90 seconds at 9 am: Spotlight on central bankers

Fed's Fischer says FOMC close to targets; India appoints an inflation hawk; commodity demand surges as China retrenches; Mongolia in current account crisis; UST 10yr yield at 1.58%; oil prices up further, gold down; NZ$1 = 72.7 US¢, TWI-5 = 75.6

22nd Aug 16, 7:23am by David Chaston

Here's my summary of the key events over the weekend that affect New Zealand, with news it is all about central bankers today as the northern hemisphere gets its final burst of summer holidays.

At the end of this week, most major central bankers will meet at Jackson Hole, WO for their annual shindig. All eyes will be on Janet Yellen looking for US Fed signals. Many of the next-level-down players have been talking recently, and the most recent has been Yellen's deputy, Stanley Fischer. “We are close to our targets,” he said overnight. “Looking ahead, I expect [US] GDP growth to pick up in coming quarters, as investment recovers from a surprisingly weak patch and the drag from past dollar appreciation diminishes,” he said. However he did not explicitly give any view on the interest rate outlook.

And, staying with central bankers, India has a new reserve bank boss. It is Urjit Patel, another former academic, Kenyan-born, and known as an inflation hawk. As India has an inflation problem, one likely to get worse as growth is pursued, this appointment will appeal to foreign investors. However, on that basis it is hard to see why the Modi government pushed out his predecessor.

In China, their transition from manufacturing to services has been the story for a while now, and we have chronicled its stumbles on the way. The story has been about its waning appetite for hard commodities. But global demand for hard commodities is just shifting, not falling. The countries of south east Asia are starting to pick up China's slack, and India too has capacity to do that. Which all goes to explain why China manufacturing is moving to close down capacity while global demand for basics like iron ore are rebounding. But its not like all China's neighbours are prospering with the hard commodity focus. Mongolia in particular is suddenly suffering badly and over the weekend raised its benchmark interest rate by an eye-popping +4.5% to 15%.

In Australia, a rapid surge in Sydney housing auctions to the highest level in more than a year has added to concerns the RBA rate cut to 1.5% has just re-ignited their property market. Cheaper money just flows into property chasing capital gains. It does nothing for the exchange rate despite what traditional central bankers might wish for. A useful lesson for Wheeler & Co here.

In New York, the UST 10yr yield was a tad lower at 1.58% at the close in New York on Friday.

The US benchmark oil price is still rising and is now just under US$49/barrel and the Brent benchmark is just under US$51/barrel. Ten more rigs were brought into production in the US last week and that makes an increase in 12 of the past 13 consecutive weeks - a +20% rise in that time.

The gold price was down by about US$11 on Friday and now at US$1,340/oz.

The Kiwi dollar will start the week at 72.7 US¢, at 94.4 AU¢, and at 64.2 euro cents. The TWI-5 index is at 75.6 which is sitting well above its average over the past two months.

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

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

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11 Comments

by Country boy | 22nd Aug 16, 8:45am 1471812307

Interesting comment above that somehow interest rates do not influence the currency. This is of course not sensible as interest rates are the yield on a currency and if yields change the price must change. What is happening is that currencies values are relative to other currencies and major central banks are dropping interest rates so that overall the impact on an individual currency of an interest rate fall is offset. Looking at property prices a fall in interest rates will raise prices unless rents or other returns on these assets also fall. Its pretty basic 101 economics and does not indicate the powerlessness of monetary policy in the medium term. Monetary policy always has a medium term focus so no surprises there.

by Stephen Hulme | 22nd Aug 16, 9:05am 1471813525

These days, finance is introduced into systems (economic and financial) with little association to economic returns. Indeed, the primary mechanisms for the creation of new finance are government (fiscal and monetary) spending and asset-based lending. Furthermore, there are no restrains on the available supply of Credit, so its price is outside the purview of supply and demand. For the most part, the government dictates the price of finance. This system is neither self-adjusting nor self-correcting.

Enter the current monetary debate: Things have not progressed as expected. Years of unthinkable monetary stimulus have failed to achieve either general prosperity or consistent inflation in the general price level. Fragilities are as acute as ever. So policymaker reassessment is long overdue. Not surprisingly, however, there’s no second guessing “activist” (inflationist) monetary doctrine. Central bankers are not about to admit that a policy of zero rates and Trillions of monetization is fundamentally flawed. Apparently, we are to believe that forces outside their control have pushed down the “neutral rate.” The solution, predictably, is lower for longer – along with more government spending and programs. So focus on the “neutral rate” becomes the latest elaborate form of policymaking rationalization/justification.

From Ben Bernanke’s August 8, 2016 blog, “The Fed’s Shifting Perspective on the Economy and its Implications for Monetary Policy”: “Projections of r* can be interpreted as estimates of the ‘terminal’ or ‘neutral’ federal funds rate, the level of the funds rate consistent with stable, noninflationary growth in the longer term… As mentioned, a lower value of r* implies that current policy is not as expansionary as thought… In particular, relative to earlier estimates, they see current policy as less accommodative, the labor market as less tight, and inflationary pressures as more limited. Moreover, there may be a greater possibility that running the economy a bit ‘hot’ will lead to better productivity performance over time. The implications of these changes for policy are generally dovish, helping to explain the downward shifts in recent years in the Fed’s anticipated trajectory of rates.” Read more

by Stephen Hulme | 22nd Aug 16, 9:15am 1471814154

What is happening is that currencies values are relative to other currencies and major central banks are dropping interest rates so that overall the impact on an individual currency of an interest rate fall is offset.

Maybe it's just a function of plain capital flows reacting to an anomaly not generally perceived by the retail investing public? Read more

by Country boy | 22nd Aug 16, 11:03am 1471820595

Whats the anomally again? Assets always have to make a return - is the return ewpected capital gains? Whats going on in term of returns.

by ham n eggs | 22nd Aug 16, 9:15am 1471814102

"In China, their transition from manufacturing to services .."

Or rephrased this is a transition from producing something to consuming debt.

by David George | 22nd Aug 16, 9:23am 1471814592

Pretty much, Ham n eggs.

The banking and financial system may fund productive investment, create real wealth, and increase living standards; or it may simply add to overhead, extracting income to pay financial, property, and other rentier claimants. That is the dual potential of the web of financial credit, property rights, and debts (and their returns in the form of interest, economic rent, and capital gains) vis-à-vis the “real” economy of production and consumption.

The key question is whether finance will be industrialized — the hope of nineteenth-century bank reformers — or whether industry will be financialized, as is occurring today. Corporate stock buybacks or even a leveraged buyout may be the first step toward stripping capital and the road to bankruptcy rather than funding tangible capital formation........

The credit system has been warped into an increasingly perverse interface with rent-extracting activities. Bank credit is directed into the property sector, with preference to rent-extraction privileges, not the goods- and-service sector. In boom times, the financial sector injects more credit into the real estate, stock, and bond markets (and, to a lesser extent, to consumers via “home equity” loans and credit card debt) than it extracts in debt service (interest and amortization). The effect is to increase asset prices faster than debt levels. Applauded as “wealth creation,” this asset-price inflation improves the economy’s net worth in the short run.

Exponential loan growth can be prolonged only by a financial “race to the bottom” via reckless and increasingly fraudulent lending. Some banks seek to increase their market share by hook or by crook, prompting their rivals to try to hold onto their share by “loosening” their own lending standards. This is what happened when Countrywide, Wachovia, WaMu, and other banks innovated in the junk-mortgage market after 2001, followed by a host of community banks. Rising fragility was catalyzed by Wall Street and Federal Reserve enablers and bond-rating agencies, while a compliant U.S. Justice Department effectively decriminalized financial fraud.
http://michael-hudson.com/2016/08/finance-is-not-the-economy/

by ham n eggs | 22nd Aug 16, 11:52am 1471823538

Yes exactly. Someone put this quote which is good on ourfiniteworld from same article.
"Just as a Ponzi scheme must collapse with mathematical certainty (even though the timing of the collapse is uncertain), so it is with asset markets that expand faster than income growth. The divergence between income growth and rent extraction (asset price growth and financial transfers) is unsustainable, although, by going global, asset markets can be kept inflated over decades."

by scarfie | 22nd Aug 16, 10:36am 1471818985

Today M3 money supply is 45% greater than GDP.

Go back 10 years and this differential is only 8%.

Surely an economy only needs enough money for production, where is the rest going?

by Country boy | 22nd Aug 16, 11:05am 1471820701

Money is a store of value and for transactions - econ 101. If the demand for money rises it can reflect savings by a group (asians) who then lend through to deficit countries

by scarfie | 22nd Aug 16, 11:17am 1471821479

So you are saying that the 45% is investments? I could agree with that. What then happens to NZ inc when investments outgrow GDP? Which they seem to be doing at an exponential rate.

by scarfie | 22nd Aug 16, 11:36am 1471822600

And if there was a demand for money its cost would go up, but interest rates are going down. How would you explain that?