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Markets on lookout for signs of higher inflation - although the RBNZ seems unmoved and unconvinced by the local trend

Bonds
Markets on lookout for signs of higher inflation - although the RBNZ seems unmoved and unconvinced by the local trend

By Doug Steel

The US 10-year Treasury yield nearly hit 2.36% during the night, then slumped back to under 2.31% before settling around 2.325%, down around 2 bps on the day. This is in contrast to a mild push higher (+1.5 bp) in German 10-year Bund yields. The US-German 10-year bond spread is at its lowest since November last year, at 189 bps.

The local swap curve steepened a touch yesterday as longer end yields pushed higher following moves in the previous offshore session. NZ 5-year swap rose 1.5 bps to just over 2.78%.

Meanwhile, short end rates remain heavily influenced by latest RBNZ guidance that the OCR is on hold for a prolonged period. The NZ 2-year swap yield did manage to lift a basis point yesterday in what was its first higher daily close since last Thursday’s Monetary Policy Statement.

However, at 2.23%, NZ 2-year swap yield is some 11 basis points lower than prevailed this time last week. The pre- MPS trading range for 2-year swap was around 2.25- 2.35%. The new range over coming months now looks likely to be around 10bps lower at 2.15%-2.25%.

Today, we expect NZ’s producer and capital goods price indexes for Q1 to reveal a broader element to the recent inflation pick up. But with the CPI already released for the quarter, and the RBNZ unmoved, expect little market reaction.

Likewise for Australia’s wage price index if it comes in at 0.5% for the quarter where the majority of forecasts are huddled.

Overnight, the EU’s April CPI will be closely watched for any signs of a pickup in core inflation given recent economic strength.

Daily swap rates

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Doug Steel is a senior economist at BNZ Markets. All its research is available here.

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5 Comments

Banks should be back to offering mortgage deals at around 4% for 1 year fixed and 4.2% for 2 years fixed but oh no the greedy bankers will retain more profit rather than pass the savings on to customers. Are swaps about to plunge to record lows?

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Probably...and that, is quite frightening.

"If there is one reality that is denied or obscured it is that the economy no longer works as it did in the past....The problem with zero-interest rate policy (ZIRP) and fiscal stimulus is neither are remotely connected to real wealth creation, i.e. increased productivity. Printing /borrowing more money into existence does not create wealth; all the new money only increases future claims on existing productive assets....every sector is borrowing from the future just to maintain the illusion of solvency and expansion. Corporations, states, central banks and households are all living off money borrowed from future earnings and taxes, or spending the gains from unsustainable asset bubbles.....Central Banks are terrified of pushing rates higher by quarter-point baby-steps, for the same reason that fiscal stimulus cannot be withdrawn: raising interest rates to historic norms would immediately send the economy into contraction...Much of the borrowed money has gone into unproductive housing....
http://charleshughsmith.blogspot.co.nz/

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David Chaston, I'd be very interested to hear your views on the article in the link in bw's comment above

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One of Bernanke's statements "By increasing the number of US dollars in circulation, or even by credibly threatening to do so, the US Government can also reduce the value of a dollar in terms of goods and service, which is equivalent to raising the prices in dollars of those goods and services".........so manipulating the price of a currency to change the price of price of goods and services is the new norm hence no economy can work the same as it once did.........governments around the world have been manipulating the price of goods and services for years.........

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The 1 year swap rate is very close to all time low

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