US still looking at rate hikes despite low inflation; ECB prepares for QE; oil price slips again; gold rises; UST 10yr yields 1.81%; NZ$1 = 77.9 USc, TWI = 80

Here's my summary of the key issues that affect New Zealand over the weekend with news of some drama in local interest rates.

But first, the US Fed is still on track for a mid-year interest-rate increase a top official said over the weekend, citing strong American economic momentum and their falling unemployment rate.

The debate also hinges on how consumers react to low inflation - inflation suppressed by low oil prices. If the net result is improved prospects driven by higher spending power, rate rises may come as suggested. But if the low energy prices push through to all aspects of modern life and deflation sets in in the US, then a return to stimulus may be needed in the US. The jury is out. 

But the jury is not out on US inflation. It was negative in December and only +1.6% for the full year when energy and food were excluded. These numbers make the Fed's decisions hard ones.

But so far, American consumers are feeling very bullish - in fact consumer confidence in January is at its highest level in a decade.

In Russia things aren't so good; capital is fleeing. Net capital outflows nearly tripled in 2014 to their highest level on record, according to their central bank data showed released over the weekend. They have the tough combination of Western sanctions and collapsing oil prices to deal with. The Russians are doing it very hard.

At the end of this week we will probably hear what the ECB will be doing with its much-touted QE program. Over the weekend ECB boss Mario Draghi apparently met with German Chancellor Merkel to brief her on the plan. Last week's dramatic Swiss action is widely assumed to be them getting realigned ahead of the ECB moves, although the Swiss actions probably haven't helped the ECB.

Closer to home and slipping under the radar, one consequence of the Swiss action is that New Zealand ten year bond yields have slipped below the OCR rate. The same thing has happened in Australia. The sudden rush to safety has seen a surge in demand for all sovereign bonds, driving yields down.

But, in New York, benchmark UST 10 year bond yields actually rose off their recent lows on Friday, inching back up to 1.81%. What is important for us is that our wholesale swap curves are now essentially flat. There is no longer any meaningful premium for time. What that means for mortgage borrowers, and probably more importantly for term deposit investors may get some attention in next week's Reserve Bank OCR review.

The oil price has stayed low. It is now US$48/barrel and Brent crude is just under US$50/barrel These levels are a full US$10/bbl lower from where we left them in mid December. However, even at these prices, they are just at 'normal' some are saying. Others see US$40/bbl prices.

The gold price rose sharply again on Friday to US$1,280/oz. That is a +7% rise from where we left it just before Christmas.

We start today with the New Zealand dollar at 77.9 USc, at 94.6 AUc and the TWI is at just on 80.

This week will bring an interesting batch of data. Although today is a public holiday in Wellington, tomorrow we get the first 2015 QSBO business confidence reading, on Wednesday is the next dairy auction, and we get the December CPI data. And on Friday its the big ECB announcement. Buckle up.

If you want to catch up with all the changes on last Friday we have an update here.

The easiest place to stay up with event risk is by following our Economic Calendar here »