By BNZ Economists
Open the usual financial media this morning and it is a case of “pick your poison” over the morning cuppa.
Headlines from Europe are shared evenly between Athens and Zurich. The latter has no markets impact, but the former is obviously of ongoing concern ahead of G7 ministers gathering in Dresden. Lagarde, of the IMF, quoted as saying that a Greek exit was now a “possibility “.
Four months of talks seem no closer to a resolution. She suggested recent optimism on a deal had sobered.
On the home front the media focus is the update from Fonterra of yesterday. There was the surprise of a further trimming to the current season payout as well as their first call on the 2015/16 season.
The announcement was arguably at the strong end of unofficial market expectations, however, that is all relative to low expectations and a poor current season. All of this will only turn the screws on an already poor cash-flow outlook for the coming months. Analysts also note that the advance payment rate, of $3.66, also affirms the tight cash-flow story for the industry outlook.
Our own forecasts and those of Fonterra are of course predicated on an expectation of commodity prices recovering going forward, reliant on a cyclical rebound in international prices and a continued softening of the NZD.
Yesterday saw attention on a weak outcome for Australian Capex (Q1 reporting). March quarter new Private Capital Expenditure fell by 4.4%, much weaker than analysts picks for a number starting with a -2.
Our NAB colleagues wrote that this is obviously at face value a weak result. Though they note that the mining aspect is well anticipated and the non-mining estimate could be subject to normal volatility in survey data. They add that to an extent, the RBA has pre-empted this result by its business liaison programme and easing policy twice recently, so the outcome holds few immediate implications for monetary policy.
Overnight the US$ has continued to find favour, especially against the commodity currencies. The NZD trading to fresh 2015 lows against the greenback below 0.7150 and not surprisingly the AUD is also under renewed pressure after the Capex numbers.
The GBP took centre stage overnight thanks to a Q1 GDP reading that was a touch weaker than expectations. UK preliminary Q1 GDP came in at +0.3% - unchanged and against a consensus +0.4%, with softer services and consumption growth. The outturn will disappoint the BoE which had recently forecast a rebound to +0.5% q/q.
The US had a light economic calendar with weekly Jobless Claims climbing to 282k versus expectations for 270k. Pending Home Sales data improved notably, the monthly print of +3.4% outstripping expectations and keeping the YOY rate at 13.4%.
Fed voter Williams (hawkish end of FOMC) said the Fed was likely to raise rates later this year and gradually over the next few years – a message consistent with other Fed rhetoric that a hike is coming.
So on we go to the day ahead and of course the bliss of a long weekend to look forward to, (many happy returns Liz). Further data for the local analysts to consider with the release of the NZ business surveys the primary focus. We really need to start this cooling a bit, to be consistent with the GDP slowdown we forecast for this year.
We get the ANZ survey at 1:00pm. Its previous edition had net confidence at a solid 30.2 and own-activity expectations up at 41.3. Most attention, however, will probably be on the inflation gauges, given the RBNZs’ worry the current phase of low inflation is getting embedded in expectations. In April, pricing intentions were middling at +23.1 and inflation expectations were at 1.76%.
First up today though is building consent figures which should hopefully hang on to the good bounce they registered in March, largely on the residential side. The headline results are always prone to whip around month-to-month. To see out the week the release of credit aggregates which are likely to maintain their recent momentum, with reference to the March outcomes of household, business and agriculture credit posting firm annual expansion of 5.0%, 7.3% and 6.0% respectively.
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14 Comments
The funded rate that counts has already risen. Fed funds is moribund and records little volume despite the Fed's misguided intention to change it via RRP open market operations. View graphic evidence
Thanks Stephen. I had to bone up on what the LIBOR actually was. Isn't the "target federal funds rate" more important. That's the thing which is decided by the FOMC and it dictates monetary policy. Those guys are supposed to be "data dependent". On June 16 when they have their next meeting they'll be contemplating the low labour force participation, extremely high USD, terrible balance of trade and a bunch of other negative indicators ...
Thank you for the considered response. One needs to understand the eurodollar funding market is fungible with that which is active or not within the US. I spent a small life time in London understanding how to transform EU wide non-us dollar bank domestic balance sheet liabilities into eurodollars liabilties. View power point plea for Middle East funding.
Read these background sources for a better understanding.
http://www.realclearmarkets.com/articles/2015/05/22/the_fate_of_the_fed…
http://www.alhambrapartners.com/2014/10/24/what-magnificent-for-some-co…
http://financialresearch.gov/working-papers/files/OFRwp2014-04_Pozsar_S…
http://financialresearch.gov/working-papers/files/OFRwp2014-04_Pozsar_S…
Brilliant links there Stephen. I've so far got through the first one and I think I managed to make sense of some of it at least. I had heard that the Federal Reserve was making it up as it went along but I had no idea just how much. I particularly liked this bit:
"I personally find it very fitting that the FOMC will stick with the federal funds rate as its main expression of policy, or, as they put it back in July 2014, "it would be appropriate to retain the federal funds rate as the key policy rate." As I said earlier this week in describing it more accurately, it is "a process of fake reserves threatening highly indirect action in a market that nobody participates in." In this era of almost total monetary confusion from the top, the idea that the federal funds rate is "key" to anything can only make sense to the same policy apparatus that brought us the Great Recession in the first place and has now presided over zero recovery."
It appears the engineers in charge of the steam boilers and plumbing don't actually know how the thing works.
Here is something extra to ponder in view of the fact our local banks secure hedged foreign wholesale eurodollar funding out of their offshore counterparties/branchs and undertake cross currency basis swaps to turn these "dollars" into NZD for a fixed duration. Thus the banks have domestic lending firepower to further create mortgage assets beyond the capacity of domestic funding sources. Read more
no real puzzle...
for we can see in action [at the .50min mark....], after the $5.65 explanation posted on the other day
http://www.farmingshow.co.nz/on-demand/audio/john-key-the-pm-285/
"It was interesting, I had one of the major bank's CEOs in my office yesterday [last Wednesday 27th] and I was talking to him about the whole thing.....
He was saying [the Banker] generally speaking no reduction in land prices, plenty of volume.....
a huge number of farms have low debt, modest debt or no debt,
the top 10% of farms have a lot of debt ...... are a bit risky....."
...overall I don't think they are looking to tip people over, thats for sure....
{ transcription never a strong suit....:( }
- from a marketing point of view look out the "other 90%" we hear you say.
- nothing about what else was talked, probably safe to assume golf, tipping comp. & where to get that friendly cup of Joe etc....
That 10% is of course the leveraged bit. The ones with little or no debt have no bearing on a banks asset books, the 10% do and hugely.
So say 5% (50% of that 10%) of farms go under, with the leverage ratio the banks run are they still solvent? Then if farms are down I find it hard to not expect housing to also be under pressure, ditto business lending.
stephen.... a question for u.... banks with accts. at the fed have huge reserves with the fed...
why would they have any need to borrow on the interbank mkt.????
https://research.stlouisfed.org/fred2/series/EXCSRESNW
the FED , in raising rates, is simply transmitting a signal to the mkt... ( there is NO excessive lending going on )
Maybe its interest is in raising the interest rates on deposits, on USA deposit accts...???
In regards to US Banks...why does the LIBOR rate matter when they have massive reserves with the FED..??
cheers roelof
Not just Greece..
http://www.bbc.com/news/uk-politics-32909896
bit slow but finally moving
The central bank has been consulting on what exactly defines an investor since September 2013.
On Friday afternoon it finally released its decision, defining the new class in the broadest way possible as any property which is not owner-occupied.
It also forged ahead with plans to force banks to hold more capital against investor loans, a move which bank bosses say will push up interest rates.
The capital rules are in addition to Auckland-specific restrictions announced earlier this month, which will force investors to have a deposit of at least 30 per cent
I see the aussies are also going to require more capital, I hope its not to late
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