Docstoc

Strategy and tactics

Document Sample
Strategy and tactics Powered By Docstoc
					Strategy and tactics
                                                                                                                          Monday, February 26th, 2007
                                                                                                                          Weekly Report
                                                                                                                          Published Monday 5.15pm
                                                                                                                                             90d 10yr gb 3yr swp 10 yr swp

New Zealand interest rate market overview                                                                                 Current rate:
                                                                                                                          One week ago:
                                                                                                                                              7.77 5.92 7.61
                                                                                                                                              7.78   5.94   7.57
                                                                                                                                                                 6.97
                                                                                                                                                                   6.92
                                                                                                                          One month ago:      7.68   6.05   7.57   6.95

New Zealand Interest Rate Risk Management Strategy Recommendation
                             Borrower                                                                            Investor
Current hedging                  Fixed: Floating Master Limit: No increase to fixed rate                            To be at policy maximums in the 3 -
general                          percentages under current market conditions.                                       10 yr time band via bonds/swaps.
recommendation                   Target forward starting rates of 6.50% and below for                               Invest in 3-10 year fixed rate
                                 swap extensions beyond 5 years (Leaving overall                                    securities (or invest in 90-day paper
                                 fixed rate percentage unchanged)                                                   and enter fixed rate receiving swaps)
                                                                                                                    to increase portfolio durations to
                                 Target forward starting rates close to 6.30% and
                                                                                                                    maximum of allowable limits.
                                 below to commence new long-term 5-10 year swaps
                                 (Increasing overall fixed rate percentage)                                         To be at the longest permitted
                                                                                                                    maturity within the cash component
                                 Target forward starting rates of 6.10% to move                                     of the investment portfolio using
                                 towards policy maximums in 5-10 year bucket.                                       investor FRA’s.
Entry tactics                    Borrowers falling below policy minimums in the 1-3
                                 year maturities should fix through forward starting
                                 option strategies.
                                 Borrowers falling below policy minimums in the 3-5
                                 year maturities should fix through forward starting
                                 option strategies.
The strategy described above represents our view of risk management actions which may, as at the date of this report, be appropriate for a range of borrowing and
investing (importing and exporting) clients. The strategy is necessarily general and should not be pursued by individual clients without specific reference to us for
consideration of the client’s particular circumstances. Our opinions as expressed in this strategy and tactics report are subject to change at any time as variations in
market circumstances occur.

NZ Yield Curve
                                                 The New Zealand Yield Curve is likely to remain at elevated levels over
                                                 coming months due to market expectations for monetary policy to be
                                                 maintained at the current or tighter setting. Any easing in monetary policy will
                                                 require further evidence of easing non-tradable inflation. Over a 6 month
                                                 period the yield curve is expected to move lower as weaker domestic
                                                 economic activity data, further pipeline tightening to the effective mortgage
                                                 rate, a reduced headline inflation rate and an easing in non-tradable inflation
                                                 raises the prospect of looser monetary policy. Over a 12 month period as the
 Medium-Term Trend:                              short-term market interest rates fall further the yield curve is likely to modestly
       Lower                                     steepen. A risk to this view is that limited supply response means capacity
                                                 constraints are slow to be alleviated resulting in interest rates across the yield
                                                 curve remaining around current levels for longer. US retail spending has
                                                 shown typical resilience and the US employment market has remained
                                                 sufficiently firm. With concerns still around higher inflation the US Federal
                                                 Reserve has little propensity to consider reducing interest rates. Despite this
                                                 US bond market activity is likely to price the outlook for lower official interest
                                                 rates in response to any weaker than expected economic data.


Disclaimer: The information contained in this newsletter is given in good faith and has been derived from                                 Asia-Pacific Risk Management
sources believed to be reliable and accurate. However, neither Asia-Pacific Risk Management Limited nor any                               Limited
of their employees or Directors or any affiliated companies, gives any warranty of reliability of accuracy nor                            Level 14, West Plaza
accepts any responsibility arising in any other way (including by reason of negligence) for errors or omissions                           Cnr Albert and Customs Street
herein.                                                                                                                                   Auckland New Zealand
G:\S&T Reports\NZ Interest Rate Report\2007\February 26 NZ Interest Rate Report.doc                                                       Ph: (09) 913 4625
                                                                                                                                          Fx: (09) 913 4626
Asia-Pacific Risk Management Limited



Roger’s Comments

    Given the strong trend upwards in one to three swap interest rates over recent months, it is hard to see
    these rates moving higher even if the RBNZ lift the OCR to 7.50% on 8th March. The local interest rate
    markets have priced-in the worst-case scenario of two 0.25% OCR hikes, continuing strong retail and
    housing markets in 2007, a re-accelerating economy in 2007 and a rising inflation rate after it hits 1.5%
    in June. What will the offshore and local players do when it is realised that none of these things are
    actually happening in 2007? Answer: They will turn the sentiment and direction immediately the other
    way i.e. one to three year swap rates will reverse to a sharp downwards trend. For this reason we
    cannot advise borrowers to fix any interest rates at current levels. How long borrowers have to wait for
    reasonable fixing levels, remains to be seen.

    “The Independent” business newspaper is publishing an article on the economy, inflation and the
    conduct of monetary policy that we have penned, this Wednesday. The essence of the message is that
    the current path the NZ economy is on is totally unsustainable. The productive sector has been
    contracting for 18 months, whilst the retail/services sector is still growing at 3% per annum. At the end
    of the day the retail/services parts of the economy are dependent on the productive sector for income
    and jobs. The retail/services sector can continue their party for a while on borrowed money and
    Government spending, but eventually limits are reached and the whole economy contracts. We wonder
    if the RBNZ are analysing the economy in this manner!!


                                                        New Zealand Productive Sectors Real GDP Growth (Weighting 30.5%)

                                            6.0%                                                                                          9.0%




                                                                                                                                                  Real GDP Growth Annual Average % Change
                                            5.0%                                                                                          7.5%
       Real GDP Growth Quarterly % Change




                                            4.0%                                                                                          6.0%

                                            3.0%                                                                                          4.5%

                                            2.0%                                                                                          3.0%

                                            1.0%                                                                                          1.5%

                                            0.0%                                                                                          0.0%

                                            -1.0%                                                                                         -1.5%

                                            -2.0%                                                                                         -3.0%

                                            -3.0%                                                                                         -4.5%
                                                    Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06
                                                                        Quarterly growth (LHS)   Annual % change (RHS)

    Note: “Productive Sectors” consist of:- Construction (approximate economy-wide weighting of 5%), Manufacturing (16%), Electricity, Gas &
    Water (2%), Agriculture (5%), Fishing and Forestry & Mining (2.5%). Approximate total Productive Sector weighting of 30.5%.




Contacts:                                            Roger Kerr                 (09) 913 4628         roger.kerr@aprisk.com
                                                     Stuart Henderson           (09) 913 4625         stuart.henderson@aprisk.com
                                                     Chris Hedley               (09) 913 4629         chris.hedley@aprisk.com
                                                     Brett Johanson             (04) 918 0008         brett.johanson@aprisk.com                                                             page 2
Asia-Pacific Risk Management Limited




                                                             New Zealand Retail and Services Sectors Real GDP Growth (Weighting 69.5%)

                                                     3.0%                                                                                                 6.0%




                                                                                                                                                                  Real GDP Growth Annual Average % Change
                                                     2.5%                                                                                                 5.0%
                Real GDP Growth Quarterly % Change




                                                     2.0%                                                                                                 4.0%

                                                     1.5%                                                                                                 3.0%

                                                     1.0%                                                                                                 2.0%

                                                     0.5%                                                                                                 1.0%

                                                     0.0%                                                                                                 0.0%

                                                     -0.5%                                                                                                -1.0%

                                                     -1.0%                                                                                                -2.0%
                                                             Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06
                                                                                 Quarterly growth (LHS)        Annual % change (RHS)

    Note: “Retail and Services Sectors” consist of:- Wholesale Trade (approximate economy-wide weight weighting of 8.5%), Retail,
    Accommodation & Restaurants (8%), Transport & Communication (10.5%), Finance, Insurance & Business Services (26%), Government
    Administration & Defence (4.5%) and Personal & Community Services (12%). Approximate total “Retail and Services Sector” weighting of
    69.5%.


Short Term Interest Rates

    The New Zealand short-term (1 - 3 year) swaps rates have been broadly stable over the last week as
    market pricing continues to assign an approximately 80% probability for an increase to the OCR next
    Thursday (8th March) and an approximately 45% probability of a second increase in May or June. The
    last week has been very quiet on the domestic economic data front with only credit card billings data for
    January released, although early this week has seen merchandise trade data and the NBNZ Business
    Outlook released.

                                                                                 NZ 1 Year, 2 Year and 3 Year Swap Rates

                                             8.00                                                                                                            8.00

                                             7.80                                                                                                            7.80

                                             7.60                                                                                                            7.60
      Interest Rate (%)




                                                                                                                                                                                           Interest Rate (%)




                                             7.40                                                                                                            7.40

                                             7.20                                                                                                            7.20

                                             7.00                                                                                                            7.00

                                             6.80                                                                                                            6.80

                                             6.60                                                                                                            6.60

                                             6.40                                                                                                            6.40
                                                 Feb-          Mar-   Apr-   May-     Jun-    Jul-   Aug-     Sep-   Oct-   Nov-   Dec-   Jan-     Feb-
                                                  06            06     06     06       06      06     06       06     06     06     06     07       07
                                                                                        1 Yr Swap        2 Yr Swap   3 Yr Swap



Contacts:                                                     Roger Kerr                 (09) 913 4628               roger.kerr@aprisk.com
                                                              Stuart Henderson           (09) 913 4625               stuart.henderson@aprisk.com
                                                              Chris Hedley               (09) 913 4629               chris.hedley@aprisk.com
                                                              Brett Johanson             (04) 918 0008               brett.johanson@aprisk.com                                                                 page 3
Asia-Pacific Risk Management Limited



    At a seasonally adjusted -1.1%mom/+6.4%yoy for January credit card billings does not seem
    supportive of accelerating consumer retail spending in January. While there is some potential for
    further ‘carry over’ of the strong +2.7%mom growth in credit card billings in December into January
    retail sales data, it is also worth noting that the annual increase in credit card billings is at its weakest
    since April 2006 (and before then September 2004). Credit card billings may only have limited
    importance in terms of the RBNZ monetary policy decision on March 8th, but at face value do not
    appear supportive of the case for an increase to the OCR in March. The monthly trend in retail sales
    growth as reported by Statistics New Zealand has eased from a rate of +0.7%mom in August 2006 to
    +0.3%mom to December 2006 and the actual monthly increase for January is likely to be below this
    level if credit card billings prove to be an accurate guide.


                                                                        NZ Credit Card Billings and Retail Sales
                                            4.0                                                                                    4.0%
                                                     Correlation: 38%




                                                                                                                                           NZ Retail Sales (mom% change. seasonally
                                            3.0                                                                                    3.0%
       Credit Card Billings (mom % change




                                            2.0                                                                                    2.0%




                                                                                                                                                     adjusted, current dollar)
               seasonally adjusted)




                                            1.0                                                                                    1.0%


                                            0.0                                                                                    0.0%


                                            -1.0                                                                                   -1.0%


                                            -2.0                                                                                   -2.0%


                                            -3.0                                                                            -3.0%
                                               Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07

                                 Credit Card Billings (mom% seasonally adjusted)                NZ Retail Sales (mom% seasonally adjusted)



    The New Zealand Merchandise Trade Balance for January registered a wider than expected deficit of -
    NZD833m, bringing the annual deficit to -NZD6.03bn. In terms of the ‘trend’ measures reported by
    Statistics New Zealand exports have remained stable at NZD2.95bn over the last 6 months while
    imports continue to grow consistent with an approximately 7% annual rate. Exports had previously
    grown strongly from late 2005 to mid 2006. For the 3 months to January 2007 exports were still 11%
    higher than the same period a year ago, although unchanged over the previous 3 months. On an
    industry basis for the 3 months to January 2007 relative to the previous 3 months, export growth has
    been strong in dairy (+30%) and meat (+28%) but negative in all other industries. For the 3 months to
    January 2007 imports were 5% higher than a year ago although 6% lower over the last 3 months.
    Capital goods were unchanged for the last 3 months and 11% lower than the same period a year ago;
    consumer goods for the 3 months to January 2007 were 11% lower than the previous 3 months,
    although 11% higher than the same period a year ago. Consumption goods accounted for 22.1% of all
    imports in January 2007, the lowest proportion since 21.5% in January 2006.

    The NBNZ business outlook showed a slight improvement in firms’ own activity outlook in February
    (compared to December) to 25.9, from 24.0 previously. At 3.11%, 1 year ahead inflation expectations
    eased to their lowest levels since April 2006, although these tend to be more closely influenced by the
    current inflation rate than an accurate predictor of future inflation. In this regard the RBNZ Survey of
    Inflation Expectations released tomorrow (Tuesday) may be more informative. Pricing intentions
    increased overall to a net 29.3% of firms expecting to increase prices from 22.9% in December,
    although as always whether firms can actually successfully implement price increases can be a

Contacts:                                          Roger Kerr                (09) 913 4628          roger.kerr@aprisk.com
                                                   Stuart Henderson          (09) 913 4625          stuart.henderson@aprisk.com
                                                   Chris Hedley              (09) 913 4629          chris.hedley@aprisk.com
                                                   Brett Johanson            (04) 918 0008          brett.johanson@aprisk.com                                                         page 4
Asia-Pacific Risk Management Limited



    different proposition. In this regard firms profit expectations eased in the survey down to +2.0% from
    +5.7% previously, a result consistent with a generally under-performing reporting of company earnings
    seen in recent weeks.

    Long Term Interest Rates

    New Zealand 10 year swaps rates have remained at elevated levels over the last week as spreads to
    US long-term interest rates have continued to widen. At 4.67% US 10 year govt. bond yields have
    fallen to their lowest level since early January 2007. Despite this the New Zealand 10 year swap rate at
    6.97% remains 105 basis points higher than the domestic 10 year govt. bond yield at 5.92%, in turn
    125 basis points above their US 10 year govt. bond yields. Collectively, the 10 year swap and bond
    spreads are at their widest level since December 2005. While there may be limited events on the
    immediate horizon to prompt these spreads to narrow, once investors move to the view that New
    Zealand market interest rates have peaked, related investor activity is likely to lead to a sharp fall in the
    New Zealand long-term interest rates, via a reduction in spreads to the US.


                                                                     NZ and US 10 Year Interest Rates
                                  7.25                                                                                                         7.25




                                                                                                                                                      NZ 10 Year Govt Bond Yields and NZ 10
                                  6.75                                                                                                         6.75
                                                                                                                               105 bps
     US 10 Year Govt Bond Yield




                                          81 bps
                                  6.25                                                                                                         6.25




                                                                                                                                                                Year Swap Rates
                                  5.75                                                                                                         5.75

                                                                                                                                125bps
                                  5.25    129 bps                                                                                              5.25


                                  4.75                                                                                                         4.75


                                  4.25                                                                                                         4.25
                                     Feb-06        Apr-06         Jun-06         Aug-06           Oct-06            Dec-06         Feb-07
                                              US 10 Yr Govt. Bond Yield (LHS)           NZ 10 Yr Govt. Bond Yield            NZ 10 Year Swap




    US Core CPI was stronger than expected at +0.3%mom/2.7%yoy in January adding further weight to
    the view of the Fed that inflation risks remain to the upside. Comments by Fed officials over the last
    week have continued to highlight the key risk for the US economy being that stubbornly high inflation
    eventuates and in this environment further tightening of monetary policy can not be ruled out. In
    contrast the US interest rate markets are priced for a reduction in official interest rates by the end of the
    year. The Fed retaining a mild tightening bias will not preclude the bond market from pricing an outlook
    for lower official interest rates in the form of lower bond yields, however it suggests the extent of lower
    market rates should be limited until a succession of weaker economic data results in the Fed actually
    moving to a ‘neutral’ bias, this is currently not the case. In terms of the January CPI there were some
    mildly encouraging signs in the form of the owners’ equivalent rent component increasing by ‘just’
    +0.2%mom. This has been one of the strongest drivers of inflation in the US for the last 12 - 18
    months.




Contacts:                                 Roger Kerr                    (09) 913 4628                 roger.kerr@aprisk.com
                                          Stuart Henderson              (09) 913 4625                 stuart.henderson@aprisk.com
                                          Chris Hedley                  (09) 913 4629                 chris.hedley@aprisk.com
                                          Brett Johanson                (04) 918 0008                 brett.johanson@aprisk.com                                                               page 5
Asia-Pacific Risk Management Limited




                                                                US 'Core' CPI and US Interest Rates
                                     3.25%                                                                                               8.00
                                                                                                            Correlation : 58%
                                     3.00%                                                                                               7.50




                                                                                                                                                US 10 Year Govt. Bond Yields (%)
                                     2.75%                                                                                               7.00
        US Core CPI (YoY % change)




                                                                                                                                         6.50
                                     2.50%
                                                                                                                                         6.00
                                     2.25%
                                                                                                                                         5.50
                                     2.00%
                                                                                                                                         5.00
                                     1.75%
                                                                                                                                         4.50
                                     1.50%                                                                                               4.00

                                     1.25%                                                                                               3.50

                                     1.00%                                                                                               3.00
                                          Jan-    Jan-   Jan-   Jan-   Jan-    Jan-    Jan-   Jan-   Jan-   Jan-   Jan-    Jan-   Jan-
                                           95      96     97     98     99      00      01     02     03     04     05      06     07

                                                      Core CPI YoY% change                           US 10 Yr Govt Bond Yield



    The upcoming week sees a busy schedule of data releases in the US with some of the more important
    including;
            o Real GDP growth revised figures for Q4: market expectations are for a sharp downward
                revision from an annualised initial estimate of +3.5% to +2.3%
            o Chicago PMI / ISM Manufacturing Indices for February: both of these fell below 50 in
                January signalling a contraction in the manufacturing sector.
            o New and Existing Home Sales for January: confidence indicators have recently pointed to
                the US housing market showing some tentative signs of stabilisation.
     The net effect of all of these is more likely to be viewed but the bond market as consistent with an
     outlook for ultimately lower official interest rates. Should this be the case, and should the New Zealand
     long-term interest rates fail to participate in any falls this would provide the opportunity for a sharper
     contraction in spreads at a later date once a necessary catalyst is presented.

Likely trading range next month:
                                                            NZ 90 Day Bank Bills                 7.60 per cent. – 7.80 per cent.     Bias: →
                                                            NZ 3 Year Swap Rate                  7.45 per cent. – 7.60 per cent.     Bias: →
                                                            NZ 10 Year Swap Rate                 6.85 per cent. – 7.00 per cent.     Bias: →/↓
                                                            US 10 Year Government Bonds          4.60 per cent. – 4.90 per cent.     Bias: →

Likely trading range next six months
                                                            NZ 90 Day Bank Bills                 7.00 per cent. – 7.80 per cent.     Bias: →/↓
                                                            NZ 3 Year Swap Rate                  6.50 per cent. – 7.60 per cent.     Bias: →/↓
                                                            NZ 10 Year Swap Rate                 6.30 per cent. – 7.00 per cent.     Bias: →/↓
                                                            US 10 Year Government Bonds          4.40 per cent. – 4.90 per cent.     Bias: →

Upcoming key economic data releases
                                                                                                                                                                                      Impact
Date
                                     Statistic                                            Previous                        Deutsche Forecasts                                           on NZ
(NZT)
                                                                                                                                                                                     rates ↓↑
27/2                                 RBNZ 2 Year Inflation Expectations (Feb)                        +2.7%                        +2.6%                                                     ↓



Contacts:                                    Roger Kerr                (09) 913 4628             roger.kerr@aprisk.com
                                             Stuart Henderson          (09) 913 4625             stuart.henderson@aprisk.com
                                             Chris Hedley              (09) 913 4629             chris.hedley@aprisk.com
                                             Brett Johanson            (04) 918 0008             brett.johanson@aprisk.com                                                         page 6
Asia-Pacific Risk Management Limited




28/2                      US Consumer Confidence (February)                        110.3                         108.0                                  →
                          US Existing Home Sales (January)                        6.22m                         6.20m                               →/↑
                          NZ Dwelling Consents (January)               -4.9%mom/-20.8%yoy            12.0%mom/0.9%yoy                               →/↓
2/3                       US Real GDP (Q4 - revised)                      +3.5% annualised             +1.5% annualised                             →/↓
                          US New Home Sales (January)                             1,120k                        1,090k                              →/↑
                          US Chicago PMI (February)                                48.8                          49.0                               →/↓
                          NZ External Migration (January)                  14,900 annual                 15,350 annual                              →
3/3                       US Core PCE Deflator (January)                 0.1%mom/2.2%yoy              0.2%mom/2.3%yoy                               →/↑
                          US ISM Manufacturing Index (February)                    49.3                          49.5                               →/↓

                                                         NZ 3 Yr Swap Rate
                       8.00                                                                                         8.00


                       7.50                                                                                         7.50


                       7.00                                                                                         7.00
   Interest Rate (%)




                                                                                                                           Interest Rate (%)
                       6.50                                                                                         6.50


                       6.00                                                                                         6.00


                       5.50                                                                                         5.50


                       5.00                                                                                         5.00


                       4.50                                                                                         4.50
                          Feb-02            Feb-03     Feb-04          Feb-05              Feb-06         Feb-07




                                                         NZ 10 Yr Swap Rate
                       8.00                                                                                         8.00



                       7.50                                                                                         7.50



                       7.00                                                                                         7.00
   Interest Rate (%)




                                                                                                                           Interest Rate (%)




                       6.50                                                                                         6.50



                       6.00                                                                                         6.00



                       5.50                                                                                         5.50



                       5.00                                                                                         5.00
                          Feb-02            Feb-03      Feb-04         Feb-05              Feb-06             Feb-07




Contacts:                          Roger Kerr          (09) 913 4628            roger.kerr@aprisk.com
                                   Stuart Henderson    (09) 913 4625            stuart.henderson@aprisk.com
                                   Chris Hedley        (09) 913 4629            chris.hedley@aprisk.com
                                   Brett Johanson      (04) 918 0008            brett.johanson@aprisk.com                                      page 7

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:82
posted:4/22/2010
language:English
pages:7