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Wheeler's speech changes market perceptions, emphasises the flexibity he has, de-emphases the focus on the headline inflation rate

Bonds
Wheeler's speech changes market perceptions, emphasises the flexibity he has, de-emphases the focus on the headline inflation rate

By Jason Wong

There have been some sharp moves in US Treasuries overnight. 

The 10-year rate fell to a fresh low of 1.79% on Dudley’s comments and the weak ISM non-manufacturing data, but then yields climbed as oil prices spiked up.  The yield is currently up 1 bp at 1.86%. 

Elsewhere, new records were broken with Germany’s 2-year rate trading below minus 0.5% for the first time ever and Japan’s 10-year rate notching up a record low for a G7 country of 0.04%.

Locally, the strong employment data and Wheeler’s speech imparted an upward bias to very short-term rates, with the OIS market now pricing the next full 25 bps easing by September, rather than June.

Limiting the damage was some doubt about the legitimacy of the big fall in the unemployment rate over the quarter and the fact that wage inflation came in on the soft side.  However, looking through the noise, the previous belief that NZ’s unemployment rate was on a rising trend can now be challenged by the fact that the data now appear to show a declining trend. This backs the RBNZ’s view of not rushing into further easing of policy.

Governor Wheeler’s speech was interpreted as being hawkish by the market.

The strong message was that the Policy Targets agreement recognises the flexible approach needed in making monetary policy decisions.

With oil price plunging, the core inflation rate was a more important indicator than headline inflation for the Bank and current core inflation was “well within” target.

Rather than get hysterical about the falling headline rate, Wheeler suggested that “some recent inflation indicators are encouraging”.  The Bank was more concerned about inflation expectations becoming unstable and declining significantly but for now, the Bank’s combined measures of annual inflation expectations were averaging 2%.

In terms of the policy outlook, the tone was similar to the January review but further colour was given on policy triggers for an easing.  Clearly the bank is watching inflation expectations closely, but also further easing may be needed over the coming year “if concerns deepen around the prospects for the global economy and its impact on NZ”.

Further along the interest rate curve, global factors were more dominant.  While the 2-year swap rate was essentially flat at 2.62%, the 10-year rate plunged by 8 bps to 3.32%.  NZ’s 10-year government bond rate (Apr-27) closed at a record low of 3.095%.  Compared to global rates, this must still look very attractive to investors.

Coming Up

At the Bank of England’s first meeting of the year, no change to policy is expected, but the inflation report will be widely read for hints about the next move.  The market has recently shifted from pricing in a rate hike next year to a possible rate cut this year, so it will be interesting to see the BoE’s interpretation of recent data.

Daily swap rates

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1 Comments

The unemployment rate went down cause the government classify anyone doing 1 hour work/week as employed
Its just lots of part timers not real jobs.

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