Speaker 1: You're listening to the Weekend Collective podcast from News Talks AB.
Speaker 2: Right now, it is time for smart money and we
Speaker 2: want your calls on eight hundred and eighty ten eighty
Speaker 2: text nine two. And our guest is director and fixed
Speaker 2: income and currency strategist from Harbor Asset Management and his
Speaker 2: name is Hamish Pepper. Good Hamish again, good.
Speaker 3: Eton, I'm good, thank you?
Speaker 1: Are you all right? All right? Thanks? So are you
Speaker 1: coming to us from Wellington?
Speaker 3: I am? I am.
Speaker 4: I'm looking out from our office onto the harbor and
Speaker 4: watching the sunset.
Speaker 2: Not too bad sunset already, Oh my goodness, I've just
Speaker 2: looked out. Yes, well, at least you can say it's
Speaker 2: but gray here.
Speaker 1: So actually gray, I don't know. I was trying to
Speaker 1: turn into a theme with sunsets and things. But the
Speaker 1: suns here we go. I've got it, I've got it.
Speaker 2: The sun may be setting on the reserve banks. Harsh
Speaker 2: rhetoric when it comes to what's happening with the cash rate.
Speaker 3: Yes, indeed, yes, finally.
Speaker 1: Finally I like that. That's not a bad metaphor. I'm
Speaker 1: going to go with that.
Speaker 2: But anyway, so, why has it okay? Why is that
Speaker 2: statement true?
Speaker 4: Well, I think we are really seeing the economy hurt now,
Speaker 4: and of course that is what they want, because that's
Speaker 4: the way in which inflation comes back to a lower
Speaker 4: and stable level.
Speaker 3: They want two percent.
Speaker 4: They definitely don't want the numbers that we were seeing
Speaker 4: a year or so ago, and with that they can
Speaker 4: take the foot off the throat, so to speak, of
Speaker 4: the economy and lower interest rates and let us all
Speaker 4: breathe again. Really, they're not quite there yet, but we
Speaker 4: think they are getting very very close to starting to
Speaker 4: reduce interest rates.
Speaker 2: Would you mean they're not quite there yet? What's not
Speaker 2: quite there? You mean the Reserve Bank aren't there? Because
Speaker 2: I think most of us are there.
Speaker 4: Well, yes, indeed, and many of us probably been there
Speaker 4: for months now, looking out the window and hearing stories,
Speaker 4: seeing data which suggests that, you know, those high interest
Speaker 4: rates have been very very effective in sort of hurting
Speaker 4: the economy and taking inflation pressure.
Speaker 3: Out of it. Why are they are so slow, so
Speaker 3: to speak?
Speaker 4: I think there's still a residual concern that they might
Speaker 4: see inflation rear its head again. Inflation inflation expectations what
Speaker 4: people think about in terms of what prices will do.
Speaker 3: So they I think are.
Speaker 4: Trying to balance the observed impact of policy, which is strong.
Speaker 4: You know, we're seeing that with the fact that inflation
Speaker 4: is not quite back to two percent, and therefore there's
Speaker 4: still a risk that perhaps if rate cuts come too soon,
Speaker 4: people then think, oh well, perhaps that might mean that
Speaker 4: inflation can pick up again, and therefore, you know, the
Speaker 4: job's not done.
Speaker 1: Can you can you give.
Speaker 2: Us a description of what of what that what's the
Speaker 2: inflation rating is now three point three percent I think,
Speaker 2: isn't it?
Speaker 1: And how significant to drop is it?
Speaker 2: And what it means in real terms that we can
Speaker 2: understand in terms of tradable and non tradable inflation all that.
Speaker 4: Yeah, I mean, I think we've probably talked a lot
Speaker 4: about that tradeable part of inflation of prices that we're
Speaker 4: seeing in the economy having normalized. We talked about supply
Speaker 4: chains which were heavily disrupted during that COVID time, you know,
Speaker 4: basically goods not being able to flow through the world
Speaker 4: like they normally do, and with that cause the prices
Speaker 4: of those goods to increase. A lot that's now all
Speaker 4: come out of the system. You've actually got you know,
Speaker 4: tradable inflation. For example, here is running negative on the quarter,
Speaker 4: so those prices actually fell on the years. It's pretty
Speaker 4: close to flat to nothing. So that's all good, and
Speaker 4: that's that's sort of been resolved. What's left is this
Speaker 4: sort of stickier what we call non tradable inflation, which
Speaker 4: is generated by the domestic economy and particularly generated by
Speaker 4: the labor.
Speaker 3: Market in terms of wage growth.
Speaker 4: And that bit is still running quite high on a
Speaker 4: quarterly basis. That came in almost one percent on the quarter,
Speaker 4: and it's above five percent annually.
Speaker 3: And so that is the bit that's the niggli.
Speaker 4: Little bit here which is probably driving that just hesitation
Speaker 4: or residual concern that the rbnz'd have about taking rates
Speaker 4: lower too soon or too quickly.
Speaker 2: Yeah, so one of the things I saw on well,
Speaker 2: on Twitter, actually there was a couple of bits to
Speaker 2: camera from Nikola Willison, also Christopher Luckson saying, look, we're
Speaker 2: getting on top of inflation. I just had it without
Speaker 2: I mean, we can get political if you like. Who's
Speaker 2: responsible because that looks like the government taking credit for
Speaker 2: the drop in inflation. Who actually can take the credit
Speaker 2: for inflation coming down?
Speaker 4: I mean, I think it's largely the central bank, the
Speaker 4: zero Bank in New Zealand deserve the credit for inflation falling.
Speaker 4: Of course, you know the global dynamic of supply chains normalizing. Well,
Speaker 4: you know that was about the vaccines and you know
Speaker 4: the world being able to operate again, but that's sort
Speaker 4: of years old now that that story. You know, I
Speaker 4: think the domestic you know, inflation pressures and the fact
Speaker 4: that on a forward looking basis they are looking like
Speaker 4: they are on that track to normalization too, is because
Speaker 4: of how quickly we saw interest rates once they started.
Speaker 4: You know, I think the Arbians themselves would say, you know,
Speaker 4: in hindsight, they probably should have started sooner in terms
Speaker 4: of lifting intrates from the quarter of a percent that
Speaker 4: we started.
Speaker 3: At at the bottom.
Speaker 4: But ultimately that you know, once they got going, they
Speaker 4: did move in quite big increments. We got to five
Speaker 4: and a half percent quite quickly and have been there
Speaker 4: now for some time. You know, those are high intra
Speaker 4: shrates and they are having a large impact and will
Speaker 4: be the main driver that takes out inflation back to
Speaker 4: two per I.
Speaker 2: Guess I was asking how much credit the government can
Speaker 2: take because the reason that Adrian or the Reserve Bank
Speaker 2: had to sort of well, actually actually maybe he was
Speaker 2: to blame in the first place. I'm just trying to remember,
Speaker 2: because there was a lot of government expenditure, of course,
Speaker 2: which this current government has criticized, which was part of
Speaker 2: the picture, I guess. But of course the Reserve Bank,
Speaker 2: who was it that kept cash.
Speaker 1: So cheap for so long?
Speaker 4: Yeah, I mean, and I think that they admit that that,
Speaker 4: you know, like I said there that with hindsight, policy
Speaker 4: was too loose for too long in the Central Bank,
Speaker 4: they recognized that, I think sooner than perhaps government did,
Speaker 4: because on the government side, we kept in place quite
Speaker 4: stimulatory policy things things like wage subsidies, for example, but
Speaker 4: just generally spending was high through a period where the
Speaker 4: economy was actually clearly recovering, so there wasn't the need
Speaker 4: for that stimulus from government and that spending from government.
Speaker 4: And what it's meant is we've now entered a period
Speaker 4: where normally you would think of government being able to
Speaker 4: help out an economy when it's struggling like it is,
Speaker 4: and it's going to struggle more. But of course they're
Speaker 4: very ham strung and limited in terms of what they
Speaker 4: can do because of that sort of residual spend and
Speaker 4: the impact that that's having on the amount of debt,
Speaker 4: for example, that the.
Speaker 1: Government is okay.
Speaker 2: So up, I'm an editor to ask the question again
Speaker 2: now that I've got it clear in my mind. So
Speaker 2: if the government stimulatory sort of approached, the economy went
Speaker 2: on too long, along with the cheap cash from the
Speaker 2: Reserve Bank, and.
Speaker 1: So they played a part in us.
Speaker 2: Needing to get on top of it, how much credit
Speaker 2: can actually the government. I'm not doing this to be mischievous,
Speaker 2: by the way. I'm just quite curious because I was
Speaker 2: amused when I saw Nikola Willis and Christopher Luxon's video
Speaker 2: and I thought to myself, I'm not sure how much.
Speaker 1: Of this is on you? So how much can they
Speaker 1: take credit for I.
Speaker 4: Don't think much at all. And I think also that
Speaker 4: you know, really, if you think of government, regardless of
Speaker 4: the political party, and just think of the role that
Speaker 4: government played through that time, then you know that they
Speaker 4: were a key driver of the inflation that then the
Speaker 4: central Bank had to respond to and is still still
Speaker 4: doing that.
Speaker 1: It's quite fascinating, isn't it.
Speaker 2: I just guess in the end politics, if something's going
Speaker 2: well and you are in government, take credit for it
Speaker 2: as quick as you can. I mean, then maybe they'll
Speaker 2: say that. I don't know what arguments could they mount
Speaker 2: for that. Again, I'm probably pushing the point, but it's
Speaker 2: just fun to get my own head around it, because
Speaker 2: I guess they would say, we've set the tone around
Speaker 2: expenditure which has helped get on top of inflation, and
Speaker 2: Adrian or subtly has has followed the signals that we've
Speaker 2: sent out there.
Speaker 1: Is that an argument they could make?
Speaker 3: Yeah, I mean I think they could.
Speaker 4: You know, it's I find it hard to kind of
Speaker 4: fully buy into it. But the argument that they could
Speaker 4: put forward is, hey, look, we've got a path now
Speaker 4: back towards fiscal balance and indeed fiscal surpluses. We are
Speaker 4: doing that through you know, a reduction and spending over
Speaker 4: that sort of four or five five year period. But
Speaker 4: at the same time they're also introducing tax cuts which
Speaker 4: come live the end of the month, and you know,
Speaker 4: that's something which ultimately slows your ability to balance.
Speaker 3: And keep it under control.
Speaker 2: So actually, why you mentioned that, I mean, how stimulatory
Speaker 2: are they really going to be when? Because there's one
Speaker 2: thing when you when you people feel they've got lots
Speaker 2: of extra money in their pocket and therefore, you know,
Speaker 2: let's go and buy another holiday and spare buy a
Speaker 2: new car and all that, But when people are struggling
Speaker 2: to make ends, mate, and the people in the middle
Speaker 2: feeling it squashed, is that tax cut really as inflationary
Speaker 2: as some some you know might have criticized it in
Speaker 2: the political hustings.
Speaker 3: Yeah, I think.
Speaker 4: I think in a weird way, it has almost by accident,
Speaker 4: come at a time where the economy really needs it,
Speaker 4: so it is actually acting in that way that you
Speaker 4: would expect fiscal policy to work. You know that when
Speaker 4: there is a downturn in the economy, then you know
Speaker 4: the government can step in and soften the blow.
Speaker 3: So it's turned out that way.
Speaker 4: But I don't think anybody thought, including Treasury, that the
Speaker 4: economy would be as weak as it is now and
Speaker 4: then likely to be weak over the coming year. So
Speaker 4: I think it has been fortunate in a way that
Speaker 4: these are coming along to provide a bit of a cushion.
Speaker 4: But I think when they were first talked about and promised,
Speaker 4: I personally thought that was an unusual thing to be
Speaker 4: happening when there was so much focus on the amount
Speaker 4: of debt that our government had accumulated and would be
Speaker 4: accumulating over the coming four or five years that I
Speaker 4: thought it was an unusual.
Speaker 2: So well, you I think we've put the politics side
Speaker 2: to bed a little bit. But it's just I guess
Speaker 2: that's the amusing side of things, seeing people take credit
Speaker 2: for different things. I guess at the heart of it is,
Speaker 2: I've always I've been developing more and more this suspicion
Speaker 2: that you forget tax cuts and all that the person
Speaker 2: who has the most control over the welfare of New
Speaker 2: Zealanders is the guy who controls the cash rate. And
Speaker 2: that's about it. And it says name is ta Mahuta. Wops,
Speaker 2: sorry Adrian, or it's dead right.
Speaker 3: It's a blunt tool, you know.
Speaker 4: You'll often hear Adrian talk about it in that way
Speaker 4: and many central bank governors. But it's very powerful because
Speaker 4: of how broadly the economy is affected.
Speaker 3: And of course we've talked before.
Speaker 4: About those that have debt and are impacted by the
Speaker 4: interest rates that they have to pay on that. But
Speaker 4: of course there's the other side of it as well,
Speaker 4: to which is those that are savers or have the
Speaker 4: ability to save, they will respond to those higher interest
Speaker 4: rates as well, and they'll be incentivized to save today
Speaker 4: and spend tomorrow, and that's something which is a driver
Speaker 4: of the economic weakness we're seeing, as well as those
Speaker 4: that are struggling to service debt.
Speaker 1: Well, let's get onto this the Reserve Bank and that
Speaker 1: pivot of theirs.
Speaker 2: Were you surprise, how would you describe the way that
Speaker 2: they've shifted their rhetoric?
Speaker 3: It was, It was a big surprise.
Speaker 4: I think that the timing mainly, I think our view
Speaker 4: had been that they were on a path at at
Speaker 4: some point they would recognize just how weak things were
Speaker 4: out there. But the timing of this was unusual for
Speaker 4: a couple of reasons. That the meeting prior had been
Speaker 4: one which we describe is very hawkish. That's one where
Speaker 4: the rhetoric around sort of inflation risks was prominent. You know,
Speaker 4: they'd even contemplated hiking interest rates at that may monetary poz.
Speaker 1: Nobody bought that one though, you know.
Speaker 4: Well, you know they didn't. They didn't, but then they worried.
Speaker 4: You know, the fact that that was stated in the
Speaker 4: meeting minutes. It's no accident that those things end up there.
Speaker 4: So there's a message that they want to want to send.
Speaker 4: But so we'd all been conditioned to this sort of
Speaker 4: strangely hawkish sort of central bank and then all of
Speaker 4: a sudden in this latest meeting, huge change in tone.
Speaker 4: You know, no way was there any consideration of hikes.
Speaker 4: It was much more balanced. It was reflecting many of
Speaker 4: the things that you know, people were experiencing and highlighting.
Speaker 4: And it was at a meeting where they didn't produce forecasts.
Speaker 4: These are sort of what are called monetary policy reviews.
Speaker 4: They're the in between meetings between the big ones where
Speaker 4: you've got to set a forecast and you can have
Speaker 4: a press conference and you explain what you're doing and
Speaker 4: all the rest of it.
Speaker 3: This was one of those interm ones.
Speaker 4: Yet they still had this this quite quite significant change
Speaker 4: in tone. And the final thing was that the chief
Speaker 4: economist was was actually on holiday. Paul Conway was not
Speaker 4: there for the.
Speaker 3: Meetings, so.
Speaker 1: All in all, and what does that mean?
Speaker 3: I just think he needed a break, and good good.
Speaker 2: I wondered if there was some significance someone's not here,
Speaker 2: what does it tell us? I mean, that's fascinating see
Speaker 2: that because you mentioned it, and I was just wondering
Speaker 2: if it's something you go, oh, he's not here, what's
Speaker 2: it mean.
Speaker 4: Yeah, no, I just think for many they would have
Speaker 4: gone into that meeting and the lead up and thought,
Speaker 4: this is not going to be one where we see
Speaker 4: a big change in communication and tone. They'll they'll largely
Speaker 4: repeat what they said in May. But instead, I think
Speaker 4: because of just how quickly the economy is deteriorating, they
Speaker 4: did feel the need to shift to a more balanced
Speaker 4: stance and and really open the door. Now the door
Speaker 4: is well and truly open to them cutting the official
Speaker 4: cash right as early as next month.
Speaker 3: Well that was unreasonable.
Speaker 1: Well that was my next question, because.
Speaker 2: What is what's the next event where they could credibly
Speaker 2: make an announcement about a change in the in the
Speaker 2: interest rate.
Speaker 4: Yeah, they could do it on the on the fifteenth
Speaker 4: of August.
Speaker 3: I think it is roughly they could. They could do
Speaker 3: it at that meeting.
Speaker 4: In between times, they will get some labor market data
Speaker 4: for the second quarter, which is likely to be really
Speaker 4: quite poor, and they have a view that the unemployment
Speaker 4: rate will pick up from the current four point three
Speaker 4: percent to four point six I mean, it could well
Speaker 4: be something more like five percent.
Speaker 3: And I think in that case, that really does.
Speaker 4: I think give them probably enough to seriously contemplate a
Speaker 4: rate cut in August that there's not a lot left.
Speaker 4: If you believe that, then this will flow into wages.
Speaker 3: It usually does.
Speaker 4: Ride a higher unemployment rate lowers the rate of wage inflation.
Speaker 4: Then on a forward looking basis, you could say with
Speaker 4: some confidence, you're on your way back to two percent.
Speaker 2: Yeah, wow, okay, look hey that's inflation, by the way,
Speaker 2: not the cash rate. Somebody will go, what hey, look,
Speaker 2: we'll come back in just a moment. With the Hamish Pepper,
Speaker 2: he's director and fixed income and currency strategist that have
Speaker 2: asset management and the fascining come just around the whole
Speaker 2: rhetoric of the reserve bank and what they're going to do,
Speaker 2: as Hamish mentioned, could be the middle of August, their
Speaker 2: next opportunity to put it down, what's your money on?
Speaker 1: Because you know what you can better as.
Speaker 2: Much as you like about you know, are we going
Speaker 2: to about government policy and all sorts of things, but
Speaker 2: another reserve bank are the ones who control so much
Speaker 2: of our of our well being and it if you've
Speaker 2: got a mortgage or you're a renter, so what's your bet?
Speaker 2: Are they going to drop the are they going to
Speaker 2: drop the rate sooner?
Speaker 1: Rather than later.
Speaker 2: And it's certainly relevant if you're looking at refixing your
Speaker 2: mortgage asking for a friend, no personal and because literally
Speaker 2: i am about to refix my mortgage, so I've got
Speaker 2: to think about that. I've made up my mind. Don't worry,
Speaker 2: but you tell me what your work, what your guess is, Oh,
Speaker 2: eight hundred and eighty ten eighty text nine two nine two,
Speaker 2: and you can email. I don't worry about emails, calls
Speaker 2: and texts. Okay, back in the mine, Welcome back to
Speaker 2: the smart money. My guest is Hamish Pepper from Harbor
Speaker 2: Asset Management. We're talking about the cash rate and the enthralling.
Speaker 1: It's almost like it's almost like.
Speaker 2: An active theater, isn't it the Reserve Bank that for
Speaker 2: such a dry institution, they're quite theatrical at times, aren't they?
Speaker 2: Because there's always something to read into the nuance, isn't there?
Speaker 1: Hamish?
Speaker 4: Yeah, I mean there is the I mean, I think
Speaker 4: one of the things that's been fantastic recently is the
Speaker 4: frequency with which they are speaking to the public and
Speaker 4: to you know, financial markets. You know, Paul Conway, the
Speaker 4: Chief Economist, recently had a speech where he had that
Speaker 4: on the basis of four pieces of research that have
Speaker 4: been produced, and you know.
Speaker 3: This is just it's great.
Speaker 4: Yes, it does give us the theater and then you
Speaker 4: know we're trying to you know, read the tea leaves
Speaker 4: and pick apart every every sentence. But you know, it's
Speaker 4: a great thing for all of us to have a
Speaker 4: central bank that's working like that, that's doing research that
Speaker 4: relates to this economy and then they're speaking about it
Speaker 4: and providing you know, a channel through which we can
Speaker 4: ask about it and learn about it.
Speaker 3: Yeah, I think that's great.
Speaker 1: Ye is there? Look, it's just reckons, isn't it.
Speaker 2: But do you think there's a little bit of anxiety
Speaker 2: at the Reserve Bank given that they made that pivot
Speaker 2: that was unexpected? Do you think there's a little bit
Speaker 2: of nervousness amongst in their ranks that maybe they've gone
Speaker 2: a bit too hard too long?
Speaker 3: I think so.
Speaker 4: Look, I think they will get no credit whatsoever for
Speaker 4: taking inflation below two percent, you know, two percents of
Speaker 4: the target. And don't get me wrong, you know we're
Speaker 4: not there yet, but we are getting close. And monetary
Speaker 4: policy operates with long and variable lags. You know, it
Speaker 4: can be up to two years before you get the
Speaker 4: full impact of where policy settings are today. So yes,
Speaker 4: I think you're right. I think that is starting to
Speaker 4: come through in the Monetary Policy Committee and the least
Speaker 4: regret which was for so long, the least regret being
Speaker 4: you know, not getting inflation back to two and leaving
Speaker 4: it above and having to you know, take policy even tighter.
Speaker 4: That least regret now is changing to one that as
Speaker 4: you say, we're a year or two head and we're
Speaker 4: looking at an economy that is really just too almost
Speaker 4: much weaker than it needed to be. You know that
Speaker 4: that's that's the regret.
Speaker 3: I think that's that's starting to emerge.
Speaker 2: I would argue that there have been a lot of
Speaker 2: people commentators who have argued that for a while, and
Speaker 2: that seems the last people to realize that was a
Speaker 2: reserve bank is that harsh.
Speaker 4: I think there is always going to be. And financial
Speaker 4: markets are the same. You know that that cohort that
Speaker 4: are kind of trying to get ahead of things, you know,
Speaker 4: and caught in calling for in this case interest rates
Speaker 4: to fall prior to you know, to them actually doing so.
Speaker 3: But I think you're right. I think overall the.
Speaker 4: RBNZ have found themselves, particularly recently, a little isolated in
Speaker 4: their view of of of how things are going to
Speaker 4: play out. I mean, just for example, the last set
Speaker 4: of forecasts we had from them, it didn't have the
Speaker 4: cash rate falling until the second half of next year,
Speaker 4: and you know, thinking about that today, it's that's just
Speaker 4: it is quite an extreme view. And so, yeah, but
Speaker 4: I think what's probably happening is there's been a revision
Speaker 4: of that, and when we see the forecast again updated
Speaker 4: next month, I think that implied start of the easing,
Speaker 4: I mean, could be as early as that meeting, but
Speaker 4: it's definitely going to be a lot lot sooner than
Speaker 4: what was in those.
Speaker 2: Yeah, and their options are to drop it by what
Speaker 2: At the moment, it's five point five, isn't it that
Speaker 2: they might They might even just drop it point two five.
Speaker 2: I don't imagine they're going to drop half off, are they?
Speaker 4: I guess it depends on just how urgent the need is.
Speaker 4: I think that the thing.
Speaker 3: That could support large moves.
Speaker 4: And I think, you know, I kind of agree that
Speaker 4: the first move is likely to be perhaps a cautious one,
Speaker 4: you know, to start start slowly and then accelerate, if
Speaker 4: you know, you keep getting the evidence that you know,
Speaker 4: rates should be lower. But the negel for them is
Speaker 4: just how far above a neutral cash rate they are.
Speaker 4: They would say themselves that they're basically double what they
Speaker 4: think is a long term term neutral rates. So they
Speaker 4: say long term neutrals about two point seventy five. We're
Speaker 4: at five and a half. And so what it means
Speaker 4: is that whenever you're above neutral, you're still having a
Speaker 4: downward impact on the economy. So if all the evidence
Speaker 4: comes through that inflation is going to be quickly back
Speaker 4: at two, you've got a labor market that's you know,
Speaker 4: seeing rapid increases in unemployment and activity in the economy
Speaker 4: is basically recessionary, then you want to you want to
Speaker 4: get to that neutral level really quite quickly, and in fact,
Speaker 4: you might even want to take it below that and
Speaker 4: start providing some stimulus.
Speaker 2: Yeah, I mean, it's all wreckord I've got. I mean,
Speaker 2: I'm no expert on these things. I do wonder whether
Speaker 2: you know, you mentioned that they might do it gently
Speaker 2: and then accelerate. I sometimes wonder whether they might have
Speaker 2: been better to go hard and then not so aggressive
Speaker 2: on the acceleration. But that's just you know, hindsight. It's
Speaker 2: a wonderful thing, isn't it. Hey, we've got a quick
Speaker 2: question here, and it ties into what the markets are doing,
Speaker 2: because we've had conversations with actually from some of your
Speaker 2: colleagues about recently. I think about bond markets, but somebody
Speaker 2: just asked me on the text my term deposit matures soon.
Speaker 1: Now.
Speaker 2: I know you're not going to give specific advice, but
Speaker 2: you could give some thoughts on this. Would it be
Speaker 2: wise to reinvest for a longer term, like five years
Speaker 2: instead of that one year that I usually go for,
Speaker 2: And let's assume that Ruth wants to keep her money
Speaker 2: saved in the savings for a long period of time.
Speaker 1: I would have My non.
Speaker 2: Specific advice would be if the bond markets are quite
Speaker 2: good right now, why wouldn't you have.
Speaker 1: A crack at that? Or give us your thoughts, Amish,
Speaker 1: what do you reckon?
Speaker 4: Yeah?
Speaker 3: I think the.
Speaker 4: Choice between term deposits and something like a bond or
Speaker 4: a fund that invests in bonds. One of the key
Speaker 4: different is to consider is liquidity. So you know we
Speaker 4: will have talked about this before, and you will have
Speaker 4: talked to others about it that you know, term deposits
Speaker 4: it's pretty strict in terms of your ability to access
Speaker 4: that money through the life of or the term of
Speaker 4: that deposit.
Speaker 3: You know, it's it's essentially locked.
Speaker 4: Away, whereas if you buy a bond or invest in
Speaker 4: a bond fund, you normally will have daily liquidity, so
Speaker 4: you'll be able to sell that if you want to.
Speaker 3: And then have your money back within a couple of days.
Speaker 4: So that's the first thing to consider. Am I getting
Speaker 4: when I go and say, as you know, sort of
Speaker 4: thought about if you wanted to go into a say
Speaker 4: even a two or a three year term deposit just
Speaker 4: for example. You know, am I getting compensated for not
Speaker 4: having access to that money for that period of time?
Speaker 4: You know, it's too whatever a bond fund might be
Speaker 4: offering me or an individual bond, so liquidity is going
Speaker 4: to be I would actually say that's probably the the
Speaker 4: biggest consideration, you know, is to think about to think
Speaker 4: about that. And then there's the one about Okay, does
Speaker 4: that interest rate over that period of time, you know,
Speaker 4: look appealing given whatever my view of the world is,
Speaker 4: and if your view of the world is that the
Speaker 4: RB and Z are quickly going to be taking you know,
Speaker 4: the cash rate to half of what it currently is,
Speaker 4: which would be much more than what markets have priced.
Speaker 4: Then you know that's going to push you into thinking
Speaker 4: about doing something like that, because if you're right that
Speaker 4: the RB and Z say quickly does half the cash rate,
Speaker 4: those term deposit rates.
Speaker 3: Are going to fall.
Speaker 4: And we've already seen some reduction in term deposit and
Speaker 4: mortgage rates since that pivot by the RB.
Speaker 2: I guess I was wondering because it was it seemed
Speaker 2: that just a few weeks ago, the conversations around bonds
Speaker 2: and everything was making them look making an un sexy
Speaker 2: product look like it wasn't such a bad idea. And
Speaker 2: you wonder if the interest rate drops quickly, how quickly
Speaker 2: that's sort of idea falls out of favor.
Speaker 1: I don't know, Yeah, I think that that's.
Speaker 3: A good point.
Speaker 4: You know, generally, what will happen is that as the
Speaker 4: interest rates fall, you'll be if you're invested in a bond,
Speaker 4: that those are good times. You know you've got in
Speaker 4: when that interest rate is high, so you get to
Speaker 4: enjoy that sort of income. And then as interest rates drop,
Speaker 4: you get a capital gain because the value of that
Speaker 4: security goes up. And so there's a moment where you know,
Speaker 4: bonds just do really well because of both of those
Speaker 4: those channels working. But then when we get to the bottom,
Speaker 4: you know, let's just choose. Let's let's use the two
Speaker 4: percent we talked about two percent. Say we get all
Speaker 4: the way to two percent on inflation yep, yep, sorry, no,
Speaker 4: on the on the cash ra.
Speaker 1: Cash rate blummy.
Speaker 3: Yeah, So let's say we.
Speaker 4: Get there, then we would have a very different conversation
Speaker 4: about bonds because we would be thinking, right, I'm only
Speaker 4: getting something like maybe two or three percent in yield,
Speaker 4: what's the prospect of capital gain, which would mean, you know,
Speaker 4: you have to be thinking about yields falling from there.
Speaker 4: That's a different conversation. I mean, that's the kind of
Speaker 4: conversation we were having about bonds. You know, when the official
Speaker 4: cash rate was zero point two five percent, you know,
Speaker 4: they were not a favored sset class.
Speaker 1: Yeah. I tell you what.
Speaker 2: We're going to take a call when we get back,
Speaker 2: and you can give us a call anytime if you
Speaker 2: want to disagree with what what Hamish was saying. I
Speaker 2: have your reckons as well. Wait if you agree, we
Speaker 2: love people who agree as well. I weight one hundred
Speaker 2: eighty ten eighty text nine two nine two. It's twenty
Speaker 2: two minutes. I get that right, Yeah, it's twenty two
Speaker 2: minutes to six. And welcome back to the Weekend Collective.
Speaker 2: This is smart Money with Hamish Pepper from Harbor Asset Management.
Speaker 2: He as a director there and fixed income and currency strategist.
Speaker 2: Fascinating discussion just around the rb NS. And it's approached
Speaker 2: the cash rate because it might sound at times, the
Speaker 2: issue of the cash rate might sound a little bit
Speaker 2: sort of dry at times, but actually the consequences for
Speaker 2: us are a big deal. If some and I know
Speaker 2: people have got some looking to refix their mortgages, have
Speaker 2: got hefty mortgages, and you know the question man or
Speaker 2: what the reserve banks doing as big stuff.
Speaker 1: Anyway, let's take some calls. Glenn, Hello, good evening.
Speaker 5: Actually, what are you going at point five in August?
Speaker 3: What the hell?
Speaker 1: No, I don't think we said point five?
Speaker 2: Did we say point five in August? Did you say
Speaker 2: did Hamish say point five in August? Where you go, Hamish?
Speaker 4: I think I think Tim offered up the possibility, but
Speaker 4: then I think the conclusion was perhaps that's too large,
Speaker 4: But yeah, I.
Speaker 5: Doubt mate, Glenn.
Speaker 1: I'm not.
Speaker 2: I'm not the economist or a heart of ex income strategist.
Speaker 2: I'm just a guy just throwing some figures out for
Speaker 2: fun to hook you in to give us a call
Speaker 2: and well done, welcome.
Speaker 4: Yeah, No, I think I think, Glenn, you know, ultimately
Speaker 4: I agree. I think it would be such a huge
Speaker 4: turn from you know, just the previous managery policy statement
Speaker 4: in May, the one we were talking about where they
Speaker 4: were thinking about pikes to in August be cutting by fifty.
Speaker 3: I agree. I think that that is too much.
Speaker 4: It's not a zero in terms of probability, but it's
Speaker 4: it's probably not the very very.
Speaker 2: Hey, Glenn, guess what I'm going to go with it,
Speaker 2: because you know, when you expect the Warriors to win
Speaker 2: and they lose, and when you expect to lose and
Speaker 2: they win, we're not expecting a cut in the grate.
Speaker 2: So I'm going to go point twenty five on August fourteenth,
Speaker 2: or whatever it is.
Speaker 5: What you've got, I think what you've got the of
Speaker 5: one something or has done nothing.
Speaker 1: So I didn't quite catch that say that again.
Speaker 5: The worries of have actually heard a coach who's done
Speaker 5: some good stuff, Adrian or he has done nothing. Here's
Speaker 5: the worst event governor in my life. He is horrendous.
Speaker 2: Why is that from your point of view that he's
Speaker 2: the absolute worst?
Speaker 5: He has just printed and kept low for too long.
Speaker 5: He watched what was happening overseas, didn't first sort to
Speaker 5: think about New Zealand as an export context. It just
Speaker 5: just followed the herd with overseas well. He didn't, for
Speaker 5: any of his own interpretation on it, any of the
Speaker 5: New Zealand's how our economy works is completely different area
Speaker 5: than out of the economy works has followed the crowd.
Speaker 2: It was, Glenn, Is there any psychology that the fact
Speaker 2: that maybe because he went too long, too low for
Speaker 2: too long, that he's going to compensate by going on
Speaker 2: the quicker side with making an adjustment.
Speaker 5: No, No, because he can't. He can't raise and then
Speaker 5: we get all the rates come through, and we have
Speaker 5: another a drought or a flood or whatever, and all
Speaker 5: of a sudden he looks in its three point two
Speaker 5: and he's got a cat again. Like that, credibility is
Speaker 5: completely at the window best different. So he won't do
Speaker 5: anything until November at the earliest. And to be honest,
Speaker 5: I wouldn't be surprised what you don't generally cap for
Speaker 5: Christmas because people feel goodly on Christmas and Christmas is
Speaker 5: usually inflationary.
Speaker 1: So what would he do?
Speaker 2: What could he do from here on in that might
Speaker 2: impress you? Okay, Glenn, call again, mate, that was that's fantastic.
Speaker 2: Love you love your takes on that stuff.
Speaker 1: Yeah. I don't have any comment, Hamers.
Speaker 4: No, not no, no.
Speaker 3: No, no.
Speaker 4: I mean I think look, part of what Glenn is
Speaker 4: saying is has been acknowledged by the ben Z themselves
Speaker 4: in terms of you know that that period through COVID
Speaker 4: where you know, and he picked up on not just
Speaker 4: rates being low, the official cash rate being at a
Speaker 4: quarter of a percent, but the fact that there was
Speaker 4: quantitative easing going on through that period in terms of,
Speaker 4: you know, an injection of money into into the financial
Speaker 4: system and all of that did did go on too long,
Speaker 4: and it was part of the reason why inflation picked
Speaker 4: up as much as it did. And I think the
Speaker 4: Omens did have you know, they've admitted that, which is good.
Speaker 4: I think, you know, so I would say that you
Speaker 4: know that that's one thing.
Speaker 2: That Yeah, no, I've just been mischievous trying to drag
Speaker 2: you into having a having a cracket avera. It's just
Speaker 2: all part of the sport now. But speaking about people
Speaker 2: who are thinking here all the time, the markets themselves,
Speaker 2: so because there are those who are thinking, well, it
Speaker 2: sounds like they're going to drop the interest rate and
Speaker 2: that people are hoping for a big change and what's
Speaker 2: on offer have but to some extent, what are the
Speaker 2: observations from you on how much those changes might already
Speaker 2: be being priced in by lenders?
Speaker 4: And yeah, so I mean, if we build off you know,
Speaker 4: kind of that conversation with Glenn, I mean he was
Speaker 4: skeptical about whether they would cut this year at all.
Speaker 4: The financial markets have a very different view. They think
Speaker 4: there will be at least two twenty five basis point
Speaker 4: rate cuts by the November meeting, and in fact there's
Speaker 4: about a fifty percent chance of a further one before
Speaker 4: the end of the year.
Speaker 3: So that's where financial markets are.
Speaker 4: And then they continue on next year in terms of
Speaker 4: an assumption that their easing cycle continues. And it's with
Speaker 4: that that we've now started to see the banks come
Speaker 4: through with lower mortgage rates. Admittedly, you know, starting sort
Speaker 4: of somewhat slowly in terms of you know, the speed
Speaker 4: with which they were changing them, but also that the
Speaker 4: increments you know, perhaps for a lot of people out
Speaker 4: there aren't going to really change the change the kind
Speaker 4: of cash flow. But I think this is how it
Speaker 4: will play out. You know, we've had sort of cuts
Speaker 4: to mortgage rates in the region of sort of ten
Speaker 4: to thirty basis points point one two point three o
Speaker 4: a percent. As I suppose the confirmation comes through through
Speaker 4: the course of this year and inter nex that the
Speaker 4: RBNZ are indeed easing and cutting interest rates and the
Speaker 4: economy is indeed, you know, justifying that in terms of
Speaker 4: being weak and inflation falling, then you would expect to
Speaker 4: see a continuation of those those declines.
Speaker 2: What about in terms of bond markets and things like that, Well,
Speaker 2: how does that all respond to it?
Speaker 1: And the and the term deposits.
Speaker 4: Yeah, so, I mean exactly like we were kind of
Speaker 4: describing at the moment. You know, if you look at
Speaker 4: term deposits out to five years, you know, you've basically
Speaker 4: got your shorter.
Speaker 3: Term ones something like you know, six or twelve months.
Speaker 4: Still the best part of six percent, and then they
Speaker 4: come off down to around five percent over over that
Speaker 4: that five years. And so you know, as we go
Speaker 4: through a possible easing cycle which halves the ocr you know,
Speaker 4: let's let's call it to seventy five as where we
Speaker 4: get to you know, those term deposit rates have a
Speaker 4: lot of room you know, to four. So for example,
Speaker 4: you know, when you got to the bottom in terms
Speaker 4: of you know, the cash rate sitting.
Speaker 3: At two point seventy five percent, you know.
Speaker 4: You're probably really looking at say six or twelve month
Speaker 4: term deposit rates that were sort of that three to
Speaker 4: three and a half, so a lot lower than.
Speaker 3: What we have today.
Speaker 2: Hey, just on the motivating factors that are going to
Speaker 2: influence the Reserve Bank on whether.
Speaker 1: They make a shift in the cash rate.
Speaker 2: You know, we have business surveys that tell a story.
Speaker 2: What are what are your what are your informed formal observations,
Speaker 2: but also your casual ones as well, just from your
Speaker 2: neck of the woods.
Speaker 4: The business surveys are just atrocious. We're talking about levels
Speaker 4: and business surveys that we haven't seen sometimes since these
Speaker 4: surveys have started, and most often it's the weakest sentiment
Speaker 4: since the global financial crisis.
Speaker 3: So one a classic.
Speaker 4: One which has been sort of highlighted recently is where
Speaker 4: you've got businesses from the manufacturing and the services sector
Speaker 4: asked about what's going on. You put those two things
Speaker 4: together into sort of a composite measure. You know, that
Speaker 4: thing not only looks as weak as the global financial crisis,
Speaker 4: if not slightly weaker, but it looks so so different
Speaker 4: to almost any other country in the world. Most other
Speaker 4: countries still have an economy that is expanding, that is growing.
Speaker 4: We most likely, as we stand today in you know,
Speaker 4: we're now in Q three, aren't we the third quarter
Speaker 4: of the year, we are most likely going backwards. So
Speaker 4: we are we are very very different to what's going
Speaker 4: on overseas, and we are very very weak. And that's
Speaker 4: that's the signals we're getting from from those surveys.
Speaker 2: And how much more of a problem is that because
Speaker 2: we are not a big economy either in terms of
Speaker 2: our size, does that mean we feel these fluctuals and
Speaker 2: these bad bits and news even worse in terms of
Speaker 2: our ability to recover.
Speaker 4: Yeah, well, I mean one of the most interesting things
Speaker 4: recently is but you know, we are we're a small,
Speaker 4: open economy. We're heavily reliant on the health of the
Speaker 4: rest of the world. And luckily, you know, those economies
Speaker 4: that I was describing are still okay, China much less so,
Speaker 4: and that's having a sort of its own negative impact.
Speaker 4: But you know, if you think about, you know, sort
Speaker 4: of what is going on in terms of people's psyche.
Speaker 4: The migration data recently have been so interesting, So our
Speaker 4: net migration.
Speaker 1: Arrivals less departures.
Speaker 4: You know, it was really high, right, it's now fallen
Speaker 4: to basically zero nothing. And it hasn't been because people
Speaker 4: have stopped arriving. People have continued to arrive at roughly
Speaker 4: the rates that we saw.
Speaker 1: You know what it is.
Speaker 2: It's worse than that, isn't it, Because we're all buggering off.
Speaker 3: Ye at a rapid rate, a rapid rate.
Speaker 4: And I think to me that speaks to just how
Speaker 4: weak we are compared to our trading partners, compared to
Speaker 4: places that Kiwis can go to relatively easy, easily, like
Speaker 4: Australia for example.
Speaker 2: Gosh, oh wow, gosh, it's fascinating. In fact, you know,
Speaker 2: it's just some of the apocryphal stories like I went
Speaker 2: on holiday and yes, I'm lucky enough that we we
Speaker 2: love to go skiing, but we we didn't go Queenstown
Speaker 2: except for a couple of days. But when I was
Speaker 2: in Queenstown, I thought, boy, this place is a lot
Speaker 2: quieter than I recall, and it just you know that
Speaker 2: that's obviously borne out by the by the sort of
Speaker 2: things you're talking about.
Speaker 1: Fascinating conversation, Amish. Thank you so much, mate.
Speaker 3: No worries at all.
Speaker 2: Pleasure to And if people want to check out your
Speaker 2: work and look at your funds or your research, that's
Speaker 2: harbor Asset dot co dot NZ.
Speaker 3: Yep, that's the one. Yeah, hopefully all the information you
Speaker 3: need is on there.
Speaker 1: Good on you. Hey, really enjoyed our chat this afternoon.
Speaker 1: Thanks so much, buddy.
Speaker 3: Cheers done, every good one.
Speaker 2: Yep, we'll be back in just a moment to wrap up.
Speaker 2: It's eight minutes to six news Talks. He'd be, yes,
Speaker 2: welcome back to the show. Well, that actually wraps up
Speaker 2: the smart money and the show for the weekend. But
Speaker 2: I'm grateful for the time and how much Pepper spent
Speaker 2: with us from harbor Asset Management. And as I say,
Speaker 2: you can go and check out harbor Asset dot cod
Speaker 2: it said, there's a lot of information there, a research
Speaker 2: and commentary and as well about the funds that you
Speaker 2: can invest in. As well, and look, I guess it's
Speaker 2: anyone's bet. We've had quite a few texts on what's
Speaker 2: going to happen, but somebody says, I predict Adrian won't
Speaker 2: come until Elian next Year's too stubborn and does what
Speaker 2: he wants. No, he wants to be seen as being
Speaker 2: hard on inflation. I don't know, Jake, who knows, But anyway,
Speaker 2: I'll tell you no specific financial advice, but I'm fixing
Speaker 2: short refixed the mortgage. But of course you make your
Speaker 2: own minds up on that. Thanks to my producer, Tyra Roberts,
Speaker 2: and I thank you all for your your feedback and
Speaker 2: your your texts and your calls during during the last
Speaker 2: few hours. Sunday at six is next. I'll look forward
Speaker 2: to your company again next weekend.
Speaker 1: Enjoy your evening and catch us soon.
Speaker 3: For more from the Weekend Collective.
Speaker 1: Listen live to News Talks it Be weekends from three pm,
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