By Roger J Kerr
Has the local moneymarket got it right in pricing-in another global economic recession?
How else do you interpret fixed swap interest rates from one to five years all trading below 3.00%?
The probability of another global double-dip recession is pretty low in my book as the US economic recovery gains momentum and China has plenty of fiscal and monetary firepower in reserve to ensure they maintain growth well above 7.5% this year.
The local interest rate market has become far too pessimistic in my view and they are over-reacting to recent Aussie interest rate cuts and European problems (which are hardly new).
Local banks are slashing their mortgage lending interest rates (and their margins along with that) as they realise bank profitability goes southwards rather quickly if new lending growth is below the level of loan principal repayments.
I cannot see the aggressive bank lending lasting too long when you consider that their cost of funds from retail deposits and offshore wholesale borrowing is increasing, not decreasing.
The local moneymarket also appears to be ignoring the very sharp fall in the NZ dollar exchange rates from 0.8300 to 0.7500.
The exchange rate change means that GDP growth near 3.00% is more assured and imported goods will be going up in price, not downwards as has been the case for the last 12 months.
The RBNZ inflation expectations survey due for release tomorrow does not normally reflect an accurate forecast of the future inflation levels, a more reaction to historical inflation numbers.
The probability of an OCR cut remains very small, although the buzz in the blogs and chat-rooms is that it is a foregone conclusion.
If the NZD/USD exchange rate was 0.8200 today I would agree that an OCR cut would have a higher probability, the reality is that the exchange rate has changed dramatically in a very short space of time.
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* 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
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5 Comments
Gosh Roj gets it wrong.
He's been on about higher rates and boom times for three years when all we ever had was a dead cat bounce.
It's now inevitable that money printing and inflation are the only solution to US and Europe's dilemmas. Anyone that fixed at the record low 5 year rates in 2009 and didn't break them when the earthquake hit is actually probably regretting ever fixing them now!
I expect banks to be awash with cash soon. Consider once the say $20b of insurance payouts are made we will see probably a good 3/4 go some way or another go to reduce bank debt or go into saving accounts. A 5+% reduction in total private debt in NZ will certainly have an impact.
Yes, some very strong results with prices up 30-40% on 2007 for unchanged properties.
Huge bidding on some. Dungers (things in dips, or near motorways or on main roads) still create little interest though.
One in Herne Bay which sold for $2.701m had about 6 active bidders which was a surprise for a house at that price level.
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