By Roger J Kerr
Unexpected developments in the wholesale swap market last week saw interest rate yields increase across the curve.
At first blush it seemed that local borrowers were adding more long-term fixed rate hedging in volume and were pushing the market upwards.
That was a bit surprising, as it appeared that most who wanted to fix rates long-term had already done so some weeks ago.
There is also a question whether the large NZ borrowers who are tapping the US Private Placement debt market at this time are swapping back to fixed or floating rate NZD borrowing. There has not been any further USPP debt issues announced since Vector and Transpower; however several others are known to be in the pipeline.
The fixed-rate paying activity in the swaps market seems to be an offshore investment bank unwinding a trading position and once again forgetting how small and illiquid the NZ swaps market is for the amounts they are used to dealing. The fact that a large overseas trader in our interest rate market does not see rates going any lower (hence unwinding a long position) confirms my view that our term interest rates have well and truly seen their lows.
The ten-year swap rates increased from 4.90% to 5.15% last week, as the unwinding of the trading position by the investment bank in the two-year part of the curve was required to be spread across all the maturities to clear the risk through the inter-bank wholesale market.
The 10-year swaps are largely driven by the US 10-year Treasury Bond yields, which increased initially from 2.50% to 2.70% last week, however they have since returned to 2.60%. Whether the swap rates hold up at these higher levels, or return to where they came from, as always, depends on the upcoming economic data.
The most important piece of data this week is the US Federal Reserve FOMC meeting on Thursday morning. If the QE2 monetary stimulus package amount is lower and more spread over time than the USD1 trillion the bond market expects, the future Fed buying of bonds will be lower and bond yield should increase from current 2.60% levels.
In terms of domestic economic data due out this week, the labour cost and employment figures may turn out to be somewhat more positive than the gloomy RBNZ outlook on the domestic economy. Recent immigration and business confidence indicators were certainly pointing to the economy doing somewhat better than the RBNZ’s current flat projection.
The accompanying statement to the RBNZ’s “no change” OCR review last week still suggests that the RBNZ will be lifting rates when the economic outlook justifies it.
They always like to have a bet each way; however my view is that they will be forced to adjust their 2011 economic outlook to a more upbeat assessment before the end of the year. So much revolves around consumer spending activity for the RBNZ and a small opening of wallets by households around Christmas, after two years of belt tightening, appears more than likely to me.
A lower unemployment number this Thursday may encourage Joe and Josephine Public that their own job security is somewhat better than the unjustifiable gloomy picture painted recently by the media, the RBNZ and Wellington-based economic forecasting groups.
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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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36 Comments
Roger Kerr says - " A lower unemployment number this Thursday"
Does anyone of any economic importance take any notice of the unemployment figures? We all know that they are a fantasy. There are so many ways to take people off the unemployment list and put them on some other kind of benefit or training programme thereby rendering the headline number as meaningless.
I really stuggle to see how unemployment will drop much if at all on Thursday's announcement
Most business managers I still speak to are struggling like mad
Some of our major employment sectors, such as retail and hospitality are having a really rough time, as is construction and related sectors, and govt is certainly not growing (in fact is actually gradually shrinking) - someone told me the other day that Housing NZ are cutting back staff now
The problem i have with unemployment number stats. is that they only show those actually without employment.
they don't show those with hours reduced from fulltime to part time etc which causes the spending power of a household to diminish even though,for all intents and purposes, those people show up as employed?
Where do the stats. come from then, Chris? My spouses contract finished in March, and neither of us has been able to find work since then ( an age issue!) and we cannot claim enemployment benefits as we have 'too much in the bank'. Who counted the two of us as unemployed?
How is it accurately recorded then?
My wife lost her job a while back, she, because of my salary didnt qualify for any assistance or recognition from WINZ...so they basically shoved her out the door as not their problem.
So as far as I am aware there is no recording of her being un-employed or now only partially employed....ie 3 hours a week instead of 40....
We have this,
http://www.dol.govt.nz/lmr/lmr-hlfs.asp
A survey....
regards
Unemployment stats, like most stats, come from surveys given to large population samples representative of the population as a whole. The sample are asked a number of questions about their current employment status and the statisticians determine the unemployment rate from this.
The statistical methods used aren't perfect but they're very good, and the models are actually amazingly effective at representing the true unemployment rates.
Like all economic statistics they're limited and not flawless. You have hit on a couple of concerns specific to unemployment statistics - underemployment (fewer hours than you want) often isn't effectively measured, discouraged workers (people who can't find a job so no longer ticks "seeking work") sometimes cannot be correctly adjusted for, and of course human shame (people who insist they're looking for work even if they aren't) are a constant pain. But all of this doesn't mean we should discount the statistica all together.
By the way, just so you know, the "unemployment rate" isn't the same as "the number of people seeking a benefit". A person is counted as unemployed if they're in the workforce, seeking work and unable to find it. Unemployment stats dont include (for a number of very good reasons) people on benefits not seeking work, people unable to work, people too young/old to work, prisoners, etc etc. Remember that unemployment statistics aren't supposed to be a measure of laziness or shame - they're a measure of people who want to work but can't due to the economic climate.
By the way, just re-reading your response above mine - I'm not sure you understand how statistics are collected. The government doesn't have the inclination or the ability to assess the employment status of each and every New Zealander - we can use statistical models to measure these things, and some statisticians and mathemeticians who are a lot smarter than you or me have figured out how to do this very accurately. Sample sizes in these surveys are large and effectively random.
My experience in statistics doesn't exceed second year uni, but surely they taught you about the basics of statistical methods in school?
So your answer is, that we two aren't counted, but estimated, and the statistical data is the result of a computerised best guess! Because, you see, statistically, the unemployment rate in our family is 100%. It's a shame we can't attach graphics on this site, otherwise I could draw you a Venn diagram to illustrate my point.
If you knew anything about science (which you clearly don't) you would understand that statistical analysis sharing many similarties with economic analysis is a hugely important part of all research. In fact any scientist taking on a research roll of any sort is expected to have a very high level of statistical nouse, without which analysis of scientific data is impossible. The types of analysis they use (sampling, regressions analysis, t- and z-score inference modelling, surveys and observational data etc) are basically the same type of data used by economic statisticians.
Although the "dismal science" of economics itself may not be comparable to the physical sciences, the data collection and processing is almost exactly the same. Economic predictions may be hard to swallow, but the data itself is usually good.
Again though, it's an exercise in futility trying to argue with incurrigible idiots who don't want to understand the nuances of economic data.
"Economic predictions may be hard to swallow, but the data itself is usually good." Oky doky. Let's take the last two sets of unemployment stats. for NZ. The words ' economists suprised at the varience between the two' came readily to the fore. Which of the two do you think was right? Or do we have to wait for another 10 guesses to confirm which was the abberration? It's all 'best guesswork', Chris. Sometimes its right; most often it's not.
The production and sale of stuffed, wolly reindeer and Christmas trees artificially or not will certainly decrease unemployment at least artificially in November /December here in NZ and increase the value of the NZ$ badly for exporters and Winston' s chance of re- erection.
Increase warmer weather means icecreme production is up by 3,25% another good sign of increased NZ production and truly the end of the recession.
Other good news: In the building industry acvtivitiy increased by 2.13% due to warmer weather - doubled glazed windows are now replaced by single glazed ones, especially in the NI around Tauranga.
So, Mr. Greed from the respected NZCorrupt and Falsehood Institute says people of NZ - all positive - Christmas isn't far away time to spend your money !
Meanwhile down on the farm where it all starts(correct Roger) ive just taken on an employee (for the first time ever), lambs are going to be $100 plus or $25 dollars up on last year old ewes $20 up and wool going through an astonishing recovery. All this depite the worldwide economic enviroment and strong currency! Glory days!!!
Enjoy it while it lasts Shagger and expect the council to up your valuation and your rates...will you be splurging on price bloated coastal residential property or replacing the buggered fences, yards, gates, tractor,dogs plus the 4wd and planning on improving the genetics of the mob?
Wolly, I certainly wont be splurgeing on coastal property and I will be investing in improving my property and paying down some debt. You may have a point on the rates as the memories of the new mayors and councillors collectively forget their election pledges of prudence. Ya cant win em all!
Obviously so called experts judging the state of NZ markets often don’t make enough research or simply ignore correlated international events happening/ occuring on many fronts. As the example of Sheep Shagger shows this combination of one sided views can lead to great damage of someone business.
I would disagree Kunst. In the example of Sheep shagger, he should be making hay while the sun shines in full awareness that there may be 10 hard seasons aftert this one. However at the moment, lamb, wool, beef and dairy are all at very very good prices despite the $
Correct me if im wrong Kunst but didnt you post a short while ago that forward bookings for your (im assuming here) accomadation business were solid for the next few months. That even suggest glass half full, Walter???.I think the point im trying to make that it is far from all doom out there as reading this site often suggests.
Considering the worldwide circumstances, yes we are doing quite well not only with the ArtGallery but also accommodation side. But as Nicholas just mentioned earlier thing can change very quick – there will not be a term called a half full/ empty glass describing an economic scenario anymore. Economics is only part of what business people should consider making decisions anyway.
“Reading the world” yes, in my opinion we are in a very critical situation and the most frustrating aspect after 40years successfully in business as business people we are increasingly doomed to react rather then act.
With my regular ideas/ vision, but unfortunately not much response I try to reverse the trend.
...and 'our' Houses in Berlin and Vienna...and....
"Tourism Industry Association Chief Executive Tim Cossar says ... Germany has followed suit, and in the last 24 hours.... Austria's also applied a similar tax adding around 120 dollars to the cost of a long-haul flight....Britain's hefty increase in air-passenger departure tax is spreading throughout Europe - and will have a huge impact here....it's the principal and the fact yet another country has done it."
It's one way to make sure the local inhabitants stay at home and spend their hard earned cash in the country of origin, I suppose. Just another sign of the tariffs to come?
Is this what Neville prefers not to believe:
"At this moment, the risk to this base case scenario is probably to the downside with a sharper than expected correction in land prices, partly due to possible foreign ownership restrictions and less appetite from rural lenders, putting greater pressure on farmers' outgoings."
It seems to be part of a sound argument to me.
Roger,
Sorry but you are missing the woods for the trees, or in this case forrests.
a) The biggest point is Peak oil which you not only ignore but fail to acknoledge which for a so called risk management organisation is horrendious. Anyway besides that, to grow the world's GDP % we need to grow oil supply by an equal amount.....cant be done....so all these below are hard enough before you consider this one point which changes the paradigm....
b) The USA is in a bad way....there is no easy recovery for it for a decade, it wants to export but there is no where to export to and they have little to export and in-sufficient raw materials to make it with, hello japan mk II....
c) Japan is entering its 3rd decade of being completely porked....see b) above.
d) They (USA) will go protectionalist, this means a one way trade, this will damge countries like NZ, but its self defeating as we will be poorer so we wont by buying American goods, and quite frankly their quality is crap anyway...even if we didnt ban by reciprocal laws....
e) China looks like one over-heated mess.....it cant continue.....so it wont, that will in turn impact OZ and then us.
f) The PIIGS will kill Europe....the only Qs are which one and how soon....Ireland looks bad but can at least export something....Greece for me is a write-off they have nothing.....Portugal...Spain....Italy.....German banks and indeed the French hold huge positions in Greece...which they are exiting from....at the expense of all of Europe....
g) Back to the USA, Congress is now Republican, no more bailouts
h) USA, many of the states themselves look to need huge bailouts in 2011....billions or default....led by California...see g) for that outcome.
h) The republicans will likely lockup the Govn and go for Obama's throat in an ultra-hard right push of no compromise....no prisioners....the ppl to suffer will be the american ppl....and in turn their lack of spending will spiral down the economy....
i) The USA's mortgage fiasco/fraud looks like a huge nighmare with banks looking at huge losses and bankruppcies they will need tarpII, see point g).....even if the republicans allow it I dont believe the tea party will....
So all the above is bad and you think it looks OK out there.........
tui?
regards
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