March OCR rate hike seems unlikely given the RBNZ is implementing LVR restrictions

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The following is a summary of the key events impacting fixed income markets over the past week.

The first week of September may begin slowly with the US on holiday, however it should begin to pick up pace with central bank meetings in Australia, Japan, Europe and the UK. The week closes with key US non-farm payrolls data for August and the subsequent US unemployment rate.

RBNZ to feature in the September bonanza

Fresh from its recent announcement regarding the loan-to-value implementation, the RBNZ will feature heavily next week when it delivers its Monetary Policy Statement. Market expectations for a hint of a rate rise might be disappointed given the Governor has already implemented one of its four possible macro-prudential tools as opposed to using the Official Cash Rate (OCR).

The market seems to be figuring out that the RBNZ will need a decent amount of time to see if its macro-prudential tools actually work and if inflation in other areas of the economy is becoming an issue. The LVR restrictions come into force on 1 October and then there will no doubt be one or two quiet months over Christmas therefore by the time the March 2014 RBNZ meeting, the RBNZ may only have three or four months of credible data to base any meaningful judgement on the success of LVR restrictions. A March rate rise seems unlikely.

Some consolidation last week

After some large sell-offs of late, New Zealand swap rates rallied over the course of the week with the long-end falling -8bp. The short-end remains relatively stable with the yield curve flattening by around -4bp. With interest rates rising around the globe, local banks have begun to pass these costs on to consumers with all four of the ‘big four’ banks raising their medium to longer term mortgage rates.

Investors seem to have taken advantage of the lower mortgage rates while they were on offer with over half (54%) of mortgages now on fixed rates as opposed to just 37% back in April 2012.

A quiet month for NZ corporate bonds

The yield on the ANZ Investment Grade Bond Index rose +14bp over the month of August, meaning a flat month for bond returns. The duration of the index continues to be short at just 2.66yrs, highlighting the lack of new corporate issuance. The ANZ Government Bond Index performed poorly with the yield rising +30bp over the month. Please see over page for further details.

The focus is once again on US jobs

Given the pledge from US Federal Chairman, Ben Bernanke, that its monetary policy is tied to US unemployment, the monthly release of such data is highly anticipated. The US is expected to have created more jobs than it did in July, however, the US unemployment rate is expected to remain at 7.4%. Anything higher than 7.4% could significantly alter the expected announcement from the Fed regarding tapering on 18 September.

RBA not expected to cut this time around

The Reserve Bank of Australia (RBA) meet for their monthly policy meeting on Tuesday with all the economists forecasting no change to the record low 2.50% cash rate. With the election looming (7 September), it will be highly unlikely that the RBA would move a few days prior. The most likely scenario is another -25bp cut in November (Melbourne Cup day).

NZ Government Bond Yields continue to rise 

The month of September may prove to be very pivotal in the grand scheme of things. We have all of the central banks around the globe reporting this month with some definitive results expected from the markets.

What is expected? Our own Reserve Bank of New Zealand (RBNZ) is due to provide its first Monetary Policy Statement (MPS) since the announcement of the implementation of loan-to-value restrictions. In recent statements, the Governor has reiterated the view that the Official Cash Rate (OCR) will remain on hold until the end of the year. 

While no-one disputes this, many of the market are still pricing in the first OCR hike to begin in March 2014, albeit with a little less conviction than prior to the LVR restrictions.

At present there is 22bp priced in for the March 2014 RBNZ meeting, considerably lower than in previous weeks as many believe the RBNZ will need a number of months to see if the LVR restrictions are working.

While the local market will analyse the RBNZ’s statement and forecasts, their attention will soon shift to the US where it is widely expected that the US Federal Reserve will announce the beginning of ‘tapering’. 

The ‘market’ reaction may not be as severe as one would have initially assumed due to most of the market now expecting an announcement and adjusted accordingly. However, the ‘beginning of the end’ (whether it comes in September or not) will impact on the market and US interest rates as US$85bn a month is slowly removed from the market.

A sell-off in US 10-year treasuries may see a similar sell-off in New Zealand, which as we illustrate below in Figure 1, has slowly begun. Longer-dated NZGB’s have been sold off by around 100bp since the end of May 2013 with August accounting for around a third of that sell-off. 

This sell-off has been more severe than other major sovereign bonds with Australian 10-year GB’s +54bp higher over the last three months, Europe +35bp and the US (i.e. the benchmark) +66bp.

By the end of September the chart below could look significantly different should the expected action from the RBNZ and the Fed fail to eventuate.

Corporate / Credit news

Air New Zealand (AIR) announced another solid result for Y13 with NPAT rising +156% to NZ$182m. Net debt (including off balance sheet debt) reduced from NZ$1,441m to NZ$1,168m.

Auckland Council (AKC) reported a NZ$246m NPAT for the year to 30 June 2013. AKC’s net debt is NZ$5.5bn, less than is in the council’s long-term plan.

Genesis Energy (GEL) revenue for FY13 fell -9% which saw EBITDAF fall -13% to NZ$336m, however NPAT increased to NZ$105m. Debt levels remained flat at NZ$1,025m with the gearing ratio falling from 36.2% to 34.5%. GEL has around NZ$200m of headroom in its debt facilities.

Fonterra lifted its Forecast Farmgate Milk Price for the FY14 season by 30 cents to NZ$7.80 per kgMS. The increase coupled with a previously announced estimated dividend of 32 cents per share - amounts to a Forecast Cash Payout of NZ$8.12.

Kiwibank (KIW) announced another record profit, up 22.8% to NZ$97.1m. KIW continued to grow its book with its loan book rising +6.1% and the deposit book growing by +4.8%. On the capital front, KIW’s common equity tier one ratio was 8.4%, tier one ratio 10.4%, and total capital ratio of 12.6%.

Mighty River Power (MRP) comfortably beat its prospectus forecasts with EBITDAF of NZ$390.5m, +NZ$7.9m ahead of forecasts. Net debt increased from NZ$951.8m at 31 December 2012 to NZ$1,027.8m with MRP’s gearing ratio increasing from 23.4% to 24.4% over the last six months. Interest cover remains strong despite falling from 5.7x to 4.4x. MRP’s weighted average maturity of its debt portfolio is 5.2 years.

NZ Post (NZP) announced a full year net profit after tax result of NZ$121m versus a NZ$170m NPAT in the pcp. However, operating profit rose from NZ$80m in the pcp to NZ$111m in FY13. This rise was driven by another record profit from Kiwibank and growth in NZP’s courier business. Mail volume declines continue to accelerate to 7.5% (or 63m fewer items in the post). NZP did retire some debt due to the proceeds from its sale of Datacom.
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