Notes From Underground: The peripheral nations are trying to get ahead of the inflation curve … with CAUTION

Last night, the Reserve Bank of New Zealand raised the overnight interest rates as expected from 3.00 percent from  2.75 percent. This was no surprise as the market widely had anticipated it. The move by the Central Banks of India and Israel was also expected, although the probabilities of the Israeli move were less than the others. So New Zealand raised rates and the currency was sold off, which has significantly weakened on the crosses. The market had a very negative reaction to RBNZ Chief Alan Bollard’s very cautious comments about rates going forward. With KIWI inflation running at an annualized rate of 2 percent, the RBNZ feels it is now ahead of inflation and will watch global growth and see how it effects New Zealand. Bollard expressed concern about the recent strength of the Kiwi and in his statement said:

“The New Zealand dollar has appreciated in recent weeks.This appreciation is inconsistent with the softeningin the New Zealand’s economic outlook …”

Again, we have another bank noting currency movements as a reason to be cautious on future rate movements. The preipheral economies are becoming more confident but are still waiting for some significant growth from the developed nations before totally removing the stimulus programs they have implemented. Safe havens seem to be losing some of their allure, but we are nowhere close to an all clear.

Gold has been sold off as the major recipient of unsecure money and certainly equities are now getting some attraction as fear is receding. We caution that this is a trading market where uncertainty lies behind every allocation. Global finances will remain fragile until we see significant job growth in the large consumer-based economies. Industrial commodities are rising as safe haven money is looking for riskier venues but the underlying economies have yet to ignite. Cheap money will continue to foster risky investments as long as there is some sense that the fog of uncertainty of lifting.

Bulls and bears are both nervous. Bulls are nervous because they fear missing out on any rally that leaves them behind after two years of weak performance. Bears are nervous because they think they may have overstayed their welcome. This is the environment in which we exist so we caution again to stay nimbel and flexible and keep your technicians close. Thin August markets will just be one more obstacle to deal with … and so it goes.

A QUICK NOTE: Problems are going to arise out of the recent softening stance of the Bank for International Settlements. The initial stringencies of Basel 3 have been watered down after an intense lobbying effort by European-centered banks. The European banks were against the new Basel-promoted capital ratios. Increased capital ratios would crimp European profits at a time when they are taking big hits from the uncertainty of their sovereign debt holdings. We are not arguing the point here because in the end it is no different from U.S. banks pushing for suspending mark-to-market requirements in the wake of Lehman Brothers. What’s interesting is that the U.S. Congress is going to hold hearings on the Basel Capital Regulations. Frank/Dodd are concerned that international regulations are going to be watered down relative to the recent financial regulation in the U.S. Senators like Ted Kaufman are very concerned that the U.S. standards will be tougher, potentially putting the U.S. financial system at a disadvantage.

This is a prime example of why all the rhetoric from the G-20 is just that: empty rhetoric. There is no global macro-prudential regulator and any effort to pretend is just creating a Potemkin Village. We will write more about the implications of this nascent controversy–U.S. versus the World–as we learn more. Just another example of 2+2=5!

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3 Responses to “Notes From Underground: The peripheral nations are trying to get ahead of the inflation curve … with CAUTION”

  1. Arthur Global Practice Says:

    As you said, “Global Macro. It used to be called Geopolitics.” (Drobny´s book)… You´ll be happy to read this article at NY, “Fed Member’s Deflation Warning Hints at Policy Shift”.

    http://www.nytimes.com/2010/07/30/business/economy/30fed.html

  2. Arthur Global Practice Says:

    ANZ´s view: A 60 per cent chance of another increase in September, then a pause. ASB´s view: Still thinks the OCR will rise steadily to 5 per cent. But if the Reserve Bank does pause, it will be in December after two more hikes to 3.5 per cent.

    House prices in parts of Asia continue to soar, despite efforts to slow them. House prices in Australia rose by 20% in the year to the end of the first quarter, faster than the 13.5% recorded in the 12 months to late 2009. By this measure Australian property is the most overvalued of any of the 20 countries The Economist track. A frothy property market was one of the reasons for the Reserve Bank of Australia raising interest rates six times between October and May. Since then, the bank has become more sanguine about the state of the market. Kenneth Rogoff, a Harvard professor, said this week: “You’re starting to see that collapse in property (China/Asia) and it’s going to hit the banking system.”

    And don´t forget Australia´s election! According to Bloomberg, Australia is abandoning a six-decade consensus favoring immigration, risking slower growth and faster inflation in a nation short of workers to help meet China’s demand for its commodities.

  3. yra Says:

    thanks Arthur–good points and good sightings—i am going to have to start sharing the phantom revenue from the blog—and you are right–the Aussie auctions need to be on the radar screen

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