New Zealand wholesale rates curves have suddenly twisted to be as inverted as they were during the GFC. This may last until inflation is beaten

Wholesale interest rates have set some new benchmarks following Wednesday's better-than-expected labour market reports.

The employed workforce is growing faster than expected, immigration is ramping up, and labour costs are still rising fast. The benchmark for labour cost rises are what will constrain inflation, and at current rates of increase these labour costs are still about double what will be required to get back to the RBNZ's inflation target.

As a consequence, financial markets are bidding up wholesale interest rates at the 'short end'.

And that is because they can't see the RBNZ stopping its rate hiking track if inflation is going to stay elevated.

Meanwhile, the international background is that rate hikes may be coming to an end. The May US Fed position removed its reference to future rises being necessary

So we are left with the RBNZ-influenced short end rates rising, and the internationally-influenced long end stable or now possibly falling.

At the end of trading on Wednesday, May 3, 2023, the one year swap rate rose +5 bps to 5.70% and the two year swap rate rose +5 bps to 5.16%. From the end of March, these are up +36 bps and +14 bps respectively.

Meanwhile the five year swap rate was unchanged at 4.33% yesterday and the 10 year fell -3 bps to 4.18%. From the end of March, these are down -9 bps and -11 bps respectively.

The result is that we now have some significant rate inversions, as large or larger than what we had during the GFC.

The GFC was followed by many years of sub-par economic performance, even though positive rate curves returned for much of that period. (Just saying.)

But positive yield curves do have an upside. It will be the short end that adjusts, and absent other changes, that might make home loan rates for one and two year terms more like what we now have for longer terms (sub 6%) and possibly even lower.