By Roger J Kerr*
September should prove to be a crucial month for interest rate direction and levels over the next 12 month period.
For interest rates from 90 days to three years, the tone and form of messages from the RBNZ in their 10 September Monetary Policy Statement (MPS) will set the scene for market sentiment and thus movements over coming months.
Reading between the lines of Governor Graeme Wheeler’s last speech indicates that the RBNZ was somewhat peeved off at some economic forecasters calling for a 2.00% OCR as the economy was headed for recession. That is not the RBNZ’s view of life as they correctly observe the reasonably robust activity levels across the economy outside of dairy.
Forecasters talking the whole economy down due to low commodity prices in one industry sector and the Christchurch residential rebuild having peaked smacked of extreme views to score the media headlines. The odds still remain that the 10 September MPS will again be less dovish than the doomsayers expect.
The Global Dairy Trade auctions on 18 August and 1 September may provide some information to the RBNZ before their MPS as to whether the NZ dollar needs to be prompted even lower due lower dairy commodity prices. Some signs of stabilisation in dairy prices may cause the RBNZ to moderate their currency depreciation language as the RBA has done in Australia recently.
For interest rates from three years to 10 years, the decision by the US Federal Reserve to lift their short-term interest rates next month for the first time in nine years should return long-term US Treasury Bond yields to their upward trend and in turn increase our longer term swap interest rates. The US 10-year Treasury Bond yields have recoiled lower to 2.15% following increases to 2.40% in June. There appears to be a major resistance line in the US bonds from moving below 2.15%.
The Chinese are very large owners of US Treasury Bonds and given their renewed focus on fiscal stimulus for the Chinese domestic economy, they are much more likely to be sellers of bonds going forward rather than buyers. Recent comments from US Federal Reserve members suggests that their economic data would have to suddenly turn very negative to stop them from raising interest rates by 0.25% in September.
US market pricing is still 50/50 on the September timing. It is still difficult to see US bond yields falling when US short-term interest rates are increasing.
*Roger J Kerr is a partner at PwC. 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