By Kymberley Martin
NZ swaps closed down 1-2bps yesterday.
Overnight, US 10-year yields pushed up from 2.50% to 2.54%.
We believe the market is once again becoming complacent on the NZ OCR outlook.
Only 54 bps of further hikes are priced by year-end despite there being five more RBNZ meetings in that time.
Further out, the market is only pricing a cumulative 125bps of hikes over the next two years. i.e. that the OCR would only be back at ‘neutral’ (circa 4.25%), 27 months into a tightening cycle, when the economy is expanding well above trend.
We believe these expectations will be overshot on the high-side and therefore current swap rates offer good hedging ‘value’.
Yesterday’s data, in the form of very strong migration data also suggest a more hawkish tilt for the RBNZ, all else equal.
Higher migration will add both to demand and inflation pressures.
Meanwhile, the fact the NZ TWI is now 1.6% below its early May highs will provide the RBNZ with some comfort, even as it remains 1.8% above the Bank’s forecast Q2 average.
Last night, US Treasuries had begun their sell-off ahead of the release of Fed minutes, and did not rally subsequently. US 10-year yields sit at 2.54% this morning.
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2 Comments
Increasing Migration will increase demand for housing but presumably it also increases the supply of labour, especially skilled labour. That might be why we are not seeing much wage growth. If increased supply of skilled labour also increases the productive capacity of industry ( which we are told it will ) and thus productivity improvements wont the level of non inflationary growth increase as bottle necks in production are removed?
I hope the RBNZ models are more sophisticated than BNZ's.
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