By Roger J Kerr
Despite the GDP growth numbers in the March quarter being weaker than most expected (RBNZ excepted!) it is still hard to see what forces are going to drive term interest rates lower from here.
Having said that, the pull back to 3.50% from 4.00% in the US 10-year Treasury Bond yields over recent weeks will prevent NZ swap and bond yields going any higher for a few months.
Lower US inflation results and successful US Treasury bond auctions have returned some confidence to the US bond market of late. It is perhaps a bit surprising that the 5 to 10 year yields have not corrected down further with the US move. Overall the best forecast for all interest rates across the yield curve over coming months is that they go sideways, awaiting fresh economic information that confirms the speed of the economic recovery.
The "forward looking" economic indicators, such as business confidence surveys, out today, provide a better indicator of the current mood. As time marches on this year and into 2010, the RBNZ will struggle to find any good reasons as to why they have to have monetary policy so loose. Eventually the artificially low official short-term interest rates at 2.50% will have to be adjusted sharply higher. The debate is only "when" that will happen, not "if" that will happen.
The 7% decline in manufacturing output in the GDP numbers was a bit of a surprise given that earlier manufacturing volume data for meat and diary was high for the March quarter. Something screwy in the timing and numbers here that may result the June quarter figures being nowhere as negative.
It appears to me that the poor economic data for New Zealand is now largely behind us; however the agricultural commodity price trends are still the dominant indicator of how we come out of this recession.
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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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