Bernanke disappoints at Jackson Hole, indicating no QE3 on the horizon

By Mike Burrowes

The NZD got in some spring activity a little early to close out the week, rising sharply and trading back above the US84 cent level. Indeed the NZD was a contender for the yellow jersey, posting TWI gains with the NZDGBP towards 0.5150, the NZDEUR to 0.5800 and NZDJPY just shy of the 64.50 level.

The USD fell against the majority of currencies as Fed Chairman Bernanke said the US economy hasn't deteriorated enough to need immediate stimulus and while that might disappoint some analysts, the detail of his commentary helped spur short covering in FX and equity markets on a day when many were preoccupied battening down the hatches for the arrival of Hurricane Irene.

In the end Bernanke's 2011 speech was nowhere near as big an event as last year (which launched QE2). The promise of ongoing consideration for QE3 and policy action fuelling risk appetite, as in the detail of his address Bernanke speaks of a Fed ready to employ all tools at its disposal to assist the US economy.

With the CHF and JPY close to record highs and the SNB and BOJ clearly focussed on preventing further currency strength, another round of US monetary policy stimulus is more likely to benefit the higher-yielding currencies, like the NZD & AUD, especially if risk-appetite is boosted. Bernanke’s Jackson Hole address clarified that the Fed funds rate would be held at current low levels for at least two more years, which argues for continuing solid yield-related demand for the NZD.

Contrast this with our own view that there is pressure on the RBNZ to hike rates over the next 12 months. We continue to forecast 125bps of hikes over the next 12 months, admittedly in contrast to current market expectations of just 48bps of hikes.

Key to the local calendar is this Wednesday’s NBNZ business survey. While its sentiment reading is likely to have cooled noticeably, from July’s red-hot result, the big question is to what extent the latest global turmoil has buckled the survey’s own-activity indicators. But given these were exceptionally strong in July, only a big fall would begin to threaten our still-upbeat NZ GDP view.

Also to consider this week is Thursday morning’s Overseas Trade Indexes, for Q2. We expect further decent gains in their export and (core) import volumes, along with a fresh 37-year high in the merchandise terms of trade. Thursday afternoon’s ANZ commodity price results, for August, will be the first set to indicate impacts from the global ructions.

Other monthly indicators to note for this week are building consents and credit aggregates, for July. Also watch for the brand-new monthly National Employment Indicator, pencilled in for Tuesday; in time this could become a useful lead to the quarterly HLFS.     

There are aspects of Bernanke's speech to consider, most obviously that the FOMC meeting set for September 20th will have another day added to it, allowing in Bernanke's words a fuller discussion of the relative merits & costs of tools at the Fed's disposal.

The meeting will of course include a review of pertinent issues, economic & financial developments as the Committee looks to promote a stronger economic recovery. In his speech Bernanke acknowledged an extraordinarily high level of long term unemployment and accepted policy to promote a short term solution may well serve longer term objectives.

Recent voting has shown a divided Fed at the table & Bernanke is likely to need the two days to build consensus on policy - though the disappointing update on Q2 GDP also released on Friday did play somewhat into his hands. The revised release printed at 1.0% - trimmed from its previous reading of 1.3%.

Subsequent to Bernanke, the weekend agenda at Jackson Hole saw outgoing ECB President Trichet attack critics who have argued for a more lenient hand on the monetary policy tiller, Trichet arguing that if the ECB were to signal it was not anchoring inflation expectations long term rates in Europe would rise swiftly. Trichet also attacked those who warn of a looming European banking crisis, noting it would be wrong to question the determination of EU leaders to hold the euro-zone intact

In contrast IMF Managing Director Lagarde, also speaking at Jackson Hole, said that Europe had to consider using the EFSF to inject money into ailing banks. Lagarde, who is only weeks into her tenure at the helm of the IMF, suggested that such recapitalisation should be "substantial". She argues that banks if necessary would access public funds & this could be through the European bailout fund, a view that will no doubt draw ire from leaders of the "rich northern" sovereign states of Europe.

With conflict amongst various leaders, it's no surprise that Greece was again a focus last week, the country's yields pushed to euro-era records on concerns Finland’s demands will derail the nation's second bailout package & the debt of Italy and Spain required the direct support of the ECB to prevent their yield escalating & progressing greater European sovereign angst.

US attention is very much on the impact of Hurricane Irene as we start our week, however, there is the Dallas Fed’s Mfg Index due for release tonight, the prognosis is poor and it is expected to fall and revisit mid 2009 levels. The aftermath of Irene and a UK bank holiday will impact on market liquidity and volumes at the start of a week that concludes with Non Farm Payrolls.

See our interactive swap rates charts here and bond rate charts here.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.