By Roger J Kerr
The reversal back upwards in short-term wholesale swap rates over the last two weeks is testimony to the fact that interest rate markets previously priced-in a high probability of European Armageddon and a weak NZ economy in 2012 – both of which are not happening.
At one point three weeks ago the moneymarkets were pricing-in 0.50% of future cuts to the OCR, all participants in the market being banks, investors and borrowers taking far too much notice of Australian interest rate pricing and incorrectly deducing that what happens there automatically occurs here.
Wrong on that count.
The markets were then pricing in a major event risk of
Wrong on that count as well as the scenario of an immediate Greek exit form the Euro was squashed by the Greek far-left political parties failing to get the support they expected.
The money markets remained pessimistic about the local economy following various commentaries of the NZ economy 'struggling' and 'stalling'.
How wrong they were on that final count as well.
The stellar March quarter GDP result sending a searing reminder to all economic forecasters and their followers of what actually drives the NZ economy - that is, rain, sun and grass-growth.
However, it was not just the strong agricultural production that was the highlight of the 1.1% GDP expansion. The lift in activity was across the board with manufacturing, wholesale trade, services and mining all increasing.
Some have argued that the growth was overstated as it was all inventory build up.
My answer to that is, so what; Fonterra are holding wholemilk powder stocks back to help the international price recover and their strategy appears to be working judging by the last two GDT on-line dairy auctions. They will export the milk powder eventually, so no worries there.
The net result of the GDP outcome is that the NZ economy is on a higher growth trajectory that what most imagined.
With that comes elevated inflation risks earlier than what most expect. Hence the sea-change in short-term interest rate market sentiment and direction.
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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
11 Comments
Inflation? Don't you need a combination of capacity constraints AND credit growth AND high money velocity for that?
I don't see any shortage of retail space or building materials or labour or land or buildings or anything. Mind you I live in Northland - we've been in a full blown depression for over four years.
The RBNZ reports credit growth as flat, even negative in some sectors. Spare money is sitting on term deposit not chasing prices higher. I don't understand how you can, in all seriousness, call inflation, Roger.
Yes I agree.....Ive totally failed to grasp Roger's last 6 or so posts.....
NB, rather than credit growth, I suppose say "ppl have more money" as wage increases can replace credit growth as a factor.
There is reported to be huge over-capacity in factories, higher than normal un-employment says the same thing, no business investment says the same thing. Chinese are stopped from exporting solar panels to the US, that should see price falls...Retail, big ticket items seem to be dropping fast, Briscos have permanet sales it seems 60% off not unusual....Not enough house building in NZ.....etc etc....all speaks volumes for idle hands so no inflation...
Sure after the carnage of a deflationary period then Inflation is probable but 3 to 6 years away...
regards
"the implicit price deflator( IPD)which has trended down since Q1 2011, has now collapsed at the fastest historical(using available data) rate over the past two quarters , such that nominal GDP has been recessionary for those two quarters"
Fascinating stuff, Ostrich. Can you put up a link to this data?
Roger is saying we're in/entering an inflationary trend but the data indicates deflation and we're seeing comodities falling in price - oil down around 25% from it's recent high. Roger never seems to follow up on his statements, does anyone out there agree with his latest call?
Fonterra are holding wholemilk powder stocks back to help the international price recover and their strategy appears to be working judging by the last two GDT on-line dairy auctions.
I would add skimmilk powder to your list of dairy commodities Fonterra is holding off the market, but at last you have provided something we agree on. Well done Roger.
Maybe his charts are upside down,and/or little NZ is going to wag the rest of the world or something. All I see across the globe is deflation, DESPITE the best attempts of central banks et al to arrest it. The only place where there seems to be inflation is at Barfoot's auction rooms.
Roger is dead right, the market has for some time been pricing an economic armageddon into the current level of interest rates. But whilst things will undoubedly be very bad in europe, and the US isnt very far behind, armageddon is really reliant upon the banking system collapsing, not recessionary or depressionary growth in some countries. Every other occassion when the world has had similar problems, be it this is on another level, it didn't have every single currency in the world, fiat.
But truth is, CBs will print money until the cows come home to avoid that collapse, in which case what do you get ?......inflation globally, plus the eventual Chch rebuild adding an extra dose of it here to go with what we'll import through commodity prices
Floating rate borrowers need to pray for armageddon, otherwise they risk a life time of regret, not to mentioned for many, the loss of their house. Eitherway, the latter probably achieve that.
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