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 »
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15 Comments
Aj.... I'd paraphrase that to say.... that these so called leaders or policy makers DONT KNOW...... they are not wise and all knowing,... like I once thought they were
They are passengers in the bus ...even thou they have their hands on the steering wheel... they dont know the effects of their actions...
I also wonder if they care that much about the costs of their actions.... Central Bankers will seem to be ruthless...
Also shows.... that even thou Govts. and Central Banks are the 2 most powerful economic forces ..... in the end mkt forces prevail... ????
I spent quite a bit of time over Christmass talking to a banker who works in one of the major overseas investment banks. One of his areas of interest is implimenting the G20 agreemnt on banking.
The impressions that I was left with are
1 The banks will still be hoplessly undercapitalised. They may talk about a capitalisation of 15-20 to 1, but that is based on a risk weighted formula (as per the credit default swaps etc) and the actual figure is nearer 100 to 1.
2 Each bank has it's own formula for how risk weightings are worked out and applied, so comparing banks is meaningless
3 When banks go belly up in future the shareholders will almost certainly loose there equity and the depositers funds will recapitalise the banks. That is the depostors will then own the banks. Hey thats not so bad- we can reclaim our banks from the Aussies. (although I am not sure how the NZ operations are untangled from the Australian operations.)
3 Now that the GFC seems to have past the banks and G20 signatories are pushing back against its provisions so that they can go back to buisness as usual. So you are right they are ruthless and do not care.
The losses are piffling compared to the winning returns bond market players have gorged upon from preemptive purchases enabled by front running pre-announced central bank QE actions. These lucky guys and gals have sucked $billions upon $billions away from productive investment, since central banks expanded their collective balances from $5 trillion to $16 trillion over the past decade.
"Propensity to consume" is eclipsed by the "propensity to pocket risk free profits." Read more
Few of them in the professional gambling community - the negative carry in most instances would have killed the trade. But short the pegged negative bound interest rate CHF against those same positive rate foreign currency nations was a winner until it wasn't. Which was inevitable at some point. Are Japanese traders selling the BoJ's printed Yen to buy US Treasuries?
Given that it is looking a tad 'droughty' in NZ (apparently there are some benefits to climate change), might be worth 30 seconds of your time on this rather stunning little animation:
http://www.bloomberg.com/graphics/2014-hottest-year-on-record/
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.
LOL - nothing slipped under the radar for this inveterate CB and sovereign bond groupie. In fact the vendor ran out of chandaliers to swing from. Begs the question when will the CB's give the weary term debt issuers a rest to compose their balance sheets and put out the begging bowl to retire that high coupon debt trading way above the par issuance price? CB instigated transfer of wealth mechanisms anyone?
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