sign up log in
Want to go ad-free? Find out how, here.

Opinion: Improvement in domestic economic data to turn moneymarket pricing

Opinion: Improvement in domestic economic data to turn moneymarket pricing
<br />

By Roger J Kerr

Media reports and bank commentaries on the outlook for monetary policy and interest rates are universal in the view that the RBNZ will not have to adjust the OCR upwards until March 2011 at the earliest and after that the 0.25% increases will be few and far between.

That’s how the scenario looks now after several month of weak domestic economic data and several economic forecasters giving a reasonable probability of the economy falling back into recession.

While GDP growth in the September and December quarters will be distorted by the Canterbury earthquake, the rebound in growth through the first half of 2011 may well surprise on the upside.

The problem is that we will not know officially how the economy performed in the first three months of 2011 until late June 2011.

The three-month lag in counting what has happened in the economy by Statistics NZ is quite unacceptable, and I am sure it is frustrating for the RBNZ as it is for everyone else. It pays not to mention the HLFS unemployment/employment statistics as the survey sampling is a complete mess and the numbers are not to be relied on.

My view is that the FX and interest rate markets will start to reflect GDP growth being higher in 2011 than generally forecast well before the official figures in June 2011.

The moneymarkets should start to price the potential of much more rapid increases in the OCR from March 2011 when it is realised that GDP growth in 2011 will be well above the RBNZ’s +2.6%.

By December this year I see the market sentiment and direction turning to such pricing due to the following developments:-

1. Domestic retail and housing market confidence and sentiment improving as the GST/income tax cut changes are now known and employment uncertainties reduce.

2. Business and consumer confidence improving as Jo and Josephine Public realise that the economy is expanding on good export performance and the prospect of a double-dip recession was just scaremongering.

3. The massive household de-leveraging and economic re-balancing running its course and wallets opening up somewhat.

4. High export commodity prices holding up and thus delivering higher profits and incomes in rural NZ.

5. Manufacturing improving markedly from current levels as the 0.7600 NZD/AUD cross-rate makes selling into Australia very profitable indeed. Output, investment and jobs can be expected to increase in this sector.

6. The 2011 Rugby World Cup providing a boost to tourism and the Christchurch re-build providing a real boost to the construction sector.

The major proviso to this more bullish economic outlook is that the NZD/USD exchange rate does not stay above 0.7500 for a prolonged period and ruin the advantage of the high commodity prices and hamper the export-led recovery.

The net result of improving domestic conditions is that the RBNZ will be forced to hastily revise their GDP growth forecast back up again in early 2011.

Their remit is to manage monetary policy today on their forecast of the economy and inflation risks in 12 to 18 months time. My take on matters is that they will be forced to remove the “emergency monetary stimulus” much earlier than the picture painted in their September Monetary Policy Statement.

--------------------

 * Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com

No chart with that title exists.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

6 Comments

Roger IMHO you are now a fully fledged citizen of Lala Land... say hi to the fairies and pixies while you sit in your candy floss cloud of delusion...

Up
0

Keep up the good work Roger, Guinness is not far away!

Up
0

"The major proviso to this more bullish economic outlook is that the NZD/USD exchange rate does not stay above 0.7500 for a prolonged period and ruin the advantage of the high commodity prices and hamper the export-led recovery"

- the best bit of the whole article which just proves Roger isn't totally away with the fairies, hes just blantantly optimistic with a tiny sense of realism running through his veins. I think that this tiny paragraph states exactly what will happen.

Up
0

Roger is in cloud cuckoo land.  Real recovery is a long way off especially with strength against the US dollar crushing exporters whilst weakness against the Aussie leaks population and productivity across the Tasman.

Up
0

This Guy should be banned from writing on this particular topic at least. Nonsense as usual.

Up
0

"6. The 2011 Rugby World Cup providing a boost to tourism and the Christchurch re-build providing a real boost to the construction sector."

1: the RWC will be one of biggest financial sporting disasters of all time in this country since the Auckland CG. Watch as the perfect economic storm again hits in 2011

2: the CHCH rebuild is being payed for by taxpayers so the reality is the "boost" is nothing but an already paid for government subsidy to rebuild existing infrastructure that got destroyed which was paid for and now must be paid for again. That is not a 'boost'., its 'welfare' for the construction industry

Up
0