Summary of key points: -
- Breath-taking US jobs increase not what it appears
- NZ monetary tightening to bring down inflation requires a higher exchange rate
Breath-taking US jobs increase not what it appears
Judging by the reaction of global foreign exchange markets to last Friday’s US jobs data (the USD immediately strengthening one to two cents against the NZD, AUD and EUR), the US economy is undergoing a spectacular rebound in activity and the Federal Reserve will need to do a U-turn on monetary policy settings. The FX markets seemingly believing that the whopping 517,000 increase in jobs over the month of January is an accurate portrayal of current trends in the US economy. The Non-Farm Payrolls January employment result should be taken with a grain of salt, as such a sudden and massive increase in hiring is totally inconsistent with all the other weaker US economic data trends in retail, housing and manufacturing.
It looks very much like a “rogue” number, caused by the statistical jiggery-pokery the US Bureau of Labor Statistics call “seasonal adjustments”. There were not 517,000 actual new jobs added in January, the number comes from the seasonal adjustments applied. In the US, jobs actually decrease every January (due to extreme winter weather, holidays etc), however the seasonal adjustments applied always brings it back to positive figure. We have seen these totally unexpected and large increases in the past, in February and July 2002 as the chart below shows. The Covid shutdowns in March/April 2020 caused 20,000,000 jobs to be lost in the US economy. That collapse and rebound of jobs over subsequent months has severely disrupted the seasonal adjustment mathematic models, resulting in the rogue, volatile and meaningless numbers we see today. The pattern on how these job statistics is calculated and presented suggests that we will see very low monthly jobs increases over coming months as the seasonal adjustments work through. The clue that points to the 517,000 increase being a garbage and screwed-up number is that all the so-called gains were in the leisure/hospitality, professional/business services and healthcare sectors, the very same industry sectors that were extremely volatile over the Covid lockdown periods.
The FX markets are totally misinterpreting to situation if they really think the Federal Reserve will now completely change their tact and ramp up interest rates higher and faster due to one month’s jobs number. In the media conference following last Wednesday’s Fed FOMC meeting, where the official interest rate was increased by 0.25%, Chair Jerome Powell was clearly hinting that they were nearing the end of their monetary tightening cycle and the annual inflation rate was reducing quicker than what they had earlier anticipated. The Fed will not be adjusting their current stance on the basis of this one “rogue” jobs figure.
The NZD/USD exchange rate climbed to a high of 0.6530 last Thursday following the Fed meeting, only to be slammed down hard by two cents to 0.6330 when the US jobs data was released on Friday night. It has to be expected that the NZD selling against the USD has been severely over-done and a bounce back will inevitably occur when other upcoming US economic data does not support the economic resurgence that the January jobs number, on the surface, suggests. Therefore, local USD exporters who took the opportunity to top-up hedging levels on the three dips to 0.6250 over the Xmas/New Year holiday period, have another opportunity to enter hedges at still very reasonable spot market rates of 0.6330.
The great USD unwind is still only half-way through its cycle in the writer’s view, and one months’ jobs number will not fundamentally change the fact that US inflation is declining sharply. The FX markets will soon return to pricing-in a weaker USD due to anticipated US interest rate decreases in late 2023 and 2024. Adding to the NZD positive factors over coming months will be stronger Chinese economic data as their business and consumer activity returns to full noise. Local forestry log exporters to China are already witnessing a massive resurgence in Chinese demand, and with that, rapidly rising log prices (up from US$125/cm to US$135/cm last month).
NZ monetary tightening to bring down inflation requires a higher exchange rate
At the height of the Covid shock in 2020, RBNZ Governor Adrain Orr was extremely forthright and decisive with his “least regrets” slashing of interest rates and money printing designed to protect the economy from the ravishes of Covid (and extreme Government enforced lockdowns). Now that we have a cost of living/inflation crisis the other way (partially as a result of the excessive money printing), Mr Orr would be well advised to be bold and decisive once again with monetary policy decisions. So far, the RBNZ renewed tightening of policy last November has not really slowed up the pace of inflation increases, as the source of our inflation is from wage increases due to crippling labour shortages. Continually hiking interest rates to clobber consumer spending and economic activity (i.e. cause a recession) does a lot of damage to household finances and the wider economy. The Governor should use other monetary tightening tools at his disposal to reduce the inflation rate. As highlighted in last week’s report, the less economically damaging tool to tighten monetary conditions and drive inflation down is a higher exchange rate. Very high import penetration in New Zealand means that the exchange rate has a significant impact on domestic inflation.
The RBNZ should be well aware (if they are not, it is a worry in itself!) that the majority of our export industries are currently very highly hedged one to two years forward against a weakening USD trend. The export sector will not be hurt by a higher NZD value over the coming 12 months, therefore the RBNZ should be talking (“jawboning”) the NZD higher in their upcoming 22 February monetary policy statement (however, do not hold your breath for that to happen!).
The value of the NZ dollar barely received a mention in the RBNZ November MPS statement, just a passing comment that increases in interest rates offshore (especially the US) was putting downward pressure on the NZD. Back in the day, when Don Brash and Alan Bollard were the RBNZ Governors the exchange rate was much more central stage in monetary policy/inflation management, as they both well understood that the level and direction of the Kiwi dollar (and importer/exporter hedging levels) has a direct impact on inflation and GDP growth. Some well- chosen words from the RBNZ Governor on the exchange rate would help him achieve his objective of returning inflation to the 1% to 3% band.
The chart below confirms that over the last 35 years a higher NZ dollar TWI value (blue line, inverted on the right-hand axis) has always been instrumental in driving the annual inflation rate back down (especially in 1996, 2008 and 2012). Currently sitting at 72, the TWI is very much at average historical levels. If the RBNZ is serious about reducing inflation, they need to push the TWI value up to somewhere between 75 and 80. The Australian dollar and Chinese Yuan exchange rates have higher weightings in the TWI basket of currencies than the USD. Only a sharply higher NZD/USD exchange rate from specific NZ factors alone will lift the AUD and CNY cross-rates to the NZD and that in turn will reduce costs and prices of imported goods.
Adrian, the ball is in your court, it’s time to play a winning stroke!
Daily exchange rates
Select chart tabs
*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.
20 Comments
It looks very much like a “rogue” number, caused by the statistical jiggery-pokery the US Bureau of Labor Statistics call “seasonal adjustments”. Exactly:
Recently, the BLS reached out to me and others to help them fix their job market report methodology. You now see why. These population and seasonal adjustments are a complete mess. Link
Payroll data is supposed to give us a good idea of what's really going on in the labor market therefore the whole economy. Instead, the BLS estimates for January were shot through with revisions, adjustments, control factors, and recoding. In the end, we're left facing the same mess as before. Link
At the height of the Covid shock in 2020, RBNZ Governor Adrain Orr was extremely forthright and decisive with his “least regrets” slashing of interest rates and money printing designed to protect the economy from the ravishes of Covid (and extreme Government enforced lockdowns).
In addition to this unsupported Quigley spin, material released under the OIA also suggests that substantive outcomes like the dreadful inflation numbers and $9bn of LSAP losses were given no weight by either Board or Minister. Link
Biden is too busy keeping up appearances and playing with balloons and its anything but party time over there.
Amazon heading for a first since 2014, all is not well.
https://www.marketwatch.com/story/amazon-expected-to-post-first-unprofi…
One or two commenters, such as JimboJones, have posted before on the structural aspects of the jobs market. Ie. Ageing population, and early retirement of many in the wake of covid.
Makes me wonder if this means a recession needs to be quite severe to see a significant increase in unemployment. Perhaps that same rise in unemployment in the past would have come off a much more moderate recession.
The RBNZ should be well aware (if they are not, it is a worry in itself!) that the majority of our export industries are currently very highly hedged one to two years forward against a weakening USD trend. The export sector will not be hurt by a higher NZD value over the coming 12 months, therefore the RBNZ should be talking (“jawboning”) the NZD higher in their upcoming 22 February monetary policy statement (however, do not hold your breath for that to happen!).
That is a pretty weak argument that a higher NZD won't hurt the export sector, I've got to say.
Meanwhile, they look to be getting nervous about the projections for Aussie Inflation, given that their OCR is due out tomorrow.
The Melbourne Institute monthly inflation gauge for January is off the hook. Trimmed Mean, the breadth of inflation, is a barmy 9% annualised in January.
Does Barrington Treasury Services have a lot of skin in the game that relies on the NZD being as strong as possible?
It seems every Kerr article on FX over the past year has talked up the imminence of the NZD strengthening, which frankly hasn't been happening except the odd rise.
Now suddenly the narrative is directingly advocating that the RBNZ must pull levers to help strengthen the NZD....
Hmmm.
And I might add, the more intermittent/random guest articles here on NZD suddenly and oddly only seem to appear after a wee NZD rise and again talk it up. I don't believe in reptilian overlords, but something here smells off...
I actually really want to learn more about FX and especially prospects for USD/NZD because, simply, I get paid in USD but am a kiwi. But I'm not trusting the balance of articles on this topic on interest.co.nz to be frank.
Filter out the signal from the noise and this is the reality: NZD (quarterly average)
Somebody please explain the logic in this article.
If the NZ dollar goes up then imports will be cheaper encouraging people to buy and travel more, while at the same time clobbering exporters. I can’t quite see how that will lower interest rates, avoid a recession and throttle back inflation.
What do you think forcing the price of everything up by pursuing a lower dollar policy would do to pricing and price expectations?
We are very good at promoting talking points about how it's super important for exporters but a big chunk of Kiwis are not exporters and for them it just means higher living costs, with no real benefit.
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.