NZ short-end swaps dipped yesterday ahead of Thursday’s RBNZ meeting. Overnight, US 10-year yields traded down to 2.22%.
Ahead of Thursday’s RBNZ meeting, the market is pricing a 50/50 chance of a cut, clearly illustrating the divergent forces at play.
We come down on the side of expecting the Bank will cut. Inflation and inflation expectations remain below target, prospects for the dairy sector remain fragile and the NZTWI, at 72.1, now sits around 6% above where the RBNZ had projected it would average this quarter.
The NZD’s bounce after the solid US payrolls report on Friday, also suggests the RBNZ can be less confident that Fed hikes can do the required work to lower the NZD.
Overnight, in the absence of key data releases, US 10-year yields followed the global oil prices lower. The WTI price has plunged almost 5%, returning to its lows for the year below US$40/barrel. From 2.29% in the early hours of this morning, US 10-year yields now trade at 2.22%.
Domestically today, the Q3 manufacturing activity index will be released. However, we expect the market will largely be looking forward to Thursday’s RBNZ meeting. The long-end of the NZ curve will take its cue from moves offshore overnight, resulting in a flatter curve.
Kymberly Martin is on the BNZ Research team. All its research is available here.
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8 Comments
The NZD’s bounce after the solid US payrolls report on Friday, also suggests the RBNZ can be less confident that Fed hikes can do the required work to lower the NZD.
Why doesn't the government consider means to lower the cost of production domestically, hence avoiding the need to rely on the vagaries and vulgarities of foreign exchange trading to do a job that could be achieved within our borders?
Note my comment on another thread.
Farmers hardly fought to address compounding capitalisation of interest diminishing productivity of their increasingly overpriced production assets. That failure alone caused farmers demise, as it was a signal to suppliers and councils alike to profit share in their faux riches. Until they fix it why should I be concerned? Read more
compounding capitalisation of interest
There you have it. The source of the problem. The airhead economists who can't see crashes coming all think the interest gets spent rather than compounded. It only gets spent by the least wealthy, the most wealthy compound it, taking a larger and larger share of society's surplus until it is all pledged in interest payments and nothing is left for re-investment. You would think someone somewhere in the RBNZ or Treasury would be aware of this process, but sadly not as far as I can tell.
Most economics /economists seem to,
a) assume steady state / equilibrium and a natural tendency to return to it.
b) dont account for energy correctly if at all.
c) Some economists dont even use models but guess.
hence its not a surprise that most economists didnt see the GFC coming.
Yes, they only see negative feedback, whereas many processes feature runaway positive feedback until something breaks. In this instance rising lending to real estate causes rising land prices causes rising lending to real estate until the interest payments cannot be met.
Likewise lending to a profitable country (eg China) at 5-10% in Yuan financed by borrowing at 1-2% in "dollars" (ie US dollars and look alikes like Eurodollars, Asiandollars and what have you) leads to a rising Yuan and compounding lending until the Yuan is overvalued and the "dollar" debts cannot be repaid.
Lending is not investment, it is mainly wealth transfer.
Finance drives economics not the other way around.
"councils alike to profit share in their faux riches." Indeed I commented some years back that councils like Marlborough assumed all farmers were growing grapes at $2400 per hectare? (I forget the area) and hence set rates based on that return. When that rate got more like $800 the rates didnt drop.
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