Here's my summary of the key issues that affect New Zealand overnight with news of much lower interest rates and exchange rates today
But first, the number of Americans filing new claims for unemployment benefits tumbled last week to its lowest level in nearly 15 years, adding to bullish signals on their labour market.
In Europe, just one week after dropping interest rates, Denmark's central bank dropped them again. In fact, it cut its already negative 'term deposit' rate from -0.35% to -0.50%. Denmark is struggling to maintain its official peg to the euro.
And in Germany, consumer prices have tipped through the zero point and are now falling, pushed down by lower energy costs. Deflation was expected in Germany in 2015, but not this early.
Chinese ecommerce behemoth Alibaba has seen its shares plunge today as they missed profit estimates. Alibaba has become something of a bellwether stock in the current tech boom and their fortunes are in stark contrast to companies like Apple.
Staying in China, there are rising doubts about their fresh milk industry's ability to prosper. Fonterra has a big position in it but smaller operators are reported to be really struggling.
In New York, benchmark UST 10 year bond yields are at 1.74%. Swap rates in New Zealand fell sharply yesterday across the whole curve following the RBNZ's signals. In fact the 1-5 differential has now turned negative, the 2-10 barely positive.
The oil price fell again overnight and is now threatening to go under US$44/barrel while Brent crude fell less and is just under US$49/barrel. Big supply reports are behind today's shifts.
Gold also fell sharply overnight and is now down to US$1,254/oz. The move is thought to be a reaction to the Fed's bullish view on the US economy.
We start today with the New Zealand dollar much lower yet again following the Aussie down. It is at just 72.5 USc, up against an even weaker Aussie at 93.6 AUc but the TWI is down to 76.1.
If you want to catch up with all the changes yesterday 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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28 Comments
Funny, when inflation was high everyone said, oh, but you have to look at "core inflation" (w/o oil) and that is still low. Now inflation is low and all of a sudden core inflation, which is still above zero is not even mentioned.
The whole "deflation" issue is a beat-up. Once the US is done unseating Putin by manipulating oild prices down, inflation will be higher, and then we are told again that only core inflation matters.
Economics is really no science, but just bs artistry.
Ageed.
The current obsession with one or two percentage points of deflation is just ridiculous and the "cure" so stupid it's not even wrong.
Deflation is normal in a competitive world ( genuine resource shortages excepted) - i.e. falling prices due to improved efficiency, a globalised work force and supply chains, declining birth rates, peak debt, weak unions and the collapse of cartels.
The central banks plan to lower interest rates - even below zero - is going to change all that? Many of the effects of lower interest rates actually encourage deflation:
Lower cost of money and almost no risk premium promotes more production at lower prices - the collapse in oil prices is classic.
Lower interest rates encourage more saving, not spending, among the cashed up cohort looking towards retirement.
The only place that the inflation is showing up is in asset prices - shares and bonds and realestate - good luck with that when it's not supported by corresponding increases in the real economy.
Seems to me that once the complete failure of easy money is recognised we'll see some real panic and god knows what bizzare plans.
If it ain't broke, fix it till it is.
Agreed. The economists tell us that deflation is bad because people will put off buying. I can see how that might happen if deflation was at 10% or above, but at a few percent I am very sceptical. We are used to deflation on our electronic products and still buy. If anyone can point me to empirical evidence that shows that the economists' models are correct I would be interested to see it. Of course, deflation is bad for people with debt because the debt is now bigger.
David Stockman's latest missive - well worth a read on this subject:
"Zero interest rates are not even remotely harmless. They amount to a colossal economic battering ram because they transform capital markets into gambling casinos.
So doing, they cause risk and long-term capital to be mispriced, meaning an accumulating level of malinvestment and excess production capacity; and this is a worldwide condition because all central banks are engaging in the same game of financial repression.
As is now evident in the case of oil, iron ore, copper, consumer electronics and much more, massive excess capacity ultimately results in the collapse of boom time prices. Soon there is in motion a withering cycle of deflationary adjustment, profit collapse and a plunge in new capital spending.
So our monetary central planners are trapped in a dangerous feedback loop. Having fueled the boom with cheap money, they now justify the prolongation of ZIRP on the grounds that they must use the same tool to ward off the deflation they caused in the first place."
http://davidstockmanscontracorner.com/the-wreck-of-the-monetary-hesperu…
Interesting thanks. How many of these issues are because we allow commercial banks to create money:
Not that I've seen a better alternative (not a gold bug) - but the above does highlight some significant risks with our current system.
""Zero interest rates are not even remotely harmless. They amount to a colossal economic battering ram because they transform capital markets into gambling casinos."
I can see why that is bad for the capital markets, but everyone elses market is told not to be foolish when they're wanting stability and lower volitility. Anyway, at the end of the day capital markets are always a gamble, that's why it's got a risk factor.
"Deflation is normal in a competitive world ( genuine resource shortages excepted) - i.e. falling prices due to improved efficiency, a globalised work force and supply chains, declining birth rates, peak debt, weak unions and the collapse of cartels."
Great post Kiwidave. At any one time there are inflationary forces countered by deflationary forces. You have just nailed the deflationary forces to the wall and everyone should read the notice. It's all good. But here at www.chickenlittle.com your words of wisdom will be lost in the screams of "The sky is falling.....the sky is falling" from the resident doomsters.
So now the clueless have moved from "we need to put up interest rates because [hyper-]inflation is coming" to "we must not drop rates because it, well doesnt matter"? or makes things worse? So no matter the problem the cure is always the same, rates must remain too high!!! yes great logic.....really.
Falling prices, well yes if you live on a flat earth (ie infinite) and have a simplistic outook.
If on the other hand you realise we lif on a geo-sphere and hence a finite planet then resources will at some point start to get less available or more expensive to extract bthat cancels efficiency gains.
Note efficiency gains are often methods to use more automation and hence more fossil based energy to extract more resources.
"collapse in oil prices is classic." except the shale oil boom was funded via junk bonds which are way above the OCR rate and was due to the high price of oil.
"the "cure" so stupid" Im not sure what you see the cure as.
"The central banks plan to lower interest rates - even below zero - is going to change all that?" you are I think confusing things, badly. Lower interest rates are a classic/proven cure to a flagging economy, setting rates higher cool an economy failry standard economics.
"Lower interest rates encourage more saving, not spending, among the cashed up cohort looking towards retirement." not sure how you arrive at this.
"The only place that the inflation is showing up is in asset prices - shares and bonds and realestate - good luck with that when it's not supported by corresponding increases in the real economy." I agree with you here, which confuses me as nothing else you have said I can relate to. All the above are greatly over-valued so logically should correct back to a fair earnings, that means huge wealth destruction.
Easy money is an attempt at a cure or stay for the problem, it isnt directly the cause of the problem.
"capitalism" is about taking a resource and converting it to something else "useful" at a substantial margin in order to fund continued growth. If there isnt such a margin there can be no continued growth whcih is what we are seeing.
It is broke, just most people cant see why its broke and hence dont realise it cant be fixed.
Thanks Steven,
agree on the resouce issue. Of course things are getting scarce - northern hemisphere fishing boats in the Antarctic, ultra deep oil wells and so on prove the point.
However, the fact is that general price inflation has been in decline coincident with falling interest rates for thirty years. There are are numerous reasons for prices to decline - global wage arbitrage, the end of the boomer cohorts entry to the market place, production efficiencies, technological improvements etc. My point is that low interest rates and increases in the supply of money appear to be failing to generate inflation because of these much more powerful forces driving prices lower. Further, the ZIRP is, in fact, having an effect contrary to the one desired. Case in point the US shale drillers. High risk outfits being able to access bonds in the 5 or 6% range. Add in a bloated share market willing to throw money to anything with the chance of a return greater than 1% and you have a recipe for higher production and, ultimately a giant misallocation of capital. And that is what happened.
Low interest rates encourage saving - if you are nearing retirement you should probably have a big percentage of your savings in low risk bonds and bank deposits. In fact many legislations require super funds and insurance companies to do just that. If you were planning on funding your retirement from interest on, say, $500K, you now need 1 mil. so hence the need to increase savings. Got it?
I think falling prices are great news but the big picture is that the (central) banks are out to protect the banks and the collosal debts that are on their books. Right or wrong that overides everything they think, do and say.
What is interesting with the shale and paper oil markets is that the supply and demand can be quite fickle.
Demand and cartel-like behaviour force product prices up. It becomes worthwhile to invest in risky projects.
The subscription and paper futures are sold on the base of future production. The extra "production" of paper oil, causes the price to drop to the point that it is a better return to not produce the product. A bunch of people lose money trying to sell off paper product, and people keep consuming, as the paper product expires, demand starts lifting, prices come up, suddenly shale is worth pursuing, since we know where there is a great pile unexploited ! They print the paper oil for the reserves causing.....
"However, the fact is that general price inflation has been in decline coincident with falling interest rates for thirty years." that was however pre-peak oil, post peak oil all bets are off I suggest.
Strange how I agree, with "My point is that low interest rates and increases in the supply of money appear to be failing to generate inflation because of these much more powerful forces driving prices lower."
but do not agree with, "Further, the ZIRP is, in fact, having an effect contrary to the one desired." I see no evidence of this. Now sure there are side effects. I am not sure we can use the shale oil drillers as a good example, but I see your point. For instance it only applies to the USA. Also the Fed is at 0.25% and teh shale bonds 5~6% so really if the OCR had been say 2~3% would it have mattered? suspect not, borrowing would have been 8% I dont see that as a show stopper.
"Low interest rates encourage saving" this is contary to what many in here have been claiming btw. Frankly I dont accept that the interest rate bears much on how much people save. As an example if I can onlyafford to save $100 a week then whether I am getting 4% or 7% makes no huge difference, maybe I bank that 3% difference, so I save $103, yippee dee doo doo. So I see what you say but no I do not agree generally.
Falling prices are only good where that is due to efficiency or competition, not desperation. At some point if a business cannot make money it goes out of business and then there is nothing on the shelf, that is bad news.
I dont agree on the CBs being there to save the banks directly, save the system yes.
Steven, regarding the ZIRP and it's power to inflate - sorry if you've already read the David stockman essay I linked to but I think this is well worth reading so have posted up some further paragraphs.
the ZIRP market is completely dishonest and therefore deeply subsidized. And every Econ 101 student knows that when you deeply subsidize something, you get more and more of it. In essence, by clinging obstinately and mindlessly to ZIRP the Fed is just systematically juicing the gamblers, and thereby inflating ever greater mispricing of financial assets and ever more dangerous and explosive financial bubbles.
In fact, after 73 months of ZIRP how can rational adults obsess over whether the first smidgeon of a rate increase should occur in June or September and whether the economy can tolerate a rise in the funds rate from 12 bps today to 25 bps sometime down the road?
The difference is utterly irrelevant noise to the main street economy; it can’t possibly impact the economic calculus of a single household or business.
Having pinned the money market rate at the zero bound for so long and with such an unending stream of ever-changing and fatuous excuses, the occupants of the Eccles Building do not even know that they are engaging in a word splitting exercise that is no more meaningful than counting angels on the head of a pin. Indeed, if they weren’t mesmerized by their own ritual incantation they would not presume for a moment that a fractional variance of the money market rate away from ZIRP would have any impact on main street borrowing, spending, investing and growth.
So why does the Fed persist in this farcical minuet around ZIRP? For two reasons that are not at all hard to discern.
In the first instance, the Fed is caught in a time warp and fails to comprehend that the game of bicycling interest rates to heat and cool the macro-economy is over and done. The credit channel of monetary transmission has fallen victim to “peak debt”. The main street economy no longer gets a temporary pick-me-up from cheap interest rates because balance sheets have been tapped out.
The only actual increases in household debt since the financial crisis has been for student loans, which are guaranteed by Uncle Sam’s balance sheet, and auto loans which are collateralized by over-valued vehicles. Stated differently, home equity was tapped out last time; wage and salary incomes have been fully leveraged for years and households have nothing else left to hock.
So households now only spend what they earn, meaning that the Fed’s interest rate manipulations—-which had potency 40 years ago—-have no impact at all today. Keynesian monetary policy through the crude tool of money market rate pegging was always a one-time parlor trick.
""The only place that the inflation is showing up is in asset prices - shares and bonds and realestate - good luck with that when it's not supported by corresponding increases in the real economy." I agree with you here, which confuses me as nothing else you have said I can relate to. All the above are greatly over-valued so"
The only issue will be for those relying on the stored equity. eg to secure loans or create a capital gain. For those who quietly delverage as time goes by, and sudden drop in asset prices won't be a problem, their paper ratios might fluctuate by the value itself won't actually change on real assets.
Good one :-)
What gets me is that (1) the Greeks, despite already having received a shocking 100 billion Euros in debt foregiveness still manage to act the part of the innocent victims, (2) that Merkel, having squandered mega-money in Greece and elsewhere while being ridiculed and insulted by those who benefitted from her incompetence is still courted as powerful, intelligent and what not. A complete loser she is.
Anyways, the Greeks play monopopolous really well ... and Merkel is the country hick she is. Stupid.
Im not sure they think of themselves as innocent victims as they had the ability to vote.
And actually I have some time for Merkel way more than most politicians who I give about 0, stupid she isnt, no some clearly are blinkered, maybe, yes, caught between a rock and a hard place she is.
The problem is is the problem solvable and is it even recognised and admitted to. Lets say it isnt solvable yet her and every pollie on the planet has said it is. What do or can they do?
zilch, nada and the voter doesnt want to hear that.
Except greek bonds, they are up a bit,
http://www.ft.com/fastft/268792
"The bond maturing in 2017 rocketed 181 bp to 15.68 per cent today, the highest on such a short-dated maturity since the 2012 debt restructuring."
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