Weekly Review

CURRENCY: The range-bound trading to close the week for the NZD was duly delivered on Friday. It attempted unsuccessfully both sides of the recent range and finished slightly below 0.75USD.

GLOBAL MARKETS: US equities and Treasury yields rose on the back of stronger data to a post-Lehman high. European equities were very slightly stronger. Commodity prices were mixed, with some metals (except copper) falling on China growth fears, but other commodity prices rising on relief that Chinese interest rates were not raised over the weekend.

KEY THEMES AND VIEWS BUBBLE, BUBBLE, TOIL AND TROUBLE. The Chinese government in the weekend released their initial economic plan for the next five years. They pledged stabilising prices via more “prudent” monetary policy, more tightly managed liquidity, more targeted investment growth, and a shift in the focus of growth from exports and investment to consumption. However, no yuan appreciation targets were revealed that would assist this; rather they will target “basic stability” in the exchange rate. Chinese inflation was 5.1 percent for the year ended November, with food prices up almost 12 percent. The broad money supply, M2, is up 55 percent in two years. The sheer volume of credit growth forced down the economy’s throat in response to the GFC is starting to cause some indigestion. The authorities now face the delicate task of popping a real estate bubble and tidying up after the massive misallocation of resources that has occurred, while maintaining strong growth. Authorities held back on raising rates in the weekend, satisfying themselves with raising banks’ reserve requirements for the third time in five weeks. But use a pin or a blunt axe, the effect of the bubble’s bursting is going to be the same in the end. High commodity prices are the one bright spot for the New Zealand economy at present. If China’s cautious braking of their runaway economy results in an ugly skid and a loud thump, commodity prices will fall sharply.
US DATA STRONGER. The stronger run of US data, interrupted only briefly by the November payrolls shocker, continued on Friday as US consumer confidence climbed to a six-month (still-fragile) high, holiday sales were forecast to be the strongest in four years, and exports hit a two-year high. The passing of the tax cut extension also boosted growth expectations, and, accordingly, longer-dated Treasuries. US 10-year bond yields finished the week up a whopping 32 points despite the Fed's ongoing QE2 and comments from Bernanke that the programme would be extended if necessary. Movements in US long rates do have an impact here in New Zealand, so despite the RBNZ's downbeat MPS on Thursday we may see some upward pressure on long rates.