy/society into a far more simplistic way of life will not justify or be able to stand OCRs / interest rates of the 70~00s...

That is finished IMHO. Now when the debt and energy problems have been worked out 30 or 40 years from now, maybe we'll see the ability to fight inflation by raising rates used. Frankly in my and probably your lifetime (assuming you are 50+) , I think in a sustained manner NEVER.

regards

by steven | 3rd Mar 14, 12:07pm 1393801629

In effect this is stored "forever". In that I assume its cached in Google and the "way back machine?" if not actually Interest.co.nz keeps backups here.

and you think we will in a sustained manner ie for say 1yr or even longer above 7%+? so a counter bet in effect?

I dont need to know everything about everything (and I dont) all I need to know is the important controlling aspects. So the math and the physics of the fossil energy limits is all that is needed to make a call long term to "know" that we cant grow any more in a sustained manner. What we will see at best is a saw tooth effect of ups and downs but with an overall trend lower for decades. There isnt the fossil energy for anything else. So teh Q has to be asked how then can households/businesses etc afford interest rates at 7%? which imlplies lending at 10~15% in a delicate/depressed economy?

As the ready saved of course you should welcome deflation, that will make your money more valuable and you wont be paying tax on that gain, a double gain.

NB I think Ive been pretty consistant in saying this on here for some years now.

I will add the qualifier that if we were to go this high (5%+ OCR) I think that would trigger a recession and a serious one, the saw tooth effect.

regards

PS being wrong on one thing doesnt mean I will be wrong on everything, ie your logic is pretty sucky. Simple place your bets as you see fit.

PPS Ive put a event in my calender for 2 years hence....lets see if the economy really is booming or if its in the doldums or worse. Catch you in 2 years.

by steven | 4th Mar 14, 11:09am 1393884588

In which case you wont be reminding me of 7% will you?

regards

by steven | 4th Mar 14, 11:21am 1393885314

ho hum, oh wow trying to be insulting now?

Well lets see, to start with I try and never be wrong. Ive been wrong before and I try not to repeat that if I can help it. So really I try and check my facts and data and form opinions and actions based on the best info I can locate.

These are of course opinions, my ones, that I take my actions on, you are quite free to make your own and act on them.

Im human....so I make mistakes, but I accept these, try and learn from it and get on with my life.

You on the other hand seem to sit there whining, bitter and twisted because someone else doesnt agree with your self centred vested interest in seeing rates rise no matter the impacts on others that would cause. On top of that Ive tried to explain my reasoning and logic, which it seems you detest.

Just whos the better human being I wonder.

regards

by xingmowang | 3rd Mar 14, 10:25am 1393795545

In essence, NZ's current 'rock star economy' status stands on two legs -- selling stuff to China and ChCh rebuild. Both legs will feel numb at some stage. Let me talk about the first leg.

I question whether Chinese continuous importation of large amount of food is sustainable or not. Some may argue is because China's environmental degradation, retirement of sick land, lack of scale to produce, and lack of efficiency to product.

Yes, they are all right but just on the surface. The very key reason for Chinese importation of large amount food is because the cost of importing them is cheaper than producing them locally. The key contributor to this is RMB!

RMB has depreciated significantly within China but its purchasing power has remain if not increased internationally due to China's capital control. Last week I remember someone talks about floating RMB etc. What would happen then?

by MikeM | 3rd Mar 14, 10:46am 1393796801

"On Friday, the extremely strong ANZ business confidence survey (70.8 from 64.1 previously) reminded the market of the buoyant state of the NZ economy. Taken literally it suggests that growth rates of 6%-7% ahead cannot be ruled out."

!!!??? Are they talking about GDP growth? Surely not.

by steven | 2nd Mar 16, 12:54pm 1456876490

"the extremely strong ANZ business confidence survey" So I just had a Calendar reminder from 2 years ago to bring things back.

interest rate / OCR "normalisation" imminent, and here we are with even these banks saying 2% OCR looks quite possible.

Trustworthy to bet on what they said at the time eh?

Lets jump this another 2 years. See what March 2018 says.

2% OCR?or 5%+? please your bets.