Christian Hawkesby on the future of neutral interest rates, migration, measuring spare US capacity, Bernanke's 'courage and grit', EU sceptic populism, Dilbert & more

Today's Top 10 is a guest post from Christian Hawkesby, head of fixed income at Harbour Asset Management.

As always, we welcome your additions in the comment stream below or via email to david.chaston@interest.co.nz.

And if you're interested in contributing the occasional Top 10 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 10s here.

1. Fonterra slashes the milk price forecast for 2014-15
The key domestic news this week was Fonterra providing the first milk price forecast for the 2014/15 season. 

The new forecast of $7/kgMS represents a 17% cut relative to the current year’s forecast of $8.40 (which was also revised down from $8.65 previously). 

Although this drop in prices may seem dramatic, is it a good reflection of the recent weakness in Global Dairy Trade (GDT) auctions. 

It highlights the ongoing divergence between falling NZ commodity prices and the elevated NZ dollar.

2. John Key blasts Labour on immigration
Net migration continues to be one of the top economic and political issues of the year as we head into the election. 

Net migration is a difficult variable for anyone to completely control. While some politicians may like to put tighter restrictions on migrants entering the country, net migration is being driven primarily by a reduction in the number of people leaving the country.

Research from ANZ also highlights that internal migration within New Zealand can work as a release valve: while foreigners tend to enter New Zealand via Auckland and Canterbury, locals have been shifting to the provinces where the cost of living is cheaper. 

3. The future of neutral interest rates
Outgoing deputy governor of the Bank of England, Charlie Bean, has added to the debate on where interest rates may settle in a post GFC world.

He suggests that UK official interest rates may rise to only 3%, compared to an average of 5% pre-GFC.  In New Zealand, most commentators pick the OCR to settle at around 4.5%, rather than its pre-GFC average of 6.5%.

"The bank rate averaged about 5% in the decade or so before the crisis," Mr Bean told the BBC.   "It's reasonable to think that given the headwinds that are still out there as well as some the global forces that perhaps the level that we go to three or five years out might a couple of percentage points below that," he said.

4. Measuring spare US economic capacity
One of the reasons that the US Federal Reserve has kept interest rates low is a view that the unemployment rate is underestimating the amount of spare economic capacity before inflation becomes a problem. 

New research by the Richmond Federal Reserve raises doubts about this, arguing that the unemployment rate is still a good guide. The paper is due to be published in June.

It has already attracted the attention of policy makers according to the minutes of the Fed’s April 29-30 meeting.

5. Yellen pays tribute to courage and grit
Policy making involves making tough choices and judgements. Federal Reserve Chair Janet Yellen paid tribute to Ben Bernanke at New York University's commencement, saying he demonstrated the courage and grit that were needed to stabilise the financial system and restore economic growth.

6. EU sceptic populism sweeps through Europe
The European establishment was dealt a blow with Eurosceptic parties making historic electoral gains in Austria Denmark, France, Hungary Italy, Poland, and the United Kingdom.

Eurosceptic parties doubled their representation in the European Parliament and now hold a third of all seats.

The establishment are under pressure to wind back the federalist direction of EU politics.

7. Scottish independence referendum
As discontent in Europe builds, so too do the poll readings for the Scottish independence referendum in 4 months.

The “yes” vote is now just 10-15 points behind in the polls.  A former Bank of England economist puts disruption from the Scottish referendum as the biggest single risk to the UK economy.

8. Russia looks East
As trouble brews in the West, Russia has turned East to finally seal a gas pipeline deal with China that has been 10 years on the negotiating table.

This is a 30-year deal to supply gas directly to China via a new pipeline, which could have implications for new gas developments in Australia, given the assumed price in this deal is significantly less than Australian LNG delivered to Asia.

9. Wink and smile a mistake: Abbott
The Australian economy has hit a bit of a rough patch in the middle of its transition from mining to non-mining drivers in the economy.

Although the Australia budget was not as harsh as economists expected, it has hit consumer and business confidence. Matters were made worse when Prime Minister Tony Abbott was caught on film winking with a smile in a talk radio studio while listening to a caller complain about welfare cuts.

10. Adrenaline junkies
For those feeling a little nervous about the geopolitical and market outlook, spare a thought for those planning to ride the world’s tallest water slide.  After climbing 264 steps to the height of a 17 story building, riders will descend at around 100 km per hour.