90 seconds at 9 am: Yellen comments raise USD

Fed lays groundwork for rate rise; US services grow strongly, consumers pull back; Greek extension approved; India search HSBC; gold falls; NZ$1 = 74.6 USc, TWI = 78

25th Feb 15, 7:23am by David Chaston

Here's my summary of the key issues from overnight that affect New Zealand, with news of the Fed laying the groundwork for upcoming rate rises.

Janet Yellen has been giving her semi-annual testimony to the US Congress today. She said the Federal Reserve is preparing to consider interest rate hikes "on a meeting-by-meeting basis". This is a subtle change of emphasis in how they see their plans for their first rate hike since 2006. She was very positive on US economic progress and prospects.

But she is keeping her options open. Their focus is turning away from jobs growth, which seems to be on a positive track up, to ensuring they keep inflation from getting too low.

In related US economic news, American single-family home prices rose in December, led by strong increases in the western half of the United States, according to the Case/Shiller survey out overnight.

The giant US services sector saw a fast rebound in growth during February driven by fastest rise in new work for four months. Jobs growth in the sector is clearly being sustained.

However, American consumer confidence has fallen more than expected in February, pulling back from a multi-year high. It is still high, but the size of the pull-back has gotten the market's attention.

Across the Atlantic, eurozone finance ministers have approved the reform proposals submitted by Greece in order to gain an extension of its bailout. But it involves some rather major compromises, mainly because it doesn't agree to roll back any of the previous Government's debt repayment commitments. What the Greeks have proposed, and what has been agreed to, looks very wooly to me and will put the Athens government in a tough budget position. We will revisit this crisis in four months time.

In India, tax officials there have searched the Mumbai headquarters of HSBC as part of a probe related to allegations that the bank's Swiss business helped Indian clients dodge taxes.

The UST 10yr yield are unchanged 2.07% in New York. We start today with our swap rates for terms 2 - 10 years lower by about -3 bps.

The crude oil price is also basically unchanged at just under US$50/barrel with Brent crude just under US$60/barrel.

The gold price however is moving down and is now at US$1,194oz.

Also moving lower is the New Zealand dollar. Yellen's comments seem to have boosted the US dollar today, The kiwi is now at 74.6 USc a drop of more than ½c, at 95.6 AUc, and the TWI is down to 78 even.

If you want to catch up with all the changes on 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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5 Comments

by MortgageBelt | 25th Feb 15, 8:07am 1424804853

The Greek situation can only be assessed in the framework of European, Russian, Asian geopolitics. There are more issues than the countries financial situation. Italy also has a strong left wing government currently.

Greece is right in the apex of Western Europe/EU and the Middle East, and Russia/Eastern Europe etc.

by Stephen Hulme | 25th Feb 15, 9:23am 1424809410

But she is keeping her options open. Their focus is turning away from jobs growth, which seems to be on a positive track up, to ensuring they keep inflation from getting too low.

Her options are about to become fewer if certain lawmakers get their way.

Alabama Republican Senator Richard Shelby, the chair of the Senate Banking Committee, led a discussion that confronted Yellen with a broad set of concerns - from currency manipulation among U.S. trading partners to whether Congress should delve more deeply into the Fed's affairs. Shelby has scheduled a separate hearing next week on Fed oversight, and challenged Yellen on the issue in his opening statement.

With a more than $4 trillion balance sheet from its various crisis-fighting efforts, "many question whether the Fed can rein in inflation and avoid destabilizing asset prices," Shelby said. "I am interested to hear whether the current Chair ... believes the Fed should be immune from any reforms."

Yellen was adamant.

Pending legislation that would let the Government Accountability Office review monetary policy "would politicize monetary policy," Yellen said, and "beyond a shadow of a doubt" make the Fed less effective. Read more

Many will point to the shambles that is still called the US Treasury bond market.

.....other asset markets continue to trade in a bizarre and outright deformed manner. Case in point, the Treasury curve, where according to the latest repo data from Stone McCarthy, there is now a historic shortage of collateral in the short end of the curve. To wit: the 5-year note is at -174 basis points this morning, the tightest it has been since September. The 2-year note, at -279 basis points, is the tightest since at least 2009. Both the 2-year and 5-year notes have traded very tightly in the past, though today's values are extremely tight for both. Read more

by Boatman | 25th Feb 15, 11:11am 1424815918

Who can predict the turn of events that will come from a Fed rate rise , becasue rates are so low , any tiny upward movement will see a dramtic effect on the cost to borrowers .

Simply if the cost of money rate is 2% and goes up by a quater of 1% (250 basis points) the instalment rises by 12,5% .......... a much larger sum in actual $

by David Chaston | 13th Mar 16, 12:35pm 1457825745

Bad math there Boatman. Use a mortgage calculator to work it out. If a loan interest rate rises from 2% to 2.25%, all else being equal, the payments will rise by +3.1%.

An example is a $350,000 mortgage at 2% over a 30 year term. The payments would be $1,294 per month. If the interest rate rose to 2.25%, the payments on that same mortgage would rise to $1,338/month.

Of course, if the interest rate rises to 4%, then the payments rise to $1,671, a +29% jump. Still, that is not double as you would imply.

btw "a quarter of 1%" is 25 bps, not 250 bps.

The issue of rising interest rates is more fierce for investors than borrowers. Bond prices are set based on yield. If the yield rises, the price of that bond must fall (a capital loss) to have the coupon yield the higher amount. So bond investors lose capital value while holding a low yielding bond. Retirement funds are full of fixed income securities (bonds) so these are the instruments that will suffer most (in the same way they benefited with capital gains as interest rates fell).

The real fears of rising interest rates is not for borrowers (who will be hurt somewhat at the margins), but for investors who will lose capital value.

But my view is that these losses must be expected and absorbed. They are just rolling back the gains that have already been had. What we see today is the consequences of the mispricing of risk. A higher, more realistic interest rate would see a much more sensible pricing of risk. Crazy debt growth needs to be restrained.

by skudiv | 25th Feb 15, 11:19am 1424816376

Greece should have hired Donald TRump (or an unmentionable New Zealander) to negotiate their banktruptcy. They would be back in the game by now, bigger and badder then ever.

I agree the deal seems a bit wooly, but it looks as if Germany via the ECB held a gun to Greece's head and said keep the deal or we kill you. I'm pretty dissapointed Syrazia folded so badly and have broken their promises. They were elected to do a job, and have failed in record time. I guess there is a lesson there, if you vote in a radical left government you better have the balls to face a financial attack, if not fugetabowtit.

Nothing has changed, the world is still drowning in debt and at some stage that is going to be dealt with.

I wonder how many Kiwis are still in favour of a currency union with Aussie?