By Roger J Kerr
Last week’s RBNZ monetary policy statement provided little in the way of fresh insights into the current performance and outlook for the NZ economy.
Unsurprisingly, short-term interest rates are staying lower for longer through 2013 based on the exchange rate being where it is and the TWI Index staying well above 70.0.
I still have my suspicions that the RBNZ are underestimating future activity levels in retail spending, construction, residential real estate, business investment and agricultural production over the next 12 months.
However, the international headwinds are for real with our largest trading partner, Australia in some trouble with their economy.
I do note that most of our exports to Australia are in food and beverage staples, not luxury items and thus prone to sharp demand decreases.
Irrespective of the RBNZ’s view of the NZ economy and monetary conditions going forward, the most significant development last week was the US 10-year Treasury Bond yields increasing from 1.70% to 1.87% following the Fed’s QE3 announcement.
Traders and investors in US Treasury bonds clearly taking a different view on future US growth and inflation levels than the currency markets, who sold the USD in response to QE3.
When buying my lunch today I chatted to a long-time financial markets compatriot, who reliably informed me that US bond yields also increased following QE1 and QE2.
So, borrowers looking for favourable interest rate movements from the Bernanke QE3 stimulus have been disappointed as the bond market focuses on the longer term economic consequences, not the short term euphoria the currency and equity markets have latched on to.
US 10-year Treasury bonds only fell from 2.0% to 1.4% in May/June because of global investors 'flight to safety' of exiting funds from Euroland and seeking the safe haven of US Treasuries. Now that European risk has reduced, those investor flows are unwinding, resulting in yields rising.
Local market attention will now centre on this Thursday’s GDP data for the June quarter. While consensus forecasts are for a modest +0.3% quarterly increase, following the very strong +1.1% in the March quarter, retail sales and agriculture production indicators point to a number above +0.3%.
Construction and manufacturing were also up marginally over the quarter, so it will come down to electricity, forestry, mining exploration and Government sectors’ combined performance to determine the final result.
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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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14 Comments
....the most significant development last week was the US 10-year Treasury Bond yields increasing from 1.70% to 1.87% following the Fed’s QE3 announcement.
Roger - you could say why? It's significant but not unknown to the likes of Pimco.
On September 13, 2012, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to begin purchasing additional agency mortgage-backed securities (MBS) at a pace of $40 billion per month. Read article
Is this alarming? On the contrary, it’s the main purpose of the exercise. In simple models of expectations-based efforts to get out of a liquidity trap, the only way the Fed can get leverage is by promising higher inflation once the liquidity trap is over.
http://krugman.blogs.nytimes.com/2012/09/20/the-trouble-with-fedspeak/
regards
"I still have my suspicions that the RBNZ are underestimating future activity levels in retail spending, construction, residential real estate, business investment and agricultural production over the next 12 months."
I may be wrong, but wasn't this a similar RK prediction 1, 2, and 3 years ago?
No, you're not wrong. In Roger's world we are constantly on the verge of rising interest rates and inflation.
For example: "the most significant development last week was the US 10-year Treasury Bond yields increasing from 1.70% to 1.87%"
Well the ten year yield is back down this morning and has been moving in that 1.5 to 2% range for a long time, so why is a little blip of 0.17% significant?
I think there's a good chance the next move on the OCR will be down but with some use of other tools to constrain excess mortgage borrowing.
How are Roger's clients coping after listening to his advise these past few years?
How are Roger's clients coping after listening to his advise these past few years?
More to the point, how do the ratepayers etc, who pay Roger's client's fees feel about the indignity of wearing not insignificant lost opportunities heaped upon higher rates bills for no visible return.
I suppose the recently retired Goldman Sach's proprietary trading dealers now employed as breakfast TV commentators pontificating about all manner of currency issues beyond their ability to understand will not doubt be performing surgery tomorrow following some instructional tweets from spin trolls.
" How are Roger's clients coping after listening to his advice these past few years ? "
I'd reckon no worse than investors who listened to Bernard's advice these past few years , or Gareth Morgan's , or that of earthquake sage Ken Ring .....
........ those who listened to Ollie Newland's advice these past few years are sporting a smug " Cheshire-Cat " like grin ....... Sods !
Well Grant A I have no truck with getting it wrong more than not - the world of trading is hard enough without carrying losers bets in my rates - money is easliy lost and usually never recovered. Loss mitigating strategies ie exit strategies are paramount to successful money management exercises.
I pesonally think if he follows the same line of thought he will only be wrong for another 3-5 years and then when the world does finally come together he will be right. Not good for anyone listening to him now mind you. Keep on keeping on Rog, you`ll get there cobber.
Raising expectations is what is expected though.
"Is this alarming? On the contrary, it’s the main purpose of the exercise. In simple models of expectations-based efforts to get out of a liquidity trap, the only way the Fed can get leverage is by promising higher inflation once the liquidity trap is over."
http://krugman.blogs.nytimes.com/2012/09/20/the-trouble-with-fedspeak/
regards
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