By David Chaston
Earlier this morning, jobs numbers out of the US came in higher than markets were expecting.
The US non-farm payrolls report showed that there were 280,000 more people employed in May than April. Data for February and March were revised higher, data for April was revised down by a tiny bit.
The American unemployment rate ticked higher to 5.5% as more people were encouraged back into the labour force. Their participation rate - anemic by New Zealand standards - ticked higher to 62.9%.
The proportion of the working age population that is employed, which some economists consider a bellwether of how the economy is performing, rose to 59.4%. It is the highest point since the US recovery began six years ago.
But most importantly, wage growth rose and is now +2.3% higher than in the same month a year ago. It was up +0.3% month-on-month. Both measures were above market expectations.
This data has implications for New Zealand.
Firstly, the giant US economy is the engine of the world economy and consumer trends there drive investment decisions everywhere. Expanding employment shows that the weather and strike reduced first quarter result is an aberration.
Secondly, the US Fed will no doubt see this data as supportive for a rate hike when they meet on Thursday, June 18.
Today, an influential Fed spokesperson said that ending balance sheet reinvestment would be tightening and they want to get rates above zero before ending reinvestment.
The same spokesperson essentially dismissed the IMF's recent call to delay raising rates. But he also said the rise in employment and wages might be because they are going through a poor patch with productivity; that is, more people are being employed than output can sustain in the intermediate term.
A rising US official interest rate will give the RBNZ some cover to hold rates here and possibly turn the recent economist chatter around to be thinking about the potential for higher rates here too at some point.
Rising rates will have a 'brutal' impact on the value of bonds, and bond losses in investment portfolios will become more likely. That could extend the rush to equity investment. Higher yields and interest rates will work to restrain asset values, and that includes in the property sector.
Thirdly, the US dollar rose on the news. That means that the New Zealand dollar fell against the greenback. The NZD closed today in New York at 70.4 USc, its lowest level since mid 2010.
It was over 88 USc less than a year ago.
A fast retrenchment in the value of the New Zealand dollar will raise inflation in the tradable sector and cease to counter the higher price rises we have regularly seen in the non-tradables sector. A turnaround in inflation could come quite quickly if our dollar stays down or goes even lower. The problem for the RBNZ is that they may react too late to restrain a rapidly rising price level.
But rising inflation and a 'house price problem' can both be addressed with monetary policy by raising the official interest rate. That would also be more palatable given the underlying economy is performing strongly at present.
But banks and their economists won't like it. And neither would 'property investors' which these days seems to be everyone who owns a house. So the usual chorus will rise to oppose even the suggestion. The loudest voices will want the unsustainable party to continue. RBNZ policy makers however seem to be the types who can look through the self-interest expressed in the media and have shown some clearer signs recently that they are prepared to take on the banks even if it is pretty tentative.
Cheap money distorts most economic decisions, both public ones and even more pronounced, private ones. Those distortions are everywhere you look and especially in Auckland.
More expensive money will be hard on some businesses important to New Zealand. That is especially true of dairying and recent dairy conversion. The recent fall in prices is bringing stress to such enterprises. But the bald truth is that over-borrowing for farming is never a good idea given the commodity cycles they go through. So a cleanout is coming and keeping the cost of money cheap to minimise the inevitable restructuring pain in one sector seems pointless.
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