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Roger J Kerr says the next RBNZ monetary policy statement on 23 November will be a difficult one for our central bank

Currencies / opinion
Roger J Kerr says the next RBNZ monetary policy statement on 23 November will be a difficult one for our central bank
wage-inflationrf1
Source: 123rf.com. Copyright: alexkerby

  • Summary of key points: -

  • US dollar weakens despite stronger jobs data
  • US Federal Reserve off the mark on US household finances
  • RBNZ face their worst nightmare

US dollar weakens despite stronger jobs data

The Kiwi dollar has broken out of the top of its shackled trading range between 0.5550 and 0.5800 of recent weeks, climbing to 0.5930 at the market close on Friday 4th November.

Yet again, it has been entirely US dollar movements on global forex markets that has allowed the Kiwi dollar gains. In a rare event, the US dollar weakened across the board despite a stronger than expected increase in US jobs over the month of October (a 261,000 increase c.f. 200,000 to 240,000 expected).

Normally, stronger labour market data in the US would send the USD higher as the Federal Reserve would have more ammunition for their stance to keep interest rates higher for longer. It appears that the currency markets focused on the fact that the US unemployment rate unexpectedly increased from 3.50% to 3.70% during October and that trend is exactly what the Federal Reserve want to see to reduce demand in the economy and bring down inflation. Therefore, the FX markets interpretation was that a rising unemployment rate would allow the Fed to pause and pivot on their tight monetary stance sooner rather than later. In always looking ahead and pricing-in future changes well ahead of time, the FX markets concluded that the inevitable shift in stance by the Fed is USD negative. It still stands as the largest factor in global currency markets over the next 12 months that all the USD gains since March 2022 on higher US inflation and higher US interest rates will unwind the other way and result in significant USD weakness from here.

Interpreting the Fed’s future position and intentions is become more challenging for the financial and investment markets. The Fed’s FOMC monetary policy statement on Wednesday 2nd November included two new sentences that recognised that fact they need to now observe the cumulative impact of the rapid tightening of policy since March and that there are time lags from when monetary policy is adjusted to when economic activity and inflation respond. The markets immediately reacted to that more conciliatory tone from the Fed with US equities up strongly and the USD weaker. The NZD/USD jumped up to a high of 0.5950 immediately after the release of the Fed’s one-page statement at 7am on Thursday 3rd November. However, everything reversed the other way when Fed Chair, Jerome Powell answered questions at the media conference just 30 minutes later.

Mr Powell delivered more confusion, than clarity when he stated that interest rate increases “still had a ways to go” and that higher rates earlier would be required to bring inflation back down. The USD strengthened dramatically during and after the media conference as Powell adopted a far more hawkish position (add odds to the official statement). The NZD/USD plummeted to a low of 0.5750 on the day, however it has recovered just as rapidly to 0.5930. In inserting the more dovish wording about “cumulative effects” and “time lags” into the monetary policy statement at this point in time, perhaps the Fed are giving themselves a back-stop to avoid criticism in two to three months’ time that they kept monetary policy too tight, for too long and caused a hard-landing for the US economy into recession. Whatever the Fed’s curious rationale may be, the net result from their statement and US economic data from last week is a weaker US dollar that should continue over coming weeks and send the NZD/USD rate back above 0.6000.

In our FX market report a month ago we highlighted that history was likely to repeat when the Kiwi dollar suffers plunges lower to the mid-0.5000’s against the USD (as it has done so on four occasions 

since 2009). It always subsequently rebounds strongly and within 12 months is 10 to 15 cents higher. A return to above 0.6000 and higher over coming weeks would again confirm the repeating pattern.

US Federal Reserve off the mark on US household finances

Another very strange and unsubstantiated claim by Fed boss, Jerome Powell in the media conference last week was that US household balance sheets were still in “very good shape” and able to handle much higher inflation and interest rates. According to Powell, US households still have excess savings left over from the Covid support payments in 2020 and 2021. As the chart below confirms, US personal savings rates have in fact nose-dived this year to very low levels last seen in the GFC in 2009. The vast majority of Americans will be observing that their household balance sheets are a lot worse than what Powel claims, with house prices now falling and their bond/share investment portfolio values in their 401K pension accounts falling significantly this year as well. You can only conclude that the US economy is currently slowing up a lot faster due to the monetary tightening than what the Fed are understanding.

RBNZ face their worst nightmare

If the Federal Reserve in the US have a looming problem with pushing monetary policy too tight and damaging the economy, the RBNZ here in New Zealand appear to be facing their worst nightmare with “wage-push” inflation emerging that will hold inflation up at elevated levels for longer than originally anticipated. The labour cost and hourly pay rate data last week for the September quarter confirmed the high rate of wage increases and business firms have no alternative but to pass those additional costs into their product selling prices.

A wage-push inflation spiral is precisely what the RBNZ have been attempting to avoid over the last 12 months, but the Government’s immigration policy has caused the labour shortages and wage increases not matched by productivity increases. Higher inflation from a large wage increases is much more permanent and stickier, as unlike other prices they cannot be immediately reduced when the supply and demand equation changes. The net result for the NZ dollar value could well be New Zealand interest rates needing to be held higher for much longer in 2023 than US and Australian interest rates and the interest rate differential attracting global fund flows into the Kiwi dollar.

Currently, the NZ two-year wholesale swap interest rate at 5.15% is only marginally above the US two-year swap rate at 4.75%. In 12 months’ time, the gap is likely to be substantially higher (say 1.50%) as US interest rates decline much further than NZ interest rates. We have not seen interest rate differentials play a part in determining currency movements for almost three years now as all interest rates were cut to zero in 2020 and all pushed up sharply this year. However, New Zealand’s stickier wage-push and non-tradable inflation problem looks set to deliver some Kiwi dollar strength on its own account later next year.

Whilst the New Zealand economy may weaken in 2023 with export prices now reducing and no longer supporting the domestic economic downturn, it does not follow that the NZ dollar will also weaken. A weaker USD on a Fed monetary policy pause/pivot over coming months and NZ interest rates higher for longer point to NZD/USD gains back to the mid/high 0.6000’s.

The next signpost for global currency markets will be the US October inflation numbers on Thursday 10th November. The core inflation rate increase over the month is forecast to be between +0.50% and +0.70%, on top of the +0.60% increase in September. A result below 0.50% will be USD negative and above +0.70% USD positive. Attention will be on whether the shelter/rent component shows any signs of easing off from its strong monthly increases this year. Air fares and health costs have also been increasing over recent months and whether that continues will influence the final outcome.  

The next RBNZ monetary policy statement on 23 November will be a difficult one for them as the pressure is mounting on them to address the root causes of our always high domestic/non-tradable inflation i.e. call out the Government for continuing their inflationary fiscal policies and causing the wage-push inflation through a messed-up immigration policy creating extreme labour shortages. The Government’s immigration “re-set” in July designed to get more workers in was far too late as all the potential immigrants has already moved to Australia and Canada months before.

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Source: CoinDesk


*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.

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32 Comments

Squeeze your employer for at least 10% or you are going backwards! 

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9

From The Scroll.

"Interest Rates will continue to go Up from here and Stay Up for a Long Time."

"The OCR Forecast Peak Goalposts will continually be Moved  Higher and Higher ! "

10% Interest Rates Next Year, Guaranteed !

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Now even finance brokers are hinting at rates between 8% to 9% - next year, could go more but baottom line is 8%.

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Does Adrian Orr or our finance minister Robbo not yet understand the enormous stuff up they've done to us ...  their Covid19 response of flooding the system with cheap credit is watcha do in a demand style shock , to rejuvenate people's desire to spend  ....

... but , we weren't there ... we were carrying on as per normal  ... except for supply side shocks , after our leaders locked us down  .... ergo , after the money printing we copped inflation ... lots of inflation  ... you getting this , Robbo ? ... Adrian ? 

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They're busy trying to deflect blame onto the private sector.

Prices rises are a symptom of increased money supply. This concept requires second order thinking, which most of the electorate are not capable of. The government hides in this ignorance.

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11

All politicians love to distribute money and will never lose an opportunity as their thinking does not rise above next election - power.

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Biggest driver of wage pressures up and down the country = skyrocketing cost of borrowing (mortgages).

RBNZ plan to avoid a wage / price spiral = higher borrowing costs

Anyone spot the obvious bloody problem here?!?

Oh, and net Govt spending this year has been next to nothing - anyone that blames Govt spending for inflation is making assumptions based on ideology not evidence.    

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> Biggest driver of wage pressures up and down the country = skyrocketing cost of borrowing (mortgages).

I don't think I agree with this. For one thing, not even close to every earner has a mortgage, but all workers are exposed to the rapidly rising prices of everything else. And in any event, wage pressure is not just about workers wanting more $, but having the leverage (in a tight labour market) to get it. 

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Talk to anyone in any HR department in Auckland or Wellington about which cost of living issue they are hearing the most about in salary negotiation discussions and exit interviews. Unsurprising given that the people with leverage in the job market are skilled and experienced people in their 30s and 40s (i.e. the typical mortgagor). 

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If you only sample HR exit interviews, sure, but that's not even close to representative of the whole. How many hospo staff do you imagine have an exit interview?

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The actual earnings growth is towards the top end of the labour market where households are more likely to have a mortgage. To use your example, hospo wages went up 1.3% last quarter, wages in ICT went up by 9.6%!  Earnings in other low pay areas like arts and recreation, and education were static! 

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Isn't the driver less about mortgage costs and more about labour shortages?

Regardless of costs, wage earners don't have leverage to get an increase if there's someone waiting on the street to replace them.

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don't forget labour shortages brought on by the largest population band retiring with a shortage of replacements.

 

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Aren't they waiting for the big lay-off?

To flood the job market with willing and now ready employees that will fight for jobs by offering to take reduced wages/salaries?

And then after that, they will implore us to spend spend spend to keep the economy juiced (again).

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4

Jfoe biggest driver for staff here has been rent increases - for a number of years now

and which is apparently my problem to solve

so two ways forward to increase spending power - pay rises which may mean a decrease in number of employees - or a significant reduction in house rentals - which is actually the most sensible

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Yes, rent puts the pressure on lower wage sectors (and early to mid-career professionals), whilst mortgage costs put the pressure on higher wage sectors. At the moment we have a combination of both (although new rents are showing some cooling). I work with a lot of HR departments and hear the same story over and over again - the turnover in Wellington as more fixed-rate mortgage deals close is particularly ridiculous,.

Worth noting here that *average* kiwi gets $330 per week in cash transfers from the Govt, and families have to be earning around or above the median wage before they can survive without a direct Govt subsidy. The system is b*ggered - we basically need to narrow the spread of wages / earnings in NZ so that we can reduce taxation and welfare.

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3

RBNZ should have think about Nightmare when they went to sleep with Inflation - Transitory Inflation ignoring all data.

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8

RBNZ sleeping happily at night , dreaming of being cradled  up in the branches of Tane Mahuta .... " rock a bye Orry , up in the tree top " ...

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2

When the economy blows the OCR will drop

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4

Employer costs are not causing inflation. If that were true, we would see lower profits.

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3

The current inflation we are experiencing is caused by many things.

People thinking it's just because the money printer went Brrrrrr will be in for an unpleasant surprise.

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I should clarify that employee wage costs are not the issue. Inputs, transport etc... yes somethings are going up. But the driver to those, again is not the employee wage costs.

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Rising wage costs are definitely helping drive inflation, they end up having a cumulative effect anywhere human labour is required for commerce.

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Employer costs are not causing inflation. If that were true, we would see lower profits.

That's Noncents, it's exactly the opposite, think about it, your cost of supplies goes up, so in order to remain profitable and not lose money, you raise your prices to your customers.  Hence higher costs for employers do cause inflation! 

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"Currently, the NZ two-year wholesale swap interest rate at 5.15%".

Be ready for an OCR peak of 5.5% next year, at the least. And once there, it is going to stay high for quite a long time. 

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4

Unless the economy makes dookie in its pants, in which case it's being driven up as a buffer for that moment once dead wood is killed off to come back down.

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1

Then back to housing speculation, mass migration and asset sales to foreigners (or as macroeconomists like to call it net capital inflows).

Take your best guess on how much NZ would have slid in international socioeconomic rankings until then, not that National-Labour cares about any of that crap.

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Under the Paris agreement our government has agreed to wind back our carbon emissions back to 50% below 2005 levels. We had a million less people back in 2005. Given that our birth rate since 2005 has basically been at replacement, that million increase in population was purely because of immigration.

I guess my point is I don't see how we can have both immigration and reducing carbon emissions to agreed upon levels unless our standard of living goes back 100 years.

There needs to be a rethink about how we do things and educate our population. We used to manage our country and economy without mass immigration and mass importing of food and finished goods.

What needs to happen? 

Clearly choosing both options means leads to feudalism. 

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We used to manage our country and economy without mass immigration and mass importing of food and finished goods.

We had more babies and bought less stuff. The fact they had a war in the 40s helped immensely for the following 30-40 years.

But yeah reducing emissions doesn't gel that well with growth based economies. I have a feeling the way the 21st century is playing about emissions are going to regress globally on their own.

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the Government’s (restrictive) immigration policy has caused the labour shortages and wage increases not matched by productivity increases

a messed-up immigration policy creating extreme labour shortages

Spot on !

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Only a part of the immigration issue is due to the government; a big part being lack of interest from potential migrant workers, which in all fairness, is also largely the government's doing.

So, migrants are likely to trickle in slower and could still ride the gravy train on high wages without making a significant enough dent in labour shortages in the short run.

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Not sure this is correct. 

I thought the wage increases were in the more qualified/experienced wage earners.  Qualified and experienced people do not want to come to New Zealand because of the high housing and transport costs. 

Thankfully the governments policies to address housing affordability are starting to pay off and house prices are coming down.

Our transport system is roading based and anyone with any sense looking in from abroad can see that we're not investing and committing enough to sustainable transport modes. They can also see that roading based transport systems are going to get shafted as oil and energy prices continue to rise. So not keen on committing somewhere where high costs are going to get even higher.

 

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