OCR 30 April 2009

You can't use the 90-day bank bill futures - you need to look at Overnight Indexed Swap (OIS) rates, which are compounded expectations of the official cash rate (without the bank credit component). These closed at 28bps today according to my Bloomberg.

Dibbo Wrote:
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> You can't use the 90-day bank bill futures - you
> need to look at Overnight Indexed Swap (OIS)
> rates, which are compounded expectations of the
> official cash rate (without the bank credit
> component). These closed at 28bps today according
> to my Bloomberg.

There is LIBOR-OIS spread (OCR-OIS in NZ) whih does include banks credit risk and liquidity component. This spread could be anything.
[en.wikipedia.org]

Options on interest rates are more accurate (imho) as they are traded for hedges against the reserve bank interest rates moves.

Correct me if I am wrong.

You are right in the first part of your latest post - that is why looking at 90 day bank bill rates (nz equivalent of libor) to accurately gauge mkt pricing on the OCR is wrong (close, but not close enough, especially in the current environment). Believe me, the market is pricing a 25bp cut in the OCR, not a pause.

Out of interest why do people here at Ipredict think that there is a 35% chance of a 50bp cut in the OCR when the number of house sales in March was 31% higher than a year earlier? Yes, the exchange rate is higher than the Reserve Bank was predicting but there is a reason for that - market sentiment is much improved over the past month thanks to some improvement in the various leading economic indicators so commodity prices are higher too. The RBA understood that..why do people think that the RBNZ will suddenly see this differently? I don't see it. Neither do the financial markets. I'm selling 50bps at 0.35 and accumulating 25bps on the dips.

Dibbo Wrote:
-------------------------------------------------------
> You are right in the first part of your latest
> post - that is why looking at 90 day bank bill
> rates (nz equivalent of libor) to accurately gauge
> mkt pricing on the OCR is wrong (close, but not
> close enough, especially in the current
> environment). Believe me, the market is pricing a
> 25bp cut in the OCR, not a pause.

Could you please provide your link to OIS data?

I was under the impression the NZ dollar is higher primarily because the US dollar has become devalued and our interest rate provides some small gain over most other major economies who are at or close to 0%.

I'm not sure what economic indicators have improved. Everything I've seen has been dropping. Number of employed, GDP, house prices, confidence, prices, wages, spending, manafacturing... plus whatever else.

A blip in the number of house sales driven by plummeting house prices and interest rates is hardly anything to crow about.

Bernard Hickey's article is interesting reading:

10 reasons why the March housing surge was an ‘Indian Summer’
[www.interest.co.nz]

Those historic indicators explain why the OCR has been eased to historic lows. They say nothing about whether it is now low enough. For that you have to look at the most leading of indicators - the most interest rate sensitive purchases. That is why I find the improvement in house sales over the past 4 months to be interesting - at least worth a pause given that we have also cut taxes again this month. More so given that we have seen the strongest rally in equity markets over the past month in 80 years (yes, it could be a bear rally) and a decline in credit spreads. If you think further rate cuts are going to stop GDP and employment contracting in the next 6 months you are deluding yourself. On the other hand excessively low rates in the near-term could lay the foundations for an even worse cycle in future (after all, that's how the US got itself where it is today - tried to completely cushion the techwreck and created a bigger disaster instead).

Indeed, i'm not confident at all on the OCR cuts, and i'm not sure there is much use to cutting at all. There was just a couple of points i disagreed with in your post. Namely the dollar and the house spike ruling out a 50bps

To cut further OCR is just feeding ozzi banks while they increase mortgage rates (even deposit rates are more than 4%) and commercial rates for businesses around 10%! (commercial bond yields are at 8%).
They pointing their dirty fingers to US but their credit situation is different and they enjoy much better protection from Oz and NZ governments.
We are bearing the consequences of the loss NZ national bank system in early 90s.
Instead of putting Kiwisaver and Super funds into overseas papers with unknown perspectives, it would be better to invest it into the national banks (Kiwibank would do with appropriate management) or infrastructure projects.
Bollard should call plumbers to the Moniac.



Edited 1 time(s). Last edit at 04/10/2009 01:49AM by russiansexpat.

Banks are businesses too.
Banks employ people too.

If we try and control how much profit the banks make, we're gonna start seeing layoffs there too.

peteremcc Wrote:
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> Banks are businesses too.
> Banks employ people too.
>
> If we try and control how much profit the banks
> make, we're gonna start seeing layoffs there too.

It may be true for free financial markets and if the country have its own banking system, which is not a case in NZ:
The high corporate bond yields and loan rates for formers, the lack of investments in infrastructure, cartel behaviour of "NZ" top5 banks (for example, denying other banks entrance to retail banking - clearing cheques and ATM network is the monopoly).

If the ocr is cut again, isnt it going to put pressure on the banks for funds, that they are finding hard to get, up goes the long term morgage rates again.

shatec Wrote:
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> If the ocr is cut again, isnt it going to put
> pressure on the banks for funds, that they are
> finding hard to get, up goes the long term morgage
> rates again.

Exactly. It is happened in NZ this year, and in Australia after RBA cut to 3% the banks did not cut their rates but demanded more cuts from the reserve bank. In the same time ANZ raised private bonds over 1bln USD at 9% rate.
All these clearly show that the reserve bank rate cuts do not stimulate economy and the governments financial policy makers lost the rest of their influence and independence to the real financial market makers.



Edited 1 time(s). Last edit at 04/11/2009 05:53PM by russiansexpat.

The long term rates are going up because Joe Bloggs NZer is rushing to fix their mortgage rates at historic low levels and Mrs Watenabe and the hedge fund community are reluctant to advance the funds. And the more the RBNZ cuts rates, the more the NZers rush out thinking that the low rates can't last. That's part of the reason why the RBNZ won't be cutting the OCR by more than 25bps later this month.

More on housing...if this continues (I think i will - housing leads the economy, employment lags it) the second half year recession stocks are also screaming sells...more house sales mean more construction with a 4-mth lag and more retail sales as people refurnish their new homes.

[www.nzherald.co.nz]

Hi guys

Everything I'm reading still seems to point to 50 points cut on 30th

[www.stuff.co.nz]
[www.forbes.com]
[www.newstalkzb.co.nz]


Can those in the know let us know what their Bloomberg data is pricing at the moment? Has it moved greatly?

I can't see a 50 point cut happening given the fact that the decline in the economy has definitely slowed indicating that things are starting to turn, and the reserve bank will be wanting to wait and see how the previous cuts will affect things.

I feel I should also remind people how almost ALL economists in Australia got it WRONG with the recent RBA cut, with MOST of them picking 50 points, when it was only cut by 25 pts.

ALSO, at the last OCR cut of 50 points on the 12th March, Mr Bollard stated that "Any future cuts will be much smaller than observed recently".

jmvm Wrote:
-------------------------------------------------------
> Hi guys
>
> Everything I'm reading still seems to point to 50
> points cut on 30th
>
> [www.stuff.co.nz]
> /2333794/More-rate-cuts-expected
> [www.forbes.com]
> 593.html
> [www.newstalkzb.co.nz]
> D=155704
>
>
> Can those in the know let us know what their
> Bloomberg data is pricing at the moment? Has it
> moved greatly?

The job of "market analists" is to create the distortion between public opinion and likely decisions of authorities.
Billions are bet on events and at the same time the market makers sell billions of derivatives to harvest naive public who read newspapers and google.
The job of decision makers is to balance between the market makers and economy realities.

Where is the link to Bloomberg or other pricing of options?

The market closed with 33bps of easing priced today for the 30 April meeting, up 1bps from the last close on Thursday.

Russiansexpat - I can't give you a link as this is not internet based data.

the OIS market is the best one to use, while the pricing is not linkable as the cuts are interpreted from prices for overnight cash. But each bank publishes a morning report which will usually detail what is priced in, Westpac's can be found at here

And although Bollard stated cuts would be smaller in the future the situation has changed since then, the QSBO was dire and todays retail spending didn't paint a very rosey picture.

I think its pretty hard to pick between 25 and 50 so i've been shorting NC especially a week or so ago when it was hitting 30c. Currently I think OTHER is showing good value between 3 and 4c, pretty cheep hedge really.

Patch Wrote:
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> the OIS market is the best one to use, while the
> pricing is not linkable as the cuts are
> interpreted from prices for overnight cash. But
> each bank publishes a morning report which will
> usually detail what is priced in, Westpac's can be
> found at here

Internal bank commentaries can't be trusted either, as
they are written specifically for bank customers
to lure them to buy bank's securities on the bank's terms.
(Though they are tend to be more accurate than Bloomberg/Fox news, as the banks to some extent obliged to give accurate information to their customers.)

Yep, seems they're all jumping on the 50bps bandwagon now...

[www.scoop.co.nz]

I still think its 50/50 between 25 & 50 though, but I've been wrong before!

If he goes to 50 now, and needs to take a major step through winter, what has he got left?. Going to 50 now, would seem to be a bit drastic, has the 3% had a real chance to work.. ? ...

Speaking to Osty's comments, I've compiled a table of bank economists success in picking the size of the 6 cuts in the OCR since this easing cycle began (a "1" means the bank was right for that meeting, a "0" means it was wrong). The average bank was right less than half of the time...

Jul-08 Sep-08 Oct-08 Dec-08 Jan-09 Mar-09
ANZ 1 0 1 1 0 1 66.7%
BNZ 0 0 0 1 0 1 33.3%
Westpac 0 0 1 0 1 0 33.3%
ASB 0 0 1 0 0 0 16.7%
Deutsche 1 0 1 1 0 1 66.7%
Goldmans 0 0 1 1 0 1 50.0%
JPMorgan 0 0 1 1 0 0 33.3%
Citi 0 0 1 0 1 0 33.3%
HSBC 0 0 1 0 0 1 33.3%
RBC 1 1 0 1 0 1 66.7%
UBS 0 0 1 1 0 1 50.0%
AVERAGE 43.9%

Dibbo it shows we should not all jump to conclusions just because the banks are all pessimists! If you look into what the incorrect economists were picking, you will find that they were usually picking a larger cut.
The economy is mostly driven by speculation, and as soon as people start being more positive, we will start seeing an improvement. The rapid decline we saw in late 2008 is over, and that is a good thing!
a 50 point cut is getting a bit extreme, so 25 points looks good.

Osty Wrote:
-------------------------------------------------------
> The economy is mostly driven by speculation, and
> as soon as people start being more positive, we
> will start seeing an improvement.

Thats the kind of thinking that creates bubbles in the first place.

Haha Itgorman, not really. I'm not saying they should all be positive to the extent that they artificially hype up the economy. To think that would be silly. I am saying, people should stop hyping up or down the economy at all.
A bubble, as well as a prolonged recession, is created because of over speculation. In a recession, it is healthy to be positive. Doom and gloom will only bring more doom and gloom.

[www.asia-pacificrisk.com]
report on OCR by Roger Kerr
(the member of Advisory Board for NZ Government Debt Management Office, [www.nzdmo.govt.nz]).
and Director of Asia-Pacific Risk Management for almost ecery major NZ company, [www.asia-pacificrisk.com])
My comment: almost nothing there (except only highly massaged CPI figures) warrant OCR cuts, and it is admitted by Roger Kerr in
his article today:
[www.interest.co.nz]

For what it's worth, financial markets have closed the week with 37bps priced in for the next meeting, down from 40bps yesterday. So investors are shading the odds slightly in favour of a 25bp cut, in contrast with the views of most bank economists and folks here at Ipredict. Will be interesting to see how things look if we get another week and a half of better than expected global economic data, more new highs in equity markets and further loosening up of credit markets. At 55c I'm shorting the 50bps contracts.

low cpi opens door for more cuts

the rbnz needs to walk the walk to get rates down after talking earlier this month.