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Weekly Overview June 12
Thursday June 12th 2014
These past two days I have been yet again at National Farm Fieldays, so start off this week’s Overview with a few observations on the sentiment and concerns of the many people I have been chatting with. This morning the RBNZ raised the cash rate 0.25% to 3.25% as near universally expected. But they disappointed some erroneous optimists hoping that they would signal a pause in July when they retained the same projected interest rate track as released three months ago. The factoring in of higher interest rate expectations has pushed the NZD up by one cent today to sit two cents higher against the greenback than a week ago.
This week we again remind employers to take the tightening labour market into account when setting their strategic plans, and to be aware that after six or more years of telling staff that poor cash flows mean wages growth must be minimal, the line is running a bit stale now that GDP growth is soon to exceed 4%.
Recent cuts to fixed interest rates for terms of three years or beyond mean that were I borrowing now I would place 80% of my debt into either three year fixed rate at 6.25%, or a four year rate at 6.59%, recently cut from 7.19%. Our floating rate is currently 6.24%. In a couple of weeks when we expect the official cash rate to rise again we expect floating rates will rise 0.25% as well, and at this stage looking out to 2018 one struggles to see when rates will start to cyclically fall from levels about 2% higher than they are now. Fixing medium to long term seems like a no-brainer. Unless you think something very bad economically will shortly happen and rates will fall.
This week I travelled to Christchurch, Ashburton and the West Coast. Activity is forging ahead in Christchurch but there are deepening concerns about the quality of some work being undertaken by those who have flocked to the city with a gold rush mentality. Ashburton is active on the back of dairy sector investment. On the West Coast the coal mining sector remains weak but tourism is picking up and lots of tradespeople are busy cleaning up and undertaking repairs following the winds of a month ago.
This week the NZD has eased slightly on the back of a weaker Aussie dollar, and bond yields have crept lower in response to growing concerns about the underlying state of the US economy.
The government’s budget this afternoon contained no surprises with a return to surplus predicted for next year and a complete absence of the horror underway across the Tasman where chickens have well and truly come home to roost after years of fiscal laxity. The divergence in the annual budgets with spending slashed in Australia and tax rates rising, versus scope for tax cuts here in NZ down the track will reinforce the massive switch in Trans-Tasman migration flows underway. Before the end of this year it is likely that for the first time since 1991 there will be a net gain to our population from Trans-Tasman flows.
Job numbers have soared by 83,000 or 3.7% in the past year. But wages growth shows no sign of accelerating as yet. This will however happen and employers need to give thought to how they will handle the coming extended period of labour shortages and rising labour costs.
This week we take a look at Labour’s proposal to make Kiwisaver subservient to Reserve Bank monetary policy desires and conclude on a number of fronts that it is not a good idea, though good on Labour for giving thought to alternative monetary policy weapons. One major problem nobody else seems to have picked up on is that forcing people to save more when the economy and share prices are soaring will exacerbate share price gains and cause people to buy more shares when prices are high.
Then when the economy is weak and share prices low and or falling, people will be forced to buy fewer shares thus worsening price declines. Labour’s policy would unfortunately exacerbate share price volatility and reduce long term Kiwisaver returns as people would be forced to buy high and buy less when prices are low.
Their policy would also tend to boost household and external debt because lower and less volatile interest rates will make borrowing money safer. That will in turn encourage more investment in housing, especially as returns to term deposits would on average be lower, and that would price housing even further out of reach of young families. Labour’s policy would also tend to boost bank profits through not just raising debt levels and giving banks more Kiwisaver business, but encouraging people to stay floating rather than fixing, given reduced risk of interest rate shocks. Bank margins are bigger on floating than fixed rate loans.
But again, good on Labour for thinking outside the square to try and address the issue of the interest rate impact on the Kiwi dollar.
In this holiday-shortened week we have seen another tightening of monetary policy, a slight rise in the NZD, and data revealing booming net immigration which has fairly clear implications for the housing market if not the economy overall.
Inflation remains low in New Zealand at just 1.5%. But with the pace of economic growth lifting in an environment of resource shortages the rate will soon start heading toward 3%. That is why the Reserve Bank is likely to raise its official cash rate again next Thursday and the current pinch of weakness in the NZ dollar may not be sustained.