By Kymberly Martin
Yesterday, NZ swaps closed up 12-15bps across the curve. By and large, yesterday’s review of the OCR by the Reserve Bank was simply a restatement of the June MPS. Indeed, much of the text was identical.
However, the market seemed surprised by the more explicit statement that the “removal of monetary stimulus will likely be needed in the future”.
But this was hardly ground-breaking news given the RBNZ’s previously published interest rate track clearly expresses a tightening trend.
The notable move in up swap yields across the curve was likely exacerbated by positioning heading into the meeting.
In addition, it is hard to disentangle how much of the push higher in yields was also a follow-on from the previous night’s offshore moves.
NZ 2-year swap closed 12bps higher at 3.32%, now back near the top of its range of the past month.
5-year swap closed up 15bps, similarly near the top of its recent range. These moves are consistent with our previously expressed view that yields will ultimately by higher across the curve by year-end.
Although there will be dips along the way these will likely prove fairly shallow and short-lived.
We maintain our view that the first RBNZ rate hike will be in Q1, 2014. As the RBNZ stated “the extent of the monetary policy response will depend largely on the degree to which the growing momentum in the housing market and construction sector spills over into inflation pressure”.
In this regard, we do expect some flow on and it will come through two channels: continued house price inflation will support domestic demand through wealth effects (both actual and perceived); increased construction sector activity will flow through into input prices via building materials and wages.
Neither of these impacts is expected to be particularly dramatic but sufficient to require a ‘normalization’ of rates. We see the OCR at 4.50% in 2015.
Overall, rates markets lacked a great deal of direction overnight. US 10-year yields traded a path between 2.59% and 2.63% for most of the night, sitting at 2.62% currently.
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