Here’s my summary of the key events over the weekend that affect New Zealand, with news the markets now accept rates will rise.
Financial markets are calm ahead of the first increase in American interest rates in nine years. The Bank of International Settlements has called it an “uneasy calm” this morning. It also called for higher policy rates, saying the current low rates fuel market instability.
The final piece of the puzzle was put in place on Saturday when the US non-farm payroll report was released. Payrolls rose fractionally more than economists has expected, and wages increased +2.3% in the year to November. Together, these represent a string of positive monthly results that started over a year ago. In that time, only three rogue low months have been reported.
Stock and bond markets now accept the rise. They had no reaction to this data, rising steadily during the Friday trading sessions.
We also saw rises in commodity prices. Copper and aluminium prices were higher. Gold jumped +$US25/oz. But oil fell, for its own special reasons.
But those parts of the global economy that have been fueled by low rates appear to be on ‘borrowed time’. Higher rates depress asset values, and we are starting to see asset values fall in some early-warning sectors. Companies financed by junk bonds have seen the capital values of those bonds fall. Some emerging markets that borrowed heavily when money was cheap look very shaky. Brazil is a flash-point. The transition to a more normal price for money and credit will not be easy.
And it will not be helped by resolute Chinese moves to cut back on industries that have severe overcapacity.
Later this week the New Zealand Reserve Bank will assess its policy rate. Most professional economists pick a cut to 2.50% from 2.75%. However, Governor Wheeler has to assess whether a move like that would actually make any difference.
The rest of the data due out this week is relatively minor, except perhaps for the REINZ results for November. And we get the Chinese trade balance on Tuesday where expectations are for a smaller surplus. We got the equivalent US data over the weekend and that showed little change to their trade deficit.
In New York on Friday, the UST 10yr yield benchmark consolidated at its higher level and starts this week at 2.27%.
The US benchmark oil price is down and importantly is now under US$40/barrel, while the Brent benchmark is at US$43/barrel. OPEC failed to agree an oil production ceiling over the weekend at a meeting that ended in acrimony. Iran said it would not consider any production curbs until it restores output scaled back for years under Western sanctions. The supply glut continues.
The gold price however is up strongly, now at US$1,085/oz.
The New Zealand dollar has also risen broadly against all-comers. It is currently at 67.5 US¢, at 91.9 AU¢ and at 62 euro cents. The TWI-5 starts the week at 72.6, a five week high.
If you want to catch up with all the local changes on Friday, we have an update here.