Breakfast briefing: RBA Governor says negative interest rates 'extraordinarily unlikely'

RBA's Philip Lowe not keen on negative interest rates, US consumer confidence lower, low rates boost US housing, China's Xi Jinping keen on blockchain, Kiwi dollar at US63.5c

30th Oct 19, 7:20am by Gareth Vaughan

Here's our summary of key international events from overnight that affect New Zealand, with news Reserve Bank of Australia governor Philip Lowe has effectively ruled out cutting official interest rates below zero and urged business to take advantage of already historically low borrowing costs, the ABC reports.

"It is extraordinarily unlikely that we will see negative interest rates in Australia," Lowe said, adding that they were having a "pernicious" effect on the functioning of the financial system and the pension system in Europe.

US consumer confidence dropped a little in October with the Conference Board Consumer Confidence Index dropping to 125.9 from 126.3 in September. A reading of 128 had been expected by economists. The Present Situation Index, which is based on consumers’ assessment of current business and labor market conditions, increased from 170.6 to 172.3. The Expectations Index, based on consumers’ short-term outlook for income, business and labor market conditions – declined from 96.8 last month to 94.9 this month. The Conference Board said confidence levels remain high and there are no indications consumers will curtail holiday spending.

Also in the US, the National Association of Realtors said the Pending Home Sales Index, which is a forward looking indicator based on contract signings, rose 1.5% to 108.7 in September. Year-on-year contract signings jumped 3.9%. Historically low mortgage rates are attributed with playing a significant role in the two straight months of gains. Meanwhile, the S&P CoreLogic Case-Shiller national house price index increased 3.2% from a year ago in August after rising 3.1% in July. This was the first year-on-year acceleration in house growth since March 2018.

The factory sector has now shrunk to just 11% of the giant American economy and that is its smallest contribution in more than 70 years. That compares with more than 13% of GDP from the real estate sector, and almost as much from the government sector.

At the time of writing, global shares are higher, boosted by strong earnings from US drugmakers Merck and Pfizer and expectations of more monetary policy stimulus from the US Federal Reserve, Reuters reports.

In China the central bank has reportedly used open-market operations to inject the largest amount of liquidity into the banking system since January so far this week, in order to meet cash demand during the tax payment season. The People’s Bank of China injected 560 billion yuan (US$79 billion) through reverse repurchase agreements in the four days to Thursday, topping the amount it granted during tax season last year.

Also in China President Xi Jinping has called for greater effort on independent development of blockchain innovations.

Meanwhile Bloomberg reports the Philippines is looking to offer prize bonds to encourage investment in a country with one of the lower savings rate in Asia. This short-term debt will pay a quarterly coupon, with prizes also raffled every three months. Due to be launched in mid-November, there may also be cash prizes of as much as 1 million pesos (US$20,000). These bonds are likely to have a tenor of one year and be offered to retail investors and cooperatives.

The UST 10yr yield is at 1.84%, and similar to this time yesterday. Their 2-10 curve is positive at +20 bps. Their 1-5 curve is positive at +6 bps. Their 3m-10yr curve is a positive +18 bps. The Aussie Govt 10yr is up at 1.18%, and a gain of +3 bps. The China Govt 10yr is now at 3.32% and a +2 bps rise. The NZ Govt 10 yr is now at 1.32% and a catchup +11 bps rise.

Gold is down again, down -US$3 overnight to US$1,489.

US oil prices are a little softer at just over US$55.506/bbl. The Brent benchmark is just on US$61.50/bbl.

The Kiwi dollar is holding at 63.5 USc. On the cross rates we are softish against the Aussie dollar at 92.6 AUc. Against the euro we are marginally lower again at 57.1 euro cents. That puts the TWI-5 at just on 68.5.

Bitcoin has held its higher level at US$9,337. The bitcoin rate is charted in the exchange rate set below.

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26 Comments

by profile | 30th Oct 19, 7:28am 1572373728

Ouch - "An academic economist left this comment on one of my weekend posts

"With this in mind, I must confess that I always threaten to fail my Otago students if they don’t migrate to Austalia, because it shows they haven’t learnt anything from me; but the university doesn’t allow me to deliver on the threat. Still, most would be financially better off if they took this advice, and migrated to a place where better firms are located, and sought jobs there."
https://croakingcassandra.com/2019/10/29/two-years-on/

by kiwimm | 30th Oct 19, 10:50am 1572385828

Because having more money makes you better off?

by Yvil | 30th Oct 19, 1:17pm 1572394670

It gives you more choices in life

by youngdumbandbroke | 30th Oct 19, 4:05pm 1572404759

Sure does

by profile | 30th Oct 19, 7:41am 1572374481

The great dematerialization. The Economy Keeps Growing, but Americans Are Using Less Steel, Paper, Fertilizer, and Energy - no wonder you can't sell lumber - "Total timber use is down by a third and paper by almost 20 percent since their high points. ...If shiny ornamental stones are excluded from the analysis, then more than 90 percent of total 2015 resource spending in America was on post-peak materials. ...Fertilizer use is down almost 25 percent from its 1999 peak, and by 2014 total water used for irrigation had decreased by more than 22 percent from its maximum in 1984. Total cropland has also fallen, to levels rivaling the lowest points of the previous century." And in the UK "Both the weight of goods entering the economy and the amounts finally ending up as waste probably began to fall from sometime between 2001 and 2003."

https://d2eehagpk5cl65.cloudfront.net/img/q60/uploads/2019/10/energy-10…
https://d2eehagpk5cl65.cloudfront.net/img/q60/uploads/2019/10/ag-1024x7…
https://reason.com/2019/10/09/the-economy-keeps-growing-but-americans-a…

by scarfie | 30th Oct 19, 8:17am 1572376642

You can make this comment because you don't understand the difference between the raw rate of growth, and the rate of growth OF the rate of growth. The latter has been declining since about the mid 80's, actually probably before but it was masked. There is a lot of information in that fact, of which you clearly have no clue how to interpret.

by nymad | 30th Oct 19, 8:25am 1572377136

Interesting. Last week you made a comment that ignored the time component of a unit of energy.
Now you're an expert in interpreting second derivatives. What a change a few days can make!

by dictator | 30th Oct 19, 9:30am 1572381039

Next up partial differential equations will be easier to work with than getting the units correct.

by nymad | 30th Oct 19, 10:31am 1572384663

Computational equilibrium of their 'systems' models will certainly be easier.

by nymad | 30th Oct 19, 8:27am 1572377278

It's almost as if...And this may be impossible...
Resource dependence is decreasing in time... Who ever would have predicted that!

by Roger Witherspoon | 30th Oct 19, 10:42am 1572385326

Or is it a symptom of the Decline of the West? Let the housing stock age, the motorways age, the bridges age, let Wall Street sell your industry and your jobs to China, let the politicians and bureaucrats bribe each other with more and more money to waste, degrade your food quality and so on?

Personally I think the US has woken up and has begun to identify what went wrong and why they are fighting amongst themselves so much. So a cyclical revival may well be underway. They are now the biggest oil producing country, which was unthinkable a few years ago. Success leads to complacency, then to stagnation, decline and infighting. Maybe the Americans need an enemy to unite them so that struggle and cooperation can lead them back to a civilised and successful society.

by nymad | 30th Oct 19, 10:47am 1572385653

Yep. I guess we could always put the tinfoil hat on.

by profile | 30th Oct 19, 12:54pm 1572393255

Sorry Roger but the, dare I say predictable, decline of West theory doesn't hold up when you look at agricultural productivity. Less inputs and land but increasing yield. If ag can do it so can other endevours? See the linked chart above.

by murray86 | 30th Oct 19, 8:10am 1572376236

With the factory sector falling to a 70 year low in the US there are big problems on the horizon for them. this factory sector provides employment for the bottom people in the economy, usually at a reasonable level of income. If the employment in this area falls, then people will be forced into lower paying jobs or onto welfare. Poverty will increase in a society that does little in the way of Social Welfare already. Societal meltdown will become a greater likelihood. Idiots like Trump are great at stirring the population up, but very poor at delivering what they need. If he survives long enough, he will need the iron fist, and I fear he will enjoy wielding that. History repeats!

by frazz | 30th Oct 19, 10:32am 1572384753

Trump Iron Fist...more like a clammy wet paw.

by murray86 | 30th Oct 19, 12:21pm 1572391300

Yes, he'd be the one whimpering a the end of the tunnel, and he wouldn't have what it takes to blow the vest. We'd have to do it for him. But he'd go out calling it fake news, and a stitch up, sorry, witch hunt!

by scarfie | 30th Oct 19, 8:13am 1572376392

So a timely reminder, given the RBA governors comments, of Scarfie's predictions based on a revised quantity theory of money to account for the effect of interest. We are in a downward trend in interest rates, the central banks can only exercise a little control over peaks and the troughs, not the trend. Aussie will see negative interest rates alright, unless they go bust first. Also the velocity of money will keep falling. I recently read that the most important work of Keynes was to decouple velocity. Well he figured there were two types, fixed and moving. So the thought that velocity of money can move isn't novel, however I am thinking the prediction if keeps falling along with interest rates probably is. The opposite of interest rates is the supply of money of course, when one goes up the other must go down. Credit has to keep flowing and expanding, so look to new, and perhaps not so new, ways to keep pumping money into the system.

The effect isn't necessarily linear, although it was from about 1986. That was about the point of maximum extractive yield in the money supply, it has been, and will continue to be, a downhill run from there.

Look for assets inflated by the surplus of credit to also start behaving the same way. This is how you can have slow house sales while values hold up, the velocity of houses going down.

by Trapped Millennial | 30th Oct 19, 8:31am 1572377491

From the RBA comments I interpreted that a zero level will happen very soon. Why say you wont go negative when your already positive unless you are in a full cutting cycle.

I do think they will stick to the Zero lower bound and not go negative. I think they will keep doing the "peoples QE" and just give ordinary people money to spend to circulate and stimulate the economy. While I think it would be more successful then the EU/USA QE system, I wonder if the Aussie people will spend on goods or reduce debt....

by nymad | 30th Oct 19, 8:48am 1572378492

The opposite of interest rates is the supply of money of course, when one goes up the other must go down.
Yes. It's called the liquidity preference.
So, well done for debunking your own "revised quantity theory of money accounting for the effect of interest" in a single paragraph.

Dunning Kruger effect in all its glory.

by scarfie | 30th Oct 19, 9:41am 1572381718

No surprise you would pop up with few stupid comments. Where is YOUR economic theory, or YOUR prediction since you are such a clever economist. Without predictive value you are worthless, and your comments above is just fallacies of argument to deflect from your lack of intellectual ability to form any new thought of your own.

by nymad | 30th Oct 19, 10:29am 1572384569

There's no point in proposing theory which fails on the most elemental level.
I fail to see how a prediction made on a fundamentally untrue premise can be anything but worthless.

I'm well aware of my limitations. I benefit from understanding how exceptionally difficult it is to develop (robust) new theory. Thus I don't bother pretending I can.

by Andrewj | 30th Oct 19, 9:15am 1572380137

I would have thought that if liquidity keeps tightening RBA won't have a choice

by dictator | 30th Oct 19, 9:36am 1572381365

Liquidity? What liquidity?

Australia passed the cash ban surprisingly quickly to allow for negative interest rates. The ground work is laid and the RBA is going to use negative rates if they have to, despite their confidence statement above. Although right now I'm more concerned about how far the Fed is going to go given that one or more of the big banks is clearly in trouble.

by Andrewj | 30th Oct 19, 9:59am 1572382754

You think central banks are in control?
I think they are flailing about,out of control

by dictator | 30th Oct 19, 10:15am 1572383758

I think the whole world is snorting up lines of credit as fast as they can be created. Germany has been negative for some time but they still haven't dealt with Deutsche Bank, or any of the broken European banks. Deutsche Bank is already being called too big to fail due to the network effect. At what point does it become too big to not collapse?

by Andrewj | 30th Oct 19, 10:45am 1572385519

The bond market is screaming something else

RBA's Philip Lowe not keen on negative interest rates, US consumer confidence lower, low rates boost US housing, China's Xi Jin­ping keen on blockchain, Kiwi dollar at US63.5c

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26 Comments

RBA's Philip Lowe not keen on negative interest rates, US consumer confidence lower, low rates boost US housing, China's Xi Jinping keen on blockchain, Kiwi dollar at US63.5c