Here's my summary of the key news over the weekend in 90 seconds at 9 am, including news of fast falling spreads.
But first, the American jobs report came in largely as expected with the good growth most observers were predicting. 217,000 new jobs were added and more people entered the workforce. The unemployment rate was unchanged as was the participation rate. There was also no change in part time workers, but the number of job loses fell. So, although there was no real improvement in the quality of the labour market, the relatively high level of new jobs created in May was seen as a confirming positive that the US economy is in full recovery mode. Markets reacted accordingly. Employment levels are now higher than pre GFC.
In China, their exports gained steam in May thanks to firmer global demand, data showed yesterday, but an unexpected fall in imports signaled weaker domestic demand that could continue to weigh on their economy.
Their trade surplus exceeded US$36 bln in May.
The ECB announcements on Friday, while not involving direct QE - yet - will see a huge expansion of support for the bond markets. These have rallied strongly driving EU yields much lower. A surge in liquidity is expected to flow from the negative deposit interest rate that the ECB implemented. Anything that moves will get a bid.
At the end of last week in wholesale markets there was also a very dramatic fall in credit default swap spreads across the board. For the US and Europe they are now back down to levels last seen in 2007. For Australia's banks they are at 2010 levels. These narrowing of spreads means that our banks will be able to borrow new wholesale money off finer margins.
In a somewhat relate shift, stock market risk volatility also declined to levels last seen in 2007 pre GFC as well.
In New York, yields on benchmark UST 10 yr bonds rose to 2.60%, gold jumped $10 to $1,252/oz and oil price remained hovering in the US$102-103/bbl range. Stocks rose across the board with the S&P500 nearing the 2000 mark on its index.
For New Zealand, these changes mean the cost of wholesale money for our mortgage market will stay inexpensive, despite what the RBNZ will announce on Thursday.
On the exchange rate the NZD was largely unaffected. It starts the week at 85.0 USc, at 91.0 AUc and the TWI is at 79.2. Its a public holiday in Australia today.
If you want to catch up with all the changes from Friday, we have an update here.
The easiest place to stay up with today's event risk is by following our Economic Calendar here »
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25 Comments
The ECB and the US Federal Reverse are keeping interest rates very low and for very long ... infact the ECB is actually punishing banks with a negative cash rate ... use the fat on your balance sheet or pay us 0.1 % penalty ...
... in a globalised world for banking , I can't see how our RBNZ can step too far out of line with them ...
Banks & borrowers will just get their dosh cheaper somewhere other than NZ ..... remember all those Kiwi cockies who got ultra cheap Swiss loans in the 1980's .... but who were later bankrupted when the $NZ crashed against the Swiss Franc ...
There is always the possibility that rising interest rates and the costs of those rises (interest payments) will be more than offset by reductions in house prices for those in the market now and those who will be in the market in the forseeable future. Those who are stupid enough to buy houses in Auckland at the current price levels have no one to blame but themselves. There are always suckers in the markets whether they be currency, housing or equity markets.
You do realise that Kimy is a local megaphone wanting the RBNZ to forever "cut interest rates" lower and lower, down to ECB negative interest rates
A rise in interest rates and a drop in house prices will hit kimy at both ends with his 13 investment properties and $2½ million in mortgage borrowings
So 3 years ago Alan Bollard reduced interest rates by 50 basis points in an emergency EQC cut
Whatever business model Postie Plus used, that emegency cut didn't help them and the minute the emergency cut is reversed they go into voluntary management under PwC
Your comment implies their problems occurred overnight, beginning April 2014, while the emergency cut for 3 yrs wasn't any use to them and didnt help
Bryan Gaynor did a piercing article the other day on their business model that nailed it
Since 2008 weve seen ppl with no pay increases, what do you think that does to high street spending over 6 years? (plus non-tradable increases anyway), Id suggest PP+ are no less efficient than many others, but retail pays amongst the highest commercial rents (I believe) across the globe. Postie plus also had a BAU model, based om never ending growth, thats now finished with, they are just the first of many.
regards
I don't think you can blame Postie Plus on interest rates not being a record lows. Things have gradually been downhill for them since publically listing in 2003.
http://www.stuff.co.nz/business/industries/10129379/How-Postie-went-fro…
I particular, when you have gradually slid to the point of being a marginal business, then your distribution system fails spectacularly, you have no more reserves to draw from.
Not everything is interest rates.
DC, if we had a booming economy where every sector was expanding, yes. If on the other hand we have some sectors expanding (seeing inflation) while ppl have no more $s in their wallets then some sectors have to suffer so others can grow, surely? as there is no more money available that is ignoring an increase (or assuming) debt levels do not change.
regards
One thing I haven't seen mentioned here is the rise in term deposits. Using data from this site we can compare two dates, March 2008 (when the slowdown started) and today.
March 2008: mortgage debt $157b, term deposits $77b, difference $80b or 43% of GDP
Today: mortgage debt $191b, term deposits $126b, difference $65b or 29% of GDP
The rise in term deposits is striking. It looks like the savings rate has increased. Presumably there are other savings as well as term deposits. A rise in interest rates of 1% won't suck 1% of GDP a year out of the economy, as a commenter here suggested, more like 0.3% a year. Interest rates on 2 year term deposits are already up 0.5%.
I think you are essentially right about the data. Hope you don't think I am being picky, but "total term deposits" includes TDs from both the household and business sector. Including all household-only bank accounts changes your comparison to:
March 2008 = $157 bln in mortgages, $80 bln in all household deposits
April 2014 = $191 bln in mortgages, $128 bln in all household deposits
(Household deposits includes all bank accounts, and all household term deposits.)
For Steven, both mortgages and household deposits in these RBNZ data sets always included bank and non-banks, so fincos always included. Besides, peak finance co balances never went above $15 bln and the max loss over all the collapses didn't exceed $4 bln. Yes, big numbers, but no part of why household deposits have grown so quickly, and so much quicker than household (mortgage) debt.
There has been a noticeable deleveraging by households. Sure you can find anecdotal exceptions, but overall it has been substantial. RBNZ data on household balance sheets also confirms this, with households having bigger 'financial assets' and a lower proportion of their 'wealth' in housing - even though 'housing is still by far the largest component. The surprise is how fast the non-housing part is growing. KiwiSaver is part of the answer, but not all of it.
Recently the NYTimes had a fabulous "how the recession reshaped the economy, in 255 charts" and that showed how substantial the remaking of their economy has been through the GFC. If we had a similar set for NZ I am sure you would also see a substantial change here too. And through that there are winners and losers. But clearly in NZ there have been far more winners than losers. It's just that you hear more from one than the other. Change is never appreciated by those going through it, but often it can't really be avoided. Most of 'us' have handled it positively. The data certainly suggests that.
It seems difficult to fathom how the ECB & US etc can be holding low interest rates & negative rates in case of ECB. - While the RBNZ is continuing on a hiking direction. Is NZ somehow immune from global problems? Will hiking have much effect on the Aucland housing market? What is going to be the effect of hikes on the average home-owner and consumer spending?
But the global problems are IN these other countries and they, say the EU have a really serious problem, they dice with a Depression. NZ will follow the world in, sure.
Hence I think our OCR should be a bit higher (edit then them), but yes I very much agree, dont raise it.
regards
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